Q2 2022 NOW Inc Earnings Call

Ladies and gentlemen, thank you for your patience and now Inc. Second quarter 2022 earnings Conference call will begin in one minute time, if you would like to ask a question at the end of the presentation. Please press star followed by one of your telephone keypad.

[music].

Hello, and welcome to the now Inc. Second quarter 2022 earnings Conference call. My name is Nadia 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 session. If you have a question. Please press star, but if I wanted to touch time side.

I will now turn the call over to Vice President marketing and Investor Relations Broadwife. Mr. Wise you may begin.

Thank you.

And good morning, everyone and welcome to now Inc. Second quarter 2022 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 <unk> brands and you'll hear us refer to distribution now and do you know, which is our New York stock exchange ticker symbol during our conversation this morning.

Please note that some of the statements we make during this call, including the responses to your questions may contain forecasts projections and estimates, including but not limited to comments about our outlook for the company's business.

These are forward looking statements within the meaning of the U S. Federal Securities laws based on limited information as of today, which is subject to change.

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

No one should assume that these forward looking statements remain valid later in the 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.

I refer you to our 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 information as well as supplemental financial and operating information may be found within our earnings release or on our website at IR 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. 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.

Please refer to our reconciliation on each of these non-GAAP financial measures to its most comparable GAAP financial measure in the supplemental information available at the end of 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 <unk>.

Second quarter.

A replay of today's call will be available on the site for the next 30 days, we plan to file our second quarter 2022 Form 10-Q today and it will also be available on our website.

Now, let me turn the call over to Dave.

Thanks, Brad and good morning, everyone.

I'm thrilled to be here today celebrating a record breaking quarter.

Sixth consecutive quarter of significantly improved financial performance and prospects for the company what an exciting time at is for distribution now revenues in <unk> 'twenty, two we're 14% stronger than the first quarter, well above what we guided and 35% higher when compared to the same quarter in the prior year.

Our gross margins climbed to a high water Mark of 23, 7% aided by healthy project product margins, resulting from inflationary headwinds lower inventory costing and pricing benefits, which outpaced our previous full year margin guidance in the 22 to 22, 5% range.

Warehousing selling and administrative expense, our WSI was driven down to its lowest level as a percent of revenues since the third quarter of 2014 at time in another era. When there were 1900 U S rigs more than two five times, the <unk> 22 level.

EBITDA in the second quarter was $47 million with <unk> 'twenty to EBIT.

That alone exceeding the results produced in all of 2021, representing again, the highest levels of EBITDA since <unk> 14, a bygone era, given today's significantly improved rig efficiencies and cap.

Disciplined by our customers.

EBITDA in terms of percentage of revenues was eight 7% an all time record achievements.

Working capital excluding cash remained strong turning more than six five times annually enabled by a continued healthy inventory turns despite planned inventory growth, which were pre positioning to ensure that products are available for our customers and to strengthen our into fatigable push to maximize.

Gross margins.

And late in the second quarter, we closed on a small, but Poland U S process solutions acquisition and expansion on our 2021 flex flow purchase fortifying, our leading position in horizontal trailer mounted rental pumps.

I mean, it's are without a doubt a result of the loyal and talented 'twenty 300 members of the Diana family, who have transformed this company by focusing on what matters most to our customers.

We continue to refine our model to drive efficiencies through regionalized fulfillment, while maintaining proximity to our customers like no one else in our space. Our drive is to make this incredible turnaround indelible, which is the main objective for this team right now.

This is a testament to our unrelenting mindset focused on understanding our value in the market evolving our product and service mix to be selective about the business, we target and the activities we sidestep.

While we celebrate our results we acknowledged that we can still enhance our model by capturing additional efficiencies and investing in our people and technology in the coming quarters to continue this transformation.

Today, our customers understand the value we offer in terms of having access to top tier quality products technical sales expertise critical product availability and a customer first service model geared to align around a common goal.

Our team outperformed revenues came in better than we guided to in the first half of the year and are expected to be even better for the full year.

In the second quarter revenues were stronger as we saw customers pull in and accept delivery for future needs early due to worries about supply chain issues.

Our revenues benefited from that in <unk>.

Large projects in process solutions, including one for $9 million delivered earlier than expected.

And the expected <unk> seasonal revenue breakup in Canada was the narrowest decline we experienced in the last nine years.

This <unk> revenue over performance means a lighter sequential revenue bridge going into the third quarter, yet, we still expect a better than average <unk> to <unk> build compared to prior years and a much stronger <unk> than our guidance implied last quarter.

And now some color on our segments in the U S revenue was $408 million up 22% sequentially and 13% in U S rig count growth.

U S growth was bolstered bolstered by expanding E&P customer activity.

We are capturing the rewards of the efficiencies that we've talked about over the last couple of years and have selectively targeted the opportunities with customers to execute orders and projects from our new regionalized fulfillment model and centralized project execution teams.

Forward positioning our inventory to our new PBF plus Super centers has enabled <unk> to become the preferred choice and product availability in a hyper competitive market.

And combined with our innovated solutions oriented employees with our customer first mindset and affords the deep D. Now the opportunity to capture margin accretive share.

We continue to supply package students in MRO products to help reduce our customers' scope one emissions working with our dedicated emissions reduction teams we.

We are seeing increased activity and demand for our fiber glass solutions as customers recognize the value of our turnkey solutions and expertise.

We experienced growth as we supplied PBF and safety services for several operators during an extended turnaround season.

In the Biofuels area, we provided PBF to refineries to support the renewable diesel expansion and turnaround projects.

During the last three to four calls we've talked about positioning and investing in growth. In addition to the investments in inventory. We just completed a full quarter of business for a new express locations in the Permian, where we have made excellent progress in terms of servicing an existing existing and new customers, while maintaining customer proximity.

And delivering value to the last mile.

Most day to day activity. There is managed locally while project and large unplanned orders are being fulfilled from the nearby Super Center.

For U S process solutions, where customers previously carried excess inventory customers were ordering equipment in advance.

In to count a shortness of inventory.

And long lead times.

We benefited from the unusually high pre planning and buying activity in the second quarter. Furthermore, some customers are dealing with a lack of Bruce workforce availability and field experience for installations and that difficulty benefited our turnkey and engineering solutions.

We are pleased to see how we now recovering saltwater disposal market, where we shipped SW D units for operators to dispose of produced water from drilling activity.

We continue to seek ways to reduce our customers' scope. One emissions are customers are replacing gas pneumatic systems with compressed air systems, which has led to high demand for our instrument air packages and those orders are continuing.

And we continue to collaborate with customers to leverage additional ESG benefits.

We recently developed and shipped a number of solar and battery powered chemical glycol units, which prevent ice formations at the wellhead during freezing temperatures.

These units would have historically been gas powered and emit greenhouse gases to the atmosphere.

It is now one of the ways the industry is seeking to improve and lower greenhouse gas emissions.

On the fluid handling.

Packaging side, we're seeing demand improve for our crude oil crude pipeline packages as oil production grows and midstream customers are looking to debottleneck existing oil pipelines.

In Canada, our team continues to Buck expectations in terms of market share and profitability, which was quite strong in the seasonal downturn period.

Revenue was $72 million in the second quarter, a 12% sequential reduction and up 41% year over year as second quarter revenue fared much better than the midpoint of our expected seasonal decline.

During the quarter, we strengthened our market position, winning multiple orders for valves and actuation projects.

Our relationships with numerous epc's and fabricators have contributed to growth as we successfully won several notable projects with key customers.

And we continue to expand our e-commerce sales hitting a new quarterly high with a top 10 e-commerce customer as we offer users a simple to use customizable platform for ordering and improving MRO material.

Market demand for products remains high and our supply chain team is working to manage lead times and to source and preposition inventory at strategic locations to meet our customers' demand for projects and MRO day to day activity within a supply challenged environment.

Our international segment revenue improved sequentially and year over year, excluding the impact from foreign currency headwinds as Mark will talk about later international second quarter revenue increased 19% year over year.

We're starting to see improvement in international market conditions and activity is increasing as we see our customers move forward with offshore investments as subsea tieback projects begin to take hold and F. BSL projects materialize in Europe .

Utilization of offshore drilling rigs are improving and day rates are increasing and expanding our opportunities to provide MRO and OEM rig equipment as current inventories are consumed through contracted offshore work.

In the Middle East, we are seeing drilling and production and investments expand we also note increasing activity in southeast Asian shipyards from Jackup rig activations that require new equipment and consumables.

<unk> per load outs.

