Q2 2023 NOW Inc Earnings Call
Good morning, My name is Chris and I'll be your conference operator today at this time I'd like to welcome everyone to the now Inc. Second quarter 2023 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you'd like to withdraw your question press the pound key.
Thank you Mr. Brad Wise, Vice President of digital strategy and Investor Relations you May begin your conference.
Thank you Chris Good morning, and welcome to now Inc. Second quarter 2023 earnings Conference call we.
We appreciate you joining us and thank you for your interest in now Inc.
With me today is David Church, Jetski, President and Chief Executive Officer, and Mark Johnson, Senior Vice President and Chief Financial Officer.
We operate primarily under the distribution now and do you know brands.
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.
Well you should note that some of the statements we make during this call, including your responses to your questions.
[noise] 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 August 2nd 2023, which is subject to change.
Just 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 <unk> 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 a 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 second quarter.
2023.
A replay of today's call will be available on the site for the next 30 days, we plan to file our 2023 Form 10-Q for the second quarter today and there will also be available on our website now let me turn the call over to Dave.
Thanks, Brad and good morning, everyone.
As we reflect at the halfway point of 2023, I am pleased with our solid execution driving increased revenues and delivering an expected strong earnings performance for the quarter.
We generated significant second quarter free cash flow of $79 million, the best quarterly free cash flow for us in nearly four years.
This cash hall accumulates to $116 million in free cash flow for the last 12 months well above expectations, considering the cash invested to produce the revenue growth during the last year.
These achievements fueled further deployment of capital for acquisitions and share repurchases benefiting our shareholders.
Second quarter results exceeded our expectations. Despite the smoky headwinds of devastating Canadian wildfires and lower U S land rig and completion activity in the period.
As an example, we lost 81 U S rigs during the second quarter more than anticipated driving a full quarter sequential U S rig count decline of 5% compounding the 24 rig or 2% U S rig count reduction experienced in the first quarter.
While the pie or market got a little smaller or piece of that pie to the unwavering focus on our customers by our people got a little bigger.
We offer a unique and innovative supply chain solutions tailored to the specific needs and demands of our largest customers and continued to invest in solutions that help them achieve their operational and financial goals. We.
We are seeing those investments investments bear fruit as we captured growth across our integrated technology enabled relationships demonstrating the enduring value those collaborations provide.
We distinguish ourselves with the team of distribution experts technical professionals and licensed engineers, who provide expertise related to pipe valves fittings pumps compressors and fluid movement packages fabricated liquid and gas measurement systems and process and production equipment.
The part of our business with the largest sequential growth, whereas our U S process solutions business.
We provide process equipment solutions to our customers through a range of rental assets distribute OEM equipment, including pumps generator sets air compressors dryers blowers mixers in valves.
And provide aftermarket services that include rental machining and repair service from a team of field technicians.
We've been able to defy gravity in this market because of the solutions, we offer and the excitement and passion and winning attitude or people had and it shows with the results produced.
I want to thank our employees for enthusiastically taking care of our customers being loyal to our key suppliers supporting our communities and each other.
Our focus over the last three years has been primarily on growth higher gross margins and significantly improving earnings and our results reflect the success of those efforts.
We are now leveraging those accomplishments and driving market share gains in a slower North America environment.
Capitalizing on our competitive strengths and establishing credentials and exciting new markets.
There are many competitors in the market that provide similar products to ours, yet our customers Trust D. Now to ensure their operations and production goals can be achieved.
Our team cherishes these partnerships and is motivated to exceed our customers' expectations.
During the quarter, we on boarded a new customer who recognize the benefits of our alliance based partnership competencies through the combined value of leveraging our technology material management and supply chain services solutions are.
Our program with this customer is in the early stages as.
As we expand additional locations. This partnership will provide the customer even greater benefits.
And now for some financial highlights second quarter revenue was $594 million sequentially higher by 2% driven by the success of our U S segment up 7% with both the U S energy and process solutions growing.
Canadian revenue declined 20% sequentially as guided during the seasonal breakup, which was aggravated by wildfires that caused mandatory evacuations disrupting customer operations and resulting in several temporary closures of our branches.
On a year over year basis, <unk> revenue was up $55 million or 10%.
