Q3 2020 NOW Inc Earnings Call
Welcome to third quarter 2020 earnings Conference call My name itself cannot be operator for today's call.
At this time all participants are not only mode. Later, we'll conduct a question and answer session.
If you have a question. Please press Star then one and you touched them all.
I would now turn the call over to Vice President marketing and Investor Relations, Brett White Mr. Weiss you may begin.
Good morning, and welcome to now Inc.'s third quarter 2020 earnings Conference call.
Appreciate you joining us and thank you for your interest and now Inc.
With me today is David Church, Penske, President and Chief Executive Officer.
Mark Johnson, Senior Vice President and Chief Financial Officer.
We operate primarily under the distribution now and do not brands and you'll hear US reports a distribution now I'd now, which is our New York stock exchange ticker symbol during our conversation this morning.
Please note that some of the statements we make during this call, including the responses to your questions may contain forecasts projections and estimates, including but not limited to comments about our outlook for the company's business.
These are forward looking statements within the meaning of the U.S. Federal Securities laws based on limited information as of today, which are subject to change.
They are subject to risks and uncertainties and actual results may differ materially no. One should assume that these forward looking statements remain valid.
Later in the year, we do not undertake any obligation to publicly update or revise any forward looking statements for any reason.
In addition, this conference call contains time sensitive information.
Reflects management's best judgment at the time of the live call I refer you to our latest 10-K and 10-Q.
Now in accounts on file with the U.S. Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business.
Further information as well as supplemental financial and operating information may be found within our earnings release on our website at IR Dot do you now dotcom or in our filings with the SEC.
In an effort to provide investors with.
With additional information relative to our results as determined by U.S. GAAP. You'll note that we also disclose various non-GAAP financial measures, including EBITDA, excluding other costs, sometimes referred to as EBITDA.
Net income excluding other costs and diluted earnings per share excluding other costs.
Each excludes the impact of certain other costs and therefore have not been calculated in accordance with GAAP.
Reconciliation of each of these non-GAAP financial measures to its most comparable GAAP financial measure is included in our earnings release as of this morning, the Investor Relations section of our website contains a presentation covering our results and key takeaways for the quarter.
A replay of today's call will be available on the site for the next 30 days.
We plan to file our third quarter 2020 form 10-Q today no will also be available on our website.
Now, let me turn the call over to Dave.
Thanks, Brad Good morning, everyone and thank you for joining us I hope that you and your families are safe and healthy businesses worldwide are struggling as this pandemic continues to take its toll and.
And our thoughts are with all those impacted by COVID-19.
As a company we're committed to working through these challenges to do our part to improve the circumstances, we continue to execute on our COVID-19 response plan to enhance safety protocols. All locations have remained open operating under who and CDC guidelines by providing essential COVID-19 related products.
To our employees and customers.
I'm proud of the hard work resiliency and dedication our employees demonstrate every day and I'd like to thank the frontline Dino women and men for taking care of our customers being loyal to our key suppliers supporting our communities and each other during this difficult time.
We announced last week that Dick Lario stepped down as was planned from a short term role as executive Vice Chairman of the company did play a strategic role advising me and our leadership team.
His wealth of experience in the oilfield services industry insight keen strategic mind wisdom and with Dick has been an invaluable leader in remains an incredible mentor to me and continues as a member of our board of directors.
In addition to posting our financial results for the third quarter. This morning. We also published our first sustainability report, which is now available on our website.
Sustainability is not new to Dino, we take our responsibility seriously to deliver products and solutions safely and reliably around the world that are essential and beneficial to our everyday lives.
We also recognize the growing stakeholder interest in transparency around TSG practices and hope you find the report to be informative.
Now, let me shift to today's market view.
Coming off a rapidly diminished level of activity within oil and gas sector. We take solace that it appears in the U.S. at least that the market cycle bottom was reached in the third quarter.
Well not desirable for any industry being here provides a good view for planning in calibrating the business for locating and sizing facilities staffing inventory prepositioning and capital allocation decisions.
And this vantage point is instructive as we continue transforming dino by combining the strengths of our highly skilled people geographic footprint strategic inventory deployment relationships with key domestic and import manufacturers and our product expertise with disruptive digital innovation.
Which I'll cover shortly.
Our focus is on first and market expansion by accumulating market share in the upstream while expanding our sales strategy into less volatile sectors.
Second digital disruption by leveraging technology to delight, the customer experience, while strengthening our position in the market to enhanced value offerings offerings, and third structurally transforming our operations and supply chain towards a more efficient and flexible model.
