Q3 2023 NOW Inc Earnings Call

November 2, 2023

Hello. Good morning, My name is Jeremy so that'll be a conference operator today at this time I would like to welcome everyone to the <unk> third quarter 2023 earnings Conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

I'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.

I would 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 Jeremy and good morning, and welcome to denounce third quarter 2023 earnings Conference call.

We appreciate you joining us and thank you for your interest in D. Now.

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

We operate under the <unk> brand, which is also our New York stock exchange ticker symbol.

Our forward looking statements within the meaning of the U S. Federal Securities laws based on limited information as of today November 2nd 2023, which is subject to change they are subject to risks and uncertainties and actual results may differ materially.

No one should assume these forward looking statements remain valid later in the quarter or later in the year.

We do not undertake any obligation.

We 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 the latest forms 10-K, and 10-Q that Dino 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 our website at IR Dot <unk> dot com or in our filings with the SEC.

In an effort to provide investors with additional information relative to our results as determined by U S. GAAP. You'll note that we also disclose various non-GAAP financial measures, including EBITDA, excluding other costs, sometimes referred to as EBITDA net income 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 of each of these non-GAAP financial measures to its most comparable GAAP financial measure in the supplemental information available at the end of the earnings release.

As of this morning the info.

The Investor Relations section of our website contains a presentation covering our results and key takeaways for the third quarter of 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 third quarter 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.

The nine months ended September 32023, representing our best earnings performance for the first three quarters in the year since being a public company.

And a strong but arguably smaller market this year versus last year in the period without the pricing propulsion due to product scarcity. We enjoyed in 2022, our employees defied gravity again, our teams produced a notable revenue resilience given me great comfort that the singular phone.

<unk> on our customers continues to pay off and accrue to the long term benefit of our company and its shareholders.

Despite north America rig counts being up just around 1% when compared to the first three quarters of 2022, our year to date revenues for the first three quarters of 2023 are up 11% in that comparative period.

In a business where the most important defining feature is its people. These results exemplify in fact lead me no doubt that Dino enjoys having the best professional women and men in our industry and.

And our customers and shareholders benefit from that distinction.

While there are headwinds, we've adjusted our sales to harness the wind efficiently and productively as we navigate the fourth quarter, where we expect a seasonal slowdown as some customers have overspent their annual budget in the first half of the year with the impact showing up in the third and fourth quarters.

For the third quarter 2023, we generated $588 million in revenue up 2% compared to the same period in 2022.

Sequentially revenue declined $6 million or 1%.

The U S represents 75% of our revenue.

In the third quarter sequential U S revenues were resilient down 2%. Despite the U S rig count decline of 10% during the quarter.

Many believe we are approaching the bottom both in terms of market activity as reported by the level of operating drilling rigs and in terms of deflationary pricing on line pipe.

For example pricing on line pipe has declined for 17 consecutive months as reported in the November pipe Logics report, but the rate of decline slowed significantly compared to September and its slowest rate.

Since prices began to fall in May of 2022.

Even with these dynamics our sourcing team in combination with sales and operations has done an outstanding job proactively managing the appropriate inflow and disposition of pipe inventory.

Third quarter gross margins were up 20 basis points to 22, 8% as we proactively managed our pipe product lines and optimized product mix from growth in our U S process solutions business.

And for the third quarter EBITDA remained strong at $46 million or seven 8% of revenue.

In the U S revenue was $448 million, a decrease of $8 million or 2% sequentially due to drilling and completions activity impacting pipe and valves project sales in the period.

U S energy centers revenues decreased 3% sequentially better than the 10% decline in U S operating rigs.

Our increasing traction in the energy evolution space provided further gains for Dino as customers' trust Deane, our solutions and products to support their projects and growing both renewables natural gas or LNG and carbon capture and storage markets.

To name a few examples we provided pipe valves and fittings or PBF for a plant expansion that increases the sidoti capture per year by an additional $1 5 million metric tons.

