Q4 2022 NOW Inc Earnings Call

February 16, 2023

Thank you for holding your conference will begin in the next minutes, let's say thank you for your patience.

[music].

Well Im reading you welcome Stefano.

Fourth quarter <unk> earnings Conference call. My name is Adam and I'll put the 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.

Now I'll turn the call over to Vice President of digital strategy and Investor Relations Pat Walsh, Mr. Wise, you may begin.

Well, thank you Adam and good morning, and welcome to now Inc's fourth quarter and full year 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 February 16th 2023, 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 on our website at <unk>.

<unk> dot <unk> dot com or in our filings with the SEC.

In an effort to provide investors with additional information relative to our results as determined by U S. 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 attributable to now Inc. Excluding other costs and diluted earnings per share attributable to now Inc. 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 of 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.

<unk>, our results and key takeaways for the fourth quarter and full year 2022.

A replay of today's call will be available on our site for the next 30 days, we plan to file our 2020 to Form 10-K 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.

Two years ago. This week, Mark Brad and I were shivering in this office on our earnings call running unlimited backup power during the great, Texas Freeze Winter storm Yuri.

That storm brought the coldest temperatures and over seven decades, the Texas.

Cold snap that impacted millions of people from Texas to the Canadian border.

We had no power and more chilling had no earnings in the year just ended 2020.

The roads were impassable the path to the future uncertainty.

Missouri pervaded the whole economy.

But there was some things at that time I was certain amount about how our new D. Now could transform itself and thrive.

One we knew that the single most important factor and successfully implementing its strategy.

Path be fully committed be disciplined and to purposefully.

Jack to the temptation by those marginal distractions, which would dilute our strengths.

Simply put build on and get better at what we're good at equip our people allocate talent in time, where our customers see value and let the other guys deal and distractions.

Two we messaged exhaustively about deliberately high grading our business by that we mean focusing on higher margin manufacturers businesses product lines locations and activities to deliver strong gross margins irrespective of the inevitable commodity price gravity Beast.

Be selective manage mix and maximize margins.

We pick partners and suppliers expect partnership reciprocity commit purchases purchase volumes to them honored our commitments promote their brands and deliberately promote value.

Three our primary operational objective was to increase customer intimacy improved product availability manage projects and deploy ample inventory stocks regionally ultimately redesigning our PBF distribution business by deploying a more efficient fulfillment model move.

From a highly autonomous branch model to a more cohesive regional supercenter posture.

This transformation was a predicate to improving product availability and value for our customers, providing better support to our suppliers, enabling higher levels of productivity, while better managing downside risk.

Our operation strategy places a premium on order accuracy adherence to customer specifications and on time delivery and our customers are rewarding us for doing so.

And lastly number four.

We said we win the market to the careful cultivation of a world class sales team, we would provide unmatched customer attention with a bias towards solutions and value without relying on price as allure.

Our sales teams place a premium.

Returning value to our customers by truly understanding their challenges in articulating denounce proprietary solutions.

The competitive spirit of our sales professionals has helped to create a true culture of winning within D. Now and the technical acumen and supply chain expertise. They provide to customers has proven to be a vital importance in an era of supply chain disruption and capital discipline.

Although every one of our employees brought about this D. Now Renaissance I want to directly thank and share our top sales leadership for.

Enduring the corporate pivot for promoting changes internally into the market for leading with confidence and attitude and delivering a much more profitable enterprise, which without them would otherwise be impossible.

Now I'll hit some of the financial highlights.

Fourth quarter revenue was $547 million lower sequentially by 5% at the better end of our guide provided on the last call.

For the full year 2022 revenues were $2, one $3 6 billion in <unk> 'twenty to overall gross margin was unchanged at 24, 1% are.

Our full year 2022 gross margin was 23, 7% up 180 basis points from the full year 2021 levels, where 2021 was itself a record gross margin year in its own right.

For the fourth quarter, EBITDA was $47 million or eight 6% of revenue strong performance, especially in a period with seasonal and holiday headwinds.

For the full year 2022, EBITDA was $175 million or eight 2% of revenue.

Consequential turning point for the company setting the stage for a significantly improved earnings power and cash flows into the future.

During the second half of 2022, we generated $48 million in free cash flow and on a full year basis in a year, where we increased revenue over $500 million added over $130 million in inventory for our customers and $9 million in infrastructure and rental equipment, we had zero consumption of cash from ops.

<unk> and only consumed $9 million in free cash flow in 2022.

Additionally to fortify our U S process solutions business, we completed two acquisitions in December of 2022 building on <unk> pump and engineered process equipment capabilities.

These acquisitions strengthen <unk> value to customers and open up additional opportunities in energy evolution.

One of the patented solutions, we acquired provides customers with dual value prop.