Turning to the recent industry trends and activity customers have reduced capex budgets and have adhered to disciplined austerity measures around maintenance as well as SDMA spending.
As such the exploration and production landscape is changing as evidenced by recently announced customer consolidations.
Fortunately, our focus on strong customer relationships and our value proposition creates an advantage in the market.
One that offers significant benefits for customers to reduce their total cost of ownership and inventory risk and provides customers with unparalleled access to the top tier suppliers around the world via our feet physical locations and to our digital channels.
For consolidating S&P companies not only do our energy branches in process solutions offer differentiating value, but our supply chain services model offers customers a means to reduce investment in working capital operating expenditures and facility costs, which frees up cash and drives efficiency gains to use of technology while.
Adopting a customized product sourcing strategy.
These are tangible differentiating solutions, which allow customers to compete in a rebalancing global oil market, while leveraging our advanced technology through the integration of systems, including order management material planning and inventory and logistics management.
The results help our customers reduce their costs and optimize their operations, making them more competitive.
As the leading upstream pipe valves fittings and pumps distributor, we expect to expand our share as customer acquisitions, and mergers are completed and future opportunities arise.
Of the six most recently announced customer consolidations in North America three of the acquirers are among Dino top echelon customers, one of which is to as a strategic supply chain services customer and a four is in our Canadian backyard, where our market position continues to strengthen.
While we take nothing for granted we see these consolidations as opportunities for growth.
Now I'll touch on financial highlights from the quarter revenue from the third quarter of 2020 was 326 million a sequential decline of $44 million or 12%.
We guided to a low to mid teens percentage to decline sequentially, but benefited from higher sales from maintenance work in the period.
Gross margins improved 60 basis points sequentially to 19.0% as product margins were resilient, even during a period of elevated inventory charges and with the gravity of deflation.
Some of this gross margin limitation is attributable to fluor fewer large projects at lower margins than what we experienced on higher margin small dollar transactions order.
Order size mix can vary and we benefited from that mix in the third quarter.
On the other hand in a trough market as we cautioned smaller less well capitalized regional competitors are using price as a competitive tool, which drives down prices and that's an unfavorable effect on gross margins, but.
But we see the impact of regional competitor desperation as temporary.
In a depressed market supplier selection discipline becomes an even more important strategic imperative favoring strategic supplier partners and channeling the bulk of our policies purchases to them, while discouraging purchases to their competitors is key to product availability inventory risk mitigation pricing and gross margin.
Yes.
Our efforts around favoring higher margin product lines and focusing on key suppliers helps buttress gross margins even in this deflationary period.
Free cash flow for the third quarter was $57 million as we expanded our cash position to a record high of $325 million, while remaining debt free we generated nearly 200 million in free cash flow in the trailing 12 months and more than 400 million of free cash flow in the trailing 24 months having.
Our cash allows flexibility around organic capital deployment and inorganic growth.
We continue to invest in our expanding digital now offering designed to simplify the customer experience drive increased revenue opportunities and reduce transaction costs.
Now I'd like to take a moment to share a few successes we've delivered in support of our strategy to expand market share and further diversify our end market participation.
In terms of end market diversification bookings within our Odessa pumps business related to the municipal water business accounted for a small but growing percentage of revenues and reflects opportunities for growth.
Another area of focus for us and one not as susceptible to major swings in the cycle is expanding our aftermarket capabilities on pump equipment.
Over the past year, we've been investing and developing our certified pump technician program to expand these capabilities.
During the quarter, we booked a sizable preventable preventative maintenance job with a large independent MP company. Our overall share of this pump aftermarket is formative, but we see plenty of runway for growth.
We shipped process measurement units production vessels and salt water disposal units from our Casper, Wyoming facility to the Bakken and Rockies, while shipping to the Permian and Eagle Ford plays from our Houston, Tom Ball facility to both MP operators and midstream companies during.
During the quarter, we secured orders in the mining industry, ER, PBR and slowly slurry pump applications pump packages for deepwater applications and utility air compressors.
As an example of expanding in the downstream refining market two major refining companies in the northern Rockies approved our Casper facility to deliver tower processing units for fractionation distillation and vapor recovery capabilities.
We picked up a new annual contract for a midstream water company that provides water management solutions for produced water transportation disposal be cycling in supply.
In Canada plant turnaround activity provide a tailwind to revenue for several midstream gas plants, the turnaround celebrity denials field inventory to aid work crews by experts expediting material availability.
We enjoyed a number of successes from our total valve solutions line by providing valve and actuation products from midstream gas processing facilities refinery coker applications and power plants.