<unk> is transported by the customer to our pipeline and has injected into an underground sandstone storage site one mile beneath the surface.

We provided PBF to our long term oil and gas customer for their carbon capture plant expansion that will capture an additional $1 two metric tons of cotwo per year upon completion.

We continue to grow our carbon capture revenues with both new and legacy customers as.

As a third example, we continued to see incremental PBF revenues tied to a carbon capture project from our gas utility customer, who we highlighted last quarter.

We are seeing more investment in <unk> type projects in the U S and we've seen increased opportunities with our current customers, who trust <unk> model of integrity and supply chain expertise to achieve their respective de carbonization goals.

The burgeoning Cc U S market is currently at the early stage of a multiyear growth cycle and our strategy is focused.

As positioned <unk> as a leader in this space.

We added revenue from the implementation of a new material management program with an IOC midstream operating gas plant, we expect revenue with this customer to grow as more sites are on boarded.

Also we expanded revenue and market share by securing a new three year MRO contract with the contract with an operator in the Rockies.

Revenue from our Workover rig programs remained steady in the quarter.

Our customers tell us that our Workover rig program not only provides them with efficiencies to get products to market, but it also helps lower scope two emissions.

Would have otherwise been emitted using a more traditional logistics model to support well maintenance programs.

And our Super Center Supercenter model provides us the ability to onboard new customers without increasing roofline expense.

In the northwest our Williston North Dakota in Casper, Wyoming Super centers are growing enabled <unk> to expand regional project revenues.

We experienced revenue growth with several large operators on project wins tied to gathering projects centralized tank battery builds and midstream compressor stations.

We provided actuated valves to several e&ps and midstream companies as well as centralized tank battery projects two operators in the powder River and Uinta basins.

We continue our project and day to day success in the midstream sector, providing a variety of PBF pumps and fabricated equipment to a number of operators.

And we extended it to your line pipe agreement with the gas utility customer.

Our U S process solutions business grew to a record 30% of our U S segment in the third quarter demand for delivery of lack units pressurized vessels instrument air systems and pump packages remained high as operators completed gathering systems, well site onshore facilities and midstream takeaway.

<unk>.

Midstream inquiries and activity remained high as customers tie in upstream production and evaluate projects.

In non oil and gas markets, we were successful in capturing revenue by providing several large pumps to our Rockies Brewing company. We also provided several vertical turbine pumps to a wastewater treatment facility in the mining industry, we provided pumps compressors and specialty valves in mines, where rare rare earth minerals.

Like lithium trona copper and gold are extracted.

Our industrial air compressors saw demand improve in the food and beverage market as we provided units to customers in several states.

In our flex flow business, we are seeing increased activity for our trailer mounted <unk> pumps for produced water disposal and for jet pump rentals, which provide primary artificial lift solutions for initially completed wells.

Demand increase for our <unk> zero, two oxygen elimination equipment as we sold a number of units used in the purification of biogas from sources, such as swine in dairy farms as well as gas collected from landfills to be sold as renewable natural gas.

We also sold a number of sulfur central Sentinels Eco papers <unk> removal units to major producers at well site onshore tank battery facilities.

Our eco paper solutions are becoming a key component towards advancing our customers' ability to reduce our emissions footprint from upstream oil and gas sites.

Furthermore, our eco vapor product line continues to expand into the renewable natural gas space using their natural gas upgrading technologies to help landfills as well as dairy and swine farm operators convert our biowaste emissions into Sellable RMG.

In Canada, we further enhanced our fulfillment model thanks to the incredible hard work and planning from our teams as we hosted a successful grand opening event for our new Edmonton <unk> facility in September.

It was well attended by our customers suppliers internal teams and dignitaries such as the local member of the Legislative Assembly.

The supercenter infrastructure is designed to regionally grow revenues efficiently.

