Q4 2020 NOW Inc Earnings Call

Okay.

Hello, and welcome to the fourth quarter and full year 'twenty and 'twenty earnings Conference call. My name is Charlotte and I will be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session.

If you have a question. Please press Star then one on your Touchtone phone. Please note that due to the recent severe weather conditions. If the speakers on the call gets disconnected from please standby and we will work to reestablish their connection and now I'll turn the call over to Vice President marketing and Investor Relations spread wise, Sir you may begin.

Good morning, and welcome to now Inc, fourth quarter and full year 2020 earnings conference call.

We appreciate you joining us and thank you for your interest and now Inc.

Please note should there be connectivity issues during the current severe weather conditions and the Houston area I wanted to remind everyone listening today that a replay will be available through our website later today.

Now with me today is David Church, and ski President and Chief Executive Officer, and Mark Johnson, Senior Vice President and Chief Financial Officer.

We operate primarily under the distribution now and D. Now brands and you'll hear us refer to distribution now and do now which is our New York stock exchange ticker symbol during our conversation. This morning. Please.

Please note that some other statements we make during the call including responses to your questions may contain forecasts projections and estimates and.

Including but not limited to comments about the outlook for the company's business. These are forward looking statements within the meaning of the U S. Federal Securities laws and based on limited information as of today, which is subject to change.

They are subject to risks and uncertainties and actual results may differ materially.

Now one should assume that these forward looking statements remain valid and the quarter or later in the year, we do not undertake any obligation to pump.

Quickly update or revise any forward looking statements for any reason.

In addition, this conference call contains time sensitive information that reflects management's best judgment at the time of the live call a.

And I refer you to the latest forms 10-K, and 10-Q that now Inc. Has on file with the U S Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business for us.

Other information as well as supplemental financial and operating information may be found within our earnings release or our website at IR Dot D now dot com or in our filings with the SEC.

And in an effort to provide investors 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.

A reconciliation on each of these non-GAAP financial measures to its most comparable GAAP financial measure is included within our earnings release as of this morning, and the Investor Relations section of our website contains a presentation.

Covering our results and key takeaways for the quarter and full year.

As I mentioned at the top of the call a replay of today's call will be available on the site for the next 30 days.

We plan to file our fourth quarter and full year of 2020 form 10-K today and it will also be available on our website.

Now, let me turn the call over to day.

Thanks, Brad Good morning, everyone and thank you for joining us before I get into strategy and talk a bit about the quarter I wanted to take a moment to thank our employees and acknowledged and their hard work.

Their dedication to serving our customers and supporting our key suppliers.

For making safety a priority and for their perseverance overcoming a year that few will remember fondly.

It goes without saying 'twenty and 'twenty, what's your Europe change, but as we round the corner My view was wanted to expanding and opportunities and optimism moving from a period of duress to a period of stabilization and growth.

Now stands in a cherished financial position and is on firm footing.

This is no longer and moment of extreme uncertainty and concern for the period of promise prosperity and possibility.

Our focus is on providing the market with the innovative solutions and products to power the world for a sustainable future.

And what this means is we will be a trusted partner to help our customers unlock the power of the energy and pursue sustainability by expanding our innovative solutions and support of our customers' ESG goals.

Last year, we laid out a strategy to recompose, our brick and mortar infrastructure as.

As we transition away from a distribution model tuned to a 2000 and U S rig environment to a model suited for 400 rigs cognos.

Cognizant that our customers are consolidating and driving procurement centrally and.

And that consumers and companies buying habits have changed abruptly.

These changes necessitate that our fulfillment design will continue to transform our branches will be smaller leaner and utility oriented which means stocking. The staples are local customers expect but not stocking locally speculative items or quantities for projects or large dollar or.

Orders.

We are laying the groundwork for long term profitable growth by standardizing the branch design when it lowers operating costs is nimble and flexible and has the ability to expand and contract more responsibly to market volatility.

We hold a formidable upstream position and expect to accumulate market share by capturing ups upstream spend in the form of maintenance capex from those customers seeking to maintain production.

In addition, and expanding our presence outside of upstream is a key part of our end market diversification.

Last year, we made inroads with key midstream and downstream customers and renewing MRO agreements implementing digital solutions and repositioning our sales and operations teams to compete on larger capital projects.

Technology will play a key role and how we use information process customer requests and fulfill orders.

And prior calls I've talked about the benefits of our new order management system, where we see notable productivity increases and customer response times.