In Indonesia activity is improving as brownfield activities in the downstream sector materialize as customers plan for 2023 shutdowns.

In Latin America, we are seeing an increase in demand as noc's begin to unfreeze budgets and reactivate plant turnaround planning and maintenance programs related to offshore activity from drilling contractors.

As discussed on our last call. We had ceased operations in Russia and are out of the country. We also reduced our country footprint and the international segment by exiting a country in Latin America, and the Middle East, where a regionalized service model will help service some of those customers from an export model going forward.

Historical revenue from these closings represented about $4 million to $5 million in quarterly revenue.

Moving to our digital now initiatives digital revenue comprised 40% of our S&P revenue down slightly as a percent from the first quarter as our digital revenue grew 9% sequentially slightly below the overall company growth.

We continue to see success with our customer centric digital dashboards, which have driven higher percentages of bill of material accuracy as compared to prior periods.

The accessibility transparency and data have expanded the knowledge sharing with customer and is leading to improvements in overall efficiency and customer satisfaction.

We successfully secured a multiyear integration services contract for a national oil company, leveraging our Mercury asset management solution.

The software will manage data on the customers installed valve population and provide data on repairs maintenance and help streamline the ordering of parts are replacement units.

And on the development side of our <unk> product, we enhanced the maintenance workflow within the software by sending automated maintenance reminders to subscribers.

We expect this new feature to make it easier for our customers to plan the scheduling of maintenance work on assets with our <unk> service Department and technicians.

Now I'd like to spend a few minutes on capital allocation.

As I mentioned earlier during the second quarter, we closed on a U S process solutions acquisition and expansion to our flex flow horizontal rent pump rental pump solution from 2021.

This acquisition Fortifies, our pump strategy and supplement our permanent installation base with additional rental H pump solutions at a time when purchased equipment lead times are stretched and the criticality of equipment uptime is in high demand in.

In addition, our flexible solution offers customers flexibility and disposing of the water collected as a byproduct of oil and gas production with customers choosing between running these units to fit their budget as an operational expenditure.

Our procuring permanent S WD units through capital expenditures and we offer both of these options.

This acquisition.

Acquisition meets our disciplined criteria further differentiating Dino and non Commoditized customer solutions at better gross margins and EBITDA flow through dynamics.

Regarding our M&A pipeline, we continue to work a number of prospects to further drive inorganic growth.

Pivoting from M&A I want to highlight the separate announcement earlier today and our expanded capital allocation strategy, describing our inaugural $80 million share repurchase program.

This authorization reflects the board's confidence and denounce post transformation significantly improved financial performance superior balance sheet, and our desire to allocate capital to our owners.

Our substantial liquidity position and newly transformed earnings profile position D. Now with this ability to expand the options at our disposal for capital deployment, among among a continued priority for acquisitions and organic growth opportunities.

This authorization expands our commitment to generating attractive shareholder returns without deviating from our disciplined approach to balance sheet management.

With that let me hand, it over to Mark. Thank you, Dave and good morning, everyone. Total second quarter 2022 revenue was $539 million, an impressive 14% increase or $66 million in growth over the first quarter of 2022 on.

On a year over year basis, we saw strong second quarter 2022 performance spearheaded by revenue growth of $139 million or 35% and elevated our EBITDA profitability to a record setting eight 7% or $47 million for the quarter.

And EBITDA level nearly six times, what it was one year ago on solid operational execution with improved gross margins.

The U S revenue for the second quarter, 2022, with $408 million up 22% or $74 million sequentially and up $112 million or <unk>, 38% year over year on continued strengthening in rig count persistent depletion of DUC inventory and increased completions activity.

Our U S energy centers contributed approximately 79% of total U S revenues in the second quarter with our U S process solutions contributing the balance of 21%.

Turning to Canada for the second quarter revenue was $72 million.

Down $10 million or 12% from the first quarter of 2022 as a result of typical seasonal breakup. However, it's worth noting that this quarter was the smallest second quarter pullback on record.

Thanks in large part to the enduring efforts of our excellent sales and operations teams executing and winning projects and additional business in the market, which also translated into year over year second quarter revenue increase of $21 million are up 41%.

International revenue in the second quarter of 2022 was $59 million.

Up $2 million or 4% from the first quarter.

When excluding the impact from foreign currency exchange rates second quarter International revenue increased 7% sequentially as the stronger U S dollar relative to foreign currencies unfavorably impacted sales by approximately $2 million compared to the first quarter of 2022.

Year over year second quarter International revenue increased 11% or $6 million when excluding the unfavorable impact from foreign currency exchange rates year over year second quarter International revenue increased 19%.

As the stronger U S dollar relative to foreign currencies again unfavorably impacted sales.

Euro year over year by approximately $4 million.

As Dave highlighted earlier, our second quarter gross margins increased from the first quarter by 110 basis points to 23, 7% and again outpacing the 21, 9% full year record margins set in 2021.

Warehousing, selling and administrative or WSI for the quarter was $89 million up $5 million sequentially.

Half of the Wsh sequential increase was expected and discussed last quarter as we emerged from a first quarter that recorded lower health care costs and fewer payroll days with the remaining increase primarily tied to variable compensation as we exceeded expectations by delivering significantly improved financial performance.

Looking back one year ago to the second quarter of 2021, we have grown quarterly revenue by $139 million, yet only added $4 million and quarterly WSI cost or about 3% of the revenue increase.

The strategic decisions and effort by our dedicated and talented employees are materializing in our performance as we successfully increased productivity throughout our network while significantly growing revenue.

And as of June 32022, we substantially completed the liquidation of certain foreign subsidiaries in Latin America, the middle East and Russia.

These liquidations resulted in the customary onetime reclassification of $10 million and foreign currency translation losses, a component of our accumulated other comprehensive income and loss to the P&L in the quarter. This noncash charge is presented within the impairment and other charges line in our income statement and excluded for non-GAAP reporting.

<unk>.

In the second quarter. The U S contributed $32 million in operating profit or approximately 8% of revenue the highest reported profitability per cent for the segment on record.

Canada delivered $6 million in operating profit or approximately 8% of revenue also a record and absolute profit dollars and percent when looking back at each of the second quarter breakup periods since being public.

The International segment reported $9 million in operating loss as a result of the noncash $10 million charge related to the two Q reclassifications of accumulated foreign currency translation losses related to those liquidations I discussed earlier.

Moving below operating profit other expense in the second quarter was $1 million.

And the same as the corresponding period of 2021.

GAAP net income for the second quarter was $26 million or 23 per share and on a non-GAAP basis net income excluding other costs was $29 million or 26 per share.

On a GAAP basis, the effective tax rate for the three and six months ended June 32022, or seven 1% and eight 2% respectively.

This GAAP effective tax rate is calculated from the face of the income statement is below the typical effective tax rate at these earnings levels.

Primarily related to the favorable tax benefit impact from changes in the tax valuation allowance on our deferred tax assets.

When imputing, our non-GAAP tax rate, we exclude such.

Tax benefit and the non-GAAP effective tax rate is closer to approximately 28% for the first half of 2022 and 28% is a pretty good proxy for the effective tax rate for the second half of 2022, when excluding other costs.

Sure.

I'll go a little deeper on the tax provision this quarter and start off with a background refresher at year end 2012 at year end 2015, we established a full valuation allowance on our deferred tax assets for GAAP reporting purposes.

There was a technical evidence.

That we may not materialize, our deferred tax assets in the future.

Since establishing this evaluation allowance for gap, we have not recognized the tax benefit stemming from any operating losses on.

On a non-GAAP basis, however, and our adjusted net income and EPS reconciliation schedules, we've consistently excluded the impact of the change in the valuation allowance on our non-GAAP earnings and we recorded the income tax benefit and non-GAAP other costs in prior periods of losses.

With our strong earnings posted through the second quarter of 2022, we are starting to consume our deferred tax assets in the U S.

So on a GAAP basis, we are not recording tax expense on our current U S earnings due to an equal and offsetting reversal of that valuation allowance. However on a non-GAAP basis. We are recording income tax expense since we continue to exclude the impact of changes in our valuation allowance on our non-GAAP earnings.

You will see this added tax expense for non-GAAP highlighted in our supplemental GAAP to non-GAAP reconciliation footnotes in our earnings release.

It is important to note that while the tax expense, we are accruing on a non-GAAP basis does impact our EPS. Excluding other costs. It has no impact on our near term cash flow as we do not expect to pay cash taxes in the U S. This year or next due to buildup of net operating loss.