<unk> revenues were $68 million for the quarter, a 3% sequential increase in third quarter revenue was lower than expected due to disrupted market activity as crude production fell to the lowest level in several years amid maintenance at oil sands mines and continued takeaway capacity constraints.

And as a result of wildfire outbreaks several of our top Canadian oil sands customers were forced to shut in production during the second quarter, resulting in lower production and the delayed startup of drilling completion activities post spring breakup impacting <unk> revenue during the third quarter.

Despite that our central Canada fiberglass business strengthened as we added new customers and saw shipments increased the way, we would expect exiting the freeze thaw period free slot period.

For international revenue was $72 million sequentially flat and up $16 million or 29% on a year over year basis.

Most active regions continued to be the U K middle East and Australia, and all three remained essentially flat sequentially.

Rig counts internationally declined three months in a row, but offsetting offsetting that reversal, where specific project deliveries in the third quarter.

Activity in the CIS area saw demand for specialty alloy valves that will be delivered over the next several quarters.

On the notable wins front Dino Mclean secured a multiyear contract with an IOC to provide light led lighting upgrades and many of their existing operating facilities.

In Australia, we provided electrical cable to an operator for a renewable projects in the middle East we provided coated steel per flow line projects tying in their newly drilled wells and the joint operations <unk> zone, and coiled line pipe for our gathering projects in Abu Dhabi.

Moving on to our digital initiatives, our digital now revenue as a percent of total revenue for the quarter was 46% versus 48% and <unk> 23, a result of customer and project billing mix.

We went live on an ecommerce implementation with a U S based E&P during the quarter with over 100 users complete with customized <unk> approvals that use our shop dot <unk> dot com channel should prefer to procure PBF and MRO products.

During the quarter, we invested in our day to day operations by modernizing the technology use at our supercenter in branches to improve the productivity of our people.

By deploying a new warehouse mobility device, our employees were able to reduce the time and effort required to create sales orders performed picking packing shipping and receiving activities.

In addition, the mobility devices used to improve inventory accuracy.

The new devices are significantly faster smaller are more efficient and easier to use and the prior units. The new technology enables dana to enhance fulfillment processes by providing improved levels of digital security, while enabling higher levels of efficiency.

And combining state of the art digital technology with mobility.

In terms of capital allocation, we continue to actively pursue M&A opportunities with focus on larger deals that will allow us to enter new markets and diversify our product offerings.

We are steadfast in our commitment to seek margin accretion accretive opportunities in diverse end markets and emerging technologies to enable us to capitalize on market trends into enhanced durability and our performance in a dynamic and evolving energy landscape.

During the third quarter, we repurchased $5 million worth of shares at an average price of $10 65.

At the end of the third quarter, we purchased $56 million with the shares out of the $80 million authorized through December 2024.

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

Thank you, Dave and good morning, everyone.

Total third quarter, 2023 revenue was $588 million down $6 million or 1% from the second quarter of 2023 on.

On a year over year basis third quarter, 2023 revenue was up $11 million or 2%.

EBITDA, excluding other costs or EBITDA for the third quarter was $46 million or seven 8% of revenue.

And year to date, 2023, EBITDA was $140 million or seven 9% of revenue.

The U S revenue for the third quarter 2023 totaled $448 million, a decrease of $8 million or 2% from the second quarter of 2023.

In Canada for the third quarter revenue totaled $68 million, an increase of $2 million or 3% from the second quarter of 2023.

International revenue for the third quarter of 2023 was $72 million flat sequentially and up $16 million or 29% when compared to the third quarter of 2022.

Gross margins for the third quarter were 22, 8% or up 20 basis points sequentially.

Warehousing, selling and administrative or WSI for the quarter was $97 million or $1 million lower sequentially.

In the third quarter, we reported $7 million of depreciation and amortization expense.

Moving to operating profit by geographic segments in the third quarter. The U S delivered $29 million in operating profit, while the Canadian and international segments delivered operating profit of $6 million and $2 million respectively.