Our E commerce platform and digital tools like E spec, which I'll expand on later provide our customers a platform to access acquire information price procure and manage spend in our ecosystem with greater speed and efficiency.

Expanding user adoption shifting work processes to these digital channels and leveraging our centralized fulfillment model will drive top line growth and lower transaction costs.

And our goal of adding and customer sustainability as noted in our 2019 sustainability report D. Now provides a broad range of products and services, which help our customers minimize their environmental impact.

And by targeting opportunities to reduce or eliminate emissions and providing responsible water management solutions for water reuse and disposal.

Some examples include efficiency audits for pumps, and compressors, capturing and properly disposing of methane or boc emissions with our vapor recovery units, while providing fluid handling equipment with leak detection and sealing technologies that environmentally help transfer and dispose of produced water and this.

Sustainable way.

More to come on customers and technology, but first to the fourth quarter.

All of our locations continue to remain open during this pandemic, but current deep cold winter weather and the U S has customer sites idled and nearly 60 day now locations closed for what could be days complicated and the seasonal recovery, we expect sequentially.

Covid conditions are still debilitating and the global economy that remains government restrictions impacting our customers and employees.

Yet we continue to follow who and CDC guidelines to help keep our employees safe and supporting our customers.

For the fourth quarter of 'twenty, and 'twenty revenues were 319 million and a sequential decline of 7 million or 2%, beating our revenue guide from the last quarter, which suggested a sequential decline and the high single digits.

And the U S and Canadian market rig activity improved sequentially, helping offset the lower international market and buttressing revenues against seasonal and Covid gravitational forces.

Having zero debt and ample cash allows flexibility around organic capital deployment and inorganic growth.

We continue to invest and our expanding digital now offering.

Designed to improve the customer experience drive increased revenue and reduced transaction and fulfillment costs.

On Friday, we successfully tucked our first acquisition of 'twenty 'twenty one into U S process solutions. The acquired business is a small but strategic engineering and construction company based in Odessa, Texas, We are excited to leverage and expand on their 20 years of experience, providing EPC services to handle.

Gathering systems for new field, upgrading or debottlenecking of existing transportation lines and facilities as well as other services and the upper midstream.

Current and previous clients include independent and major energy companies for design build projects and EPC work for independents.

This addition of non Commoditized capabilities expands denounce engineering and construction capabilities by adding an additional channel to proactively market and sell our pipe valves and fittings or P. D F as well as pumps process production and measurement equipment earlier and the project development cycle.

This acquisition should enhance D. Now as early look at gathering and related midstream projects bolstering project wins.

Two the talented employees, joining our company and listening today welcome to the <unk> family.

And now further pursuit of M&A managed like and investment portfolio, we are seeking to add companies, which expand customer appeal create competitive advantage.

[noise] Frenchie Asian, and build barriers to entry for D. Now, while as evidenced last year exiting low margin commodity product lines locations and divesting two businesses in 'twenty and 'twenty that didn't support and our strategy or more margin dilutive.

Now to our operating segments and end markets.

U S energy revenue increased sequentially due to increases in drilling activity in the Permian, while we experienced increased operator activity and the Eagle Ford taking advantage of higher natural gas prices.

The DJ basin and started to improve towards the back end of the quarter, while customers in the Bakken and northern Rockies operating and maintenance Capex mode.

Workover rigs increased in the Bakken, resulting in revenue gains from our MRO well maintenance products.

Revenue declines occurred in the Western U S. As midstream related activity was lower sequentially.

Among E&P customers, we were awarded and P. B up and MRO contract from an IOC operator for operating assets and the northeast.

We were also awarded a P. B S. MRO contract from a large U S based independent for Permian and South Texas assets.

And we gained regained and Alaska as well with the PBF contract from a customer operating assets and with two fields and the north slope.

For our large committed supply chain services customers, we observed a muted capex spend during the quarter with increased maintenance as more workover rigs were deployed to maintain well production.

Resulting and consumption of MRO products and tubing services.

We also received orders for a scheduled gas plant turnaround and set for the second quarter of 'twenty 'twenty one.

We've been focusing on further and market diversification by actively marketing and our products and services and expanding our customer base.

During the fourth quarter, we were awarded a three year well connect program and the Rockies from the midstream natural gas gathering and storage asset company.

Our platform of digital solutions, plus our for bird valve product offering was a contributing differentiator for winning the business.

We recently completed our digital now E commerce integration with the company establishing them as part of our digital ecosystem.

During the quarter, we had some meaningful project wins for P. B F pumps and fabricated equipment with another midstream customer with assets and the rock and Rockies and Permian.

