Q2 2021 NOW Inc Earnings Call
All participants please stand by your call will begin momentarily once again please standby.
[music].
Yeah.
Welcome to the second quarter 2021 earnings Conference call. My name is John and I'll 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 the second if he drove the question Press Star then 1 on your Touchtone phone.
And now I'll now turn the call over to Vice President marketing and Investor Relations, Brad Wise, Mr. <unk> you may begin.
Well good morning, and welcome the now Inc. Second quarter 2021 earnings Conference call.
We appreciate you joining us and thank you for your interest in now Inc.
With me today is David <unk>, 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 note that some of the statements we make during this call.
<unk> 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 is subject to change now.
And are subject to risks and uncertainties and actual results may differ materially.
No 1 should assume that these forward looking statements remain valid later in the quarter or 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 that reflects management's best judgment of the time of the live call.
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 further.
Further information as well as supplemental financial and operating information may be found within our earnings release on our website at IR day, now dot com or on our filings with the SEC.
In an effort to provide investors with additional information relative to our results as determined by U S. GAAP.
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 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 our site for the next 30 days.
We plan to file our second quarter 2021 form 10-Q today and it will also be available on our website now.
Now, let me turn the call over to day.
Thanks, Brad Good morning, everyone and thank you for joining us the second quarter marked another strong quarter for distribution now from a topline perspective, why while global rigs in the quarter were unchanged compared to the same quarter in 2020, our revenues grew 8% sequentially global rigs increased 2% and our revenue.
<unk> grew 11%.
Gross margins on the back of <unk> 21 record highs and against our expectations of the modest contraction due to increased project activity and downward pressure from Canadian breakup gross margins again reached a new high of 21, 3%.
It's easier to grow revenues by conceding price, it's harder to grow the business and improve gross margins at the same time, we did so for a second consecutive quarter.
Moreover, <unk> 2021 marks the third sequentially quarter on quarterly market expansion since the <unk> 2020 bottom where U S rigs had declined by 2 thirds from the first quarter of 2020.
The spending discipline exhibited by our customers, which limits their purchases and in turn our revenue opportunities in the short term also moderates the extreme volatility we experienced through the cycles.
Customer spending restraint curbs, the feast or famine shocks, our industry has experienced historically, enabling better inventory management and reduced product obsolescence in the IPO.
Resulting from the wild swings of lack of spending discipline creates.
In 2020, our push was to recompose of the company amid the steep decline in market activity.
We have work left to do to align our cost structure to our strategy and to the market the <unk>.
Focus in 2021 is prioritized around revenue retention market share gains and market diversification and inorganic expansion.
We believe the restraint exhibited by public operators lays the groundwork for expanded domestic rig activity for 2022 as E&P balance sheets improved this year, providing more opportunity to finance capital investment.
This environment sets up well for D. Now if demand continues to recover.
As part of the end market diversification strategy, we are tapping into municipal water and mining customers, while targeting growing markets like carbon capture renewables and hydrogen tied to a shift in capital investments towards the energy transition movement.
We are designing for the future fueled by a strong balance sheet.
We are leveraging technology application, knowhow and streamline supply chain and technical process workflow to enhance our solutions and drive incremental sales of the products, we offer to achieve levels of differentiation in the market.
We are focused on delivering value to our customers and applying inventive solutions, while diversifying our end markets.
Now 2 of regional look.
In the U S revenue was up $44 million sequentially or 17% U S energy revenue increased sequentially due to increased increases in drilling and completions activity.
We expanded sales with E&P operators driven by growth in spending by some of our largest customers and do the rigs being added by private operators.
Notably revenue gains with private E&ps outpaced sequential rig additions for the for public companies as most publicly traded operators helge of their capital discipline.
In the Rockies area, we expanded our relationship with an independent energy company, we use of <unk> captured from industrial resources.
Otherwise been vented into the atmosphere.
In the DJ Basin, we expanded PBF market share with the regional independent on new facility construction projects and in the Bakken We provided PBF for several new tank battery builds for an Oklahoma based independent oil producer.