Moving to income taxes, the effective tax rate for the three months ended September 32023 was five 4% on a GAAP basis.

I'll remind you. This is the effective tax rate that is calculated on a GAAP basis from the face of the income statement and is below that 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.

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.

Given <unk> level of profitability in the U S and abroad. It is possible in a future period, we could release portions of our valuation allowance as reported for GAAP.

At that point, we expect that our go forward GAAP effective tax rate will be more closely aligned with our non-GAAP effective tax rate.

From a cash perspective, we don't expect to pay U S. Federal cash income taxes for 2023 or 2024 due to available net operating loss carryforwards.

Net income attributable to now Inc. For the third quarter was $35 million or <unk> 32 per fully diluted share.

And on a non-GAAP basis, Q3, 2023 net income attributable to now Inc. Excluding other costs was $28 million or 25 per fully diluted share.

Moving to the balance sheet at the end of the quarter, we had zero debt and a cash position of $194 million cash decreased by $9 million in the third quarter as we invested in the growth of our business and continued to repurchase common stock in the quarter to return value to shareholders.

We ended the quarter with total liquidity of $547 million, which comprises of our net cash position of $194 million.

And $353 million, an additional credit facility availability.

Our existing $500 million revolving credit facility extends into December of 2026.

Providing D now with uninterrupted access to capital under the facility for the next three years.

Accounts receivable was $396 million, a decrease of $21 million from the second quarter.

Days sales outstanding DSO was 61 days at the end of the third quarter, an improvement of three days sequentially.

Inventory was $415 million at the end of the third quarter, a decrease of $9 million from the second quarter with an improved annual turn rate of four four times.

Accounts payable was $301 million at the end of the third quarter, a decrease of $63 million from the second quarter, the timing of inventory receipts impacted the ending payable balance this quarter compared to the elevated levels in June.

And for the third quarter of 2023, working capital excluding cash as a percentage of our third quarter annualized revenue.

Was 17, 7%.

In the third quarter, we generated $4 million of cash from operating activities, consisting of the third quarter earnings contribution and changes in networking capital.

We achieved better than expected free cash flow with a breakeven free cash flow quarter, including capital expenditures in the third quarter of $4 million.

As we invested in revenue generating rental assets for eco vapor inflect flow.

For the nine months ended September 32023, free cash flow accumulated to $68 million.

Last quarter, we raised our 2023 expectations to $120 million in cash flows from operating activities and we will work to deliver $100 million and free cash flow in 2023.

This demonstrates how our focus on the fundamentals and disciplined managing the business has positioned <unk> to generate cash through the cycles.

Which bodes well for future growth and capital allocation plans.

We continue to execute our share repurchase program that is authorized through December 31, 2024, with additional repurchases of $5 million in the quarter.

As of September 32023, our cumulative repurchases under our $80 million authorized share repurchase program equaled $56 million.

Our commitment to growing the company through accretive organic growth and acquisitions remains a key priority. While also having the ability to repurchase shares opportunistically as we use the tools and are brought into 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 now.

With that let me turn the call back to Dave.

Thank you Mark.

Now switching to our outlook for the fourth quarter of 2023.

In the U S and Canada, we expect revenue to be sequentially lower due to fewer business days more holidays and customer budget exhaustion and international we expect activity to be relatively flat sequentially.

Rounding out our full year 2023 versus 2022, we expect full year revenue growth of approximately 8% at the low end of our 8% to 12% guidance that we set on our February call. Despite U S rig counts declining every month this year driving the removal of more than 150 U S.

Rigs since year end 2022.

We expect full year EBITDA to approximate 2022 absolute EBITDA dollar levels.

But unlike 2022 were gienow had breakeven cash flow from operations and free cash flow consumption of $9 million in 2023, we could generate approximately $120 million in cash from operations or $100 million in full year 2023 free cash flow.