And gathering and natural gas and disposal of produced water.

We signed an agreement with the Midwest mid continent gathering and transmission midstream company that should provide additional revenue and 2020 as well.

During the quarter, we were successful and providing PBF and fiberglass pole and project to a water management management company with operations and the Bakken Permian and South Texas.

And the midstream and industrial Arena refinery activity was sequentially lower as major product projects and turnarounds were pushed out to 'twenty 'twenty one.

Finally during the quarter, we renewed a two year MRO and safety services contract for a major refinery company and extended and existing P. F F agreement for.

Additional three years with another major IOC refiner.

U S process solutions revenue for the fourth quarter was down sequentially during.

During the quarter, we experienced increased quoting activity, especially from municipalities are good and reversal from what had been significantly reduced and two two and <unk> 'twenty and 'twenty.

Odessa pumps experienced reduced activity and the fourth quarter due to oil and gas seasonality, partially offset by new orders related to municipal water projects and a sizable hydro pump rental contract for terminals, operator, moving water from tanks pipelines and firewater bypass systems.

The first quarter has started off better book and a large municipal water order from and municipality and North, Texas as we continue to target water opportunities.

With a large independent E&P, we expanded our aftermarket pump program, two and additional producing field that will result in servicing and up to 170 pumps with ample runway to grow.

Some notable market share gains from our Casper power service facility included 20 vessel package for and E&P operator in the Powder River Basin Powder River Basin.

Sizable orders from the Bakken and Eagle Ford for production equipment and lacked units as well as several water transfer units sold to a large independent E&P.

And our top all Texas facility, our orders are recovering from the two two and three Q low points as we diversify products with wins for lack units and pump packages for E&P and midstream operators.

In Canada market activity increase for the quarter, allowing for sequential revenue growth. Despite the <unk> headwinds mentioned earlier.

We secured wins and the quarter and our valve and actuation product lines with several midstream terminal customers <unk> and oil sands customers.

And the unconventional areas, we'll be successful at providing and EPC and IOC customer valves and variable frequency drive solutions as part of our well site automation and control offering.

On the conventional side, we increased market share with our new natural gas E&P customer operating and the Altair is region provided PBF projects products.

And then Regina Saskatchewan region, we expanded our market share with the midstream pipeline operator by performing aftermarket work, replacing existing actuators with our preferred actuation product line.

The valve actuation and aftermarket has been a key target market for us, resulting in our first win for this application with additional opportunities for growth.

Finally in Canada for our composite piping systems, we completed work with and oil and gas operator, and the Manitoba region from the previous third quarter contract Award.

The project deployed our Spooled fiberglass pipe for 19 oil flow and water injection line applications.

For international and the fourth quarter International rig count and a more than 20 year low international sales languished and lower rig activity reduced spending project holds et cetera.

And much of the region Covid restrictions interfered with logistics and operations put limitations on travel.

On a positive note our total valve solution initiative that was expanded to a major IOC and the middle East.

As we implement implemented are valid lifestyle lifecycle asset managed solutions and solution.

Combined with and MRO agreement, leveraging our digital E catalog.

Now a little more on technology and.

'twenty and 'twenty, we committed to becoming a leader in our space by investing in digital technology, not only to make our internal systems more productive, but also to speed the journey and customer appeal of our digital now ecosystem.

Connected to our technology environment and for me in the outer layer of our customer ecosystem are a number of our digital platforms, where we offer access to customer specific content.

Web based and mobile applications analytics and data sets and other digital tools.

The goal is to provide our customers with the seamless connected and to an experience for a wide range of products and services through a single access gateway without leaving the ecosystem.

And for our suppliers and partners. It allows a framework for digital collaboration that will accelerate solutions to the marketplace.

One example, which I talked about last quarter, where we're beginning to get traction is on a strategic third party drop ship partner.

Which provides customers a broader range of products not only not normally stopped at our branches, but readily visible and available to our customers. It is similar to the marketplace experience on Amazon.

By growing our partner and ecosystem D now benefits by expanding our catalog and convenience to customers, while realizing working capital benefits for the optimization optimization of our inventory investment while lowering future inventory risk.

We previously announced the rollout of our new digital now E spec product.

We expect tools and digital product configuration that enables customers and the ability to select configure and price out a number of our process solutions products.

And our initial launch in November we had three fabs.

Fabricated products available for customers to configure today, we have expanded and be available products Tonight.

The products available and east back range from ASME production vessels used to separate the crude oil mixture to several transfer and measurement units for separated oil and gas.