Second quarter gross margins were 22, 6% impacted primarily by higher revenues and lower product margin <unk> tubing pipe sales tied to customer Workover rig program programs and to a lesser degree from increased bidding as product availability has improved in the market.
And geographic geographic revenue mix and historically higher gross margin Canadian revenue was lower.
And for the second quarter, EBITDA was a solid $47 million or seven 9% of revenue.
Now some comments on a regional basis in the U S revenue was $456 million, an increase of $29 million or 7% sequentially, driven primarily by process production and pump packaged equipment sales in our U S process solutions business, where sequential sales increase by 20%.
U S energy revenues increased 2% sequentially resilient given the market headwinds discussed earlier.
Revenue growth was driven by public operating companies focused on oil and NGL production, while activity from independents, private e&ps and gas Levered public E&ps softened.
U S energy supply chain customers delivered growth during the quarter as several increased spending from <unk> levels in support of their annual production goals.
Williston basin, and northern Rockies operators coming off a slow <unk> due to weather impacts contributed to sequential revenue growth.
We saw activity improving from <unk> as large independents in the Permian ordered PBF for gathering projects and tank battery construction to support 2023 production plans.
Our Workover rig materials management program contributed to revenue gains as our customers work to offset production decline curves and enhanced oil recovery.
Our cold coiled line pipe product sales expanded as we sold products to new Permian and South Louisiana operators.
Also our coiled line pipe offering obtained final AML approval from a large public operator clearing a key hurdle for future revenue opportunities for use in their gas lift applications.
We are seeing increased customer adoption as coiled line pipe provides a safer cost effective solution when compared to conventional line pipe by reducing the number of connections and leak points minimizing emissions tied to ageing infrastructure.
We continue to leverage the benefits of our supercenter model across the U S and Canadian energy and industrial areas with the dual benefits of increasing our market position and enhancing efficiencies.
During the quarter, we renewed and extended several key customer contracts, ensuring continuity of existing operations and future project opportunities.
We saw some notable project wins in the midstream sector, providing a variety of pipe valves fittings pumps and fabricated equipment to a number of operators.
For one of the projects, we provided large bore valves and actuation packages for installation on the natural gas pipeline that will feed Gulf coast LNG markets. The.
The project will be comp line complemented with a carbon capture and sequestration solution, providing producers with the <unk> offsets emission solution.
With a large integrated midstream company, we provided valve actuation products as well as field service across several upgrades to existing compression stations for the transmission of natural gas on a pipeline project.
We also updated one of our MSA agreements with the U S. Midstream operator and are in the process of executing a punch out catalog E Commerce project.
We expanded market share with several private midstream companies by providing actuated valves for new compressor station builds and.
And finally, we expanded our valve product line reach with a manufacturing partner by providing valves for midstream energy infrastructure company.
Lastly, we had a notable win with the midstream operator as part of their natural gas transmission and underground storage project supplying seamless high yield line pipe and World fittings. In addition to several fabrication units from our power service group combined with our local branch support of PBF and MRO material shorts at the construction site.
Our U S process solutions business expanded to 29% of our U S segment in the second quarter due to increased deliveries of lack units pressurized vessels instrument air systems and pump packages as gathering systems, well shot well site onshore facility construction and midstream.
Takeaway activity was hot during the quarter.
Operator activity drove demand for a number of our fabricated pipe projects.
And products as oil and gas gas operators for separation equipment Piper.
<unk> water transfer and measurement products was strong.
In several western U S States, we have been focused on growing and diversifying revenue from traditional non oil and gas markets.
We are seeing revenue growth and increased demand for our pump products mechanical seals and industrial air compressors.
During the quarter outside of oil and gas, we provide the products to the food and beverage pharmaceutical municipal water recreational sports mining and power generation industries.
We supplied water pumps gets to a Permian operator for frac water reuse and treated wastewater applications.
Overall this portion of our revenue mix still remains small when compared to our core oil and gas business, we are making progress in expanding our reach while also maintaining our core focus on oil and gas customers.
In our flexible business activity increase for our trailer mounted jet pump rentals that provide artificial lift solutions for initially completed wells.
We completed a new MSA for a key Canadian customer that will further expand existing trailer mounted rental opportunities on indigenous lands.
