Q3 2021 NOW Inc Earnings Call

November 3, 2021

It looked a question and answer session during which can be dealt with Dar one if you have a question I will now turn the call over to Vice President of digital strategy and Investor Relations, Brad Wise and you may be good Sir.

Well good morning, and thank you Brandon and welcomed allowing third quarter 2021 earnings Conference call. We appreciate you joining us and thank you for your interest in now Inc.

With me today is David Church, Henske, President and Chief Executive Officer, and Mark Johnson, Senior Vice President and Chief Financial Officer.

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

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 is subject to change they are subject to risks and uncertainties and.

An actual results may differ materially no one 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 at the time of the live call Ah refer you to the latest forms 10-K, and 10-Q that now and now has on file with the U S Securities and Exchange Commission for a more detailed discussion of the major risk factors.

[noise] affecting our business further information as well as supplemental financial and operating information may be found within our earnings release or our website at <unk> Dot <unk> dot com or in our filings with the SEC.

In an effort to provide investors with additional information relative to our results as determined by U S gap. You'll note that we also disclosed various non-GAAP financial measures, including EBITDA, excluding other costs, sometimes referred to as EBITDA net income excluding other costs and diluted earnings.

As per share excluding other costs each excludes the impact of certain other costs and therefore have not been calculated in accordance with GAAP.

Reconciliation in each of these non-GAAP financial measures to its most comparable cap 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 in 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 2021 Form 10-Q today and will also be available on our web site now let me turn the call over today.

Thanks, Brad and good morning, everyone I'd like to begin this call with a big Thank you to the thousands and Dinah women and men around the world who successfully connect the manufacturers we support to the customers who rely on us to power the world for a sustainable future.

These are challenging on many fronts, the COVID-19, Serge labor and materials shortages elevated transportation costs and changing political winds among other things.

Despite these factors, we performed very well you've seen strong demand this quarter, especially in North America. Our service to customers has been exceptional we are leveraging our scale modernizing our geographic footprint and demonstrating agility as we keep this the customer at their center of every dollar we invest.

Our goal is to always be in an advantage position to help our customers achieve their goals and solve their problems.

While the supply chain environment is stressed we're confident in our skills to respond the evolving dynamics.

In the face of labor and materials shortages, we are providing superior service and helping our customers minimize disruptions we are investing in inventory to seize growth as the market expands further.

While we navigate tight supply chains and labor shortages quite well these disruptions impacted revenues a bit more in the third quarter of 2021 and in the previous quarter, especially in the area of steel pipe and for products and use process solutions.

These trends seem to seem likely to endure in the short term.

To address these we are leaning on technology alternative supply sources, and Brant initiatives to improve productivity and order fulfillment.

The degree and pace of recovery is contingent upon COVID-19 impacts customer budget discipline, ESG initiatives and availability of capital labor and products amid the lingering supply chain bottlenecks.

We have taken action in a transforming market, one where we see a bright future for D now and our customers.

Domestically the public E&P spending abstinence has emboldened private emp's to spur operations driving nearly 80% of the U S rig count growth in 2021 three.

Three Q21 was a really good quarter, where we achieved 10% sequential revenue growth, beating our mid single digit revenue guide.

We achieved a record quarterly gross margin percent that drove greater than forecasted flow throughs on relatively flat, whereas warehousing selling administrative expenses late.

Later, I'll close with how pricing and gross margins are driving our strategy.

We delivered 15 million and EBITDA or three 4% on $439 million in revenue.

For context looking back at another recovery year for the full year 2017, Dino generated more than 2.6 billion in revenues, but just 7 million and EBITDA during that full year.

As a point of comparison, we generated $439 million in revenues and three 221 and more than twice the EBITDA dollars on 106, the revenues when compared to the full year of 2017.

This is a significant achievement and a major pivot, allowing for greater Incrementals, a leaner supply chain and reduced inventory risk as a byproduct of our fulfillment model modernization.