I want to close with an important update regarding our brand.

We will be transitioning away from the use of distribution now the distribution now naming convention and we will be known as Dino going forward <unk>.

<unk> is already the most consistently referred to name for our company and the name we will align around going forward.

The decision to amplify the <unk> brand is rooted in our commitment to distinguish our company as a valued solutions based product and service provider centered around our ethos inspire one another slight to customer and fueled future.

Our refresh brand will help us communicate our vision more effectively fostering a sense of unity and purpose. We will continue to support our valuable affiliated brands for example, TSM Odessa pumps eco vapor Mcclain power service flex flow and Dara.

I am confident that this branding change will support us for even greater success in the future.

Finally, we are excited that our third quarter earnings proved resilient and produce our best year to date earnings since becoming a public company.

Our gross margins to remain strong as we optimized product mix and proactively manage our pipe product lines.

We are realizing the benefits of our energy evolution and market adjacent strategies as U S process solutions expanded aided by demand for fluid handling equipment increased eco vapor product sales used in renewable natural gas decarbonization projects.

Maximizing shareholder value is our top priority our focus is on leveraging our debt free balance sheet with $547 million of total liquidity.

Generating higher levels of free cash flow pursuing margin accretive acquisitions and market share and executing our share repurchase program.

Looking forward, we believe that <unk> will continue on a growth path next year as customers add rigs from our fourth quarter 2023 rig bottoming from customers resetting their budgets from additional energy evolution projects from gains in Adjacencies and the midstream from acquisition.

Activity, which we expect to continue in an environment of strong oil prices, which are averaging near $80 over the last 12 months, coupled with our demonstrated ability to defy gravity so far in 2023.

We did this through selective share expansion and M&A.

Our supercenter footprint efficiencies and a laser focus on cost management and delighting our customers.

As such we see support for growth in 2024, which will provide an update for on our February call.

With that let's open the call for questions.

Perfect. Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.

For one moment to compile the Q&A.

All right. Our first question comes from the line of Nathan Jones from Stifel. Nathan. Please go ahead.

Good morning, everyone.

Good morning, Nathan good morning.

I jumped on lifestyle I apologize if I asked the question.

You've already answered.

I just want to start with the expectation for regret in 2024.

Can you tell us about.

What intelligence you have for for that outlook, what customers are saying.

Do you intend to their capital spending plans in 2024, and we should get some of those budgets here over the next month or two but just any information you have.

Look into that kind of thing that gives you confidence that youre going to see growth in rig counts in 2024.

Well I think.

Premises, we'll see growth from where we're at today. So joint contractors. Some of them are saying, they're going to add rigs. There is a lot of speculation that we're at a low point in rig count.

Net rigs will be added back at some level.

So there is that so I expect some growth from where we're at and then I'm.

Comforted by the fact that we've been able to retain revenues, even though we've seen a pretty strident decline in U S rigs during the year, which is where we experienced about 75% of our revenue. So I believe we have been we have a strong market position that we have gained some share in this mean time.

That the market is quote unquote bottoming expected to grow from here and then we're real focused on our what we call our energy evolution strategy, where we're focused on carbon capture and.

Renewable natural gas.

And adjacencies in our space, where we can sell pumps into other markets like we've felt like some of which I talked about on the call.

And then M&A.

No.

Growth from where we're at.

Strength in retaining revenues, even in a declining are shrinking market effectively in the United States.

Our bread basket.

Pursuing adjacencies and carbon capture and new businesses, which is a big focus for us for the last couple of years, and then M&A, which to me is kind of a swing vote in achieving some meaningful growth and going into the new year.

I guess my follow Up's on M&A, I mean, the stock prices trading at a pretty low multiple a pretty low multiple of EBITDA pretty low multiple of free.

Free cash flow.

How do you look at the balance between strategically you guys are looking to do M&A.

With the stock trading at these multiples, it's pretty hard to find accretive deals that are accretive to the share price immediately buses.