Proposition of improved gas recovery as well as emissions reductions within traditional oil and gas and the elimination of flaring, but also expands our reach into the renewable natural gas or LNG market.

Our second December acquisition grows our market, leading pump position in the Permian area by expanding our customer relationships customer base and our capabilities on aftermarket service and pump repair.

Now some comments on a regional basis in the U S revenue was 414 million $21 million lower sequentially down 5% due to predicted seasonal impacts product margins declined slightly as non pipe product lines, partially offset or offset some margin compression.

On steel line pipe, which we expected to happen and mentioned in the last few calls.

Gross margins were flat as vendor consideration in the fourth quarter grew due to achieving higher purchase volumes.

During the quarter, we began operations for our new newest.

Newest supercenter or Mega Center as I mentioned on the previous call located in Williston, North Dakota strategically positioned right in the heart of the Bakken play.

This new facility afforded us the opportunity to optimize our regional footprint by consolidating several of our Standalone businesses.

Not only does our Williston Mega Center, how is our U S energy pipe valves and fittings regional operations, but it also includes other dinar product lines, such as TSM fiberglass and flex below.

We experienced a number of market share wins in the fourth quarter as customers realize the benefits in our ability to lower their operating costs by partnering with <unk> now and customized supply chain solutions.

We also delivered several large pipe orders during the fourth quarter for our utilities company in the southeast and an operator in the Gulf of Mexico totaling more than $12 million.

Which drove our strong <unk> revenue beat and those $12 million of orders are not expected to recur in the first quarter of 2023.

In the midstream sector, we continue to supply steel and fiberglass pipe actuated valves and fittings for our natural gas transmission customers.

Notable projects include new compressor stations compressor upgrades to existing stations and pipeline expansion products across the U S.

In the downstream sector customer spending during the quarter remained strong at several of our refining and chemical customers hold in PBF and consumable deliveries before year end to prepare for <unk> two three.

Turnarounds.

In our U S process solutions business, we saw demand for our fabricated equipment packages increase as orders continue to be placed.

Heading into 2023.

We experienced demand for vessels for tank battery construction as well as lack units meter skids launcher receivers and water transfer units as midstream activity picked up in response to the steady increase in drilling and completion activity over the past few quarters.

Outside of oil and gas, we provided air compressor packages and vertical turbine pump from mining operations for rare Earth minerals extraction.

For our pump distribution businesses, we experienced steady demand for pump packages for oil and gas tank battery construction SW deep construction and midstream projects.

We look to continue to diversify our end markets and drive incremental revenue gains from projects that are upgrading or expanding.

Notable water districts.

In our flexible product line demand for our trailer mounted horizontal renting pumps rental pumps is picking up steam as drilling and completion activity and SWT permitting drives demand to transfer and dispose of increased quantities of produced water.

We're currently making investments by upgrading some of our mobile fleet in response to increased market demand as extended delivery times for permanent SWT units persist.

In Canada revenue was $75 million for the quarter, a 13% decrease sequentially, primarily due to a seasonal impacts as expected and revenue was up 4% year over year.

Overall, we delivered impressive results, yielding a full year Canadian operating profit of nine 5% a record for our Canadian segment.

During the quarter, we invested in our Canadian operations as we began initial work in upgrading to a new supercenter location in Alberta with the work scheduled to be completed in the first half of 2023.

It will house multiple business units under the same roofline maximizing the synergies and value we can deliver for our customers, while fostering more collaboration and promote a higher level of teamwork.

The workspace will be more modern and will reduce our environmental impact as we adopt the use of a solar integration system and other lighting energy efficiencies.

Furthermore, the new facility will help offset rising facility and tax operating expenses when compared to our older facilities.

For international revenue was $58 million, increasing sequentially by $2 million market conditions are steadily improving in most of the areas. We serve as numerous countries seek to balance our investments in energy security affordability and sustainability.

In the U K, we have seen a return to growth as market activity is increasing both offshore and onshore where we see higher order inquiries for cable valves safety and bulk electrical products, where Maclean distribution brand.

Activity for West Africa increased as we supply major ioc's with gas detection sensors power cable and electrical Bulks two our export model based in the UK.

In Norway, we are seeing activity increase as drilling contractor and service company Oems ramp up development of subsea and related surface projects.

In the Middle East, we are seeing opportunities pick up as rig activation activations increased drilling and well servicing ramps up and EPC projects materialize from <unk> across the GCC countries.

During the fourth quarter, we supplied a variety of pipe to an NOC and the middle east and towards the end of the fourth quarter invested in future revenue as we increase our local pipe inventory investments by over $5 million.

We also experienced an increase in orders for drilling products to support rig count growth in Activations in the regions. We remain upbeat about our international segment, where we see activity, increasing and market condition is becoming more favorable.