Other key wins included growing sales with the large regional operator in west, Texas, providing PBF material from multiple projects and maintenance on a variety of facilities centered around tank batteries.
In the northeast, we delivered line pipe orders to regional gas utility customers as well as PBF from wellhead hookups to gas operators in the Ohio, Ohio Valley region.
In the midstream sector, we provided valve solutions for a large regional petroleum products pipeline leveraging of new valve supplier partnership targeting midstream liquids applications.
In South, Texas, we saw sequential growth from public and private e&ps as activity ramped up producing the orders from PBF per tank batteries and flow lines, while midstream companies acquired line pipe for gathering lines and actuated valves and fittings for transmission tie ins.
In the southeast we secured line pipe orders from an offshore marine transportation and logistics company as well as provided fiberglass pipe per flow lines to of Haynesville shale operator.
We captured revenue gains with our large integrated supply customers revenue was driven by the Inc. By increased winter as Asian products projects in the Bakken plant turnarounds day to day business associated with drilling programs increased level of central tank battery builds and large line pipe orders for gathering systems.
For Workover rigs, our workover trailers enabled our customers to maximize inventory availability and eliminate downtime associated with stock outs, while using our mobile app to acquire MRO products that deliver cost savings and efficiency gains for the operator.
At U S process solutions revenue expanded sequentially with increased completions activity from drilling operations and DUC drawdowns, yielding higher demand for our fabricated engineered equipment packages. In addition to pump packages for fluid handling.
We are seeing an increase in customer interest and order wins from our fabricated equipment solutions.
Activity in the quarter was primarily focused in oil producing regions, while diversified end market business was captured in the midstream and municipal water markets.
Key wins included 15 production separators and vessels for the powder River basin for a large independent E&P, operator, and multiple air compressor units as operators seek to eliminate the venting of gas from direct gas compression, replacing old compressors with much lower emission compressed air systems.
In effort to support the ESG initiatives relating to lowering of greenhouse gas emissions.
Our investment in digital solutions is bearing fruit using our E spec engineered equipment configuration and budgeting tool, we were able to successfully secure an order for 90 air compressor units from a large independent E&P operator.
E spec enabled the Richard contextual discussion with the customer providing enhanced configuration and pricing options net added value through of compressed sales on a cycle.
On the packaged pumping unit side, we were successful in a variety of applications, including water handling transfer and treatment applications for non oil and gas markets related to waste management and the industrial water treatment.
In the renewable space, we feel about the pumping solutions to geothermal power plants and also expanding into the recreational market, where we delivered water handling equipment for snow, making applications at ski resorts.
And we deployed our pumping rental fleet of assets for a regional operator in the Midland Basin used to protect child wells, while parent wells are drilled to mitigate subsurface communication.
With increasing flows of produced water, we expect operators to continue to turn on pump rental services to support the disposal capacity increases.
As completions grow and saltwater disposal activity increases the deployment of D. Now mobile horizontal pumps on.
Sure the operations support that's needed when disposing of newly produced fluids.
In Canada, the second quarter revenue was 51 million, a sequential decrease of $7 million or 12% better than what we normally experience.
Leveraging the new supplier relationship strengthened our value proposition in several focus areas for pipe fittings, and flanges or PFS.
For our sourcing strategy of that resulted in several key project wins.
Building on the success of our sourcing initiatives, we established a new partnership on valves that increased our market competitiveness and several material types that produce wins during the quarter.
The success is a direct result of strategic sourcing, we're being selective and partnering with top tier suppliers drives market share gains.
During the quarter, we extended the 2 year <unk> agreement with the top 20 Canadian customer expanding the agreement to now include valves.
Another project win during the quarter included large actuated balance from an EPC for a major operator used and the bitumen extraction process and the oil sands market.
With 1 of our top customers, we expanded market share in our artificial lift product line and captured of variable frequency drive automation project for our automation product line.