Now moving to EBITDA, excluding other costs or EBITDA.

For the second quarter, EBITDA was $47 million or eight 7% of revenue our highest since being public.

The EBITDA to revenue flow throughs of 29% sequentially and 28% year over year, a result of our team's execution and strategic focus across our new <unk> structure that make it easier for our team to provide exceptional service levels to our customers.

Now moving to the balance sheet, we ended the second quarter in a net cash position of $232 million, including zero debt and zero draws in the quarter, resulting in total liquidity of $574 million.

Comprising the $232 million of cash on hand, plus $342 million, an additional credit facility availability.

Accounts receivable was $389 million, an increase of 14% or $48 million from the first quarter in line with the increase in customer activity.

And this prolonged period of global supply chain constraints, we continue to meticulously source the products our customers require from our long established and trusted partnerships with critical industry, leading manufacturers. This is a competitive advantage for Dino and provides us the maneuverability and reliability our customers deserve.

And our commitment to support our customers can be seen on our balance sheet. This quarter as we invested $35 million in additional inventory, while improving our quarterly inventory turn rate to 5.0 times.

Accounts payable was $290 million, an increase of only 4% from the first quarter of 2022 and driving most of the change in our working capital efficiency with days payable outstanding reducing six days or 9% sequentially.

Cash used in operating activities during the second quarter was $29 million.

Primarily due to about a $70 million buildup in our working capital to support our customers' business activities offset with current period earnings.

In the second quarter capital expenditures were $6 million as we invested in infrastructure to enhance efficiencies and improve service levels to our customers.

And as of June 32022, working capital, excluding cash as a percentage of second quarter annualized revenue was approximately 15%.

And finally as I hope you saw in our separate release issued this morning, our board of directors authorized the company's first common stock repurchase program for up to $80 million of our common stock beginning today and continuing through and including December 31 2024.

Our substantial liquidity position and newly transformed earnings profile position the company with the ability to expand its options for capital deployment, among a continued priority for acquisitions and organic growth opportunities.

The addition of our repurchase program to our capital allocation toolkit clearly demonstrates our strong belief that the market is currently undervalued Dino shares.

To that end, we look forward to using this new tool and our broader capital allocation framework repurchasing shares opportunistically when it makes prudent economic sense to do so.

Our ongoing commitment to a stringent approach to balance sheet management remains unchanged by this strategy.

We expect to apply a similar diligent approach to repurchase decisions as we do to balance sheet management, and our ongoing capital allocation decisions.

And with that let me turn the call back to Dave.

Thank you Mark.

And now turning to our outlook for the third quarter, we expect sequential revenues to increase in the mid single digit percent range, a significant upgrade to our guidance implied from the last quarter.

We expect gross margins to revert to the first half of 2022 average still at record high levels.

With the recent acquisition and our results for a full quarter paired with investments in our people.

And a few projects to fuel future growth and productivity warehousing selling and administrative expenses are expected to increase a few million dollars sequentially. However, I want to highlight that the percentage of revenue to WSI in the third quarter will be similar to the second quarter historically low performance of 16, 5%.

Our expectation is for EBITDA dollars to be flat to down low single digits in <unk> again, much stronger than the implied guidance from the last quarter and at record high levels.

Halfway through the year, we are significantly raising our full year guidance and expecting 2022 to become our highest revenue growth percentage increase and strongest EBITDA percent percent year ever.

With 2022 full year revenue now expected to grow up to 30% compared to full year 2021, with EBITDA approximating, 7% of full year revenue, which would represent a 420 basis point improvement from 2021, or adding approximately $100 million in EBITDA dollars year over year.

Even with much higher revenues than forecast our expectation is to generate positive free cash flow in 2022, with the timing of impacts to our supply chain and the contours of an expected fourth quarter seasonal pause as our touch customers catch their breath as variables to this input to this.

Pursue.

In conclusion I'm excited about how Dino has transform for the future and I'm proud of our record EBITDA generated in the second quarter and the first half of the year. These.

These results reflect the transformative two year journey of the organization has made laying the groundwork for making this incredible turnaround indelible.

I'm honored to serve alongside each of our highly talented women and men for inspiring one another and fostering an inclusive people first customer centric culture.

We are singularly focused on delighting the customer everyday as we win the market and pursue sustainable growth into the future.

With that let's open the call for questions.

Thank you we will now begin the question and answer session. If you have a question. Please press star followed by one no touch 10 thing if you wish to remove your question. Please press star followed by case, if you need or how might your assistance. Please press Star then right. If you are using a speakerphone you may need to pick up the handset festival.

I think the numbers once again, if you would like to ask a question. Please press Star then one on your touched hindsight.

Our first question today comes from Tommy Moll Stephens Tony. Please go ahead. Your line is open.

Good morning, and thanks for taking my questions.

Youre welcome good morning, Tommy.

David I wanted to start on gross margins I believe the 24% you just reported was our all time record since the IPO and also that it was probably a little bit.

Yeah.

And probably a little bit above where you had even anticipated.

A quarter ago.

So I wonder if you could comment on some of the upside drivers there in the second quarter and then it sounds from the guidance like you might reset a tad lower in Q3, and if you could give us some of the drivers quantitative or qualitative there as well that'd be appreciate it sure.

Sure. So in our last call, we talked about expecting full year gross margins in the 22 to 22, 5% range of course, the second quarter was well above that but of course the guidance spoke to the full year. So we go through a process where.

D now happens to be.

In a very enviable position and its upstream focus.

Clearly number one in terms of distributors in the upstream space. So we have a priority with with mills in terms of pipe availability and other types of products and as we've talked about the last few quarters, we've been building inventory.

Proactively given the inflationary aspects of really all products consumer and business oriented. So we have a difference in our inventory value versus the street price for products, we sell to our customers and we enjoyed a.

A really nice pop in the second quarter.

<unk> been planning some some projects one large one that hit in the second quarter for about $9 million at good margins again, because we have access to products and we kind of four forethought.

Pre positioning of inventory to maximize.

Gross margins in the short term.

It's been a campaign of ours to significantly improve gross margins, but.

But we did benefit from from from those kind of events, culminating.

But now we're seeing a bit of a convergence in.

Supply and demand for pipe. So we expect those margins to narrow a little bit, but we're still in the in the record.

Realm.

Still expect very strong gross margins in the second half, but we don't expect $23 seven to be to be the norm.

Yes, that's helpful. Thank you Dave.

You mentioned, the two year transformation journey you've been on.

That includes a lot of different areas gross margin operating leverage others.

I Wonder is it possible at this point, Dave to talk to.

What kind of operating margin or adjusted EBITDA margin.

Is a reasonable goal here as you move forward I mean will all start to think about 2023 or already have really.

And what kind of Incrementals are reasonable assuming the market continues to grow.

Is there any way to kind of wrap it all up into where you might land through this cycle.

On a margin basis.

From an EBITDA perspective.

We believe for the full year 2022 that will be 7% EBITDA.

That's a high water market, that's well above any anything we produced in the past.

Along those lines.

We're trying to stand up a model that maximizes approx.

Proximity to customers and the efficiencies to deliver the products of Acs the most value in meaning we're going to find the product lines, where we have the best positions in the best costing the best potential for large gross margins and will favor those and apply our resources human capital talent to those.

Endeavors. So that's that's our main focus for US now what is what is 2023 looked like that of course, it's hard for us to say.

We expect the market continue to grow.

We expect strengthened our gross margins.

We are enjoying in.

In the second quarter kind of.

We call it a high watermark, because we don't think that'll be the norm going forward, but we still have.

Model improvements to make efficiencies to achieve and the companies. We're buying are all significantly higher gross margin businesses significantly improved.

EBITDA, so we expect to be in this 7% 7% realm.

Certainly in the near term.

<unk> goal is to grow on that in future years, so that would probably be the starting point now.

A year ago I of course, I would never would've forecast.

Saying that 7% would be a standard for us we generated I think last year to 8% EBITDA. After a really rough 2020, and we are very happy with those results now we're at 7% and we were hungry for more so that's kind of where we're at and where we're heading going forward.

Thank you I appreciate it last one for me just on the.

The repurchase authorization.

Can you talk to what the catalyst was to go ahead and make that.

Announcement or rather for your board to go ahead and make the decision now.

And now that the decision has been made.

How aggressive do you do you anticipate being at these levels.

Well I think the catalyst was.

We see for some time our shares have been trading at a material discount.

To what we think what we think the shares are work.