And now I'd like to make a few comments related to energy security and the energy evolution in the fourth quarter, we with an.

Operator in the Permian, we worked directly with their greenhouse gas capture project team to provide PBF instrument air packages and player retrofit products that reduced our greenhouse gas emissions and we expect more projects like this to continue into 2023.

We provided PBF products in support of a turnaround for the renewable diesel project in an oil refinery.

In the midstream space, we supplied PBF to an operator for a transmission line used to transmit cotwo for enhanced oil recovery.

And finally, we provide products for an expansion project in the Gulf coast for a carbon capture facility.

Moving on to our digital initiatives, our digital revenue as a percent of total revenue for the quarter increased to 46% as we continue to leverage technology automate processes and work with customers to integrate our systems and leverage digital technologies to streamline the procure to pay process.

A big focus of ours has been on integrating Punjab catalogs for customers, who want to leverage our digital catalogs to transact electronically by populating requisitions and purchase orders digitally providing a fast and efficient means to order processing.

We continue to provide meaningful data towards supply chain program customers, which helps them better understand and analyze how their day to day processes impact our supply chain and thus provides a framework for collaboration by optimizing and improving workflow processes.

We are leveraging our access now technology to provide 24, 7% secured access and inventory control to products that are onsite location at a major refinery in the Gulf Coast.

And finally, I am excited about <unk>, a digital monitoring service offering from our flex flow business targeting customers, who own and operate permanent horizontal pumping units operating on a permitted saltwater disposal site.

Our service monitors to health and operating performance of horizontal pumps by using the data collected to predict future maintenance events that could lead to unplanned maintenance significantly improving the run time or reducing the downtime and operating units.

Furthermore, our service identifies inefficiencies that may cause excessive power drop.

Using our performance based algorithms, we can adjust the pump operating performance, resulting in improved operating efficiencies, yielding a net benefit in lowering the customer customers operating expenses.

As an added benefit it also helps to lower customers' cotwo equivalent consumption values, thus potentially improving their respective ESG scores.

With that let me hand, it over to Mark Thank.

Thank you, Dave and good morning, everyone total fourth quarter 2022 revenue was $547 million down.

Down, 5% or $30 million from the third quarter on a year over year basis. The 2022 fourth quarter revenue was up $115 million or 27%.

On a full year basis totaled 2022 revenue was $2 1 billion.

Up more than $500 million from 2021 or an increase of 31%.

EBITDA, excluding other costs or EBITDA for the fourth quarter with $47 million or eight 6% of revenue nearly tripling the EBIT dollars delivered one year ago.

On a full year basis totaled 2022, EBITDA reached eight 2% of revenue or $175 million near.

Nearly four times the EBIT dollars delivered in 2021.

This marks the third quarter in a row that our quarterly EBITDA dollars surpassed the EBIT produced for the full year of 2021.

EBITDA to revenue flow throughs were 20% sequentially and 26% year over year as a result of our team's execution and strategic focus.

The U S revenue for the fourth quarter was $414 million down $21 million or 5% sequentially driven by seasonal impacts of the holidays and fewer working days.

<unk> 2022 U S revenue totaled $1 $5 $91 billion.

For the full year up 37% or $428 million from 2021.

Our U S energy centers contributed approximately 76% of total U S revenues for the fourth quarter with our U S process solutions group contributing the other 24%.

On a full year basis U S energy centers contributed approximately 78% of total U S revenues in 2022 with U S process solutions contributing 22%.

Turning to Canada for the fourth quarter revenue was $75 million down $11 million or 13% from the third quarter of 2022 on fewer rigs and the primary result of customer projects delivered in the third quarter as we discussed on our last call and a 4% negative impact of foreign currency due to a stronger.

U S dollar.

On a full year basis, Canada revenue totaled $315 million, an increase of $66 million or 27% when compared to 2021.

Despite a negative foreign currency impact of 4% or approximately $12 million year over year.

International revenue for the fourth quarter of 2022 was $58 million up $2 million sequentially.

On a full year basis international revenue totaled $230 million, an increase of $10 million or 5% when compared to 2021.

Largely impacted by 7% negative foreign currency impact approximately $16 million.

Our fourth quarter gross margins remained flat from the third quarter at 24, 1% buoyed by increased vendor consideration levels, which we do not expect to repeat and will be lower in the first quarter of 2023 as purchase volume thresholds reset and helped to offset a modest decline in product margins due to product and project mix.

<unk>.

On a full year basis gross margin for 2022 was 23, 7% compared to 21, 9% in 2021.

The 180 basis point improvement was driven by a combination of factors, including the intentional action of selectively prioritizing resources to accretive business and our product margins benefited from product inflation in the period, which has started to moderate especially on line pipe.