And the worst downturn in history, we acted quickly and adroitly. These achievements are a testament to our employees hard work and our management team focus and determination and strategic execution by re sizing denounce and reshaping our strategies for current and future markets.

We achieved these results despite some of our revenue engines not firing on all cylinders for example projects and use midstream market have remained relatively muted.

International growth continues at a slow pace has the pandemic impacts the demand for oil and gas, thus keeping less keeping some OPEC plus supply off the market.

And a number of carbon management energy transition projects are just in the early planning stages, where Dinah possesses a number of PBF and engineered solutions, which offer future revenue opportunities.

As one or more of these cylinders begin to fire and activity materializes, which I am confident they will there still be an accretive tailwind to denounce revenues and bottom line results.

We believe this sets us up nicely for what we expect to be a much stronger 2022.

Now some comments on a regional basis in the U S revenue was up 16 million sequentially U S energy revenue increase sequentially due to drilling and completion activity and favorable margin contributions primarily from steel pipe inflation the.

The recent increase in land contracted joining riggs was dominated by private oil and gas producers during the quarter.

<unk> is actively targeting customers and making positive inroads.

We experienced broad product line sales growth across the U S as drilling completions gathering lines and tie ins were sold into the oil and gas producing regions.

A notable portion of Julian programs are targeting well locations in proximity to facilities that have additional processing capacity, meaning a portion of our producer customers are spending lower capex per well site and they had historically at least for now.

Market share gains in the quarter included a major operator in the Permian, whose rigs remained flat sequentially that revenue increased substantially from central tank battery builds.

We expanded PBF sales through several epc's for tank battery abilities, and the new Mexico, Delaware play.

Also during the quarter with a focus on private operators, we executed several msas, which will open future growth opportunities for their Permian assets.

We increased market share with PBF for facility builds for private producer and several line pipe sales with the gas utility company.

And the downstream sector, we provide the PVM several chemical processing companies for plant turnarounds in a major valve upgrade project, having inland refinery.

And highlighting how customers are using our mobility based technology solutions to dry point of sales efficiencies, we implemented a customer onsite inventory solution, where customers access our Dino app from their mobile phones to procure material.

Customers can also connect with our local branch on the mobile app to place orders for pickup or delivery.

Shifting to use process solutions revenue expanded sequentially from increased completions activity with drilling operations and duck drawdowns, yielding higher demand for a fabricated engineered equipment packages. In addition to punk pop punk packages for fluid handling.

Engineered packaged units were delivered to the Permian Eagle Ford Rockies powder River and back in place.

Products include a variety of ASME pressurized vessels, including heat or treaters and separate is an oil transfer skids.

Activity in the midstream and water management markets is increasing as demand for lack units pipeline blending skids and water transfer units increased during the quarter.

And the downstream sector will be provided a number of pump packages and refinery applications located in the northern Rockies and delivered a large order of balanced tied to a soda ash mine project in Wyoming.

The municipal waterfront, we are seeing increased levels of court activity for pump packages as projects and this and market begin to gain traction.

On the aftermarket side, we are seeing demand pick up for our field service offerings on pumps and air compressors are field service work drives parts and labor sales, which delivered strong margins to our base distribution business.

In Canada third quarter revenue was 68 million, a sequential increase of $17 million or 33% amid continued share gains in the market emerging from a seasonal breakup.

Western Canadian select heavy blend averaged $57 a barrel for the quarter and is fostering bullish sentiment for increased capex budgets and project activity for key oil sands producers.

In addition, we can prove natural gas prices the macro sets up well for more projects drive conventional in midstream growth.

Or preassembled packages for well had hookups and tie ins led to notable gains in the quarter with many of our customers.

Finally, we continue to see success with our valve and actuation product line, winning business with multiple epc's, we've targeted with a number of major EMP in midstream operators.

For international in the third quarter revenue was up 6 million sequentially or 11% to $59 million internationally drilling activity is beginning to pick up as OPEC plus spare capacity begins to narrow as demand for energy increases.