In Canada revenue was $66 million for the quarter, a decrease of 20% sequentially amid seasonal breakup and off a very strong first quarter that delivered higher than expected revenue from timely project orders.
As a result of the wildfires in Alberta, and British Columbia, We idled three of our branches due to safety concerns and town evacuation mandates most of the E&P companies in these evacuated areas were forced to curtail drilling and construction activities.
Highlights during the quarter include revenue tied to an IOC material management program that resulted in a historical peak revenues on a per quarter basis for this IOC.
Products provided include PBF and automated valves for a large project tied to LNG gathering infrastructure.
We expect continued growth from this operator in the second half of 2000 22003.
In Saskatchewan, we expanded market share in the utility sector by Onboarding, a new gas utilities customer providing them with a variety of PBF products.
During the quarter, we relocated an orbiting branch into our new supercenter location in Edmonton to consolidate locations and improve operational efficiencies.
For International revenue was 72 million, a sequential decrease of $2 million, a little better than guided or up $13 million or 22% on a year over year basis.
Activity within the U K's brownfield market and export business to West Africa was healthy during the quarter followed by growth in activity in the middle East.
In the U K, we've provided electrical bulks cables and safety products from our Mcclain international business to UK onshore and offshore operators, while securing contract extensions with several <unk> based in the UK and the Netherlands.
In Ireland, we were successful in opening up new markets, providing instrument and power cable from our Mcclain International group for a gas processing facility that from an offshore natural gas field.
In the Middle East, we provide pipe valves and fittings to IOC NOC is in a joint venture operation to support oil and gas production projects.
And we continued to provide tooling and MRO products to several offshore wind operators as market aftermarket opportunities to expand in the north Sea.
Now I'd like to talk about our de carbonization and energy evolution initiatives.
On prior calls we've highlighted specific project wins in the energy transition space or what we term energy evolution.
Because it's clear the transition will take longer than originally estimated.
In the refining sector, we have provided PBF products at several of our customers expand their operations to produce biofuels and.
In the upstream oil and gas sector, we have provided PBF to aging infrastructure projects to reduce methane emissions, while providing industrial air compressor packages to replace gas pneumatic systems with compressed air systems.
In fact, we generated additional revenue this quarter tied to more greenhouse gas capture projects.
We see these types of projects continuing and now we are starting to see larger more frequent carbon capture and sequestration opportunities as opportunities as operators seek to meet their carbon reduction goals by investing in direct air capture projects gathering and transmission projects and sequestration projects.
Mostly being driven by our current customers.
On the <unk> side, we see opportunities for <unk> products in the mining and harvesting of rare Earth minerals like lithium used in the production of EV batteries.
This sector can benefit from our pump packages fabricated process and production packages and Pvs.
Our goal is simple for D now to be a leader in the energy evolution as a number of <unk> current customers are ramping up investment in projects that expand this growing market.
During the quarter, we won several Ccs projects and an accompanying midstream valve actuation project for our PBF offerings. We are excited about what the future holds for our recent acquired eco paper business.
And during the quarter, we grew our number of their leased units sequentially. We.
We are seeing operators realize the benefit in the reduction in scope one emissions attributed to routine flaring at well sites onshore facilities due to oxygen contamination of tank vapor gas.
Eco vapor continues to add units with our key oil and gas customers in the Rockies Bakken and Permian Basin.
In the biogas market, we're gaining momentum with eco vapor in the landfill gas space during the quarter. We commissioned several units in the <unk> end market and the quoting activity continues to be robust in the second half of the year.
Finally, we deployed our eco vapor emission scout product to an operator in the Bakken working with a local university and an environmental Research Center.
The goal of this partnership is to educate local operators and industry groups on volumes of gas being flared from well site onshore facilities with a particular emphasis on the lower producing sites, which poses an opportunity to capture additional gas streams, while minimizing the regions emission footprint.
We are investing in energy evolution is a promising market opportunity one that is growing demand for many of their product products. We provide today and it's primarily driven by our current customers.
Moving to our digital now initiatives, our digital revenue as a percent of total revenue for the quarter climbed to 48% as a result of the customer and project billing mix on topline growth during.
During the quarter, we completed four customer <unk> integrations that contributed to the increase.
On the E Commerce side, we completed a punch out project with an IOC based in the UK that will streamline and make it more efficient to order products from our Mcclain International group for electrical Bulks.