Warehousing, selling and administrative expense or Ws say for the quarter was $97 million up.

Up $2 million sequentially and up $6 million year over year.

The majority of the increase in WSI in 2022 compared to last year was driven by higher variable compensation expense from the increase in revenue and performance.

Looking back one year ago to fourth quarter of 2021, we expanded quarterly revenue by $115 million, yet only added $6 million in quarterly WSJ or about 5% of the increase in revenue.

Demonstrating improved efficiencies and our ability to leverage our cost base.

Moving to operating profit by our geographic segments in the fourth quarter. The U S delivered $26 million in operating profit or six 3% of revenue in.

In Canada delivered $7 million in operating profit or nine 3% of revenue.

The International segment reported $2 million in operating profit or three 4% of revenue in the fourth quarter 2022.

Moving to income taxes on a GAAP basis, the effective tax rates for the three and 12 months ended December 31, 2022 were five 9% and seven 2% respectively.

I'll remind you. This is the effective tax rate is calculated from the face of the income statement and is below the typically expect the tax rate at these earnings levels as our tax provision includes a favorable tax benefit impact from changes in the tax valuation allowance on our deferred tax assets.

As such this is why when imputing, our non-GAAP tax rate, we exclude such tax benefit.

For modeling purposes, the non-GAAP effective tax rate was approximately 26% for.

2022, and 26% to 28% is a reasonable proxy for the effective tax rate for the go forward quarter and year when excluding other costs.

Net income attributable to now Inc. For the fourth quarter was $32 million or 28 per fully diluted share.

And on a non-GAAP basis, Q Q4, 2022, net income attributable to now Inc. Excluding other costs was $29 million or 25 per fully diluted share.

Moving to the balance sheet at the end of the year, we had zero debt and a cash position of $212 million.

Cash decreased $55 million in the fourth quarter, primarily related to the successful completion of two acquisitions totaling $59 million in the quarter.

In the fourth quarter, we reported $5 million of depreciation and amortization.

And $19 million for the full year 2022.

In the first quarter of 2023, we expect quarterly depreciation and amortization expense to increase to $6 million as a result of our <unk> acquisitions.

We ended the year with total liquidity of $564 million, which comprises our net cash position and $352 million, an additional credit facility availability.

Accounts receivable was $398 million, a decrease of 2% or $8 million from the third quarter.

Inventory was $381 million at year end, and we invested $20 million in additional inventory in the fourth quarter that caused a slight drag to quarterly inventory turn rates that equaled four four times.

I will highlight a portion of our fourth quarter inventory investment was specifically procured to support several customers in our international segment with growth forecasted in 2023.

Accounts payable was $304 million, a decrease of $35 million from the third quarter.

And for the fourth quarter of 2022, working capital excluding cash as a percentage of our fourth quarter annualized revenue was approximately 16, 7%.

Cash flow provided by operations was $6 million in the quarter, which drove positive free cash flow of $4 million in the fourth quarter after considering the $2 million in capital expenditures.

Capital expenditures for full year, 2022 was $9 million as.

As we invested in operating equipment and facilities to enhance efficiencies and increase service levels to our customers.

Looking back at 2022.

The story of two halves as working capital investments in the first half of 2022 contributed to a net consumption of $51 million in cash from operations.

Compared to the last two quarters of 2022, when we generated $51 million in cash from operations in the second half of the year on a lower build in working capital and improved earnings.

Thus, bringing full year 2022 cash from operations to zero.

And when taking into account our $9 million of capital expenditures in 2022, the full year 2022 free cash flow was a use of $9 million.

This year marks a significant milestone for our business and one with important implications about our cash flow generation potential and.

In 2022, we demonstrated our ability to expand our business 31%.

Without consuming cash from operations.

<unk> feed for a distribution business that traditionally generates countercyclical cash flows.

This shows how our actions over the past few years have positioned <unk> to generate cash through the cycles.

Which bodes well for our future aspirations and capital allocation plans.

In the fourth quarter, we continued to execute on our share repurchase program.

With additional repurchases of $3 million at an average share price of $11 50.

As of December 31, 2022, we repurchased $7 million of our $80 million authorized share repurchase program at an average share price of $10 82.

Our commitment to growing the company through acquisitions and organic growth remains a top priority. While also having the ability to repurchase shares opportunistically as we use the tools and our broadened capital allocation framework to generate attractive shareholder returns without deviating from our disciplined approach to balance sheet management.

We continue to be debt free have no interest payments and remain meticulous with our disciplined capital allocation strategy.

Delivery on cash flow generation is a priority effective working capital management, and maintaining our strong liquidity and financial position.

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

Thank you Mark.