He now has positioned well in key areas to take advantage of increased drilling activity through a number of our drilling contractor frame agreements.

Some notable international wins include delivering electrical PPE Emaar all products on various project orders to a major oil and gas upstream operator in Iraq and.

In the <unk> region, we were successful in receiving project orders for PPE, Kazakhstan, while obtaining notable wins.

For PFF within easy in Russia.

In Indonesia, we provide about two and EPC for a project and a downstream petrochemical facility.

In Australia wins include shutdown balance and spares for major international oil and gas Company. In addition to project awards for control valves for a major international gas producer.

Maclean International delivered electrical cable for an onshore gas expansion project for an Australian based engineering and construction firm.

And an electrical cable order for solar panels to a customer in Australia.

We've been busy securing future business by executing a number of key frame agreements for our electric business that includes a three year agreement for a major oil and gas producer operating in West Africa, and a five year agreement with the global EPC.

These agreements provide future opportunities to secure meaningful electrical products revenue as projects and MRO business accelerates.

In Brazil, we delivered to large valve water from an EPC on an F. PSL project producing for a major national oil company.

We also leveraged our total valve solutions offering, including our digital valve asset management solution with an offshore Brazilian producer Kalp capturing valve orders. In addition to notable wins from several offshore drilling contractors.

Now I'd like to address the impact of global supply chain delays and inflation are having on our business.

With our PBF product lines, we maintain a global sourcing strategy, where we started from several preferred domestic and import manufacturers, which allows us the option to proactively manage our inventory availability to meet customer demand in times of supply chain disruptions.

Our procurement and sourcing teams have done an excellent job ensuring high product availability during these logistical challenges for.

For steel pipe in some components that are assembled as part of our engineered process production and pump packages, we are experiencing product delays and some of our packaged offerings pushing approximately five to 10 million and four Q21 orders into the new year.

Moving to our digital now initiatives in terms of our digital commerce channels, we continue to increase customer adoption now eclipsing 44% of revenue connected to our digital channels during the third quarter.

We onboarded numerous b two b e-commerce customers across midstream industrial and service companies. This quarter, we continue to work with our digitally integrated customers to further enhance their e-commerce experience optimizing their product catalogs and developing customize workforce flow solutions to our shop Dot <unk> dot com platform.

Arm.

Our technical sales team and R. U S process solutions business is leveraging our aspect product configurator tool to capture revenue.

During the quarter, we saw an increase of active users by 48%.

And recently, we enhance the user experience by incorporating three dimensional imaging and the ability to view are packaged units in an augmented reality environment. This.

This allows our customers to better visualize, but the completed package would look like from a 360 degree vantage point.

We are using E track or asset management lifecycle tool to improve the accuracy of customer owned equipment counts to enhance traceability and reduced labor costs associated with required monthly yard reconciliations.

We are using E track within.

Within our materials management customer engagements, enabling higher productivity and driving more value for both parties.

And now I'd like to touch on a few comments related to energy transition.

As we have seen during the third quarter, the elevated price of oil and gas as a result of increasing demand for energy on supply that requires continued investment to expand.

For dinner, we are a critical part of enabling our customers ability to safely and efficiently produce and transport energy to market the.

The products, we distribute combined with our highly efficient supply chain services solutions helps our customers achieve lower cost production, when producing and transporting oil and gas.

We are investing expanding our solutions to help our customers reduce greenhouse gas emissions as well as solutions around carbon capture storage transmission and management.

And the third quarter, we used R E spec software drive more meaningful conversations with customers to reduce greenhouse gas emissions, noting specific value tied to compressed air system solutions, which offer direct replacement of methane gas spending systems.

And one example, we provided air compressors and dry our equipment packages to producers who are committed to reducing greenhouse gas emissions from gas pneumatic devices, replacing them with compressed our systems.