We've continued to improve our earnings profile, we have a pristine balance sheet. We thought there's there's more value in our stock. So we're going to buy it at the appropriate time at the appropriate price.

The catalyst was primarily that we think we're undervalued.

In terms of the aggressive.

The pace of buybacks I think we're going to be opportunistic there.

We're going to.

Buy it at the right times with a primary focus which I want to make this point, primarily we're focused on acquisitions to the extent.

Organic opportunities.

Fully exhausted so it's organic growth and we've been really focused on that acquisitions as our primary capital allocation mode.

Load and.

And then share repurchases at the appropriate time.

Two.

To improve.

You know.

The value to our to the owners of the company. So I think in terms of how aggressive we'll be I think we're going to just be opportunistic.

And.

We set an amount we think we can we can execute on fully and we intend to do that over the next couple of years.

Thank you I appreciate it and I will turn it back.

Yes, thanks for your questions.

Thank you and our next question comes from Doug Becker of Benchmark Research Doug. Please go ahead. Your line is open.

Thanks.

Following up on the share repurchase is it fair that this is going to be a tool used through the cycle and not just during a down cycle.

Yes. This is mark I agree I think we have this.

Vehicle expiring in the end of 2024 and so for.

For us it's just another tool in the toolkit and so the other thing I would enhance that.

What Dave mentioned earlier is also the free cash flow generation in a growth cycle for us.

Historically isn't positive we would consume cash and growth cycles. So so reaching these levels of growth and with the commitment to them to not need.

The liquidity to fund that growth and that way provides us the opportunity to to have this.

Authorization and clearly a growth period now and you know on the counter cyclical side of our cash flow and.

If the market goes the other way we generally generate.

A tremendous amount of cash off the balance sheet as well so.

Really this just becomes another avenue for us to evaluate the use of our liquidity.

Organic growth that <unk> seen over the past several quarters, we've been very intentional with the money there.

Also looking at acquisitions, when those multiples align and we see theres value there and the return and as David highlighted the third element.

Which for US is highly flexible share repurchase gives us that flexibility to be in the market. When we think it's the right time to be in the market, but also.

To be able to focus on inorganic growth with M&A.

I think it would be a through cycle vehicle for us.

No it makes sense.

Real positive clear positive signals.

Generating ability of the company through the cycle.

Speaking of cash and maybe more specifically free cash flow.

To get a little more color around your.

Free cash flow assumptions in the back half of the year I guess more specifically working capital given the seasonal slowdown in maybe a more succinct way of summarizing if theres growth in the fourth quarter.

Do we actually see free cash flow dipping negative modestly for for the year.

Yeah.

A good question and Mark might add to my answer.

Almost every year, we see revenue decline in the fourth quarter, even in a strong growth second half to 2021, we saw revenues decline.

<unk>.

We think that.

Given the stresses in the market.

And.

And the pace of growth this year that we're going to experience that same kind of decline.

And therefore, our customers like us like I said in my opening remarks, they'll have a chance to catch their breath catch up old payables.

And we can clean up our books that way, but we expect a slight dip now if it went the other way then it would strain our ability to generate free cash flow in that period.

But so shall we.

The offset to that would be we've been building inventory.

And we've been adding a lot of inventory I think that pace will decline a little bit so the prospects are still pretty good.

We said on our last call we would consume cash in the first half we still think it's a.

Good shop that will generate free cash flow in the second half primarily in the fourth quarter.

Maybe jumping to international growth for next year some of the large service companies about 15% give or take growth, we're seeing offshore pick up and you alluded to some of the.

Increased number of projects.

Is it reasonable to be thinking about international growth for D. Now double digits next year I know it can be very lumpy, but everything seems to be lining up pretty nicely for that business.

Yes.

Yeah, No I would agree I think the print.

And what we're seeing in activity lends itself to to to another year over year growth in the international segment. So.

Certainly exciting to see where we're well positioned there.

I would agree I think it's double digits I mean, it's early for next year to a full guide, but it feels right. It feels like there's a lot of opportunity and optimism for the international market next year.

Thank you.

Thank you. Thank you.

Thank you as a reminder, if he would like to ask a question today. Please press star followed by one on the attached hindsight.

And our next question today.

In Zhengzhou Stifel. Nathan. Please go ahead your line is open.

Good morning, everyone.

Good morning, good morning, good morning.

Just just wanted to follow up on gross margins.

Obviously.

Benefited a little bit from having low cost inventory versus spot prices used in some of.

The prices come down, particularly on scale.

The risks what do you see as the risks of maybe a quarter or two where you end up with higher cost inventory versus the spot price on the straight when we say a little bit of pressure on gross margins.

That's something we're watching closely I don't think for close to that.

That.

Convergence of price and cost.

But we are seeing the cost of.

Pipe coming up, but we still have a margin for selling that pipeline and its profit obviously, so that's something we watch for.

And when we're planning inventory purchases as to whats the whats happening too.

The price the customer is willing to pay versus our cost to acquire that inventory and we still have very healthy margins, we expect that to continue.

At least for the next several quarters.

Great.

Would be interested in hearing a little bit more about the WSI investment.

Are you looking to making the third quarter and going forward.

I guess that the investment in people is probably just adding heads.

If not I'd love.

The air about it, but particularly interested in hearing about the technology investments that youre looking to make what kind of patient teach you think thats going to generate how better says to customers to catch up.

Okay. So I'll start off there.

If you look at.

Where we're at today in terms of last year head counts.

Actually down 75 people, probably today versus a year ago.

Some of that's intentional most of that is unintentional.

It's difficult to find people in this environment everyone's experiencing that.

What worked.

Pacing is increased base wages due to the great resignation that affects us quite a bit I think that's pretty universal we've seen bonuses.

Variable comp increased significantly because.

Performing very well in terms of operating profit performance, we resumed our 401K in 2022 that kind of added cost as well.

And and now we're investing in.

Training and technology, which mark can talk a little bit about.

But basically it's been.

Variable comp costs driving the biggest changes because we've achieved efficiencies in the business but.

But some of the kind of unit Russell impacts from great resignation haven't had been felt and I think pretty broadly used in industry. Mark do you have anything to add to that I think the.

Two years ago, we talked a lot about working to get our cost to revenue in line and finding ways to become more productive as a business.

And really the downturn required that in.

Sure.

We're kind of upping our investment here in the second half of the year on similar initiatives to continue to make our employees and our customers lives easier to do business with us.

And so.

All of that is internal software.

Investment in technology and also some processes that help.

Really remove errors and make it easier to do business and so youll see some of that investment come in in the second half of the year because as Dave says.

Not finished fine tuning the model and.

And we certainly have the liquidity to invest organically.

And we're going to we're going to do that here in the second half so.

Thanks for that.

One quick one on M&A typically at this point in Issaquah, you flagged prices going up so the expectation is getting pretty high I know you did a small deal in the second quarter.

Is there much out there that <unk>.

Provides good value at this point in the cycle for you or should we expect the pace of M&A to be pretty slow.

Well I think we are seeing.

Greater interest on would be sellers and work.

While we're always actively engaged in possible deals.

We can.

<unk>.

The number and the <unk> and the innings and some of these deals is just further along because theres an interest in selling.

Interest rate increases as part of probably part of that.

And inflation some of those things that.

Affect the seller.

And they want to they want to.

And that strength in the market the market strong so people want to sell at least this is a good time to sell.

Given those other factors so.

No I said on our last call, we'd probably do a couple of deals this year and we're looking to do more than that and thats always subject to change.

But the size of the deals we're looking at.

Again, the bigger harder to conclude is increasing and the number of.

The conversations we're having is probably the highest it's been in the last six quarters. So.

That's always a wait and see kind of thing we're very active in finding companies that are going to be durable theyre going to be profitable through a cycle there'll be favorable in terms of.

Working capital drag on revenue.

Free cash flow gross margins EBITDA margins et cetera, So that's a big focus for us each of those need to be better.

<unk> been than our overall base business, which is improving substantially so.

To me the the rate of interest or the interest.

<unk> is up there and it's making for a lot of conversations and prospects for Dana.

Great. Thanks for taking my questions.

Thanks Nathan.

Thank you ladies and gentlemen.

We have reached the end of our time for question and answer session. I will now turn the call over to David <unk>, CEO and president for closing statements.

I'd like to thank everyone for calling in today and we look forward to talking to everyone again in November have a good quarter. Thank you.

Thank you ladies and gentlemen. This concludes today's call. Thank you for participants participating in today's conference. This concludes our event you may now disconnect.

Yeah.