Since and launch aspect has been a valuable customer collaboration tool, allowing our tactical sales professionals the opportunity to have meaningful discussions involving processing facility design and budgeting for our E spec products.

Customer registrations and use have drunk use has grown since our initial launch more than doubling since the first of January two O for 120.

Over the next six months, we will be releasing additional digital tools that further enhance our technology, including and upgraded E Commerce platform.

With that let me hand, it over to Mark.

Thank you, Dave and good morning, everyone.

As Dave mentioned, we entered 2021 with relief and optimism relieve that one of the most difficult years and the Companys 159 year history is behind us and optimistic for our future given the significant actions taken and underway.

We are encouraged by the recent worldwide deployment of COVID-19, vaccines improved crude oil prices and the progress we are making on our strategy.

For the fourth quarter of 2020, our revenue outperformed our guided revenue percentage decline of high single digits with revenue of $319 million or down 2% sequentially.

The U S segment fourth quarter, 2020 revenue was $224 million down $4 million or 2% from the third quarter of 'twenty and 'twenty as our traditional for Q headwinds of fewer business days extended vacations customer budget exhaustion, plus COVID-19 impacts were partially offset by increased rig count and complete.

And as activity.

Our U S Energy branch revenue was up 1% from the third quarter as we captured increased drilling and completion activity. During the end of the fourth quarter, partially offset by the expected seasonal declines due to less billing days and customer activity around the holidays.

U S energy revenue accounted for 81% of the U S segment revenue and the fourth quarter compared to 79% and the third quarter of 2020.

Our U S process solutions revenue was down 13% from the third quarter, mainly a result of seasonality and customers' continued order deferrals as they draw down their surplus pumps vessels and fabricated inventory.

With the increase in rig and completion as noted at the end of the fourth quarter through today, we began to see some life from customers in terms of future activity increases and project work.

Both should create opportunities for pump and vessel orders and the first half of 'twenty 'twenty one.

And our Canadian segment fourth quarter, 'twenty, and 'twenty revenue was $48 million up 14% from the third quarter as we supported increased customer activity levels and expanded our value for many clients through D. Now is unique combination of bundled solutions and products.

Outside of North America momentum slowed through the fourth quarter with additional Covid Lockdowns and travel restrictions continued customer project approval delays and the slowing activity and places like Russia, the middle East and offshore.

International revenues were 47 million for the quarter down $9 million is working rigs fell and drilling activity slowed.

In addition to generating stronger than guided revenue in the fourth quarter pricing on product margins held steady when compared to the third quarter of 2020.

And the fourth quarter gross margins were 14, 1%, including a fourth quarter non cash inventory charge of $24 million.

Or seven 5% of revenue and the quarter.

We've historically experienced inventory charges to be higher than normal during depressed market conditions. These elevated inventory charges were the result of additional product rationalization initiatives and connection with market dynamics customer preference changes and adjustments to our product lines and locations that no longer align with our strategy and activity levels.

And the fourth quarter of 'twenty, and 'twenty warehousing, selling and administrative expenses for WSI was $81 million or down $2 million sequentially and $4 million below our fourth quarter wsh implied guidance of $85 million.

As a result of accelerated cost transformation initiatives that more than offset the sequential for million reduction and government subsidies.

At the onset of the pandemic, we swiftly identified and implemented initiatives focused on maximizing customer service and transforming our operating model.

These bold actions, bringing our annualized fourth quarter, 'twenty and 'twenty WSI exit run rate to $324 million.

Or a $270 million reduction reduction of 40% and Ws say compared to 2019.

The most consequential effort taken in recent history.

The collective effort of our team to respond to the market challenges is notable and worth acknowledging as a strategic shift and our discipline.

Two activity and actively transform D now.

While we are not yet at the finish line. This is a major milestone it would not have been possible without the customer focus and dedication of our talented managers and employees.

And we together are working every line on the financials with a focus on profitable market share gains and pushing for reduced cost for manufacturers targeting high margin product lines and rigorously pursuing fitness at the expense line.

We're deploying technology to augment labor content, automating and digitizing processes and activities, reducing discretionary and infrastructure costs and thinking resources to match the current market activity levels.

Including the cost reductions completed.

We expect WSI to remain relatively flat and the first quarter of 'twenty 'twenty, one compared to the fourth quarter of 2020 as the new year brings a seasonal increase and expenses driven primarily by the resetting of limit based payroll taxes and health care cost inflation.

Moving to net loss net loss for the fourth quarter was 44 million or a loss of <unk> 40 per share.