This is a great example of how Dean I was able to improve our customers ESG profile by helping them meet their emission reduction targets.

Additional emission reduction solutions, we offer our customers focus on upgrading pumps and pumps seals to minimize leaks and greenhouse gas emissions and Tankless tank battery designs.

We are collaborating collaborating with producers on carbon dioxide direct or capture projects as well as dedicated C O two capture and transmission projects.

So we are excited about our core markets and equally excited about the emergence of new end markets, which enabled <unk> to expand our top line into the future.

With that let me hand, it over to Mark.

Thank you, Dave and good morning, everyone <unk>.

Total third quarter of 2021 revenue was $439 million, a 10% increase over the second quarter of 2021 outperforming are guided mid single digit percentage growth.

The U S revenue for the third quarter of 2021 was $312 million up $16 million from the second quarter into our highest level since before the pandemic.

An increase customer activity and significantly improved product margin contribution.

R U S energy centers in process solutions revenue channels were up 5% and 7% respectively with U S energy centers contributing approximately 80% of total use revenues in the third quarter.

Moving to the Canadian segment, Canada revenue for the third quarter of 2021 was $68 million up $17 million or 33% from the second quarter as we successfully expanded our revenue in both the upstream in midstream space.

Year over year revenue was 26 was up $26 million or 62% from the third quarter of 2020.

International revenue was $59 million, an increase of 6 million or 11% from the second quarter, primarily from increased project activity.

[noise] gross margins improve sequentially 60 basis points to 21.9%. This increase was primarily from a higher product margins as inventory charges remained relatively modest at $2 million in the quarter.

Gross margin gains were fueled by the inflationary currents in the steel market impacting line pipe and high steal content fittings and flanges, but we also captured margin growth, albeit to a lesser extent across our other product lines as we selectively migrate towards those products and solutions that provide the greatest value to D. Now.

Inventory charges vary depending on the actions taken to adjust our business model to support current and future activity, including customer demand changes both in volume in preference the incline or decline in the market and specification changes on available products, we continue to evaluate our products and locations too aligned to the changing.

Market conditions customer preferences, and our strategy, which could impact the level of charges going forward.

And the third quarter of 2021, warehousing, selling and administrative expenses or Ws say was relatively flat up 1 million sequentially with cost reduction initiatives not fully offsetting the waning government subsidies in the period.

Third quarter government subsidies, which total less than $1 million, we're down from almost $2 million in the second quarter and we expect these benefits to continue to phase out through the fourth quarter.

Considering this and other actions underway, we do expect wsh remained relatively flat into the fourth quarter and.

And we are expecting modest decreases in wsh in the first quarter of 2022.

As we see additional traction from our longer duration initiatives begin to bear fruit.

Operating profit for the third quarter was $10 million.

And we delivered favorable year over year operating margin flow through his across all three segments driven by improved gross margins on reduced WSI.

And the third quarter, we generated operating profit and all three segments last achieved two years ago, when a revenue was 70% higher.

A strong indicator, reflecting how well we are leveraging our lower cost base.

Sequentially the U S delivered 44% incremental flow through as to operating margins and a $4 million operating profit in the third quarter. This is a notable improvement for the U S segment as we continue to deliver more revenue across our cost base.

And the third quarter of 2021, the international segment reported $1 million in operating profit of approximately 2% of revenue.

In Canada delivered $5 million in operating profit, 7% of revenue with 18% incremental flow throughs in Canada to operating margins as it emerged from seasonal breakup.

GAAP net income for the third quarter was 5 million or five per share and on a non-GAAP basis net income excluding other costs was 6 million or five per share.

Non-GAAP EBITDA, excluding other costs was $15 million or three 4% for the third quarter of 2021.

As noted in our improving results, we've been focused on continuously identifying and implementing initiatives to transform our operating model, increasing our valued customers and maximizing our customer service the hard work and commitment from our employees can be seen today in our financial performance as year over year revenue expanded 35%.