In terms of in terms of capital allocation on the M&A front, we continue to evaluate a number of deals of varying sizes during.
During the second quarter as I mentioned on our May earnings call. We acquired two companies in the U S that expand our U S process solutions business and serve industrial and general industry end markets contributing to our efforts to capture share in markets beyond oil and gas.
We continue to be acquisitive pursuing margin accretive opportunities, including prospects outside of upstream oil and gas, where we occupy a solid footing.
During the second quarter, we purchased $8 million worth of shares at an average price of $10 31.
Through the end of the second quarter, we have repurchased $51 million worth of shares of the $80 million authorized through December 2024.
With that let me hand, it over to Mark. Thank you, Dave and good morning, everyone. Total second quarter 2023 revenue was $594 million up $10 million or 2% from the first quarter of 2023 on a year over year basis second quarter revenue was up $55 million or 10%.
EBITDA, excluding other costs or EBITDA for the second quarter was $47 million or seven 9% of revenue.
And year to date, 2023, EBITDA was $94 million or 8% of revenue.
The U S revenue for the second quarter, 2023 totaled $456 million or $29 million increase or 7% higher than the first quarter of 2023.
Year over year U S revenue increased $48 million or 12% from the second quarter of 2022.
And increased 19% or $141 million from the first half of 2022.
In Canada for the second quarter revenue totaled $66 million, a decrease of $17 million or 20% from the very strong revenue in the first quarter of 2023.
Down as guided and year over year, Canada second quarter revenue was down $6 million or 8% impacted unfavorably by $3 million or 4% from foreign currency changes.
International revenue for the second quarter of 2023 was $72 million down $2 million or 3% sequentially and.
And compared to the same period last year International second quarter revenue was up increasing $13 million or 22%.
Gross margins for the second quarter were 22, 6%.
Which is down sequentially 90 basis points.
Some factors contributing to.
To lower margins as Dave noted earlier include OTT G tubing margin compression improved product availability on steel pipe and valves, which contributes to competitive pricing pressures and geographic segment revenue mix on lower Canadian revenue.
Warehousing, selling and administrative or WSI for the quarter was $98 million $4 million lower sequentially, partially due to reduced legal expenses of $3 million in our second quarter favorable impact of a 1 billion dollar asset sale gain.
In the second quarter, we reported $6 million of depreciation and amortization expense.
In the third quarter of 2023, we expect quarterly depreciation and amortization expense to total $7 million.
Moving to operating profit by geographic segments in the second quarter. The U S delivered $29 million in operating profit.
While the Canadian and international segments delivered operating profit dollars of $3 million and $4 million respectively.
Moving to income taxes, the effective tax rate for the three months ended June 32023 was two 9% on a GAAP basis.
I'll remind you. This is the effective tax rate that is calculated from the face of the income statement and is below the typically expected tax rate at these earnings levels due to the income tax expense provision on the income statement, which includes a favorable tax benefit from the 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 income tax benefits.
For modeling purposes, the non-GAAP effective tax rate was approximately 26% for <unk> 2023.
And for estimating an effective tax rate for the go forward quarter and year for modeling net income excluding other costs could approximate 28% tax rate and excludes the favorable impact from changes in the valuation allowance.
Net income attributable to now Inc. For the second quarter was $34 million or <unk> 31 per fully diluted share.
And on a non-GAAP basis, Q2, 2023 net income attributable to now Inc. Excluding other costs was $27 million or 25 cents per fully diluted share.
Moving to the balance sheet at the end of the quarter, we had zero debt and a cash position of $203 million.
Cash increased by $35 million in the second quarter, while we completed two acquisitions invested in growth of our business and repurchase common stock in the quarter to return value to shareholders.
We ended the quarter with total liquidity of $584 million, which comprises our net cash position and $381 million, an additional credit facility availability.
Our existing $500 million revolving credit facility extends into December 2026, providing D. Now with access to capital for the next three and a half years.
Accounts receivable was $417 million, a decrease of $5 million from the first quarter.
With inventory $424 million at the end of the second quarter and our quarterly turn rate of four three times.
Accounts payable was $364 million at the end of the second quarter, an increase of $41 million from the first quarter.