We continue to capture market share through leveraging our service model and tactical application support with the Pcs, notably winning the large PFF project for an operator, who haven't who we hadn't historically participated with in their day to day business.
Furthermore, we renew the key fiberglass pipe contract with the top customer and delivered flow lines and tie ins to an oil and gas operators mature oil assets.
For international in the second quarter International revenue was up $2 million sequentially or 4% recoveries continue in Australia Asia and Latin America.
And Australia orders increased from a major offshore drilling company with several rigs contracted for a large domestic natural gas producer.
In Singapore, we secured of no notable projects valid order for our refinery customer.
In Asia with the expansion of our electrical cable product line for the Onboarding of new supplier, we generated new business to an industrial automation fabricator to producers of assembly solutions for traditional and electric vehicles.
In Latin America, we leveraged our balance solution offering for offshore producing assets from the Brazilian operator.
In Europe, we were successful on extending the 3 year electrical MRO of agreement with the large independent oil and gas company and we secured a 3 year contract award for MRO material for a large gas producer in the North Sea.
We want of valve and electrical project win in Europe that will start to deliver later this year for a state of the art steam and power generation facility at an integrated refinery and petrochemical complex.
This new business expands our end market diversification in the downstream sector internationally.
And before I turn it over to Mark I wanted to discuss the 2 points with regards to inflation and its impact on our business.
We are seeing inflationary pressures on most of the product lines, we offer driven by a combination of tight steel and resin markets exacerbated by tight labor markets and rising transportation costs, while lead times continue to lengthen.
Additionally, importers of finished goods and raw materials have been diligent in pushing through increased ocean transportation costs.
Pipe prices began to increase in late 2020 now continued to move higher. This has been caused by an increase in <unk> demand the primary product pipe mills produce.
On a tight scrap and iron ore market.
Behind this the broader steel markets have seen a rather dramatic increase in demand from all of those sectors such as the industrial.
And housing markets.
U S inventories of products, we provide were much higher than normal in 2020 and have come down substantially. This includes our manufacturers raw input materials stock as well as with in finished goods.
The majority of our suppliers are still delivering reliably but lead times have increased and some gaps on certain products have become more prevalent.
With that let me hand, it over to Mark.
Thank you, Dave and good morning, everyone total revenue for the second quarter of 2021 with $400 million, an 11% increase over the first quarter outperforming our guided range of mid to high single digit percentage growth the.
The U S revenue for the second quarter, 2021 was $296 million up 44 million or 17% from the first quarter on increased drilling and completions activity.
Our U S energy centers and process solutions revenue were up 16% and 23% respectively with the U S energy centers revenue contributing approximately 80% of total U S revenues in the second quarter relatively in line with the first quarter levels.
Moving to the Canadian segment, Canada revenue for the second quarter of 2021 was $51 million down $7 million or 12% from the first quarter due to seasonal breakup.
International revenue was up to $53 million, an increase of $2 million or 4% from the first quarter, primarily from increased project activity.
In addition, the D now growing revenue of 11% in the quarter, our gross margins improved sequentially 50 basis points to 21, 3%.
This increase was primarily from inventory charges declining sequentially from 5 million in the first quarter to $1 million this quarter, partially offset by lower product margins due to product mix and increased transportation costs.
Inventory charges and general variants.
The product of many factors, including customer demand changes both in volume and preference the incline of decline in the market specification changes on available products and actions taken to adjust our business model to support current and future activity.
We continue the evaluation of our products and locations to align to the changing market conditions, and our customer preferences, which could impact the level of inventory charges going forward.
Yes.
In the second quarter of 2021, warehousing, selling and administrative expenses or WSI was within our forecasted range of $85 million or up 6 million sequentially half of the increase is driven by the impact of the first and second quarter acquisitions. In addition, we of the sequential wsh headwind from the non.
Non recurrence of the first quarter 2 million bad debt credit from the collected aged receivable.
With the remaining balance of the increase primarily driven by the resumption of certain discretionary costs and the reduction in COVID-19 related government subsidies the SEC.