On a significantly improved cost basis.

We delivered <unk> EBITDA flow through sequentially of 23% and 27% year over year.

The high flow throughs are a combination of higher product margins paired with our team continuing to create business deficiencies that enabled greater revenue across our network.

I would also point out below operating profit and other expense for the quarter included approximately $1 million an expense related to the increase in the fair value of the estimated contingent consideration liability.

As of the end of the third quarter, we have a net cash position of $312 million of $19 million from the end of June.

Total debt remained at zero and included zero draws in the quarter with total liquidity, which is calculated as total availability from our undrawn credit facility of $248 million plus cash on hand equal 560 million as of September 30th 2021 account.

Accounts receivable or $299 million, an increase of 10% from the second quarter and.

An inventory was $244 million down $6 million from the second quarter with inventory turns now reaching five six times a quarterly best.

Accounts payable or $243 million, an increase of 12% from the second quarter.

And as of September 32021, working capital, excluding cash as a percentage of our third quarter annualized revenue was 10.6%.

With some of the working capital reduction this year attributable to the $19 million, an estimated fair value of contingent consideration, which is subject to change and.

And we do expect this working capital ratio to increase some as we intentionally fuel growth by adding working capital to grow the business.

Our commitment to working capital efficiencies reflected in a new quarterly best cash conversion cycle of 62 days.

Marking five consecutive quarters of improvement.

A primary driver for these working capital efficiency gains has been increased inventory turns which help to minimize the cash needed to fund our sequential revenue growth.

Free cash flow in the quarter was $22 million and when looking back three years, we've generated approximately half a billion dollars or more precisely $486 million in free cash flow.

We are committed to balance sheet management, making investments in good inventory pursuing strategic acquisitions, and maximizing asset health to fuel the future we.

We celebrate the successful quarter with optimism for the future and we possess the talent resources and fortitude to grow our bottom line develop a more agile business and create sustained value for our customers and shareholders with that I'll turn the call back to Dave.

Thank you Mark and now have you on M&A in the fourth quarter.

We remain focused on deploying capital to capture organic and inorganic opportunities for Dinah.

Through M&A M&A, we are targeting accretive margin businesses that provide non commoditized solutions that fit within our strategy.

We continue our active engagement with potential targets as we evaluate opportunities in our strategic areas of focus.

One area of focuses on strengthening our process solutions product lines by adding companies, which create competitive advantage differentiation and build barriers to entry for Nina.

Another area of focus is on businesses that help diversify our end markets to provide greater market differentiation.

As you can tell I'm excited that the company once again achieved solid results with better than expected sequential revenue growth of 10% a third consecutive quarter of record breaking gross margins and EBITDA, excluding other costs of $15 million well above expectations are.

Our strategic execution accelerated these results and generated $22 million in free cash flow in a period, where we would have historically consumed cash.

Looking near term at the fourth quarter, we typically see customer expenditures slowdown due to a combination of budget exhaustion and reduced customer activity due to the holidays in November and December.

This typically create seasonal headwinds to sequential top line growth.

Furthermore, shipping delays on <unk> imported products and a lack of product availability has the potential to delay revenues.

Taking this into account our views at the revenue in the fourth quarter will be flat to down mid single digits sequentially as we experienced seasonal headwinds that we don't expect to repeat into one Q22.

We anticipate full year 2021, EBITA improvement over full year 2020 to be nearly $90 million, representing a fundamental shift in the capabilities of the company and its earnings potential.

Again laying the groundwork for a strong 2022.

Looking ahead, we expect fundamentals and our business to be continued to improve with global demand for energy improving and the supply of energy from oil and gas poised for growth after years of on your investment we.

We are excited about 2022, especially as a number of industry analysts are forecasting double digit growth in 2022 to what some have termed the beginning of a multi year energy super cycle, leading to sustained growth.

Finally, I want to close on gross margins and pricing and really hit this point hard.