Repurchasing your own stock, which doesn't have the same strategic value that youre Youre getting company, you know very well at pretty low for us.

Yes, I think Thats a great point, so three three to five years ago, we had a much.

<unk> multiple and we could we had more currency in that multiple to make to do deals.

Better prices. The fact is the sellers recognize the kind of market. We're in the energy space and we recognize that we're going to try to do deals within that current trading multiple.

We may of course consider the revenue synergy that would come from the deal any any cost synergies that might come.

That'll be factoring in as well, but we do have a narrower trading range that does limit the.

M&A opportunities, but we've done some smaller but really good deals in the last couple of years now we're looking at bigger deals and more having some.

Mutual interest so I agree with your sentiment.

We understand that and I think sellers do as well and we're going to try to take advantage of that.

<unk> for retina market.

Okay. That's good to know that you're considering that that as we go forward. Thanks for taking my questions. Thank you Nathan.

Alright. Our next question comes from the line of KOL Couzens from Stephens Cole. Please go ahead.

Hey, guys. Thanks for taking my questions Youre.

Youre welcome good morning call Warnaco.

Can you guys talk through the gross margin or Opex dynamics as we enter into Q4 I think on my math the implied <unk> is down pretty meaningfully sequentially.

And then how are you guys thinking about margins as we approach 2024, and maybe some initiatives that Dino is driving to support structurally higher gross margins longer term.

Okay I'll speak to the gross margin and maybe Mark will chime in about Opex our WSI.

So we said on our last call that we expect a little improvement in gross margins, suggesting that were.

We're kind of that.

To be a normalized run rate in the second and third quarters of 2023.

And we said we would get about a 20 basis points increase in gross margins in the third quarter and we achieved that so we feel like this is kind of a good normalized level for us right now and may be a good starting point.

For 2024 of course, we're always focused on high grading our businesses focused on higher margin product lines businesses locations M&A opportunities et cetera, with the idea of growing those gross margins over time, which we've been very successful in doing over the last several years. So.

That's kind of a starting point for gross margins in terms of SG&A market and if you want to add any color, but let.

Let me say, but.

We consider it to be pretty flat, but you want to give some comments on that yes, absolutely I think the our ability in the third quarter to <unk> relatively flat.

Expectation is that's probably a good number for the fourth quarter.

Two Q3 Q range.

Nothing else to add on the margin side outside kind of defying that margin decline that we were having over the past few quarters being able to arrest that and show growth in gross margin this quarter.

It gives us confidence into that.

<unk>.

And being able to continue to.

Optimize that margin going forward long term.

Awesome. Thanks.

And then higher level kind of on the energy evolution topic can you guys talk through what customer conversations.

Look like.

And kind of going forward are these wins going to be more so with existing customers or potentially with new customers and at this point in time what percent of revenue mix comes from those.

Energy evolution.

Projects.

Thanks Al.

I'll start on that Brad So I think.

For more of our oil and gas opportunities those are going to come from our existing customers. Our biggest customers who are investing heavily in the energy transition or the new energy or energy evolution as we call. It. So I think the oil and gas oriented projects opportunities will be with existing customers.

And with with the.

Some of our big growth in the second half of this year is happening in the R&D space primarily.

Through our <unk> acquisition, those are new customers or at least new customers to <unk> now and some of that is new customers to eco paper as well so outside of oil and gas we will see some of that activity happening most of that activity happening with <unk> with new customers. Brad is there anything you want to add to that to answer <unk> question, Yeah, I'll just add that.

The projects that we've called out on our prepared remarks.

The last and <unk> in this quarter.

Been with existing customers.

And really existing product lines that we carry predominantly in our inventory so it's a.

A nice extension of our growing end market.

That we're able to service with our existing infrastructure and the current investment in working capital that we have today and we're tracking a number of our projects call in.

Every month every quarter that that tracking matrix. We have grows so we're seeing mark.