Quarter government subsidies, which totaled approximately $1.5 million are expected to continue their phase out through the second half of the year.
This marks the fourth consecutive quarter, we've improved our WSI as a percentage of revenue.
During this and other actions underway, we expect WSI to remain relatively flat into the third quarter as we continued to streamline our organization and invest in our strategy.
Operating profit was breakeven in the second quarter as we realized favorable year over year operating margin flow throughs across all 3 segments, driven by improved gross margins and our lower cost structure.
Sequentially the U S delivered 23% incremental flow through to the operating margins and of 3 million operating loss in the second quarter.
In the second quarter of 2021 of the International segment reported 1 million of operating profit or 2%.
In Canada delivered 2 million of operating profit of 4% of revenue despite facing the customary seasonal breakup headwinds.
This is the notable improvement for the Canadian segment, when compared to the second quarter of 2019 of period with double the revenue yet produce lower operating profit dollars and <unk> 2021.
The GAAP net loss for the second quarter was $2 million or loss of <unk> <unk> per share on.
On a non-GAAP basis net income excluding other costs was nil or zero per share.
Non-GAAP EBITDA, excluding other costs was the positive $6 million of 1.5 per cent for the second quarter of 2021.
And we reported 6 million of depreciation and amortization in the period and expect similar levels in the third quarter.
At the onset of the pandemic, we swiftly identified and implemented the initiatives focus on transforming our operating model and maximizing customer service. The results of these actions can be recognized today and our financial performance has been out delivered <unk> EBITDA flow throughs year over year of 70%.
As we delivered 8% higher revenue year over year, while reducing wsh over 12%.
Now to move to the balance sheet at the end of the second quarter. We have of net cash position of $293 million down 81 million from March driven by the $90 million cash payment for our second quarter acquisition, we discussed on our last call.
Our debt position remained at zero and included zero draws in the quarter.
Total liquidity, which is calculated as total availability from our Undrawn credit facility plus cash on hand was $528 million as of June 32021.
Accounts receivable ended at $271 million, an increase of $26 million from the first quarter and inventory ended at $250 million substantially unchanged from the first quarter with inventory turns reaching 5 times of quarterly best our accounts payable ended the second quarter at $217 million.
And as of June 32021, working capital, excluding cash as a percentage of our second quarter annualized revenue was 12, 3%.
With some of the working capital reduction attributable to the estimated fair value of contingent consideration, which is subject to change.
We do expect its working capital ratio to avert some as we intentionally add working capital to grow the business.
And our focus on working capital efficiency as reflected in a new quarterly best cash conversion cycle of 71 days.
Mary driver for efficiency gains over the year has been increased inventory turns that helped to minimize the cash needed to fund our sequential revenue growth of 11%.
Free cash flow in the period was $7 million, reflecting net cash provided by operating activities of 8 million reduced by $1 million in capital expenditures.
When looking back over the last 2 years, we've generated approximately $350 million of free cash flow. We will continue our commitment to balance sheet management make investments in good inventory pursue strategic acquisitions and maximize asset health to fuel the future.
Our team is focused on profitable market share gains, we're actively deploying technology to augment labor content, automating and digitizing processes and reducing infrastructure costs. We are intent on continuously developing a more agile business and increasing productivity.
We continue into 2021 with the optimism for the future and we possess the talent resources and fortitude to grow our bottom line and create sustained value for our customers and shareholders with that I will turn the call back to Dave.
Thank you Mark now.
Now a bit on how our digital now initiatives are impacting our business.
In order to manage the scale of transactions and capture efficiencies across the procure to pay cycle, we offer our customers and suppliers of digital solution for capital catalogue browsing transacting sales orders purchase orders and invoices across the procure to the cake procure to pay process.
Many of these practices are unique to the customers' ERP procurement system or involved the third party middleware vendor demonstrating the flexibility and tailored solutions are digital now platform.
Platform provides our customers.