And for the second quarter of 2023, working capital excluding cash as a percentage of our second quarter annualized revenue improved to 15, 6%.
In the second quarter, we generated $85 million cash flows from operating activities consisting of the second quarter earnings contribution and reduced working capital.
In the second quarter, we generated $79 million in free cash flow with capital expenditures for the second quarter of $6 million as we primarily purchased property and rental equipment.
For the six months ended June 32023, free cash flow accumulates to $68 million and for the trailing 12 months free cash flow has totaled $116 million.
We have been targeting $100 million in cash flows from operating activities in 2023 and with our strong performance. This quarter, we are raising our expectations to $120 million in cash flows from operating activities. This year and will deliver in excess of $100 million in free cash flow in 2023.
This demonstrates how our focus on the fundamentals and disciplined managing the business has positioned D now to generate cash through the cycles.
Which bodes well for future growth and capital allocation plans.
We continue to execute on our share repurchase program that is authorized through December 31, 2024, with additional repurchases of $8 million in the quarter as of June 32023, we have repurchased $51 million under our $80 million authorized share repurchase program.
Our commitment to growing the company through organic growth and acquisitions remains a key 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 on debt and keep cash flow generation a priority.
And with that let me turn the call back to Dave.
Thank you Mark.
Now switching to our outlook for the third quarter of 2023.
In the U S. We expect revenue to be flat due to U S rig count headwinds and project mix as compared to the second quarter.
Internationally, we expect project activity to increase in the third quarter driving modest sequential growth in that segment.
And in Canada, given expected seasonality coming out of breakup will drive sequential revenue higher.
Taken altogether, we expect Dina <unk> third quarter sequential revenues to increase in the low single digit percentage range from Q2, 'twenty three approximating year over year third quarter growth of 5% for Dana.
We expect third quarter EBITDA to approximate 8% of revenues.
And for the full year 2023, we reaffirm our view that revenue will increase 8% to 12% compared to the full year 2022 revenue.
U S rig count has been declining since the.
Fourth quarter last year, and we believe it could bottom during the second half of this year.
Before we open it up for questions I want to close with some comments about the business.
Now is in a great place with no debt and $203 million of cash on our balance sheet. We continue.
To expand our core market, while we invest and grow in areas, where we see opportunities areas tied to investments and de carbonization and the energy evolution, but also non oil and gas areas like mining municipal water food and beverage and general industry, our focal points.
I am proud of our Dino team as strong performance continued in the second quarter generating $47 million in EBITDA and resulting in our most profitable first half of the year since being a public company.
In the second quarter, we produced strong free cash flow of $79 million completed two acquisitions and recorded an impressive 22% year over year growth in our international segment.
I am excited about the traction we are making positioning D. Now is a vital energy evolution partner deploying our full suite of supply chain management services and de carbonization products and technologies, including our <unk> offering to provide our customers the innovative emissions management solutions necessary.
To achieve their sustainability goals.
We are focused on executing our strategy and creating shareholder value by growing market share leveraging our debt free balance sheet with $584 million of total liquidity pursuing margin accretive acquisitions and continuing our share repurchase program.
With that let's open the call for questions.
Thank you as a reminder, if you would like to ask a question. Please press Star then one on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
Okay.
Our first question is from Nate Jones with Stifel. Your line is open.
Yeah, Hi, good morning. This is Adam Farley on for Nathan Hi, Adam.
I wanted to start.
Good morning, I wanted to start with the outlook in the U S. So.
Rig count and drilling and completion activity does appear to be moderating moderating, but on the flip side oil prices rallied in the quarter.
$2 on <unk>.
What is your expectation for productivity in the second half.
Particularly into the fourth quarter as well thank you.
Okay. So.
In the U S. We guided sequentially to two flatness and.
So what we're seeing in the market in the U S. Although the second quarter frustrate very strong.
Our global growth for the period.
We saw rig counts in the first quarter declined 2% sequentially.
We saw the rig count in the second quarter declined 5% on top of the 2% decline in the second quarter and quarter to date, we're seeing rigs declined.
Pretty quickly so we use the term around here, we're defying gravity we see.
A main source of revenues.
Rigs rig activity and completions activity, that's a pretty good benchmark for revenue opportunities for the company, we're seeing that slow down.