<unk> expansion here.

As our current customers invest more in.

In the energy evolution looking at de Carbonization, and whether it's through carbon capture or whether it's through just reduction.

Current emissions that they have we have been experiencing that for a number of quarters here. We're.

Kind of the low hanging fruit is to remove the methane emissions.

And go to to more air pneumatic systems in the oil and gas operating field, but now we're starting to see much bigger projects that we're tracking specifically around more infrastructure tied to carbon capture cotwo blinds sequestration. So we're excited about the future.

Certainly about.

The next few years of where that market is going and the growth opportunity not only in the U S. But also internationally as well.

Okay.

Awesome. Thanks, that's great color I'll turn it back.

Thanks, Paul Ryan Denki again, if you'd like to ask a question Press Star then the number one on your telephone keypad.

Our next question comes from the line of Jeff Robertson from Water Tower Research Jeff. Please go ahead.

Thank you good morning, David and John can you talk.

You all have talked before about the line of sight you have on.

Well pad construction type projects when you look at R&D and Ccs do you have a longer line of sight from customers over what kind of business you might be able to generate.

In those areas in 2024, and even in 2025 as construction starts to pick up and people take a long term view of those opportunities.

Brad Yes.

Yes, Jeff good morning.

We've talked a lot about the well site.

That's certainly been the <unk> kind of bread and butter.

We provide all the pipe valves and fittings for the gathering systems and.

And also the fabricated equipment and pump packages to separate oil gas and produced water and move those to the midstream sector.

As part of.

Looking at.

Carbon capture we've been involved.

With a number of our customers on.

As they use carbon dioxide cotwo for enhanced oil recovery, we've been involved in some of those projects now we're starting to see.

Other technologies coming to market like direct air capture we partake in some of those projects.

I think we're kind of early here in the cycle is really kind of looking at a standardized footprint going forward I think our customers are still doing a lot of engineering and work in this area. So I think that remains to be seen but what we like about it is it's our current customers.

That we currently have agreements with terms with.

We have the technical aptitude to support our customers as they go through this process. So.

So we really like that aspect about the Ccs type market and then the R&D market.

We.

Previously, we have provided pipe valves and fittings as.

As players move into that space too.

Connect to different Pharm systems, whether it's dairy or for swine farms to a to a gas processing facility to process that gas to be able to sell that product to the midstream and then with our eco vapor acquisition December 'twenty two it gave us a technical solution.

To sell into and to that end market and so we feel like that is unlocking more opportunities for us not only in the vast number of RMG sites that are currently being <unk>.

Explored and developed but also additional products that we might be able to sell into the R&D as we get more experience with that gas processing side.

As well as the standard pipe valves and fittings that go along with it so.

We like those two sectors of the great growth environment for us looking into the future and.

We're looking to expand where we can and both of those end markets.

Are there acquisition opportunities that would support the process solutions business that was <unk>.

Give you more penetration into those types of opportunities.

Jeff, Yes, I would say there are we've looked at a few deals.

They range in from technology too.

Equipment packages that are.

That could append or.

Be sold in connection with the current technical and engineering capability that we have.

And then we also look for certainly one of our acquisition strategies is to look for more exclusivity of territory or our manufacture our products in a certain geography like we do on our pump package in our pump lines. So we're always looking for occur.

Accretive margins on M&A or looking for some exclusivity where we have.

Dedicated.

Opportunity to sell products in certain geographies or certain end markets. So.

The answer is yes.

And last question Mark you talked about couple of USA, which has been running.

This value of $100 million for the last couple of quarters.

As you look at the 2024 businesses that do.

Do you think Thats a good number for us.

As you look out into next year.

Per quarter.

Yes, I think a lot of Jeff will will be dependent on the trajectory of growth into 2024.

I can tell you we're committed to.

And ensuring that we maximize the productivity of that WSI line.

And so being able to to hold it.