Okay.

Okay.

Okay.

Okay.

Yes.

Right.

Yes.

[music].

[music].

Hello, and welcome to the now Inc. Second quarter 2022, adding its conference call. My name is not yet 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 session. If you have a question. Please press star one on your touch times, but I will now turn the call over to Vice President marketing and Investor Relations Broadwife. Mr. Wise you may begin.

Thank you Nadia and.

Good morning, everyone and welcome to now Inc. Second quarter 2022 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 <unk> brands and you'll hear us refer to distribution now in D. Now, which is our New York stock exchange ticker symbol during our conversation this morning.

Please note that some of the statements we make during this call, including the responses to your questions may contain forecasts projections and estimates, including but not limited to comments about our outlook for the company's business.

These are forward looking statements within the meaning of the U S. Federal Securities laws based on limited information as of today, which is subject to change.

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

No one should assume that these forward looking statements remain valid later in the 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.

I refer you to our 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 information as well as supplemental financial and operating information may be found within our earnings release or on our website at IR Dot <unk> dot com or in our filings with the SEC.

In 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.

<unk> other costs each excludes the impact of certain other costs and therefore have not been calculated in accordance with GAAP.

Please refer to our reconciliation on each of these non-GAAP financial measures to its most comparable GAAP financial measure in the supplemental information available at the end of 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 <unk>.

Quarter.

A replay of today's call will be available on the site for the next 30 days, we plan to file our second quarter 2022 Form 10-Q today and it will.

He will also be available on our website.

Now, let me turn the call over to Dave.

Thanks, Brad and good morning, everyone.

I'm thrilled to be here today celebrating a record breaking quarter.

Sixth consecutive quarter of significantly improved financial performance and prospects for the company what an exciting time at is for distribution now revenues in <unk> 'twenty, two we're 14% stronger than the first quarter, well above what we guided and 35% higher when compared to the same quarter in the prior year our gross.

Margins climbed to a high water Mark of 23, 7% aided by healthy project product margins, resulting from inflationary headwinds lower inventory costing and pricing benefits, which outpaced our previous full year margin guidance in the 22 to 22, 5% range.

Warehousing selling and administrative expense, our WSI was driven down to its lowest level as a percent of revenues since the third quarter of 2014 at time in another era. When there were 1900 U S rigs more than two five times, the <unk> 22 level.

EBITDA in the second quarter was $47 million with <unk> 22, EBITDA alone exceeding the results produced in all of 2021, representing again, the highest levels of EBITDA <unk> 14, a bygone era, given today's significantly improved rig efficiencies and capital discipline.

Led by our customers.

EBITDA in terms of percentage of revenues was eight 7% an all time record achievements.

Working capital excluding cash remained strong turning more than six five times annually enabled by a continued healthy inventory turns despite planned inventory growth, which were pre positioning to ensure that products are available for our customers and to strengthen our into fatigable push to maximize <unk>.

Gross margins.

And late in the second quarter, we closed on a small but potent U S process solutions acquisition and expansion on our 2021 black slow purchase fortifying, our leading position in horizontal trailer mounted rental pumps.

The minutes are without a doubt a result of the loyal and talented 'twenty 300 members of the <unk> family, who have transformed this company by focusing on what matters most to our customers.

We continue to refine our model to drive efficiencies to regionalize fulfillment, while maintaining proximity to our customers like no one else in our space.

Our drive is to make this incredible turnaround indelible, which is the main objective for this team right now.

This is a testament to our unrelenting mindset focused on understanding our value in the market evolving our product and service mix to be selective about the business, we target and the activities we sidestep.

While we celebrate our results we acknowledged that we can still enhance our model by capturing additional efficiencies and investing in our people and technology in the coming quarters to continue this transformation.

Today, our customers understand the value we offer in terms of having access to top tier quality products technical sales expertise critical product availability and a customer first service model geared to align around a common goal.

Our team outperformed revenues came in better than we guided to in the first half of the year arent and are expected to be even better for the full year.

In the second quarter revenues were stronger as we saw customers pull in and accept delivery for future needs early due to worries about supply chain issues.

Our revenues benefited from that in <unk>.

Large projects in process solutions, including one for $9 million delivered earlier than expected.

And the expected <unk> seasonal revenue breakup in Canada was the narrowest decline we experienced in the last nine years.

This <unk> revenue over performance means a lighter sequential revenue bridge going into the third quarter, yet, we still expect a better than average <unk> to <unk> build compared to prior years and a much stronger three Q then our guidance implied last quarter.

And now some color on our segments in the U S revenue was $408 million up 22% sequentially and 13% in U S rig count growth.

U S growth was bolstered bolstered by expanding E&P customer activity.

We are capturing the rewards of the efficiencies and we've talked about over the last couple of years and have selectively targeted the opportunities with customers to execute orders and projects from our new regionalized fulfillment model and centralized project execution teams.

Forward positioning our inventory to our new PBF plus Super centers has enabled <unk> to become the preferred choice and product availability and a hyper competitive market.

And combined with our innovative solutions oriented employees with a customer first mindset and affords the deep D. Now the opportunity to capture margin accretive share.

We continue to supply packaged units in MRO products to help reduce our customers' scope one emissions working with our dedicated emissions reduction teams.

We are seeing increased activity and demand for our fiber glass solutions as customers recognize the value of our turnkey solutions and expertise.

We experienced growth because we supplied PBF and safety services for several operators during an extended turnaround season.

In the Biofuels area, we provided PBF to refineries to support our renewable diesel expansion and turnaround projects.

During the last three to four calls we've talked about positioning and investing in growth. In addition to the investments in inventory. We just completed a full quarter of business for a new express location in the Permian, where we have made excellent progress in terms of servicing an existing existing and new customers, while maintaining customer proximate.

And delivering value to the last mile.

Most day to day activity. There is managed locally while project and large unplanned orders are being fulfilled from a nearby supercenter.

For U S process solutions, where customers previously carried excess inventory customers were ordering equipment in advance.

In to count a shortness of inventory and.

And long lead times, we benefited from the unusually high pre planning and buying activity in the second quarter. Furthermore, some customers are dealing with a lack of workforce availability and field experience for installations and that difficulty benefited our turnkey and engineering solutions.

We are pleased to see how we now recovering saltwater disposal market, where we shipped SW D units for operators to dispose of produced water from drilling activity.

We continue to seek ways to reduce our customers' scope. One emissions are customers are replacing gas pneumatic systems with compressed air systems, which has led to high demand for our instrument air packages and those orders are continuing.

And we continue to collaborate with customers to leverage additional ESG benefits.

Our recently developed and shipped a number of solar and battery powered chemical glycol units, which prevent ice formations at the wellhead during freezing temperatures.

These units would have historically been gas powered and emit greenhouse gases to the atmosphere.

This is now one of the ways the industry is seeking to improve and lower greenhouse gas emissions.

On the fluid handling and packaging side, we are seeing demand improve for our crude oil crude pipeline packages as oil production grows and midstream customers are looking to debottleneck existing oil pipelines.

In Canada, our team continues to Buck expectations in terms of market share and profitability, which was quite strong in the seasonal downturn period.

<unk> was $72 million for the second quarter, a 12% sequential reduction and up 41% year over year, our second quarter revenue fared much better than the midpoint of our expected seasonal decline.

During the quarter, we strengthened our market position, winning multiple orders for valves and actuation projects.

Our relationships with numerous epc's and fabricators have contributed to growth as we successfully won several notable projects with key customers.

And we continue to expand our e-commerce sales hitting a new quarterly high with a top 10 e-commerce customer as we offer users a simple to use customizable platform for ordering and improving MRO material.

Market demand for products remains high and our supply chain team is working to manage lead times and to source and preposition inventory at strategic locations to meet our customers' demand for projects and MRO day to day activity within a supply challenged environment.

Our international segment revenue improved sequentially and year over year, excluding the impact from foreign currency headwinds as Mark will talk about later international second quarter revenue increased 19% year over year.

We are starting to see improvement in international market conditions and activity is increasing as we see our customers move forward with offshore investments as subsea tieback projects begin to take hold and <unk> projects materialize in Europe .

Utilization of offshore drilling rigs are improving and day rates are increasing and expanding our opportunities to provide MRO and OEM rig equipment as current inventories are consumed through contracted offshore work.

In the Middle East, we are seeing drilling and production and investments expand we also known increasing activity in southeast Asian shipyards from Jackup rig activations that require new equipment and consumables.

<unk> per load outs.