During the second quarter of 2021, 43% of our transactions are digital.
We are leveraging technology to drive increased efficiencies across our business for our employees customers and our suppliers.
And as incremental transactions and revenue are captured and processed they provide an increase in employee productivity and system efficiencies.
The continued to increase adoption across our digital platform by adding new customers during the quarter.
During our last few earnings calls you've heard us talk about E spec and <unk> tools as a refresher east back.
Helps customers select configure and create budgetary prices for 10 unique power service fabricated engineered equipment packages.
Our tool automatically generates of real time budgetary estimate plus of detailed working bill of material, which is used to produce the formal quote.
Last quarter, we introduced E track, our asset tracking that simplifies operators asset management processes by Geo locating and asset <unk>.
<unk> specifications and engineered drawings compliance certifications and provides the ability to view maintenance and service work history information.
For our customers he track improves asset transfer timeliness and accuracy, while the inventory report facilitates asset audits.
The simplifies our customers' inventory control process make cycle counting easier and enables the tracking of assets in and out of holding yards to become working assets.
E track provides T now with the platform that enables our sales and operations teams the ability to expand and extend value to our customers within our materials management programs, improving our efficiency expediting future service requests and enables parts of orders to expand after market sales.
During the second quarter, we on boarded multiple E&P, operator customers by identifying and logging hundreds of assets.
Going forward, all engineered equipment packages shipped from our U S process solution locations will be equipped with E track, giving customers the ability to more effectively manage their assets.
By using our E track mobile app customers have the ability to create service for quarters and order parts through our shop Dot Dino Dot Com E Commerce platform.
And as the final note E track provides customers with the historical repository of asset recordkeeping, thus leveraging technology combined with our engineered products aftermarket service and E Commerce platform for the lifecycle of the asset.
And now our view of the third quarter looking.
Looking ahead fundamentals on our business continued to improve with oil in the $67 range as global rig counts and completions are expected to grow.
The summer months in North America, usually set up the third quarter to be our most active quarter of the year.
The impact on oil and gas demand due to the Covid Delta variant adds the degree of uncertainty as more stringent actions are taken to contain the spread.
In the U S. E&P companies can continue to add rigs increased completions and drawdown ducks the growth in rigs driven by private operators expands the market for our products as we look to grow sales related to flow lines gathering lines and tie ins day.
And for PBF in our fabricated and packaged engineered process solutions offerings increases as incremental production drives tank battery construction and increased saltwater disposal capacity.
With the pullback in production throughout the pandemic producers have seen midstream takeaway capacity open up.
Therefore, delaying large capital transmission projects that would add incremental takeaway capacity.
Canada emerge from breakup and rigs are expected to grow sequentially at the current oil price.
We have observed an increase in activity with several projects related to energy transition in the form of carbon capture and <unk> pipelines.
We're working with our customers as they evaluate and budget carbon capture carbon capture type projects to support their net zero carbon emission goals.
Internationally, there are some costs for caution as countries grapple with an acceleration in Delta Covid cases economic.
Economic growth in most countries could be metered and public officials consider more stringent lockdowns that will drive less consumption of energy.
As OPEC OPEC plus managers supply additions over the near term and spare capacity returns to pre COVID-19 levels over the next year, we see of structurally supported macro environment, depending on the pace of economic recovery.
Taking this into account our view is that revenue in the third quarter, we will grow in the mid single digit percentage range sequentially.
Further we expect to see sequential <unk> to <unk> 2021 EBITDA to revenue incrementals to be at the lower end of our historical 10% to 15% flow through range as we expect gross margin compression in <unk> as inventory and freight charges may be higher than the second quarter and projects will serve as the pricing headwind.
<unk>.
With regards to mergers and acquisitions working capital discipline continues to provide flexibility as we evaluate the list of opportunities in our pipeline.
After 2 acquisitions closed so far this year, our position remains strong with total liquidity ending the first half of $528 million, including $293 million in cash zero debt, which provides maneuverability and the evolving energy space.