For engineering firms, where we supported their ability to configure and select actuated bout products for their client projects. A number of these projects are completed in Canada and export it to the middle East and Africa.
This is an example of our teams adding value beyond the sale of commodity items offering application expertise and one of the components of our midstream as one of the components of our midstream strategy.
We renewed and MRO contract from a major PBF and artificial lift.
While expanding its potential value by adding our fiberglass piping solutions to comp to the contract, but it's accretive market share gain.
Further to our end market diversification diversification initiatives, we saw several wins in the industrial sector in Canada, we saw increasing product sales in the potash mining sector with two separate operators. These are market share gains as we execute on our strategy to increase our coverage of the mining sector not only in Canada, but in the U.S. and Australia.
In the international during the quarter, we executed a new and MRO contract for an offshore driller with contracts in Brazil, and an additional one with operations in Mexico, we executed at MRO agreements with several land rigs land based drilling contractors in Saudi Arabia, and Kuwait, and we renewed a key MRO agreement.
And I'll see in West Africa.
We delivered a large number of valves swung fps so customer in Brazil.
In addition to production control valves or large I'll see natural gas producer in Australia.
During the quarter, we have seen West Africa, and Southeast Asia markets return with a modest screen strength. However, the middle east remain soft with fewer large projects, resulting from attempts to adhere to OPEC agree to cuts.
As touched on earlier digital disruption combined with customer adoption is presenting new and exciting ways for us to provide greater value to our customers.
I'd like to highlight several examples of the progress we've made on our expanding digital platform, but also on the commercialization of the technology.
First our E commerce platform shop Dot D. now dot com is gaining traction not only in new customer implementations, but continued enhancements.
On the platform development side key enhancements to our E. Commerce platform include new features for customer viewing.
Recommended compatible products and convenience options in addition to adding more skews images and product descriptions.
And just recently expanding the value of our E. Commerce channel, we introduced thousands of additional skews that would normally be traditional immediate resale non inventory items, leveraging a key third party drop ship partner.
Realized customer benefit benefit is access to an expanding catalog with the d. now benefit being the elimination of inventory risk, while reducing transaction cost for this activity.
One area of growth in user adoption has been with our mobile ordering app that enables customers to order material directly from their smartphone or tablet and define how that material is obtained and when it is needed.
The orders of process directly into our ERP system, resulting in a real time communication of customer order requirements and associated transactional efficiency gains.
As we mentioned in our previous call independent and independent oil and gas company has used our complex ordering feature to procure two three and four well pad tank battery orders on our E Commerce platform and this quarter. They have placed additional orders in that manner as well.
This is an area of focus for us to expand the capacity of our system to handle large builds and materials to minimize the time throughout the order process focusing on eliminating nonproductive work, while expediting kitting and procurement of customer hookups and tank battery orders.
Last week, we rolled out our new digital now expect product.
Spec tool is a digital product configurator that enables customers the ability to select configure and priced out a number of process solutions products.
We provided access to a limited group of customers. So we can drive continuous improvement in the applications.
An additional digital application is our lifecycle asset management program, which is marketed under our digital platform over.
Over the past months and major I'll see natural gas producer in Egypt, and offshore producer for petrol boss and in Brazil, a customer with a facility in Indonesia, and two drilling assets and Saudi Arabia partnered with us to pilot, our lifecycle asset management tool to maintain their assets.
Finally internally, we've completed our rollout of our new order management system with adoption increasing across the organization.
Efficiency gains across the network allow employees to process sales more quickly and with increased accuracy.
This technology results increased order handling effectiveness for our customers and allows us internally to optimize our order management process.
Our digital strategy is well underway, we have more to come with more exciting products and solutions and development.
With that let me hand, it over to Mark for further commentary thank.
Thank you, Dave and good morning, everyone for the third quarter of 2020, our revenues outperformed our guided revenue percentage decline of low to mid teens with revenue of $326 million or down 12% sequentially.
The U.S. segment third quarter, 2020 revenue was 228 million down $32 million or 12% from the second quarter of 2020.
One piece of business transformation completed in the period was the combination of our U.S. supply chain services business, including its downstream industrial and our integrated supply chain solution offering into our U.S. energy business.
This combination of similar purpose groups focused primarily on the energy market improves performance accountability and combined financial performance as a whole.
This decision was made to foster new levels of collaboration and consolidation and will deliver operational efficiencies spark additional innovation and most importantly provide increased value and attention to our customers.
Our newly combined U.S. energy branch revenue was down 7% sequentially as many of our customers deferred projects and continued with reduced drilling and completion activity during the quarter.