We are very deliberate about high grading our business and by that I mean, focusing on higher margin manufacturers businesses product lines locations activities and markets and customers for.

For a perpetual trek to improving product margins.

Like every organization, we too have limited resources, so we must choose where we allocate our time and talent and treasures.

We are picking suppliers expecting partnership reciprocity committee spend to them honoring our commitments promoting their brands and deliberately promoting value.

Focusing our inventory investment focusing our precious human capital on higher margin opportunities, focusing our talent, where the customer sees value where the customer is willing to pay for the value we provide.

Conversely, we're unfocused and Disfavoring lower margin opportunities.

There is no nexus and allocating precious resources inventory and human capital, where the customer does not see value.

I want to highlight what this focus means to earnings.

Product margins over the last six years on a per year basis.

We're from 2016 forward, 18%, 19%, 20% two years in a row as 2019 market activity declined below 2018 levels, 21% in 2020, and now 22% on a year to date 2021 basis.

This is not accidental this is not market derived in fact, many of these product margins gangs were achieved in a period of deflation.

This was intentional and outcome Holy created by the women and men have D now, where our organization finds its place in the heart of customers, where they see value.

Focusing our valuable resources on the right opportunities.

Now coupled that strategy on top of on top of a much leaner more streamlined business and the result is durable earnings power greater than what we've been able to achieve in the past.

With that let's open the call for questions.

Thank you Sir will now begin the question and answer.

If you have a question for you tell star one on your phone keypad, if you'd like to be removed from the Q b sell the Palestine or the head.

It's got a speaker phone please pick up your handset first before dialing once again if you have a question. Please tell star one on your phone keypad.

And from benchmark restrict we have dug Becker. Please go ahead.

Thanks, Dave.

Dave I'd like to continue on the margin commentary, just maybe a little more insight into what you see for the fourth quarter given the multiple moving parts, but then even longer term last quarter, if we're still talking about 22% being a target.

Given this quarter's results it certainly looks like a readily achievable target and just maybe your latest thoughts on that and margins longer term.

Yes, good morning, Doug Thanks for the question Yeah.

Yeah, I did say 2022, 22% as a target I didn't expect to see margin appreciation like we did in the third quarter. In fact fact, we guided to some compression.

We have our management team.

I tried to make the point towards the end of my opening comments.

Like any.

Family any business any organization, we all have limited resources, we have to make choices.

As we.

Migrate how we fulfill customer requirements.

We tasks are task our resources pointed at the higher margin activity and everything we do we're negotiating new deals with with long term customers.

Suppliers long term manufacturers, we're trying to get the best possible price, we're trying to give them all of our business. So they understand reciprocation.

And then we're changing how we price things in the past a lot of people in our company had pricing authority, we're changing that so that we can maximize.

The delivery of the right products to our customers at a good margin.

We're doing that across the board, we're buying companies with the.

The companies we bought this year any way we.

With better gross margins better expense.

As it relates to revenue.

And and we're like I said disfavoring those at the other end of the spectrum. So while 22% is a is a record for us.

I don't see it as the floor, yet because we did enjoy the benefits of pipe pricing.

In a period like this where product availability is scarce.

It comes down to allocating products to customers and if.

If we can acquire it in as a large oil and gas distributor we have we have.

A better position in terms of product acquisition command, a higher price for perhaps the product in the first place so.

So 22% remains or target can we build on that I believe we can.

It is an organizational effort.

That we pursue the value for our customers, we meet them, where they see the value in D. Now.

We have allocate our resources to those efforts and then not to those where they don't see the value. So I think I think the opportunities for greater margins in the future in the third quarter. However, we did see a benefit from pipe when we could talk about more about that as well.

Lots of things that are certainly showing up in the numbers maybe just.

Talk a little bit more about Python as it relates to just the fourth quarter would you expect a little gross margin compression.

In the fourth quarter, just given revenues that might be flat to slightly down yeah.

Yeah, I think that's I.