It is our intention to play a bigger more active role in the energy evolution.

We see a growing number of opportunities where <unk> can collaborate with our customers to reduce our scope one two and three emissions with the products, we provide combined with our supply chain services and digital offers offerings.

We are helping our customers working towards meeting their greenhouse gas emission reduction goals working closely with their corporate focused ESG teams to identify and eliminate greenhouse gas emissions by upgrading their aging oil and gas PBF infrastructure, replacing gas pneumatic systems with compressed air systems.

And partnering with our supply chain management teams in areas that lead to emission reductions tied to improved supply chain efficiencies related to materials management and logistics to support the production.

I am proud of the positive impact our Dino employees are having on our industry not only.

Reflecting on our own ESG journey, but positioning <unk> as a more important contributor to our customers.

In fact, we have seen many of our customers set goals to reduce or eliminate flaring and one example, I would point out Exxon Mobil's recent announcement to end flaring in the Permian and earmarking, some $17 billion on reducing its emissions by 2027. According to a January Reuters' report.

In an effort to tap into this demand and expand on the contribution.

We are making in lowering our customers' emissions I'm happy to announce that in December 2022 D. Now further expanded our set of energy evolution in ESG solutions by completing the acquisition of eco vapor recovery systems.

Eco vapor has a unique position in the oil and gas sector. Its patented prospects process technology addresses the venting and flaring of gas from oil and water tank batteries, allowing operators to reduce emissions, while generating revenue from the sale of the additional gas.

Oxygen contamination and storage tanks is common due to low tank operating pressure, resulting in a captured gas product that exceeds the allowable percentage of volume and therefore cannot be sold to local gas gatherers and midstream facilities.

Operators have had little recourse other than flaring this gas a waste of energy and a source of carbon and nitrous oxide emissions.

<unk> patented zero two product short for zero oxygen addresses this common problem and is highly effective in reducing oxygen content to meet pipeline specifications.

The value is simple zero to treat what was the source of emissions and allows the captured gas to be sold for additional revenue there.

There is abundant evidence that tank batteries I wanted the principal sources of emissions in the upstream production inventory.

Industry.

<unk> is a leading environmental solution and now operates in most major oil producing basins in the lower 48.

Eco vapor technology and service platform is poised for growth given the increasing focus on emissions and energy security as a products focused on the elimination of the waste of natural gas from our production operations.

I'm optimistic about <unk> growth opportunities in the RMG or renewable gas sector.

<unk> and R&D capacity have grown rapidly over the last few years and expectations of production growth could be in the neighborhood of 50% by 2024.

Sales of <unk> zero, two product line and associated equipment from the <unk> sector are a growing contributor to <unk> revenue and earnings.

Ego vapors position in this industry is somewhat unique and enjoy some key competitive differentiators. These advantages are particularly evident in the livestock and agricultural based biogas projects, which represent three quarters of all biogas projects under construction.

The zero two product line is well suited for the AD based projects with multiple sizes, which allows the project owners to optimize capacity and cost.

Eco vapor resides as part of our expanding U S process solutions business alongside alongside our market, leading power service Odessa pumps and flex flow brands further differentiating Dino and the value we provide our customers.

Now switching to our outlook for 2023 in the U S. We expect customer spending to increase year over year with capital discipline regulating production growth according to industry forecast.

It is worth noting rig day rates and completion.

<unk> continues to rise in fact, they are forecasted to rise more as a percentage and the product we provide.

In Canada, we expect customers to look to maintain production and we see a basically flat scenario playing out there.

Internationally, we expect to see growth as activity in sales inquiries have increased as <unk> and <unk>.

Posted larger percentage year over year growth.

Specific to the first quarter of 2023, we expect sequential revenue to increase in the low to mid single digit percentage range compared to <unk> 22.

<unk> 23, EBITDA dollars could reach as much as 50% above <unk> 22, EBITDA dollars, which was $28 million.

And we upgrade our forecasted full year 2023 revenue now increased 8% to 12% compared to the full year of 2022 revenue.

Full year 2023, EBITDA is targeted at 8% of revenue.

Cash flow from operations to approximate $100 million in the full year 2023 at these forecasted levels of activity.

Im thrilled about our strong fourth quarter results, which capped off a stellar record year for Dino.

For the year, we achieved revenue growth of $504 million or 31% growth compared to 2021 without consuming cash from operations as we turned working capital seven times delivered impressive gross margins of 23, 7% and generated $175 million in EBITDA, excluding other costs.

Or eight 2% of revenue.

Our investments in four Super centers equipped us to grow in those regional markets and calibrate product availability to resolve customer supply chain challenges. Additionally.

Additionally, the three acquisitions, we completed during the year further enhanced our competitive position and importance to suppliers.