Our U.S process solutions revenue was down 28% sequentially on lower customer activity, we felt the impact of several months of customer deferrals and elevated new order discipline as customers focus on conserving cash and drawing down their surplus pumps vessels and fabricated inventory.
During the quarter U.S. process solutions shipped existing orders for lacks pump packages measurement units launchers, and receivers to active operators. The increase of completions does provide opportunity for U.S. process solutions and specifically our power service group to increase our vessel order activity those relatively quiet during the third quarter.
And our Canadian segment third quarter, 2020 revenue was $42 million up $1 million from the second quarter as we discussed on the last quarter.
Twoq call Canadian revenue included a large 5 million dollar project order, which did not repeat in the third quarter, excluding for that our Threeq you Canadian revenue was up 17% sequentially.
Moving to the International segment third quarter, 2020 revenue was $56 million down $13 million from the second quarter as countries in locations adjusted to the lower activity levels and pandemic movement restrictions in place, particularly in the middle East and Europe.
In the third quarter gross margins were 19% an improvement of 60 basis points sequentially.
Gross margins improved partially through increased pricing and favorable revenue mix with lower project activity in Canada and international.
Inventory charges in the period were $9 million as we adjust our product lines and locations that no longer aligned with our strategy and evaluate current activity levels.
We have historically experienced inventory charges to be higher than normal during depressed market conditions.
And as we account for the change in our customer demand.
In the third quarter of 2020, warehousing, selling and administrative expenses or WSA was $83 million or down 14 million sequentially.
Ahead of our plan and beating our guidance of high Eightys to low ninetys.
As a result of continued cost transformation initiatives and an increase of government wage subsidies by 2 million sequentially.
Or $6 million for the quarter.
We completed five location closures during the quarter or 45 facilities year to date as we continue to rightsize our footprint according to our strategy.
And branch operations, we are scaling back the number of employees trucks inventory and facility size to favour a more centralized fulfillment model.
From a product portfolio perspective, as you'll notice on our balance sheet. We've included assets and liabilities held for sale at September 30.
These primarily relate to the divestiture of a small regional lighting business in the UK that was successfully sold last week.
Moving back to WSA reductions. These past few quarters, we focused on implementing numerous cost reduction initiatives. These include streamlining our customer service model to accelerate structural changes and optimize processes for near term and long term games were.
We're working every line on the financials with a focus on profitable market share gains pushing for reduced costs for manufacturers targeting high margin product lines and rigorously pursuing fitness at the expense line.
We are deploying technology to augment labor content, automating and digitizing processes and activities reduced discretionary and infrastructure costs and headcount from 4400 to 2550 since the beginning of the year.
Including current actions underway and recognizing unknown variability due to customer bankruptcies and separation costs, we forecast a year over year 2020 versus 2019, WSA reduction of over $140 million exceeding our full year cost out commitment discussed in February by over 100 million.
While we are not done this is a major milestone and would not have been possible without the customer focus and dedication of our talented employees.
Moving to net loss net loss for the third quarter was $22 million or a loss of 20 cents per share.
Net loss, excluding other costs was $17 million or a loss of 16 cents per share.
Non-GAAP EBITDA, excluding other costs for the third quarter of 2020 was a loss of $15 million, which includes 9 million and unfavorable inventory charges.
With the ongoing liquidity challenges faced worldwide, we continue to stand in a position of strength, we took decisive and proactive steps during the quarter to focus on what we control and delivered a record cash position of $325 million.
As of September 32020, our total liquidity from our Undrawn credit facility availability plus cash on hand totaled $534 million.
Accounts receivable in the period were $213 million down 29 million sequentially with Dsos of 60 days.
Inventory ended the third quarter at $318 million down $52 million sequentially with similar inventory turns to Twoq at 3.3 times.
Our accounts payable ended at $163 million with days payable of 56 days for the third quarter.
Net cash provided by operating activities year to date was $133 million with $59 million in the third quarter and after considering 2 million and capital expenditures free cash flow was $57 million.
Our year to date free cash flow was 126 million exceeding a quarter early the high end of our full year free cash flow guidance.
During stress periods in our business, we focus on the preservation of liquidity and the management of variable and fixed costs to that end, we produced approximately $53 million in quarterly WSA when compared to the year ago quarter.
And when looking back on our successes and optimizing working capital and strengthening our financial position over the trailing eight quarters, we've generated $432 million in cash when considering free cash flow and cash generated from our divestitures.
This focus on the balance sheet fitness can also be seen in our working capital execution as of September 32020, working capital excluding cash as a percentage of third quarter annualized revenue was approximately 22%.