Net loss, excluding other costs was 28 million for loss of 25 per share.

Non-GAAP EBITDA, excluding other costs for the fourth quarter of 'twenty and 'twenty was a loss of $29 million, which includes 24 million and unfavorable inventory charges.

With liquidity challenges faced by many worldwide, we continue to stand and a position of strength.

We took decisive and proactive steps during the year to focus on what we control and that shows by our record cash level of $387 million more than doubling our net cash position and the year.

As of 12, 31, and 2020 total liquidity from our Undrawn credit facility availability plus cash on hand totaled $584 million.

Accounts receivable and the period for.

For 198 million with Dsos of 57 days.

Inventory ended the year at $262 million with inventory turns are for point to.

And our accounts payable ended at 172 million with days payable of 57 days for the fourth quarter.

Net cash provided by operating activities in 'twenty, and 'twenty $189 million with 56 million and the fourth quarter and after considering 1 million and Capex free cash flow was $55 million.

Our total 'twenty and 'twenty free cash flow was 181 million, beating our previous full year guide.

Additionally, as I mentioned on our last call and the fourth quarter, we completed the divestiture of a small regional lighting business and the U K, bringing our full year 'twenty and 'twenty proceeds from the divestiture from.

From divestitures to $26 million.

And when looking back on our successes and optimizing working capital and strengthening our financial position over the last two years, we've generated $419 million and cash when considering free cash flow and cash generated from our divestitures and further improving what was already and enviable balance sheet.

Our focus on fortifying the balance sheet can also be seen and working capital efficiency improvements and the year with a record low cash conversion cycle.

And the quarter.

And as of 12, 31, and 2020 working capital excluding cash as a percentage of fourth quarter annualized revenue was a record low 15, 8%.

And when using the trailing 12 months revenue working capital as a percent of revenue was approximately 12, 5%.

We entered 2021 with optimism for the future are revamping of the business model transformative cost reduction initiatives technological enhancements and shedding of non core businesses have prime day now to be and its best position for sustained value creation for our customers and shareholders and 159 year history.

With that I'll turn the call back to Dave.

Thank you Mark.

And now I'd like to shift the focus for the first quarter.

Looking ahead, there's cause for optimism with oil trading and the high $50 range and North American activity continuing to improve.

And off fourth quarter momentum.

And the U S companies continue to add rigs and frac spreads, but some customers seem restrained as they meter rapid production growth and favor returns to shareholders.

We expect midstream gathering systems to follow suit favoring modernization projects overcapacity and expansion.

Domestic refinery runs are currently at their highest since the start of the pandemic.

We expect the U S to improve sequentially in the first quarter as customers complete recently drilled wells convert ducks, and Buildout tank batteries and gathering systems.

The Canadian market continues to be continues to be structurally challenged.

With the Keystone XL pipeline paused again, and the heavy oil coming in by rail.

However, the current market, we do expect sequential improvement and revenue as we build on our market presence and capture increased activity with our customers.

Internationally, the visibility is uncertain and to the first quarter as we await and an inflection point to start a recovery and therefore guide international revenue lower sequentially.

The global uncertainty related to Covid, 19, and the possibility of future industry and economic volatility certainly temper, our ability to forecast deep into the year.

As more vaccines are administered we expect greater energy demand yet the pace and vaccines remained slow thus the impact on our full year outlook remains cloudy.

Except for unknown weather impacts related to the current deep freeze and the U S. One Q 21 day now sequential revenue could expand into the mid to high single digit percentage range.

In closing I'm encouraged by the D now transformation underway and its success to date.

The other global Covid pandemic has had a material impact and has provided a great opportunity for us to carry out our strategy and.

And downturn. This severe provides the motivation for transformative change.

Necessity itself is fuel.

And this kind of transformation is really most successfully delivered and a market and muddle like this.

2020th of Europe, rapid change and our industry and it D. Now and we view 2021 optimistically, we expect it will be more fun and exciting as we build back then growth.

The execution of our strategy and what has been a tough year for our industry, our employees and our customers enables us to create a more resilient stronger company, one able to better manage risk and future energy cycles.

In closing I'm very pleased about the stronger than expected fourth quarter topline and thrilled about emerging from the lowest point and the market downturn with a great deal of flexibility and how we shape, our company and expand and our success and the future.

The women and men of distribution now and the reason for our enviable position today, the faith and confidence I have and our employees because of their perseverance through all the trials and tribulations for 'twenty and 'twenty. There continued patience their innovation and our constant focus on our customers reaffirms my.