While deepening our appeal to customers.

Entering 2023, we are in a great places the company remained debt free with ample liquidity and are well positioned for continued growth and success.

<unk> family. Our success is a direct result of your singular focus on our customers each and every day and for that and for everything you do for <unk> now I think with that let's open the call for questions.

Thank you we will now begin the question and answer session.

If you ask a question. Please press star one touch time side, if you wish to be removed from the queue. Please press star two.

If you were using a speakerphone you may need to pick up the handset first before pressing the numbers. Once again, if you have a question. Please press star one on your Touchtone phone.

And our first question today comes from Coke ovens from Stephens. Please go ahead. Your line is open.

Hey, guys. Thanks for taking my questions.

Morning call how are you.

Doing well.

<unk> 2023, it looks like it's going to be a strong year for cash generation with a $100 million of expected operating cash flow.

Can you guys talk a little bit more about how you plan to allocate that between M&A and repurchase.

Well I think we.

Would continue along the same path so.

Sure.

We said when we when we launched the share repurchase program that our priorities were.

Fund organic growth and we've done that.

And we're focused on that in 2022, the market expanded our revenues grew 31%, we think that rate of growth will decline.

But the strong in 2023.

Thus, allowing for more cash thrown off from from the business.

So that allows the opportunity for more M&A, we closed two deals in December three and the full year 2022.

That's a that's a priority for us is the rate of growth in the organic space.

Lower we're going to focus even more on M&A and of course the.

Third alternative is to bolster our participation in our share repurchase program.

Which began in earnest in the second half of last year.

That's helpful.

And on <unk>, you guys saw a pretty significant improvement in 2023 can you talk through any additional.

However, as you have to continue to drive improvement in productivity there.

Sure. This is this is mark I agree I think us transforming the business over the last several years.

It really generated.

Record record flow throughs.

This revenue growth. So so I think our focus.

For 2023 is a lot of intent on gross margins.

Youre looking at the levers there is.

We all recognize the steel steel pipe or steel prices in line pipe prices.

That has stabilized some and are starting to come down a bit. So that's a focus of ours and finding ways to maximize.

Margin mix.

As well as operational efficiencies, we're still marching through.

Our Super Center model, and finding ways to enhance that closeness to customers and solutions there.

So in.

<unk> 2023 was.

Incredible year for us and that productivity.

Our guidance for next year would have.

A lighter flow throughs on a year over year basis.

Because we will have some gross margin compression.

Lightly forecast and then.

Ws, saying, we're going to continue to invest in the business.

Great and if I could squeeze one last question and <unk> talked about gross margin being down in 'twenty. Three how are you guys thinking about gross margin seasonality throughout 2023.

Well I'll take that Mark I think we're going to start off the year.

Right.

<unk> tends to be our lowest gross margin period.

That's just how it tends to be so I think we'll see a little bit of a dip there upfront for the seasonal impacts and in 2020 to like 2021, our purchase volumes, especially towards the end of the year ramped up enough, where our vendor consideration we kind of tag.

It off in the fourth quarter.

And it ended favorably impacted gross margins. So I think we'll see our first quarter contraction, but I think the first half gross margins will be will be stronger perhaps in the second half.

We haven't talked about overall gross margin.

And going into the new year, but it could be a 30 basis points decline, but still well above our 21 2021 2022 average.

If you recall, we had pipe prices mid 'twenty two at very high levels. We enjoyed the benefit our competitors enjoyed the benefit of that kind of hyperinflation and pipe like Mark mentioned earlier, that's diminished. So we still expect really strong gross margins.

But a little bit of an easing going into the new year.

Perfect. Thanks, guys I'll turn it back.

The next question is from Nathan Jones from Stifel. Please go ahead. Your line is open.

Good morning, everyone.

Morning, Nathan good morning.

Dave I'm going to pick up a comment you made in your opening remarks that said.

Hold on and get better at what you're good at and avoid distractions.

Can you maybe talk about where you think you are in that process. What are the primary things you need to build on that and get better at.

Theres still things within the business that you need to say it may be.

Get out of the basis to avoid some of those instructions.

Yes, I think we're.

Really I was referencing the sentiment and the main thing I wanted to focus on two years ago.

And we've done a lot along those lines, we're a much more efficient organization.

We've changed our fulfillment model, where historically most projects were managed from all of our locations. It was inefficient it left at <unk>.

That excess inventory across across the whole network, we've tried to regionalize that where we can.

Manage.

Projects regionally.

With a lot better flow through.

More efficiency.

And.

I think I think we're very well down that path and we're going to.

We have we talked about a supercenter that we're going to expand in Canada in the first half of this year, we'll probably do another one which we haven't named the location yet publicly but we'll probably do another one in the first half of the year as well with that standing up a bit.