And when compared to the trailing 12 months of revenue working capital as a percentage of revenue was approximately 15%.
We have a strong balance sheet and ample liquidity that allows us to operate efficiently and intelligently in this environment. We will continue to execute on what is in our control. We are continuously developing a more agile business and remain focused on increasing productivity in everything we do.
With that I'll turn the call back to Dave.
Thank you Mark and now I'd like to shift the focus towards our outlook for the fourth quarter.
We experienced seasonal revenue declines from the third quarter to fourth quarter, each year due to weather delays on projects fewer billing days holidays and seasonal customer budget exhaustion. For example, our third to fourth quarter revenue declined in 2019 was 15% while global rigs declined 6% producing a.
Seasonal net revenue to global rig decline or spread of minus 9% that's.
Thats spread from Threeq to Fourq, you was a decline of 7% in 2018 that.
Thus recent history experience, which suggests you should suggest a decline in the high single digit percentage range from the third quarter to the fourth.
This year, we expect these drags on sequential revenue to be negatively impact by the broad range impacted by the broad range of customer reactions to macro conditions, where while some will spend more as rigs and completions inch up others will ease activity due to coal which impact on demand and the potential for addition.
Lockdowns.
Moving to M&A. The current market uncertainty has created its share of new challenges, adding unpredictability to the typical M&A process notable for us on the expanded processes related to financial due diligence and the stress testing we discussed on our last call around current target earnings performance as.
We evaluate the requirement is critical to trigger closing the transaction.
We continue to update and refine our pipeline to confirm each deal is still aligned with our expectations.
Our balance sheet affords us the ability to be patient and prudent we are actively engaged in various stages of multiple deal conversations.
We continue to remain highly selective and we'll strike at the right time for the right business at the right value to our shareholders.
On the divestment side as Mark mentioned in October we closed on the sale of a business line in the UK. Although it was a small part of the overall business. This move further exemplifies the proactive steps were taken to transform our business and prioritize providing long term value.
In closing Im excited about the momentum building in the execution of our strategy Dino.
Denounced performance reflects our employee steadfast dedication to provide superior service and value to our customers we.
We have produced strong gross margins. Despite the deflationary poll by the market and have extracted historic levels of cost from the business with plans for further cost transformation.
Our working capital discipline has resulted in a record cash balance and we are deploying disruptive technologies to simplify the customer experience develop new revenue channels and drive efficiencies.
We remain debt free with more than half a billion dollars in total liquidity to continue our investment in technology, while to justice judiciously pursuing inorganic opportunities that provide the optimal strategic fit.
Now lets open the call for questions.
Thank you we will now begin the question and answer session.
Have a question. Please press Star then one on you touched Tom Brown.
Can you speak about you may need to pick up the handset burst before pressing the net price. Once again, if you have a question. Please press Star then one on the attach Tom Paul.
And our first question comes from Sean Meakim from Jpmorgan.
Thank you Hey, good morning.
Hi, Sean.
So they don't want to start.
Morning, gross margin was elevated again, so if we exclude the impact of inventory charges to be above 21%.
Inventory charges are necessarily new you could have some each quarter, but you've been calling them out given the magnitude.
While activity is collapse, how we move past the larger inventory charge periods do you see that as on going into next year and how should investors calibrate.
All the moving pieces to what a normalized gross margin could look like next year.
Okay. That's a good question Sean so so we talked about over the last few calls we've had kind of two phases of cost reductions. Those are those are behind us and mark kind of spoke to the impact of those now we're moving into another phase, which will take a little longer. So we have 200 locations around the world we see in the <unk>.
Sure re purpose seen them to be.
Customer.
Customer focus book.
Narrower range of of inventory.
Less less inventory.
Fewer people less vehicles et cetera, so to pull costs out business that will take little bit longer so that'll sizing up how much inventory is at risk as we re purpose our branches will take a little longer we we hope to do most of that by year end. So we would expect elevated inventory charges through the end of the year and.
And then maybe if we do more more dramatic changes in the new year, we'd see some in the future, but we expect that to normalize at the end of year.
Inventory charges are part of our business or our big distributor, we have a lot of inventory over time, we see about.
Half a percent to 1% of our revenues.
Beyond the normal level of inventory charges for example, but.
But as we said recently they've been elevated so in terms of what the normalized.
[music].
Gross margins would be we think they'll be 20% plus now I say, 20% and I say plus for a couple of reasons, you, adding up higher number than that part of that's because we've talked exhaustively about growing our position in midstream.
And while the transaction costs to handle large midstream orders is lower meaning the WSA percentage of revenue would be lower so goes the gross margins. So that would be an impact to the extent we're successful in in our pursuit, but the midstream business.