Confidence we are absolutely on the right path to ensure maneuverability and the evolving energy space.

A record cash balance of $387 million and zero debt provide a firm financial footing.

Couple that with the profound cost transformation buoyed by favorable oil price trends. The completion of our first acquisition of the year the promise of vaccines and a hunger for getting back to life as it would be once enjoyed at all give us plenty to be excited about as we enter 'twenty 'twenty one.

With that let's open the call for questions.

Yeah.

Thank you and we will now begin the question and answer session. If you have a question. Please press Star then one on your Touchtone phone if you wish to be removed from the queue. Please press the pound signed or the hash key if you are using your figure for.

Joan Please pickup your handset first before pressing any numbers once again, if you have a question. Please press Star then one on your Touchtone phone.

Our first question comes from Jon Hunter from Cowen. Your line is now open.

Hey, good morning, gentlemen, and.

Good morning, John Good morning, good morning.

So and my first question is just as it relates to your guidance for the first quarter of up mid single to high single digits sequentially and.

It seems like that doesn't include any impact for the weather that we've seen just recently here. So I'm curious if you've attempted to.

Kind of quantify what what kind of impact that may have on your outlook. So that's the first question and then the second one is just as it relates to.

The guidance you put out there for the first quarter, how are we tracking so far either through the end of January our current life term mid February here. Thanks.

Youre welcome Okay. So so in terms of the weather impact.

So right now we have about 60 locations closed.

And which will probably be three three or four days closed due to lack of power lack of water.

Either in the business location itself or for the people that work on those and those locations same for our customers. So.

We came into this.

This earnings call expecting like we said and our in our guidance that we'd see sequential revenue growth and the mid to high single digits, but I qualified it.

And the language as it relates to this this weather snap and that's it.

Pretty destructive one.

We will lose revenues for several days and there'll be diminished significantly for several days, we don't know to what extent, we'll see some sort of snapback the necessity for more valves and you know more repair.

Out of the products that we sell that could help us and the positive side. We don't know if that would be enough to make to fill the gap for the revenue shortfall on the meantime, so so we stuck with our guidance.

Low to mid are sequential improvements because we think things will improve in March for example.

Now in terms of how are things going January.

Actually it was a little lighter than December December and ended up being a pretty good month and the fourth quarter I never expect December to be a strong month, but December interestingly was a little bit better.

And.

And then October and November and January was a little down in February is tracking along the lines of January but margin is.

Good long month will be out of the weather doldrums.

And we will start to see you know matriculation, but with vaccines and and forward progress there.

So you now.

So I think we can get to the guidance, we talk about but the weather impact we just we don't measure that.

And by the way from someone's telling me that I said low to mid we gave guidance of low to mid and we the guidance was mid to high single digits with the qualification that weather impacts could could could impact that number.

Did I answer right now.

Yeah, Yeah that's helpful.

And then next one is as it relates to gross margins, obviously, you had elevated inventory charges here.

How should we think about the level of inventory charges going forward in 'twenty and 'twenty one and.

You know your ability to get to 20% plus gross profit margins and whether that's and do you think you can get there and and the first quarter second quarter or.

Is that later on and me here.

Okay. That's a great question so.

Just wanted to give some color, which we didn't include in our opening remarks.

Our.

Our EBITDA loss for the year I think was around $56 million.

Which includes the negative impact of inventory charges of about $54 million.

So I think that's always good numbers and Mark 57 for them for you.

Okay. So.

This was the worst year in history, perhaps since the great depression and terms of impacts for the energy industry and if you take out those and inventory charges.

We broke even now.

We don't take out inventory charges, when we compute EBITDA because it's a valid expense as it relates to this business, but we went from an environment, where we had 800 rigs and the U S.

2000 and rigs globally and.

And since then we've seen 50% to 70% rent declines around the world. So so I first wanted to say, we did an awesome job and converting inventory to cash and dealing with the blow back of going from an environment like that but for the market. The bottom falls out in terms of answering your question specifically.

We won't see $54 million and inventory charges in 'twenty and 'twenty one.

But they could remain elevated so and in my prepared remarks I talked about.

Sure.

Still and the transformation mode for this company.

We want to to have our.

Our field network of locations could be and situated close to our customers.

But the utility a bunch of locations will change I do expect inventory to charges to be elevated but nothing like what we saw in the fourth quarter.

And I expect them to revert to the mean at some point later in the year.

And then and generally we see inventory charges approximating 1% of revenue they'll be higher than that this year. So.