That newer supercenter will be well down that kind of journey towards optimizing the network now it's a matter of season growth organically and Inorganically.

Sure.

Okay.

Okay. Thanks for that I guess second question I wanted to ask on the eco vapor business is this.

I was just thinking about it as it relates to palace.

Take a tank battery solutions that you're doing is it basically just the pace of equipment you can bolt onto.

To that 10-K tank battery that will capture some of the emissions that come out of that.

I would think that's a pretty easy way for you to kind of expand their styles.

And what we believe the main opportunities for you to grow their sales.

Hey, Nathan this is Brad I'll start and maybe Dave or Mark will have additional comments, but.

Yes, Youre right I mean this is.

We highlighted two applications first of all in the prepared remarks, the first one being oil and gas tank batteries and the other opportunity to be in the <unk> market, which is positioned to grow greatly in the oil and gas market.

Opportunities in existing tank batteries, what we call brownfield applications are attractive they tend to be lower flow rates.

Aware, new greenfield opportunities or <unk>.

Larger tank batteries.

That have higher production.

We have a scalability of our product based on the flow of gas and the application is really on the low pressure gas side.

The the oil storage and produced water tanks will.

Net vapor.

Paper, it's actually a rich vapor.

Saturated with liquid so the recovered gas once we remove the oxygen.

Out of that out of that captured gas is a rich gas in there.

It's really a nice.

Premium for the oil and gas companies to recover that.

And be able to.

Sell that for additional benefit and then obviously.

This would be the kind of the routine flaring, if a midstream operator, which is sampling the gas stream. The techs are high parts per million oxygen level, they will shut down.

The supply line of gas and therefore results in the flaring.

Non routine flaring up oil and gas company, so kind of that Dave talked about that dual value proposition.

We're excited about that opportunity.

Naturally fits within our U S process solutions business, we have.

Our full portfolio, our suite of products for that tank battery and we can leverage not only the eco vapor existing sales technical sales team, but we have a highly technical sales force that we employ with our power service on Odessa pumps and also flex flow organization. So we plan to scale.

The business development and sales opportunities there to get more exposure to <unk> customer base, where prior eco vapors exposure as was limited or less just because of as a smaller company. They are our marketing.

Sure.

Now go out and Nathan.

I was going to say it seems like a business that you should be able to grow pretty rapidly.

Our relationships is there any information you can give us on kind of what level of revenue. They are at now and what level of revenue.

You can grow that to about three to five years.

Yeah.

I'll give you kind of.

Some summary information so they are probably in the $12 million to $15 million revenue range at good margins and I think the opportunity is.

To put more units.

In the fleet.

To favor sales over rental for some of the products, but to grow really I think the sweet spot would be to grow outside of oil and gas as we as we embrace the energy evolution, but I'd start off small, but it really to your.

Implied to your question I think there is real benefit as we have Neil it with our power service business in particular.

Okay. Thanks for taking my questions.

Youre welcome.

The next question comes from capital.

Capital One South Carolina is open. Please go ahead.

Thanks, Dave I was hoping you could expand on what Youre hearing from the U S upstream customers about activity this year and particularly given the decline in natural gas prices.

But how do you want to take that I think.

Yes, Doug Thanks for the question.

We're.

Obviously in the middle of earnings season here. So we're seeing much like many of you customer budgets come out.

We are seeing.

Increases year over year, our customer budgets and in a lot of.

The kind of built into our 8% to 12% year over year revenue Guide was I was really thinking about.

The drilling contractor.

Yeah.

The field is somewhat tight as far as inventory, we're seeing day rate pricing pressure increase we're seeing.

Tightness, there and that's.

That's driving inflation, that's going to consume part of our customers' budgets, we're seeing completions and Frac spreads right also limited.

And tight supply there. So we're thinking more of the capex that customers are spending going to be consumed there kind of Conversely, the pipe mills over the past couple of quarters have kind of caught up the supply to the demand. So we're seeing some kind of deflationary pricing pressures.

Associated with our line pipe, which we benefited from last year or so.

We still think.

Obviously growth is poised for it in the U S market poised for growth.

Maybe an immediate concern is how the market is going to respond to lower gas prices that we've seen here recently still trying to digest that.

Taken all together I think again, a larger percent of the customer budgets on a year over year basis are being consumed by.

The products and the labor that we don't sell right now so kind of our percent of that pie is a little bit smaller so we kind of baked that into our guide as Dave noted earlier.

No that makes sense, but it sounds like as we sit here today you haven't noticed any response to the natural gas prices is that fair to say.

Yeah actually I think that's fair I mean, we.

We've seen rig counts decline and I think that's going to impact us, especially in the first quarter, but no. We still we gauge our near term outlook on cut.