But weve talked for a few years now of high grading our customers our product lines, our locations our businesses too far.
For a perpetual.
You know track along improved product margins, so and gross margin showed 20% is kind of the baseline.
Got it I appreciate all that feedback I think that's that's really helpful.
Somewhat intertwined.
All those efforts in the <unk>, that's impacting inventory is really about the cost reset and so they've made huge strides in ws today.
But even with all the cost out given where activity is getting back to consistently pay.
Positive EBITDA.
EBITDA number is little bit challenging until we get more more volume.
Have you run forward analysis once you've reset the cost base, where you want it to be in terms of how much volume or revenue is required to hit certain hurdle rates around.
The EBITDA margin target can you maybe just talk are you able to give us give us a framework around kind of a trough.
Like versus normalized EBITDA EBITDA margin going forward relative to maybe what you were able to accomplish in the prior cycle.
Yes, So you want me to forecast an EBITDA target.
I mean.
No.
What I first want to do is get the business to to breakeven.
And and ultimately we toss us top extort historically, we've been in the 5% EBITDA range, we definitely want to get back to that level and higher but first when you get to breakeven. So we've seen our north American market declined by 80% since 2014, we've made significant restructures in the business.
We're kind of pursuing a fulfillment migrate central migration, where we're moving our business to more of a centralized model. So so getting to the right level of.
W are seeing the business.
Forecasting the revenue is all that has to come together, where we before we start talking about what kind of EBITDA progression.
But I, but I would tell you 5% is a minimum starting point and we need to get to breakeven first we believe we'll get to breakeven in the first half of 2021.
And that's going to require.
Yes.
A few things for example in the fourth quarter, we talked about a decline I gave some guidance along those lines in the meantime during the fourth quarter were seeing rig counts in shop and completions likely will follow suit as we're seeing more frac crews go to work.
Continues into the first quarter, and we experienced an expected seasonal increase or reversal from the fourth quarter decline.
And we continue to make progress.
In a muted recovery in terms of gross margins, while we're pulling out cost we can get to breakeven in the first half. So that's that's kind of phase one.
After.
The worst oilfield industry since the great depression.
We've done.
Her role at work in this company to get to where we're at right now so for US we need to get to breakeven. We have it we have a plan to do that and then in the spirit of your question than we need to get to meaningful EBITDA numbers, and 5% would be a base and above that would be where we need to go as we as we buy companies as we divide divest parts of our.
Business that aren't profitable.
And as we high grade all those things that don't work and don't work in our business.
Thanks, Dave I know, that's an easy question, but I appreciate the context around your goals, it's very helpful.
Youre welcome Sean.
Our following question comes from John Hodulik of Cowen.
Hey, good morning, David Mark.
Good morning.
So just wanted to dig into the revenue commentary a little bit for the fourth quarter. So your dreams, you're guiding down high single digits.
But perhaps there's a little bit of offset.
From the completion side of things.
That seems to be improving in the fourth quarter. So maybe that helps your process solutions business. So.
Can you kind of talk to if there are some conservatism baked into that.
Expectation and then how does that revenue decline look split between your energy process solution segments.
Okay. So.
If you look at.
Just the seasonal the normal seasonal impact.
We would see a revenue declined in the last several years. The only time, we sought and increases in 2016 when rig count really took off in the second half of the year and then we look on a net basis, what happens with our revenues historically compared to what happens with rig count which to me, which is the better long term gauge for revenue opportunities for us.
And we just we simply see that that difference of last year, our revenues declined 15% while rigs declined six so we saw a 9% decline. So we're kind of expecting that will happen. When you look at October and of course, we've seen our our preliminary October revenue numbers, they're flat with September.
And then a few if you recall, what we've kind of the.
The contours of that of the third quarter September was one of the weaker months was the weakest month in third quarter. So our October numbers rival September but September was a soft month in the third quarter. So we kind of start the fourth quarter.
And October generally is your best month of the fourth quarter. So I expect a seasonal dip in November December that's how we get to that number there might be some positive offsets. We do have customers that are committing to buy more and we're in we're seeing in some of the numbers, but I think theres a heavy pause out there on the dish.
Total investment.
No.
Bigger more impactful than normal given.
Given uncertainty.
But we're doing everything we can and we talked exhaustively about focusing on gaining share in the upstream space. While we find revenues in you know in the municipal water business and the mining business in other parts of.
Our customer base, where we can grow.
So thats the best that's the best guidance, we have right now John.