So we are leveraging our strengths with our Super Center, and our market share and we think despite.
Despite.
By what we expect to be further.
Erosion and the size of the market in the third quarter. We think we can quote unquote defy gravity in that period. So we're focused on.
Leveraging our strengths and our strengths are our proximity to customers we have a large <unk>.
Streamlined.
Ops branch business, and then we'd be punctuate, a fulfillment and focus on our customers and big customers in the in the.
Super centers, and Thats where were.
Picking up projects, where we have the right kind of product availability and making gains there to mitigate some of that.
What would historically be.
More drive more revenue declines and we've experienced in fact, we've grown in.
In the first quarter and the second quarter and now again, we're calling for growth in the third quarter, except in the U S. But so we're we're kind of pumped about where we sit in the market, but we are seeing things slow down in the third quarter.
Some of our customers are saying that they they may see or that they expect rigs to bottom in the third quarter or the fourth quarter. So that's.
That's not we don't really know how that's going to play out.
But rather simply focused on the fundamentals, we're seeing our competition.
In a period where there.
We have more market share, we're better positioned in the market. Our competition is competing on price and that showed up in our gross margin line, but thats kind of how we see the cadence of the second half we expected the market to be a little smaller and we expect our punch in the market to be more impactful.
And to pick up some share in the process.
Okay.
Okay. Thank you for that color. That's very helpful. And then following up on that gross margin commentary.
A couple of moving pieces as I understand the gross margin expected to moderate through the year.
Maybe you could just help me with what is a sustainable level for gross margins as our supply chain and inflation normalizes.
Yes, I think given where we're at kind of in the market. So we're seeing these.
This.
Rig count decline and we're seeing a little more ferocious.
Pricing on bids against our smaller competitors. So we're we're feeling some pain there on the gross margin line.
I don't think this will be the sustained level of margin like we like we posted in the second quarter I think it will get a little better.
But that may happen. After we see the bottoming of completions activity of rig counts et cetera to your to your opening comment about oil prices being.
Where they are at today.
See that as encouraging of course, and we think given that some of our some of the joint contractors and some of the operators, saying that the the bottoming should happen in the third or fourth quarter, we think that will accrue well to us going into the new year and we just don't know exactly how it's going to impact that.
Third and fourth quarter, but I don't think this is the same.
The ongoing level of gross margins going forward.
But there is going to be a little.
Competitive spirit has happened in the second half of the year.
We felt it and it shows in our numbers in the second quarter.
Yes.
Okay. Thank you for taking my questions. Thanks, Adam.
The next question is from Jeff Robertson with Watertown Research Your line is open.
Thank you David you talked about.
<unk> solutions revenue I think it was up about 20% from the first quarter of.
23, and it looks like it was up over 50%.
From the second quarter of 2022.
This is the mix of products that you all are supplying into customers mean that your revenue is becoming a little bit decoupled from the actual rig count and more related to just ongoing.
Projects that your customers are working on.
Well I think what we're seeing in.
In process solutions.
So we've made a few smaller acquisitions there that's helped a little bit I think on a year over year basis.
Acquisitions may have added about $14 million in revenues in the second quarter.
Sequentially I think it was 3 million. So it's kind of a small impact, but where we're really seeing things come together. There is first of all we do see.
Process solutions kind of lag or branch energy Center business, So where we've seen the energy center business.
Grow at a lesser rate each successive quarter for the last few quarters.
Process solutions is really hitting its stride in the middle of 2019, we bought a company fabrication company here in the Houston area.
<unk>.
They are they are re.
Denying orders from large customers because we do have the capacity to fulfill and that we're in a really sweet spot where the demand is really strong our order book is.
Had grown to a pretty high level and now we are really enjoying the benefits there, but so process solutions, we should kind of see that growth later in the cycle and we and if you look at the numbers over the last several quarters, you'll see that and we will see the growth extend beyond what we experienced in the energy branch business, but we're doing a large large.
Projects for customers, primarily our largest customers.
That straddle, our energy center business and our process solutions business, that's kind of filling up our shop and Brad is there anything you want to add there.
Thanks, Jeff I'll, just make some comments on.
And our fab shops that we have in Casper in the Houston area.
As rigs increase we generally provide more kind of separation equipment and the kind of the upper upstream tied to the.