Customers projects that they place with us versus projects that are in the pipeline. We look at our kind of order book versus and how thats trending so we feel like.

Our guide is.

Not a conservative one.

<unk>.

It's not going to be an easy one to deliver in 2023.

But we'll learn more as the customers.

Put out their budgets, but I think what.

What <unk> is trying to say is the bulk of the customer capex budget is going to be consumed by day rates and frac crew costs and things that really arent product cost related.

The impacts of oil prices.

Kind of at a five quarter low and gas prices as we discussed I don't think we've seen the impacts yet but.

Except except in the rig count, which really is to me the best barometer for our revenue opportunity and that is starting off pretty slow this year.

Right.

Mark what are the assumptions around working capital and the cash flow from operation guidance for the year.

Yes.

Question, and I think we're going to work too.

To optimize some of our working capital metrics to try to get some of that balance sheet into that free cash flow number into next year, but again still a growth year still still an expectation.

For us to add.

Inventory to the balance sheet in the coming year.

So.

I think that we finished the year inventory turns were a little lower than we would have historically wanted as a metric goes.

But there were some intentional forward deployment there for.

For some inventory so I think as the quarters ebb and flow, especially maybe heavy in the year, we're going to see a little bit of a build there in working capital on the balance sheet, Yes, Let me, let me add to that Mark we have really strong working capital turns.

In 2021, we had a kind of an era of inventory depletion, which made our working capital turns.

And almost nine times in some of the quarters. That's change of course, because we're still in build mode market is still going to expand in but we will now be able to see the rate of growth on absolute inventory values in absolute receivables values taper off and then we'll be able to burn.

Cash in that in that scenario so.

I think we will see our working capital turns ease a little bit or be a little less.

Strong, but I think that's just a natural result of.

A full kind of fully stocked mode in terms of customer order fulfillment and that's that's showing in our numbers, but still really good balance sheet management.

But there is room for improvement for sure.

Got it and then just a last one.

Pace of share repurchases slowed modestly during the fourth quarter wanted to get a sense of what the thought process was behind it is it just a byproduct of the buyback program being opportunistic with the acquisitions or was it some other factor.

Yes, I think I think you had it so.

We.

Primarily.

It was we did two acquisitions in the fourth quarter, we spent $59 million.

When we spoke about opportunistic obviously, you want to buy at a good price and.

And buy at the right time, and we like I've said from the beginning we want to we want to execute that program, but the timing was.

Do favor to the acquisitions, we made in the corner I think we will see some increased participation in 2023.

But it was really was an opportunity to.

Six two acquisition opportunities and we jumped on those.

Thank you very much.

Thank you Doug.

Our final question today comes from Jeff Robertson from Wichita every such Jeff. Your line is open. Please go ahead.

Thank you.

Dave can you talk a little bit about the strategy for acquisitions and with respect to process solutions is there a goal in terms of what you would like that to become four for that as a share of U S revenue.

So I think where we're at today is three.

Three quarters in the U S is energy and <unk>.

<unk> <unk>, 25% as our process solutions naturally we want them both to grow and I'd be happy if they growth both grew 50% neighborhood and then ratios where the same three years from now.

But process solutions to me, it's primarily a pump business.

But a lot more than that.

It has.

<unk> of stickiness with our customers it puts us in a really sweet spot with core manufacturers.

That that's I think where we've done our last eight or so acquisitions, because it's a business, we simply want to build organically and inorganically.

So.

Anyway.

I think the focus is on bolstering that business.

Because it's it's something that's a bit of a departure from standard upstream oil and gas and process solutions does afford us some opportunities to grow in the industrial space as well.

Now I've said for.

My tenure as CEO that we have been less interested in energy businesses, because our energy business wasn't as strong as it is today. So we'll be looking to grow acquisitions across the board by segment or by.

By business unit, but theres more after market service opportunities and some of these acquisitions were focused on and that tends to be more on the process solution side. So.

That's where we're putting our acquisition dollars, so far but that could change.

Thanks for the question Jeff.

Ladies and gentlemen, we reached the end of our time for question and answer session. I will now turn the call over to <unk> for closing remarks.

Well. Thank you everyone for your questions today and your interest in now Inc. We look forward to talking with everyone on our first quarter 2023 earnings conference call in May have a nice day and I'll turn the call back over to the operator. Thank you.

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

[music].

Okay.

Yes.

Sure.

[music].

You're welcome to the now Inc. Fourth quarter <unk> earnings Conference call. My name is Adam and I'll be the operator for today's Coke at this time all participants are in a listen only mode. Later, we will conduct a question and answer session I would now turn the call over to the Vice President of digital strategy and Investor Relations Pat Walsh, Mr. Walsh you may begin.