I think that's implicit in on guide because so while we've been very good.

Fulfilling customer requirements, we are things are slipping a little bit and a few key areas.

Again, we're working to fill those gaps.

To make sure we can maximize.

Customer service and product availability, but in the areas of steel pipe.

We are tapping all of our resources around the world.

Important domestic pipe sources to acquire pipe.

And we are seeing some slippage in terms of product availability, so that could mean better margins, but lower revenues. So so the mix, we'd see them, we'd see a mix issue, there where our pipe sales could.

Go down in terms of total sales, which will have a negative impact on margins.

So that's one reason why we might see some gross margin compression in the fourth quarter Ah secondarily. We do we are seeking alternate sources and four four fungible goods, where where where alternatives are available we might seek.

Sure Ah sourcing strategy, where we buy from competitors or master distributors, and we pay a little bit more for the frog product, we get the revenue, but we see a little bit less in terms of gross margin. So to answer your question, Yes, we expect a little bit of compression.

I have said that for a few quarters I've been pleasantly surprised.

But I gave a little color on my opening comments about how we are seeing.

$5 million to $10 million in projects or orders that are slipping into the new year basically due to waiting on products to arrive and those tend to be our higher margin product lines. So.

I guess the answer is yes, we will see some compression and likely due to those reasons.

She lives in a short term.

Margin compression and and to your original question I think we can get back into that 22 range into the new year.

A final one just.

Can't help but notice the tracks and you're getting with involves globally. It's an area where you are targeting some acquisitions.

Just any context about the current size and how big that business might be kept my might ultimately become.

Well I think in terms of our total sales today valves discreetly represented by 20% of our business now that there's also where we do kidding and they're part of a project and those values may not be considered there.

But to me, it's a matter of.

The right kind of valves and the right kind of profitability from the lines, we carry but we see that as one of the more.

It's one of the few products, we carrier carry that where there's a high brand preference for we have we have very little brand preference preference for pipe and fittings and flanges.

But for valves, there's a brand preference there so if we get the right.

Agreements with our.

Suppliers and as we grow our actuation about service business. We can see that continue to grow continue to grow we haven't set aside for that size of the to that part of the business, but we see it as a big opportunity for us to manage a fleet of various competing valves out there to do a valve and actuation services.

And to become more <unk> more and more important to our customers in the process.

Got it thank you.

Thank you Don.

I'm, calling we have gotten hunter. Please go ahead.

Good morning, Thank you.

Morning.

So I guess around out the discussion on.

2022, I mean, it seems like you'll start the year at the 22% type gross margins you alluded earlier in the commentary for double digit type.

Increases in.

The top line I believe.

Some some of the larger off as companies are talking about 20% increase in any ANP spending next year in North America.

I'm curious if <unk> agrees with that outlook.

Or is there a potential upside to that if you see market share opportunities I know you're kind of actively targeting the private so that could be an area of opportunity.

So yeah, if you could just speak to that that would be helpful.

[noise], Yeah, I think what we were saying in terms of 2022 of course, we're not prepared to give guidance on 2022, but there is a lot of optimism and most people are talking about 10% growth or greater some some of the numbers get into.

Well into the teens.

We're not there yet but.

There's two things there.

Was pretty outspoken on the opening comments about.

This notion of limited resources and focus on.

Really cherry picking the highest margin.

Highest EBITDA margin opportunities in terms of product line focus that could mean.

We.

We move away some for some product lines and that could be a headwind too too.

Revenues in the new year, but a boom too.

Earnings at the bottom line, so while I believe and once again, we haven't fashion.

<unk> that 10% is probably a good starting point for the new year and could be materially stronger than that.

Many many things impact and that of course, but we're bullish on 2022.

And I think we should see growth in that range for sure.

Thanks, Thanks, Dave that's helpful and <unk>.

Following up on that the WSI is kind of flat in the fourth quarter and then.

There are some opportunities to reduce that.

In the first quarter of 2022.