In Indonesia activity is improving as brownfield activities in the downstream sector materialize as customers plan for 2023 shutdowns.

In Latin America, we are seeing an increase in demand as <unk> begin to unfreeze budgets and reactivate plant turnaround planning and maintenance programs related to offshore activity from drilling contractors.

As discussed on our last call. We had ceased operations in Russia and are out of the country. We also reduced our country footprint and the international segment by exiting a country in Latin America, and the Middle East, where a regionalized service model will help serve some of those customers from an export model going forward.

Historical revenue from these closings represented about $4 million to $5 million in quarterly revenue.

Moving to our digital now initiatives digital revenue comprised 40% of our revenue down slightly as a percent from the first quarter as our digital revenue grew 9% sequentially slightly below the overall company growth.

We continue to see success with our customer centric digital dashboards, which have driven higher percentages of bill of material accuracy as compared to prior periods.

The accessibility transparency and data have expanded the knowledge sharing with customer and is leading to improvements in overall efficiency and customer satisfaction.

We successfully secured a multiyear integration services contract for a national oil company, leveraging our Mercury asset management solution.

The software will manage data on the customers installed valve population and provide data on repairs maintenance and help streamline the ordering of parts are replacement units.

And on the development side of our <unk> product, we enhanced the maintenance workflow within the software by sending automated maintenance reminders to subscribers.

We expect this new feature to make it easier for our customers to plan the scheduling of maintenance work on assets with our <unk> service Department and technicians.

Now I'd like to spend a few minutes on capital allocation.

As I mentioned earlier during the second quarter, we closed on a U S process solutions acquisition and expansion to our flex flow horizontal rent pump rental pump solution from 2021.

This acquisition it fortifies, our pump strategy and supplement our permanent installation base with additional rental H pump solutions at a time when purchased equipment lead times are stretched and the criticality of equipment uptime is in high demand in.

In addition, our flexible solution offers customers flexibility and disposing of the water collected as a byproduct of oil and gas production with customers choosing between branding these units to fit their budget as an operational expenditure.

Our procuring permanent S WD units through capital expenditures and we offer both of these options.

This acquisition.

Acquisition meets our disciplined criteria of further differentiating Dino and non Commoditized customer solutions at better gross margins and EBITDA flow through dynamics.

Regarding our M&A pipeline, we continue to work a number of prospects to further drive inorganic growth.

Pivoting from M&A I want to highlight the separate announcement earlier today and our expanded capital allocation strategy, describing our inaugural $80 million share repurchase program.

This authorization reflects the board's confidence and Dino is post transformation significantly improved financial performance superior balance sheet, and our desire to allocate capital to our owners.

Our substantial liquidity position and newly transformed earnings profile position D. Now with this ability to expand the options at our disposal for capital deployment, among among a continued priority for acquisitions and organic growth opportunities.

This authorization expands our commitment to generating attractive shareholder returns without deviating from our disciplined approach to balance sheet management.

With that let me hand, it over to Mark. Thank you, Dave and good morning, everyone. Total second quarter 2022 revenue was $539 million.

An impressive 14% increase or $66 million in growth over the first quarter of 2022.

On a year over year basis, we saw a strong second quarter 2022 performance spearheaded by revenue growth of $139 million or <unk>, 35% and elevated our EBITDA profitability to a record setting eight 7% or $47 million for the quarter.

And EBITDA level nearly six times, what it was one year ago on solid operational execution with improved gross margins.

The U S revenue for the second quarter, 2022, with $408 million up 22% or $74 million sequentially and up $112 million or <unk>, 38% year over year on continued strengthening in rig count persistent depletion of DUC inventory and increased completions activity.

Our U S energy centers contributed approximately 79% of total U S revenues in the second quarter with our U S process solutions contributing the balance of 21%.

Turning to Canada for the second quarter revenue was $72 million.

$10 million or 12% from the first quarter of 2022 as a result of typical seasonal breakup. However, it's worth noting that this quarter was the smallest second quarter pullback on record.

In large part to the enduring efforts of our excellent sales and operations teams executing and winning projects and additional business in the market, which also translated into year over year second quarter revenue increase of $21 million are up 41%.

International revenue in the second quarter of 2022 was $59 million up $2 million or 4% from the first quarter when excluding the impact from foreign currency exchange rates second quarter International revenue increased 7% sequentially as the stronger U S dollar relative to foreign currencies unfavorably impacts.

Sales by approximately $2 million compared.

Compared to the first quarter of 2022.

Year over year second quarter international revenue increased 11% or $6 million.

Excluding the unfavorable impact from foreign currency exchange rates year over year second quarter International revenue increased 19%.

The stronger U S dollar relative to foreign currencies again unfavorably impacted sales.

Year over year by approximately $4 million.

As Dave highlighted earlier, our second quarter gross margins increased from the first quarter by 110 basis points to 23, 7% and again outpacing the 21, 9% full year record margins set in 2021.

Warehousing, selling and administrative or WSI for the quarter was $89 million up $5 million sequentially about half of the wsh sequential increase was expected and discussed last quarter as we emerged from a first quarter that recorded lower health care costs and fewer payroll days with the remaining <unk>.

Increased primarily tied to variable compensation as we exceeded expectations by delivering significantly improved financial performance.

Looking back one year ago to the second quarter of 2021, we have grown quarterly revenue by $139 million, yet only added $4 million and quarterly Ws say cost for about 3% of the revenue increase.

The strategic decisions and effort by our dedicated and talented employees are materializing in our performance as we successfully increased productivity throughout our network while significantly growing revenue.

And as of June 32022, we substantially completed the liquidation of certain foreign subsidiaries in Latin America, the middle East and Russia.

These liquidations resulted in the customary onetime reclassification of $10 million and foreign currency translation losses, a component of our accumulated other comprehensive income and loss to the P&L in the quarter. This noncash charge is presented within the impairment and other charges line in our income statement and excluded for non-GAAP reporting.

In the second quarter. The U S contributed $32 million in operating profit or approximately 8% of revenue the highest reported profitability per cent for the segment on record.

Canada delivered $6 million in operating profit or approximately 8% of revenue.

Also a record and absolute profit dollars and percent when looking back at each of the second quarter breakup periods since being public.

The International segment reported $9 million in operating loss as a result of the noncash $10 million charge.

Related to the two Q reclassifications of accumulated foreign currency translation losses related to those liquidations I discussed earlier.

Moving below operating profit other expense in the second quarter was $1 million and.

And the same as the corresponding period of 2021.

GAAP net income for the second quarter was $26 million or 23 per share and on a non-GAAP basis net income excluding other costs was $29 million or 26 per share.

On a GAAP basis, the effective tax rate for the three and six months ended June 32022, or seven 1% and eight 2% respectively. This.

This GAAP effective tax rate is calculated from the face of the income statement is below the typical effective tax rate at these earnings levels, primarily related to the favorable tax benefit impact from changes in the tax valuation allowance on our deferred tax assets.

When imputing, our non-GAAP tax rate, we exclude such.

Tax benefit and the non-GAAP effective tax rate is closer to approximately 28% for the first half of 2022 and 28% is a pretty good proxy for the effective tax rate for the second half of 2022, when excluding other costs.

Sure.

I will go a little deeper on the tax provision this quarter and start off with a background refresher at year end 2012 at year end 2015, we established a full valuation allowance on our deferred tax assets for GAAP reporting purposes.

As there was a technical evidence.

That we may not materialize, our deferred tax assets in the future.

Since establishing this evaluation allowance for gap, we have not recognized the tax benefit stemming from any operating losses on.

On a non-GAAP basis, however, and our adjusted net income and EPS reconciliation schedules, we've consistently excluded the impact of the change in the valuation allowance on our non-GAAP earnings and we recorded the income tax benefit and non-GAAP other costs in prior periods of losses.

With our strong earnings posted through the second quarter of 2022, we're starting to consume our deferred tax assets in the U S.

So on a GAAP basis, we are not recording tax expense on our current U S earnings due to an equal and offsetting reversal of that valuation allowance. However on a non-GAAP basis. We are recording income tax expense since we continue to exclude the impact of changes in our valuation allowance on our non-GAAP earnings.

You will see this added tax expense for non-GAAP highlighted in our supplemental GAAP to non-GAAP reconciliation footnotes in our earnings release.

It's important to note that while the tax expense, we are accruing on a non-GAAP basis does impact our EPS. Excluding other costs. It has no impact on our near term cash flow as we do not expect to pay cash taxes in the U S. This year or next due to buildup net operating loss.