Later in the year I think we'll get to a point where.

We've gotten to rationalize which countries when we exit if we exiting which locations we're going to downsize and move.

Now, we stand up our super centers and and.

Situate close to our customers, but with a different inventory backdrop that all impact gross margin. So.

But this is that's a long winded answer John but our inventory charges will diminish, but they could still be elevated as we transform the company.

Thanks, Dave and I appreciate it I'll turn it back and you're welcome.

Thank you. Our next question comes from Sean Mcham from Jpmorgan. Your line is now open.

Thank you and good morning, Hi, Shaun Mara.

Sure.

So Dave I'd like to touch on margin progression.

Gross margin looks pretty good if we back out the impact of those inventory charges.

A lot of progress on cost out last year of course.

G&A guide is flat and <unk>.

So think about expectations of margin progression.

Excluding inventory charges as we've covered that.

And then now what is this are we expecting kind of a steady state for G&A and and you'll adjust further based on what the market gives you and those two levers as it pertains to margin progression and 21.

So that's a good question John so except for acquisition. So we did a small one.

And that will have limited impact on and SG&A somebody didnt speak to it.

But our our WSJ should be coming down each quarter.

Except for acquisitions.

So that that line needs to continue.

To go down and that's going to come from.

The.

And the ethylene.

And the evolutionary nature of transforming the business you know we've done a lot of heavy lifting a lot of the harder things early in the process and but I expect that number to come down even despite growth in revenues.

So that's a challenge for US now speaking to.

What that number is.

As the quarters progress.

And I only speaking to the first quarter right now.

And I think Mark said that that's basically it would be flat with the fourth.

And fourth quarter.

Which was lower than we expected and I think I think it was $3 million lower than we expected and so I think it will be flat in that regard but to answer your question generally the WSJ number should come down each quarter.

Outside of acquisitions.

And there you know there are some things like pipe prices.

That'll Inc.

Packed product margins, but like we've said for several quarters and now our pricing and our product product margins had been really resilient.

So I think there's there could be some lift there now to the extent, we do large projects.

Know that projects would dragged down margins, a little bit, but I'm pretty comfortable that product margins will remain resilient, it's just a matter and what kind of inventory charges will endure and income.

And coming quarters.

And as kind of the cadence increased revenues.

And we'll give a little more flavor.

To that and the next 90 days, hopefully will be and a much better position to guide the rest of the year.

And that shouldn't be the trajectory continued reduction.

And operating costs and WSI.

Flat to improved gross margins and elevation and and revenues as well.

Understood that's helpful.

And then thinking about working capital and you generate a lot of cash last year I think that's expected given the countercyclical cash flow profile of the business.

Your working capital metrics.

Luminar and also helped somewhat by those inventory write downs right and about a quarter of the production and inventory over the past year, we've talked about that issue.

And if we're generating let's say nominal EBITDA.

And we're growing volumes, there's likely some reinvestment required and working capital.

That's just.

Receivables, but also getting and the right inventory.

Whats your confidence level about generating free cash and 21.

Okay. So if you look at our our inventory balance and you're right.

I mean, I think Mark cited our working capital excluding cash as a percent of revenue about 15, and 16%, which is a very low number you add back the $24 million and inventory charges of course, it gets closer to 18 or 19 or.

But that's still that's turning and working capital of five times debt that's solid.

To the extent and we see revenue growth and were forecasting that and the first quarter. There's a lot you now we're gonna start rebuilding our inventory.

And a pivot mode.

Where although we're going to see you know we're not we're not speaking to revenue inflection beyond the first quarter and we're going to see some.

Revenue build and our stocks our shelves are pretty not bearing but you know are and we're ready to replenish.

And we're gonna see.

We're going to consume cash as it relates and inventory as it relates to receivables and we could consume cash not just not generate free cash flow as early as the first quarter.

And so that's how I see things going now.

The flat if the revenues are flat, we could generate cash quarter to quarter. We're now.

Got.

Forecasting that and were hoping against it we're hoping we see revenue growth and we're hoping we have the right plan in place to get ahead of demand to make sure we have the products our customers need.

At the right cost for us. So we can maximize gross margin Mark do you have anything to add on that.

Now I think it and as you pointed out the metrics at the end of the year were a record record record efficiencies on working capital. So we've been adding back the inventory charge and tissue that is a good one exactly and so I think you're either the easing there on some of those metrics.

And we naturally have and have the cash to fund that growth that Dave mentioned to make sure. We do have that inventory deployed so.

I think that's free.

Free cash flow generation.