We remain focused on M&A is the lever for inorganic growth targeting accretive margin businesses that provide non commoditized solutions that fit within our strategy.
We continue our active engagement with several potential targets in our forging for opportunities. We are focused on strengthening our process solutions product lines by adding companies, which expand customer appeal create competitive advantage differentiation and build barriers to entry for D. Now.
Furthermore, we are evaluating businesses that helped diversify our end markets to provide greater market differentiation for.
For the company.
In closing I'd like to thank our employees and acknowledged their hard work their dedication to serving our customers and supporting our key suppliers for making safety a priority.
And for their Pearce of perseverance that has enabled the bright future that lies ahead.
We remain focused on generating greater operating efficiencies, while enhancing our differentiated offering to customers our size and scale strengthen our value proposition that customers can depend on as they navigate industry consolidation supply disruptions and the energy transition.
With that let's open the call for questions.
Thank you, we'll now begin the question and answer session.
All of a question from.
Star then 1 on your touch on phone if you wish to hear Brian removed from the queue. Please press the pound spine or the heartbeat.
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Yeah.
And our first question from Jon Hunter from Cowen.
Hey, good morning, everyone.
Good morning, Jonathan how are you.
I'm doing well thank you.
So first question I had is just on the.
The revenue progression into the third quarter, and then and then fourth quarter.
Mainly on the U S side I am curious what is embedded in your revenue expectation in the U S for the third quarter versus your expectation for completions.
And then as we move into the fourth quarter.
Seems like E&ps have been relatively disciplined.
And their approach to capital spending this year so.
<unk>.
Im wondering what youre expecting in terms of a seasonal drop off on muted seasonal drop off in the fourth quarter.
Okay. So in terms of the third quarter, we're basically listening and hearing from our customers what they expect to spend in that period.
We expect the seasonal inclined like we've talked about but when we look at their what they are forecasting from the third quarter, we're getting into that low to mid single digit range.
For our customers generally we think we can make some further ground with the private E&P companies Thats been a big focus for us they tend to be adding more rigs and doing more of the completions work. So that's that's the target area for us where we're laser focused on picking up share from traditionally.
Lower or higher hanging fruit for us we tended to focus on the on larger customers. Historically, so that's why we see our revenue shaking out in the third quarter.
In terms of the fourth quarter, it's hard to say it depends on we generally see a fourth quarter slowdown, especially in the month of December.
At this point, it's hard to gauge that.
Still seeing.
We've seen rigs go up for example for almost every week for the last 50 weeks slow but steady growth.
We're seeing.
Product delays, especially in the pipe area now which could.
Could the.
Kind of combined with the normal seasonal dip, we expect because we might not have the pipe available for the fourth corner on which is the bigger product line for us in this period. So we're not guiding to the fourth quarter.
There's still a lot of uncertainty with COVID-19 and its impact.
But it could go either way it just depends on.
On.
On a variety of factors.
Understood. Thanks, Thanks, David.
Shifting to margins.
I understand there are some.
Headwinds on the third quarter in terms of.
The supply chain and perhaps some inflationary cost pressure. So I'm curious as we look into the fourth quarter and perhaps into 2022.
Youre able to quantify how much of a headwind.
Types of things are to third quarter, and then as we look into next year, what's the more.
Normalized type gross margin level, we should be thinking about once these things are past us.
Okay. So in the short term, where we're seeing the biggest influencer.
And gross margins for us over the last 5 quarters has been inventory charges.
Now of those tend to be higher in a downturn.
Which we are out of and lower in a recovery, which we're in.
In the first quarter like Mark had said, we had $5 million of inventory charges in the second quarter, they dropped quite a bit from the first quarter that all depends on the timing of purchases customers.
The kind of.
The product preferences obsolescence damage products et cetera.
The number 1 impact freight has been.
<unk> has been a big impact on the second quarter and it probably will continue into the third I don't expect that to be of permanent impact I do believe as the company. We're much more thoughtful about product acquisition and buy the inventory risk about having what the customer needs, but not getting too heavy into speculative purchasing.