Now moving to EBITDA, excluding other costs or EBITDA.

For the second quarter, EBITDA was $47 million or eight 7% of revenue our highest since being public.

The EBITDA to revenue flow throughs of 29% sequentially and 28% year over year, a result of our team's execution and strategic focus across our new <unk> structure that make it easier for our team to provide exceptional service levels to our customers.

Now moving to the balance sheet, we ended the second quarter in a net cash position of $232 million, including zero debt zero draws in the quarter, resulting in total liquidity of $574 million.

Comprising the $232 million of cash on hand, plus $342 million, an additional credit facility availability.

Accounts receivable was $389 million, an increase of 14% or $48 million from the first quarter in line with the increase in customer activity.

And this prolonged period of global supply chain constraints, we continue to meticulously source the products our customers require from our long established and trusted partnerships with critical industry, leading manufacturers. This is a competitive advantage for <unk> and provides us the maneuverability and reliability our customers deserve.

And our commitment to support our customers can be seen on our balance sheet. This quarter as we invested $35 million in additional inventory, while improving our quarterly inventory turn rate to 5.0 times.

Accounts payable was $290 million, an increase of only 4% from the first quarter of 2022 and driving most of the change in our working capital efficiency with days payable outstanding reducing six days or 9% sequentially.

Cash used in operating activities during the second quarter was $29 million, primarily due to about a $70 million buildup in our working capital to support our customers' business activities offset with current period earnings.

In the second quarter capital expenditures were $6 million as we invested in infrastructure to enhance efficiencies and improve service levels to our customers.

And as of June 32022, working capital, excluding cash as a percentage of second quarter annualized revenue was approximately 15%.

And finally as I hope you saw in our separate release issued this morning, our board of directors authorized the company's first common stock repurchase program for up to $80 million of our common stock beginning today and continuing through and including December 31 2024.

Our substantial liquidity position and newly transformed earnings profile position the company with the ability to expand its options for capital deployment, among a continued priority for acquisitions and organic growth opportunities.

The addition of our repurchase program to our capital allocation toolkit clearly demonstrates our strong belief that the market is currently undervalued D now shares.

To that end, we look forward to using this new tool and our broader capital allocation framework repurchasing shares opportunistically when it makes prudent economic sense to do so.

Our ongoing commitment to a stringent approach to balance sheet management remains unchanged by this strategy.

We expect to apply a similar diligent approach to repurchase decisions as we do to balance sheet management, and our ongoing capital allocation decisions.

And with that let me turn the call back to Dave.

Thank you Mark.

And now turning to our outlook for the third quarter, we expect sequential revenues to increase in the mid single digit percent range, a significant upgrade to our guidance implied from the last quarter.

We expect gross margins to revert to the first half of 2022 average still at record high levels.

With the recent acquisition in our results for a full quarter paired with investments in our people.

And a few projects to fuel future growth and productivity warehousing selling and administrative expenses are expected to increase a few million dollars sequentially. However, I want to highlight that the percentage of revenue to WSI in the third quarter will be similar to the second quarter historically low performance of 16, 5%.

Our expectation is for EBITDA dollars to be flat to down low single digits in <unk> again, much stronger than the implied guidance from the last quarter and at record high levels.

Halfway through the year, we are significantly raising our full year guidance and expecting 2022 to become our highest revenue growth percentage increase and strongest EBITDA percent percent year ever.

With 2022 full year revenue now expected to grow up to 30% compared to full year 2021, with EBITDA approximating, 7% of full year revenue, which would represent a 420 basis point improvement from 2021 are adding approximately $100 million and EBITDA dollars year over year.

Even with much higher revenues than forecast our expectation is to generate positive free cash flow in 2022 with the timing of impacts to our supply chain in the contours of an expected fourth quarter seasonal pause as our customers catch their breath as variables to this input.

In this pursuit.

In conclusion I'm excited about how Dino has transform for the future and I'm proud of our record EBITDA generated in the second quarter and the first half of the year.

These results reflect the transformative two year journey of the organization has made laying the groundwork for making this incredible turnaround indelible.

I'm honored to serve alongside each of our highly talented women and men for inspiring one another and fostering an inclusive people first customer centric culture.

We are singularly focused on delighting the customer everyday as we win the market and pursue sustainable growth into the future.

With that let's open the call for questions.

Thank you we will now begin the question and answer session. If you have a question. Please press star followed by one no touch 10 thing if you wish to remove your question. Please press star followed by case.

You need overlay to assistance. Please press Star then zero.

If you are using a speakerphone you may need to pick up the handset first before pressing the numbers. Once again, if you would like to ask a question. Please press Star then one on your touch hindsight.

Our first question today comes from Tommy Moll Stephens Tony. Please go ahead. Your line is open.

Good morning, and thanks for taking my questions.

Youre welcome good morning, Tommy.

Dave I wanted to start on gross margins I believe the 24% you just reported was the all time record since the IPO and also that it was probably a little bit.

Yes.

And probably a little bit above where you had even anticipated.

A quarter ago.

So I wonder if you could comment on some of the upside drivers there in the second quarter and then it sounds from the guidance like you might reset a tad lower in Q3, and if you could give us some of the drivers quantitative or qualitative there as well that'd be appreciated sure.

Sure. So in our last call, we talked about expecting full year gross margins in the 22 to 22, 5% range of course, the second quarter was well above that but of course the guidance spoke to the full year. So we go through a process where.

D now happens to be.

In a very enviable position and its upstream focus.

Clearly number one in terms of distributors in the upstream space. So we have a priority with with mills in terms of pipe availability and other types of products and as we've talked about the last few quarters, we've been building inventory.

Proactively given the inflationary aspects of really all products consumer and business oriented. So we have a difference in our inventory value versus.

Street price for products, we sell to our customers and we enjoyed a really nice pop in the second quarter.

We've been planning some some projects one large one that hit in the second quarter for about $9 million at good margins again, because we had access to products and we kind of four forethought.

Pre positioning of inventory to maximize.

Gross margins in the short term, it's been a campaign of ours to significantly improve gross margins.

But we did benefit from from from those kind of events, culminating.

But now we're seeing a bit of a convergence in.

Supply and demand for pipe. So we expect those margins to narrow a little bit, but we're still in the in the record.

Realm.

Still expect very strong gross margins in the second half, but we don't expect $23 seven to be to be the norm.

Yes, that's helpful. Thank you Dave.

You mentioned the.

To your transformation journey you've been on.

That includes a lot of different areas gross margin operating leverage others.

I Wonder is it possible at this point, Dave to talk to.

What kind of operating margin or adjusted EBITDA margin.

Is it a reasonable goal here as you move forward I mean will all start to think about 2023 already have really.

And what kind of Incrementals are reasonable assuming the market continues to grow.

Is there any way to kind of wrap it all up into where you might land.

Through this cycle.

On a margin basis.

From an EBITDA perspective.

We believe for the full year 2022 that will be at 7% EBITDA. That's that's a high water market that is well above any anything we produced in the past.

Along those lines.

We're trying to stand up a model that maximizes proxy.

Proximity to customers and the efficiencies to deliver the products that they see the most value in meaning we're going to find the product lines, where we have the best positions in the best cost being the best potential for large gross margins and we will favor those and apply our resources human capital talent to those.

Endeavors. So that's that's our main focus for US now what is what is 2023 looked like that of course, it's hard for us to say.

We expect the market continue to grow.

We expect to strengthen our gross margins.

We are enjoying.

In the second quarter kind of.

We call it a high watermark, because we don't think that'll be the norm going forward, but we still have.

Model improvements to make efficiencies to achieve and the companies. We're buying are all significantly higher gross margin businesses significantly improved.

EBITDA, so we expect to be in this 7% 7% realm.

Certainly in the near term.

With goals to grow on that in future years, so that would probably be the starting point now.

A year ago I of course, I would never would've forecast.

Same at 7% would be a standard for us we generated I think last year to 8% EBITDA. After a really rough 2020, and we are very happy with those results now we're at 7% and we.

We're hungry for more so that's kind of where we're at and where we're heading going forward.

Thank you I appreciate it last one from me just on the repurchase authorization.

Can you talk to what the catalyst was to go ahead and make that.

The announcement or rather for your board to go ahead and make the decision now.

And now that the decision has been made.

How aggressive do you do you anticipate being at these levels.

Well I think the catalyst was.

We see for some time our shares have been trading at a material discount.

To what we think what we think the shares are worth.

We've continued to improve our earnings profile, we have a pristine balance sheet.