Thanks battery facility and as Dave mentioned, the lagging effect.
Is that production has come online over and really talking about last year as rigs increase then you start seeing the midstream build out. So we are really enjoying the kind of the midstream build out and our process solutions business as well as our energy business and our valve actuation business I think midstream grew sequentially in the quarter.
And these are lack units lot of measurement type equipment that we sell to not only integrated midstream providers, but also.
Regional and private as well so.
A little bit of a lag on the timing but.
On the gathering and transmission side.
Very very strong activity right now.
We don't see that.
We don't see the midstream activity really.
Abating at least the.
The second half of this year.
Dave you talked about de carbonization and the energy evolution.
Now his position with existing customers.
Can you share any color or your thoughts on where you think that market could go over the next couple of years as companies start breaking ground on the on the projects that they have on the drawing boards.
I'll start with the answer Jeff.
We've been.
Pursuing this market for.
Probably 18 months or so now we've established and are part of department is squarely focused on it.
And in this process and the early.
Parts of energy evolution as we call. It we attended conferences.
And heard from customers and collaborated with customers and kind of went from a rhetorical stage, but it was largely a lot of talk and budgeting and planning to Apio stage and we're starting to see things take off now how it's going.
While it is going to grow too.
And what the possibilities are I don't think we know yet I think we think it's it's big for us, but just to give you. Some examples.
We've had some $400 800000 smaller orders.
Over the last year or so, but now we're starting to see some $567 million orders.
And we expect to see more of those so we're starting to see some big projects.
Where we are largely sourcing are.
From the same suppliers with similar or the same products to our existing customers. So it's a natural convenient adjacency for us that we intend to exploit so that's that's a focal point, it's hard to kind of measure of what it's going to grow too, but we're excited about it.
Being a nice.
Supplement to our existing core business.
Excuse me.
Lastly, I guess.
You talked about eco vapour in the increase since you all announced that acquisition.
Are you, having any trouble keeping up with demand for that product and are you seeing more applications more inquiries or applications from customers than you might've, even thought about when you made the acquisition.
Yes, Jeff This is Brad I'll take that one maybe Dave or Mark you got a comment on top but.
At the moment, we're keeping up with.
With demand, we're leveraging our fabrication business internally to build some units for eco vapor where prior to the acquisition they had outsourced those.
<unk>.
We have.
You look at the.
The dual value proposition that eco vapor provides.
In the oil and gas sector, Dave mentioned that our leases have grown. We also have sold units to oil and gas operators, we expect that to continue to expand even with gas.
Three level, just because of the scope one reduction of a lot of those oil and gas operators can.
Can leverage and report through their Sustainment sustainability efforts and then as gas prices increase over time.
That gas that's captured.
The operators can sell that back at.
And generate some revenue.
On the renewable natural gas so landfill gas.
The dairy and swine farms.
We're aware where we're collecting.
Methane and.
We have.
Fairly active business development effort to really expand that effort within RMG, we commissioned a number of units during the quarter.
In R&D that tend to be larger units than in the oil and gas phase and we typically sell those units instead of lease them.
So there's really no no capex associated with that growth in that sector.
So we like we love that market.
We see that expanding.
And if we have trouble keeping up with demand that would be a good problem to have there so but at the point at this time, we're not.
Yeah.
Thank you.
Okay.
Again, Thats star one if you'd like to ask a question. The next question is from Doug Becker with capital One your line is open.
Thank you.
Dave The North America guidance was really encouraging given what's happening in the rig count could you provide any color about just how July looked to get increasing comfort with that outlook.
Yes, now July so the way we missed the quarter kind of the contours of the quarter July is the going to be the shortest month.
Because of the July 4th had as fewer business days August is the big months. So it's really hard for us to get a solid read on the quarter, but it's starting off good.
We think our revenue.
Guide is promising and we feel good about that August is going to be the big test. It is the biggest month of the quarter and then September we tend to.
Closed strong in the third month of the quarter and customers try to cleanup things before quarter end.
But we feel good about where we stand right now.
Timing of projects is going to matter, so I talked a little bit about some of these.
These larger projects we have.
Some of them slip into the fourth quarter that will help us in <unk>, but could hurt us in the third quarter, but.
It looks it looks pretty strong.