Thanks, Thanks, Dave and then I guess following on to that same line of thinking if you did mentioned that their municipal water and mining and industrial pieces of the business that could be growth areas.
For Gino can can you talk about.
What percentage of the business or what kind of revenue contribution you are getting from those businesses today.
A possible market size for for those types of end markets yet.
I noted in my commentary those are small parts of the business a lot of that activity is happening Odessa pumps in it and Odessa pumps is.
Less than 10% of our business and that might be and we're seeing growth in the water water disposal business and that represents about 10% of ADESA pumps. So on the less than 3% range in terms of where we are today, but we do see though is more customer acceptance of the offerings. We have in that area. So we see it as as a.
Central to grow, especially after one of our most successful businesses and Odessa pumps.
Two views our fixed cost.
Branch network, Odessa pumps, and add business to the existing revenue stream there.
Understood and then I guess kind of a bigger picture question is looking into 2021.
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No your activity progression as as things improve here, how do you think about working capital for the full year is there still some efficiency to began there such that.
Your working capital consumption as activity improves could be limited or.
Is there any kind of range or a way to think about that in 2021. Thank you.
Okay. So in terms of working capital next year, I think Mark mentioned that our working capital as a percent of revenue was 22% for the quarter and.
For the tail end of but the 2019 period, we had working capital as percent of revenue the 80% range. So I say I'd first answer that there's room for improvement in terms of the turn.
Turning our inventories a little faster improving collections. So there's room for improvement prudent there if we see some modest growth next year and again, we're not forecasting 2021, but to the extent we do.
We would begin to consume.
Capital somewhat to AD inventories certainly for accounts receivable. So how much cash flow. We have is going to be a function of revenues, but but I think in the spirit of your question.
While our AR I think Mark said, our inventory turns of 3.3, thats kind of a low but in a market like this we see that as a pretty strong performance given how illiquid.
Most inventories are up there, but but generally room for improvement.
But to the extent there is growth we may see muted free cash flow in the new year.
Thanks, I'll turn it back.
Ticker John.
Our following question comes from Doug Becker from Northland capital.
Thanks.
I wanted to get a little more color on the margin improvements in the quarter I think in the prepared commentary you mentioned pricing improvements as well as mix just wanted to get to make sure I heard that correctly, but also any color on where the strength was.
Yes. So so mix was was so there's really three components to.
Major impacts on gross margin, Sean Sean asked about one of them and that was inventory charges. They were a little bit lower in the quarter that wasn't the primary driver for for gross margin improvement, though it was it was price and the two components there would be mix, which we benefited from so in in the international space.
And in the us as well, we saw lower projects lower levels of projects projects tend to be larger orders at lower margins. So that helps so there was a mix component and we're continuing the process of picking.
The right manufactures who support our customers to maximize margins. So we have a better margin gain from from.
From saddling up at the right suppliers and more board.
Continuing lines that are less profitable so.
So that's that's kind of that's a mix effect too.
But it also is we're picking the higher margin products.
Or with some some customers pricing the products better.
So we're in that but throws of a downturn.
There's a lot of competitive activity some of that is behind us with certain customers and now we're repricing that higher level.
That all makes sense.
Is it fair to say that we've probably seen the trough in gross margins maybe in the second quarter.
Given those some of those things are more structural than than.
And transitory in nature.
So my sense is.
Yes, but let me let me qualify that at so.
It feels like we have I mean, if you look at pipe prices they.
They turned the corner in severity, which some very slight term, but we've seen pipe pipe prices begin to improve maybe for one month.
[music].
And last but my caveat would be we're going into the fourth quarter.
Almost all of our competitors are going to decline in terms of revenues.
And I think we'll see real scrappy.
Competitive response in the fourth quarter, just due to the seasonal decline in revenues and so.
So we already guided to a revenue decline we said we're in a period of elevated inventory charges, we expect a competitive response from.
Especially the regional competitors trying to make payroll to price, even better inventory below cost in the fourth quarter.
So all those are kind of negative effects on gross margins in fourth quarter.
Largely driven due to the evaporation of projects and volume opportunities in the fourth quarter. So on.
Balance.
We could see us just a little bit of slip in the fourth quarter.
Inventory charges will impact that quite a bit.
Sure, but I do believe from a pricing perspective, Doug we have trough.
Okay. That's good.
And then you mentioned.
Do you expect to gain share as a result of the MP consolidation.
Where did those share gains typically come from <unk>.
Presumably because your larger competitors talking about share gains from consolidation as well, it's the smaller players, but just want to give more context around that.
So I top very topically about that in the call and I'll elaborate so so we're looking at six North American.