For us is really just a stellar job and and the past 12 months by our team.

So just to put a button on it would you be able to give us a sense of target of working capital to sales exiting 'twenty one.

So we don't quite know the sales number and thats not yeah theres some uncertainty in terms of what volumes look like.

About a target for working capital to sales exiting 'twenty one yeah, I think it's going to be you know it'll be around 20% now.

Now, let me give a little color on that so we will be.

Pre positioning inventory so.

And we couldn't you could see that.

Working capital to revenue ratio would be higher than 20%, but it shouldnt you now.

You know kind of gravitate towards that number but it's in the early parts from a recovery will stock up will see receivables growth.

And you know those those.

Ratios can extend a little bit more car bed and you now several quarters into the future, but it'll be around 20%, maybe a little higher.

Okay.

Very good thanks for all that.

Thank you. Our next question comes from Nathan Jones from Stifel. Your line is now open.

Good morning, everyone Hope everybody's Walmart Inc.

I had a follow up on the WSI side of this a day.

And as we've gone along through the recession here have.

Targeted being.

Bright gave and and maybe profitable at the bottom of cycles.

And if we're looking at the second half of 'twenty run rate of revenue is about 1 billion and three in the second half of 'twenty.

Let's say, 20% product margins would mean that you'd need to get down and probably the mid to upper 60 zone WSI and you've talked today about a.

Continuing to drive that number down is you've kind of getting that down under 70 million a reasonable target as we go through 'twenty and 'twenty one.

Yeah.

And.

And certainly not set let me speak to what we've got and we've talked to you about the first quarter and and we won't get to 70 and first quarter marks given some color there it depends on the revenues I mean.

My first my my gut responses, no we won't get to $70 million this year.

And in part because we're gonna be layering and I hope to come to you 90 days from now and say we did another deal and I hope, it's a bigger deal.

Except for that getting to 70 this year I don't I don't know.

Possible.

If we did if we got to a level that low you'd see more inventory charges, because we would more more quickly pushed that transformation envelope.

I'm going to give a little color there Nathan because.

You know we've done we've done a lot of things and the last 12 months.

And I said.

On a.

Three or six months ago debt.

I want to take this journey with our customers I Wanna rate retain those relationships with our customers as we do some pretty tough stuff to the business.

So getting down to $70 million and EBITDA.

I don't I don't see that happening in 'twenty 'twenty, one and it's possible, but right now we don't have a forecasted number that load.

Thanks that helps and I guess my follow up question is you've made.

Real transformation to the business model.

Here with.

Lucky inventory at local locations mall, essentially held more online, which means by the way probably not going to say costs to return to the business in the same way that they have done in past cycles. So maybe you could give us some help on how you envision W and at WSI comes.

Back into the business kind of how much revenue could you layer on to it.

And where you're at today, and where you're going to get to in 'twenty and 'twenty. One before you really have to add some costs back and then maybe if you've got any idea of incremental dollars of WSI per dollar of revenue growth as we get out for that because my assumption here is that that's going to be lower than what it's been historically.

I agree I agree completely so so they'll they'll be.

You know, we've experienced and the in 'twenty.

Late 2016, 2017, and 18 kind of and uneven recovery. So we added locations. We added people will see that similar phenomenon going forward.

But on an incremental basis. For example, we just opened a branch and Canada, because we're we believe we're taking market share there.

We're on the offense and we're going to add costs. When we need to now there are other parts of Canada, where we're still pulling out costs and we'll continue to do that.

But generally as we add revenue dollars.

Almost all of those gross margin dollars should go to that should go to the bottom line and you should we generally historically have flow flow throughs EBITDA to revenue and the 10% to 15% range.

The the WSI Inge.

Increase with each revenue dollar should be.

Two to five or less because we should be.

And we should seek flow throughs, and the 15% to 20% range. So you know I said earlier that I expect WSI, it's not a perfect every quarter on a perfect every quarter basis, but to come down quarter after quarter, even as revenues grow so I expect really strong flow throughs.

Nearing that 20% level.

Okay.

That's helpful. Thank you very much I'll pass it on.

Thanks Nate.

Ladies and gentlemen, we have reached the end of our time for the question and answer session and I'll now turn the call over to David Church, and ski CEO and president for closing statements.

Okay, well. Thank you everyone for joining us and thanks, everyone listening and call, who prepped us without having power and water and all the hard work done getting this here, but thank you everyone and we'll see you next quarter.

Thank you.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect.

Yeah.

Well, we're doing okay. So far.

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Yeah.