So I think over time.
And into and into 2022, we'd see inventory charges, which like I said was the big part of our gross margin variability.
<unk> been fairly low, especially compared to 2020, especially compared to that so 1 thing thats been a positive for us in the last few quarters of inventory charges coming down I expect that to persist.
The freight charges, which were high in the second quarter I expect that to continue into the third maybe throughout the rest of the year, but that will ease and that will I believe correct itself in terms of product margins, which is the main driver for gross margins.
We remain very resilient across our product lines, including pipe now pipe is growing as a percent of our activity and expect it to grow into the third quarter as we see more projects and pipe of the lower margin project product relative to valves and fittings et cetera. So those are kind of of the puts and takes in terms of where.
We would be next year again, not guiding to 2022, but this 25 plus range.
Is is a good bet.
And maybe it could be better than that we continue of process, which we've done for years now where we focus on higher margin businesses customers product lines et cetera that continues the acquisitions. We made this year, we will have margins in excess of what we normally experience. The acquisitions. We do later in the year should we be.
Successful.
We'll continue that pattern so.
High grading of our gross margins is a big focus around here.
Exiting low margin products.
Disfavoring them as part of that process as well, so I see more upside in terms of gross margin Jonathan.
Thanks for that day, I will turn it back okay.
Our next question is from Doug Becker from Northland capital markets.
Good morning, Doug.
Thanks, just following on the 1 of the question about gross margin as revenue starts to approach $2 billion. The changes you're doing in terms of mix and the efficiencies is the 22% gross margin unrealistic off of.
$2 billion.
<unk> revenue base.
Well.
Hi.
I don't think it's outrageous I mean, I think it's plausible.
I think there are many many things that would impact that.
But you know we're at 21.
And like we alluded to in her opening comments, we do expect a little downward pressure on the third quarter because of the low very low inventory charges.
But the 22 is within the realm of possibility of course and <unk> and.
And again I said, we're very particular about and if you look at the trend of gross margins for Dino over the last few years.
Bringing that number up focusing on higher margin activity.
And intentionally not focusing on the low margin stuff and we need to do that because we still need to pull cost out of the business of mark alluded to that as well. So I do think 22% is in the realm of possibility and it's a target for us for sure.
Now that makes sense.
Does that play into the M&A.
M&A opportunities.
Obviously looking for margin accretive, but any particular areas of focus.
Well the companies we're looking at of course, our most important metric is how much.
Earnings power of they have so you could have a <unk>.
Higher gross of lower gross margin business, but very strong EBITDA, we would not walk away from those possibilities could be dilutive to gross margins.
But all of the D, but accretive to EBITDA margins of course of course, yes got it but all of the deals. We're looking at I believe have gross margins in excess of where we operate today and.
And that's not the main determinant EBITDA percentages would be the main determinant, but but we're focused on higher margin products.
As kind of a mainstay of.
The organic and inorganic opportunities.
Okay, and then just another really strong quarter on managing working capital last quarter, you were talking about trying to keep net working capital as a percentage of revenue closer to 15 came in at 12, 3%. This quarter how much of that was a function of of maybe the delays receiving some of the inventory.
Tori and should we still be thinking about inventories growing 30% to $40 million over the course of the year.
Well.
I said it in my opening comments.
A small part of bits due to delays on inventory not a big part of it.
We've been.
I've said it before debt if you look at our experience in 2020.
Our EBITDA for the year I believe was 57 of -57 million for 2020 of the worst year in our history and we.
Okay.
57 million EBITDA in our inventory charges were 54.
So the.
That tells us we need to be very smart about the inventory Mark told you earlier that we had of 5 turn in the first quarter and the second quarter. We've never had a <unk> 5 turn I don't believe so we're focused on making sure that we can keep those margins high keep those turned strong.
And we believe we were able to fulfill customer requirements in the second quarter and didn't have pent up.