Purchases or acquisitions or combinations and and three of those six.
Hi.
Top echelon ranking customers big customers of ours, with whom we have strong relationships and that the company. Most company loans that are being acquired are not in our top echelon so to the extent.
That the acquirers per.
Pursue a sole source or a a singular strap procurement strategy, we should pick up share.
From the acquired companies.
Not so much from the acquire.
First because we already have a strong position I mean generally that national distribution companies benefit from these kinds of mergers the regional players find.
Find themselves kind of flat footed they can't they can't manage and nationwide or north American wide relationship. So we have an advantage there.
And we see the opportunity there is to leverage our process solutions business. So in each of these relationships and by the way all 12 of these companies are customers of ours.
But are less but our process solutions is becoming more and more important to our big customers.
So we see that as an opportunity to parlay.
That.
Product offerings set to the acquired company as well so.
So.
I see the pickup potential really being with the acquired company.
And that's kind of our target.
We said on the call bad.
While we are optimistic this will be a hardscrabble fight, but we think we're well positioned.
Thank you very much.
Welcome.
Our next question comes from Walter Liptak from Seaport.
Hey, good morning, guys good morning.
Congratulations on controlling the costs I wanted to.
To ask about the Ws in May and if I heard you right.
We're tracking towards about 400 million.
W estimate for the full year is that right.
Mark Threeninety five about 390 fives of.
The guide.
Okay, alright and within theirs.
There's probably some transitory costs, both pluses and minus I wonder if we could talk.
Give us a little bit of color on those like you.
You called out government subsidies. So those are going to go away.
You are spending on this digital.
That there might be some expenses going through I wonder if you could just help us understand maybe yes.
What like the normal level of W. us today might be as we we pull out some of those pluses and minuses.
Right, Yes, I think.
As we mentioned, we're we're still pulling levers. So so I think normalize out they were were to talking about that we can call out you're right.
Some of the government subsidies, albeit limited and cap based on some of them those and we've as we see it those peaked in the third quarter and we see those trailing off in the fourth quarter and then that's in our our expectation as well that are those also offset so would other initiatives that were underway to reduce.
Reduce costs so.
I think right now we're in the process of planning annual planning and.
Visiting with customers and planning as much as we can into the next year and so a lot of those initiatives underway and so I think next time. We're on this call will overlap a little better line of sight, let's hope about the industry and activity levels to talk more about normalized levels of WSA, yes.
I think while we.
I mentioned, a little bit in MCU in a earlier on the call that.
We've made significant reductions in our.
And those were.
The.
Most were less.
Those are easier to make in terms of now we're moving towards a system, where we want to stay close to our customers we want to maintain as much as possible.
Our fleet of locations, which is 200 today.
Tomorrow, we're going to be pursuing branches half and half their size and and with less inventory and fewer trucks like Mark said and that takes a little bit long to affect that kind of physical move of those branches. So it's harder for us to to.
To say, what our normalized level of WSA as we have said historically that.
That.
A normalized.
Say should be closer to 15% of revenues, so thats, where we have to end up.
And Thats, where were going going to to get but that'll be that'll be more of an evolution than what we've experienced so far which is in terms of cost reduction more revolutionary.
Okay got it yes, there'll be some evolution to that the WSA line.
Yes, I wondered about the digital now if theres any data points you can give us like what how many orders were processed as a percentage or the number of users that were added.
Yes, any data for us to kind of help us understand where you are in that process.
Yes, so so.
Similar to last quarter, our revenues about a third of our global revenues.
No.
Okay happened through various digital channels and that's growing if you look at our top.
30.
Top 30 or.
Three dozen customers by 56% of our revenue.
His through digital channels, so usually our larger customers is where we do the bulk of our digital activity today. The opportunity is to fold in Morse more smaller customers and to add product offerings like we talked about earlier in the prepared remarks about making it easier for customers to make large purchases from us.
Mick to really accelerate that process and to kind of cut out the quoting and the price degradation process and the high cost to quote process and make it simple for the customer to take to to get to produce wells et cetera. So so thats kind of where we're at.
Midstream.
Our.
[music].
Upstream customers, where we see the most digital integration, we think the opportunity to areas with our midstream, which is where we have no east.
And thats largely because that's a high quoting business and we're still working on making that process more seamless.
Okay got it thank you.
Welcome.
Ladies and gentlemen, we have reached the end of our time to the question and answer session. I will now turn the call over to date Terra chips ski CEO President for closing statements.
Okay, well. Thank you everyone for attending the call. We appreciate your interest in now Inc. and we'll talk to you soon stay safe.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
Okay.