Is.

Do you think you can.

Whittle that down to kind of and 80 million.

Type run right on W essay by the end of the year or what.

What kind of contacts should we be thinking about for your target on the WSI line in 2022.

Well, let me let me answer the question this way because.

Growth growth will impact how much.

Where that Ws lamp WSJ line goes.

If we're able to land some of the acquisitions, we have on the table right now of course, all of that's going to impact that but we have plans in place to add.

We.

Stand up are Super centers.

In Casper.

Wyoming in Odessa, Texas in Williston North Dakota.

Three major investments across the spine of the U S oil field reached.

We should continue to see improvements in our cost structure.

As it stands right now we expect a call $12 million of expense out of the business at a at a flat level of revenues.

So that can that would potentially being WSJ down by 3 million a quarter now if our growth.

Is.

Much higher than 7%, 10% and that'll change that WSI numbers, so the greater the growth.

You are we might project will impact that Ws a number.

Unfavorably right that WC number would be a little higher if the growth of a stronger than we.

Forecasts, but but we do have but efficiency measures that will achieve in 2022.

And they're in the 12 $50 million range right now.

Great. Thank you for that and then last one for me is.

The free cash flow in the quarter was impressive.

You know I was expecting a little bit of a working capital built.

Do you actually released a little bit. So curious as you think about 2022 in your inventory image, how how should we be thinking about.

Working capital consumption in the fourth quarter or perhaps early.

In 2022.

Well, so the biggest thing impacting.

Whether we produce or consume free cash flow in the fourth quarter is the timing of receipt of good. So we have.

Tens of millions of dollars of inventory on order as we often do but work.

We're like I said, we are clamoring to get similar product lines and your faster.

Those who would be off.

Offsets to free cash flow in the fourth quarter, but our current modeling shows that will generate cash in the fourth quarter it'll be 022, a few million dollars probably now last quarter. I think we said, we would consume up to $30 million to $40 million in the second half of the year.

It could be that we produce $30 million in the second half of the year as it turns out so.

In the third quarter.

We turned our working capital nine times on an annualized basis, which is unheard of for an inventory intensive accounts receivable intensive company.

We sell goods to our customers.

Terms and we have to invest a lot of inventory to generate the kind of sales we generate we turned our working capital nine times. So that's add that so.

Something that's going to be hard to maintain likely we won't maintain it.

But so that are working capital turns will get a little less great.

But it's possible and it's probably a good bet will will be generating cash to some level in the fourth quarter could be could be zero, but could be a little bit more of an incentive consuming cash like we had expected earlier on.

Great. Thank you I'll turn it back thanks John.

And as a reminder, if you have a question. Please tell star one on your phone keypad and from a depot we have Nathan Jones. Please go ahead.

Money everyone.

Good morning Nathan.

Following up a little bit on the wsh commentary.

That you obviously, you said, obviously that WSI number is going to depend on what growth is maybe.

Maybe you can give us a little bit more color on what kind of W essay you'd be looking to add back.

Revenue increased.

If you increase revenue by one dollar DNA that 10 Tec WSI five W essay.

Any kind of color you can give us on that.

Okay.

I'll make it I'll.

I'll make a stab there.

To me.

Every every dollar revenue should should include no more than five and.

And wsh.

Then again I've set for many quarters that.

Our expense are wsh percent of revenue remains too high.

<unk> also said that once we bought once the market bottomed that we were primarily focused on growing the business on taking market share.

On growing gross margins.

And a highly hotly contested competitive environment and we're doing those things. So I'm most urgently concerned about our position in the market and growing the business.

And that would could entail some additional expense expenses a percent of revenue in 2022 will go down we're going to be.

Careful about not adding expense I talked a moment ago about a plan to pull $12 million to $15 million of expense out on business at current.

Revenue levels, but to answer your question discreetly.

Three to five cents for each dollar would probably be.

Acceptable.

But we also need to get our expense.

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