Goods receipts issues, we do expect that to begin to trickle into the third quarter. We are finding in some of the pipe of reordering taking longer to get here, which could have a negative impact on the second half relative to the growth we projected in the third quarter.
But we're starting to we may start to feel a little bit on the on pipe and less so on the other product category or categories.
In terms of our working capital per cent of revenue of 12% on <unk>.
$12, 3 which is the working capital turns of 8 that is a.
And we guided that to expand a little bit that's that's the.
Just a function of.
The collecting our bills as fast as possible working with our suppliers in terms of pain, a little bit later and being good at managing inventory, which historically we've been.
Less than good so.
I still think 15% to 20% working capital just on revenue is a good range.
But.
Dave.
Please standby.
All participants please standby.
Robert.
Net.
Yes.
Okay. Thank you.
Okay.
So it wasn't the whole architecture system of Mr. Starr long are we out there.
Yes, you are back.
Okay.
Okay. So I think I answered that last question, sorry, we had some technical difficulties.
Did you have any other questions Doug.
Doug if you can re prompt a few did.
Further questions.
Sure.
The adjusted with everyone.
Okay, we have the back.
Doug.
Oh no no problem. So just wanted to tie a bow on that of 15% to 20% of revenue still a reasonable target going forward.
I believe so okay.
That's it thank you.
Sorry about the technical Snafu.
Okay, and we have Nexus Nathan Jones from Stifel.
Hi, Good morning, this is Adam Farley on for Nathan.
Good morning, Adam or good evening wherever you might be.
Good morning out here in Denver.
So back on to the gross margin and pricing.
How accepting of the market of price increases associated with inflation and do you think.
Higher prices of impacted demand at all.
Well, here's what we're seeing so far our customers.
On.
Like we've talked about and talked about exhaustively are very focused on cash maximization and and that includes <unk>.
Price of goods. So we are getting pushback from customers on increasing price. We are seeing that now so far we've been able to push customers to substitutes.
Which might which would enable us to capture of the sale.
And to keep them interested in the transaction, so, but we are seeing some customers push back.
As as lead times expand we'll see less of that resistance from customers because there'll be more interested in getting the product then paint a few pennies more than than they had historically, but there is a little pressure along those lines.
Okay that makes sense.
Turn it over to the WSI of spend I believe you gave us a run rate outlook for 2021, but.
Maybe longer term, how do you expect expenses to layer back in with growth.
So in the short term.
In 2020, we were very focused on.
On resizing the business in a market that had <unk>.
Strunk by 70% in.
In 5 months.
So and you've.
Talk about the debt the.
Metaphor of catching a falling knife and how difficult that is we believe we caught that knife and I set of 2 or 3 quarters ago.
Now, we're going to be circumspect, we're going to be thoughtful we're going to be careful to preserve our position on the market. When you reduce your workforce by 45% and when you close 50 out of 250 branches you forgo revenue opportunities. So right now we're focused primarily on growing the.
The business, taking market share and making smart inorganic purchases.
And secondarily.
Secondarily.
Over a period of time.
Realize and are focused on modernizing our branches relying more so on central distribution, where we can push more volume.
Across fewer people.
With better flow throughs, and better WSJ, but over time, our debt WSJ number needs to come down relative to the current level of revenues.
It's not just WJ needs to come down as a percent of revenue the absolute value needs to come down all other things equal.
So.
<unk>.
In the coming quarters, we are still working on a I call. It a migration to a centralized model I call. It migration because it takes some time.
And so we will see those numbers come down in the future but.
But they won't like Mark said, we expect them at least for the third quarter to be above where they were in the second.
Thanks for taking my questions.
Well.
And we have no further questions at the time I'll turn the call back over to David Church of SKU, CEO and president for closing statements.
I want to thank everyone for joining us today I apologize for the technical Snafu.
We look forward to seeing you in a few months and have a great quarter.
Thank you, ladies and gentlemen that concludes today's call. Thank you for participating and you may now disconnect.