We thought there is there's more value in our stock so we're going to buy it at the appropriate time, if the appropriate price.

The catalyst was primarily that we think we're undervalued in.

In terms of the aggressive.

The pace of buybacks I think we're going to be opportunistic there.

We're going to.

Buy it at the right times with a primary focus which I want to make this point, primarily we're focused on acquisitions to the extent.

Organic opportunities.

Our fully exhausted so it's organic growth and we've been really focused on that acquisitions as a primary capital allocation mode.

Load and.

And then share repurchases at the appropriate time.

Two.

To improve.

You know.

The value to our to the owners of the company. So I think in terms of how aggressive we'll be I think we're going to just be opportunistic.

And.

We set an amount we think we can we can execute on fully and we intend to do that over the next couple of years.

Thank you I appreciate it and I will turn it back.

Yes, thanks for your questions.

Thank you and our next question comes from Doug Becker of Benchmark Research Doug. Please go ahead. Your line is open.

Thanks.

Following up on the share repurchase is it fair that this is going to be a tool used through the cycle and not just during a down cycle.

Yeah. This is Marc I agree I think we have this.

Vehicle expiring in the end of 2024 and so for.

For us it's just another tool in the toolkit and so the other thing I would enhance that.

What Dave mentioned earlier. It is also the free cash flow generation in a growth cycle for us.

Historically isn't positive would consume cash and growth cycles. So so reaching these levels of growth with the commitment to to not need.

The liquidity to fund that growth and that way provides us the opportunity to to have this.

Authorization and clearly a growth period now and you know on the countercyclical side of our cash flow and if the market goes the other way we generally generate.

A tremendous amount of cash off the balance sheet as well so.

Really this just becomes another avenue for us to have.

Evaluate the use of our liquidity so the organic growth that <unk> seen over the past several quarters, we've been very intentional with the money there.

Also looking at acquisitions, when those multiples align and we see theres value there and the return and as Dave highlighted the third element.

Which for US is highly flexible share repurchase gives us that flexibility to be in the market. When we think it's the right time to be in the market, but also.

Be able to focus on inorganic growth with M&A.

I think it would be a through cycle vehicle for us.

No it makes sense.

A real positive clear positive signal generating.

Generating ability of the company through the cycle.

Speaking of cash maybe more specifically free cash flow, we wanted to get a little more color around your.

Free cash flow assumptions in the back half of the year I guess more specifically working capital given the seasonal slowdown in maybe a more succinct way of summarizing if theres growth in the fourth quarter.

Do we actually see free cash flow dipping negative modestly for for the year.

Yes.

That's a good question and Mark might add to my answer.

Almost every year, we see revenue decline in the fourth quarter, even in a strong growth second half to 2021, we saw revenues decline.

We think that.

Given the stresses in the market and.

And the pace of growth this year that we're going to experience that same kind of decline.

And therefore, our customers like us like I said in my opening remarks, they'll have a chance to catch their breath catch up old payables.

And we can clean up our books that way, but we expect a slight dip now if it went the other way then it would strain our ability to generate free cash flow in that period.

But so shall we.

The offsets to that would be we've been building inventory.

And we've been adding a lot of inventory I think that pace will decline a little bit the prospects are still pretty good. We said on our last call. We would consume cash in the first half we still think it's a good.

Good shot that we'll generate free cash flow in the second half primarily in the fourth quarter.

Maybe jumping to international growth for next year some of the large service companies about 15% give or take growth, we're seeing offshore pick up and you alluded to some of the.

Increased number of projects.

Is it reasonable to be thinking about international growth for D. Now double digits next year I know it can be very lumpy, but everything seems to be lining up pretty nicely for that business.

Yes, yes.

Yeah, No I would agree I think the print.

And what we're seeing in activity lends itself to two two another year over year growth in the international segment. So.

Certainly exciting to see where we're well positioned there.

Yeah.

I would agree I think it's double digits I mean, it's early for next year to full guide, but it feels right. It feels like there's a lot of opportunity and optimism for the international market next year.

Thank you.

Thank you. Thank you.

Thank you as a reminder, we'd like to ask a question today. Please press star followed by one on attached hindsight.

And our next question Nathan.

Nathan Jones of Stifel. Nathan. Please go ahead your line is open.

Good morning, everyone.

Good morning, good morning, good morning.

Just just wanted to follow up on gross margins.

Obviously.

Benefited a little bit from having low cost inventory versus spot prices used in some of.

The prices come down, particularly on scale.

What are the risks or what do you see as the risks of maybe a quarter or two where you end up with higher cost inventory versus the spot price on the street, when we say a little bit of pressure on gross margins.

That's something we're watching closely I don't think we're close to that.

That convergence of price and cost but.

But we are seeing the cost of.

Pipe coming up, but we still have a margin for selling that pipeline at a profit obviously, so that's something we watch for.

And when we're planning inventory purchases as to what's.

What's happening too.

The price the customer is willing to pay versus our cost to acquire that inventory and we still have very healthy margins. There we expect that to continue.

At least for the next several quarters.

Great.

I'd be interested in hearing a little bit more about the WSI investment.

So you are looking to making the third quarter and going forward.

I guess that the investment in people is probably just adding heads.

I'd love to hear about it.

Particularly interested in hearing about the technology investments that youre looking to make what kind of patient teach you think thats going to generate how bad it says to customers to catch up.

Okay. So I'll start off there.

If you look at.

Where we're at today in terms of last year head counts.

Actually down 75 people, probably today versus a year ago.

Some of that's intentional most of that's unintentional.

It's difficult to find people in this environment everyone's experiencing that.

What worked.

Pacing is increased base wages due to the great resignation that affects us quite a bit I think that's pretty universal we've seen bonuses.

Variable comp increased significantly because.

Performing very well in terms of operating profit performance, we resumed our 401K in 2022 that kind of added cost as well.

And and now we're investing in.

Training and technology, which mark can talk a little bit about.

But basically it's been.

Variable comp costs driving the biggest changes because we've achieved efficiencies in the business.

But some of the kind of universal impacts from the great resignation haven't had been felt I think pretty broad leafed an industry Mark do you have anything to add to that I think the.

Two years ago, we talked a lot about working to get our cost to revenue in line and finding ways to become more productive as a business.

And really the downturn required that in.

Sure.

We're kind of upping our investment here in the second half of the year on similar initiatives to continue to make our employees and our customers lives easier to do business with us.

And so there are.

Some of that is internal software.

Investment in technology and also some processes that help.

Really remove errors and make it easier to do business and so youll see some of that investment come in in the second half of the year because as Dave says we're.

We're not finished fine tuning the model and.

We certainly have the liquidity to invest organically and we're going to we're going to do that here in the second half so.

Thanks for that.

Just one quick one on M&A typically it is putting the stock where you find prices going up so the expectation is getting pretty high I know you did a small deal in the second quarter.

Is there much out there that <unk>.

Provides good value at this point in the cycle for you or should we expect the pace of M&A it could be pretty slow.

Well I think we are seeing.

Greater interest would be sellers and work.

While we're always actively engaged in possible deals.

We can.

<unk>.

The number and.

And the earnings.

Some of these deals is just further along because theres an interest in selling.

Interest rate increases as part of probably part of that <unk>.

Inflation some of those things that.

Affect the seller.

They want to.

They want to.

And that strength in the market the market strong so people want to sell this as a good time to sell.

Given those other factors so.

No I said on our last call, we probably do a couple of deals this year and we're looking to do more than that that's always subject to change.

But the size of the deals we're looking at.

Again, the bigger harder to conclude is increasing and the number of.

Conversations we're having is probably the highest it's been in the last six quarters. So.

That's always a wait and see kind of thing we're very active in finding companies that are going to be durable theyre going to be profitable through a cycle there'll be favorable in terms of.

Working capital drag on revenue.

Free cash flow gross margins EBITDA margins et cetera, So that's a big focus for us each of those need to be better.

Additions than ours than our overall base business, which is improving substantially so.

To me the the rate of interest or the interest.

<unk> is up there and it's making for a lot of conversations and prospects for Dana.

Okay.

Great. Thanks for taking my questions.

Thanks Nathan.

Thank you ladies and gentlemen.

We have reached the end of our time for question and answer session. I will now turn the call over to David <unk>, CEO and president for closing statements.

I'd like to thank everyone for calling in today and we look forward to talking to everyone again in November have a good quarter. Thank you.

Thank you ladies and gentlemen. This concludes today's call. Thank you for participants participating in today's conference. This concludes our event you may now disconnect.