Visibility gets a little murky beyond that.
In the U S. Like I mentioned earlier about process solutions.
Especially in our power service group.
We do have capacity constraints, there and that's bad because we're having to push away some orders, but it's good because we're able to really maximize the utility of those locations and generate some good earnings but.
We feel good about where we stand right now.
And.
You look at what's happened in the market the last few quarters in the United States, We really feel good about our market position because.
To beat to death that term defined gravity, we feel like were.
Well situated we've got the right people.
We can tell by what's happening with some of our competition that we've got the right model and we're going to exploit it.
Yes.
No it's definitely interesting departure from history.
Yes for sure maybe a little bit on the cash flow outlook.
Continuing to generate more than I think most expected. This year would you attribute this last.
Upside just to ongoing working capital efficiencies or is there another driver callout.
Well Theres a few things up our accounts payable grew in addition to earnings of course, our accounts payable grew in the second quarter. We were intentional about that so that helped us, but our DSO has got better.
Our inventory grew and we think theres some opportunity to bring that down in the coming quarters there'll be a push for that and our dsos have some improvement as well but.
Steady earnings.
Real organizational focus on generating free cash flow across the company should yield better better.
Primarily better Dsos.
Debt and inventory by the end of the year inventory reductions that should keep that.
Level.
Or to keep free cash flow is a big strong component.
Our.
Balance sheet management in the period, but.
Like we said we generated $68 million in the first half we do expect the third quarter to be to be narrower.
To be we don't expect that.
Much cash generation in the third quarter, we think will generate in excess of $100 million free cash flow for the year and the balance balance of which will largely happened in the fourth quarter.
Okay, and then I think I caught that digital was 48% of revenue in the first quarter, which second quarter weather, which is a pretty big bump.
From the first quarter I want to make sure I caught that right and just maybe drivers and the implication maybe on margins.
<unk> well.
Well I think the biggest and Brad can correct me, if I'm wrong, but I think the biggest impact was some of our biggest digital customers simply bought more so it helped.
Helped the mix in terms of measuring how much of our activity was digital I think that was the main driver plus we're focused on onboarding more customers. We have a list a long list of customers, who want to be added to our digital processes that helps them manage their payables helped and process payables.
Invoices et cetera, it helps us manage the process as well and we actually have a backlog there but.
So we've onboard it's more and more customers as well that's a key focal point did I Miss anything Brad or no I think that captures it.
Ben.
For the past several quarters have been really focused on.
Integrating large punch out customers.
That new centralized buying through our platform.
And then of course.
Just.
Working with each customer individually to.
Identify workflows and efficiencies in doing some E business integration.
It takes both parties so those projects do.
Take time to complete but once they're complete.
Some highly sticky relationships and that certainly drives efficiencies across the.
Both both systems.
Thank you.
Thanks, Doug.
The next question is from Jeff Robertson with Watertown Research Your line is open.
Thanks.
Dave just a follow up on your comments on EV and mining are you are you seeing that as a <unk>.
Visible opportunity for some of your.
Valves and pumps that move water it can handle wastewater.
Yes, Jeff This is Brad Thats exactly right mining has always been one of those end markets that we have.
Participated in.
Certainly to a smaller extent.
We saw a lot of pumps pump and air compressor units in there out of our process solutions grew we do periodically get some PBF tied to some of that spend.
The soda ash mining.
Gold mining.
And then most recently you are hearing.
With the growth in Evs projected.
<unk>.
Bert a burgeoning lithium domestic lithium mining opportunity so.
As Exxon mobile for example, looking at investments in Arkansas.
For lithium extraction through Brian water I think those are.
Those opportunities to lend themselves well to <unk>.
An existing customer for us and we have the products currently in our portfolio. It's just a matter of.
When those projects come to fruition I think we could.
Certainly capture.
Additional revenue through through investment in the mining sector.
Great. Thanks, very much Brad.
There are no further questions at this time, Mr. <unk> I'll turn the call back over to you.
Well. Thank you everyone for your questions today and your interest in now Inc. We look forward to talking to everyone on our third quarter of 2023 earnings conference call in November have a nice day and I'll turn it back to the operator to conclude our call.
Thank you. This concludes today's conference call you may now disconnect.
Okay.
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Yes.
Yeah.
Yeah.
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