97, this quarter down from 90, 890, 798 looks good into the into the fourth quarter and really look at what it could be going forward, depending on the trajectory of growth next year.

Certainly willing to invest in.

Yes.

And people and facilities and things that grow that middle line, we're going to achieve the top line.

Accretion that we want so it's a little early but in February should have a better better view with you there.

Thanks, Jeff.

Thank you.

Alright, there are no further questions at this time, Mr. Brad Wise I turn the call back over to you.

Okay. Thank you everyone for your questions today and your interest in <unk> now, we look forward to talking to everyone on the fourth quarter and full year of 2023 earnings conference call. In February of next year have a great day, and I'll turn it back to the operator to conclude the call.

Perfect. This concludes today's conference call you may disconnect.

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Hello. Good morning, My name is Jeremy and I will be your conference operator today at this time I would like to welcome everyone to the <unk> third quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. We would like to ask a question. During this time.

Please press star followed by the number one on your telephone keypad.

If you would like to withdraw your question press the pound key. Thank you Mr. Brad <unk>, Vice President of digital strategy and Investor Relations you May begin your conference.

Thank you Jeremy and good morning, and welcome to <unk> third quarter 2023 earnings Conference call.

We appreciate you joining us and thank you for your interest in <unk> with me today is David <unk>, President and Chief Executive Officer, and Mark Johnson, Senior Vice President and Chief Financial Officer.

We operate under the <unk> brand, which is also our New York stock exchange ticker symbol.

Please note that some of the statements we make during this call including responses to your questions may contain forecasts projections and estimates, including but not limited to comments about our outlook for the company's business. These are forward looking statements within the meaning of the U S. Federal Securities laws based on limited information.

As of today November <unk>, 2023, which is subject to change they are subject to risks and uncertainties and actual results may differ materially.

No one should assume 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.

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

Including 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 of each of these non-GAAP financial measures to its most comparable GAAP financial measure in the supplemental information available at the end of the earnings release.

As of this morning the.

The Investor Relations section of our website contains a presentation covering our results and key takeaways for the third quarter of 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 third quarter 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.

The nine months ended September 32023 represent our best earnings performance for the first three quarters in the year since being a public company.

<unk> on our customers continues to pay off and accrue to the long term benefit of our company and its shareholders.

And our customers and shareholders benefit from that distinction.

For the third quarter 2023, we generated $588 million in revenue up 2% compared to the same period in 2022.

Sequentially revenue declined $6 million or 1%.

The U S represents 75% of our revenue.

In the third quarter sequential U S revenues were resilient down 2%. Despite the U S rig count decline of 10% during the quarter.

Many believe we are approaching the bottom both in terms of market activity as reported by the level of operating drilling rigs and in terms of deflationary pricing on line pipe.

Since prices began to fall in May of 2022.

Even with these dynamics our sourcing team in combination with sales and operations has done an outstanding job proactively managing the appropriate inflow and disposition of pipe inventory.

Third quarter gross margins were up 20 basis points to 22, 8% as we proactively managed our pipe product lines and optimized product mix from growth in our U S process solutions business and.

And for the third quarter EBITDA remained strong at $46 million or seven 8% of revenue.

In the U S revenue was $448 million, a decrease of $8 million or 2% sequentially due to drilling and completions activity impacting pipe and valves project sales in the period.

U S energy centers revenues decreased 3% sequentially better than the 10% decline in U S operating rigs.

Our increasing traction in the energy evolution space provided further gains for Dino as customers' trust Dina solutions and products to support their projects and growing both renewables natural gas or LNG and carbon capture and storage markets.

To name a few examples we provided pipe valves and fittings or PBF for a plant expansion that increases the sidoti capture per year by an additional one 5 million metric tons.

The <unk> is transported by the customer through our pipeline and has injected into an underground sandstone storage site one mile beneath the surface.

We provided PBF to our long term oil and gas customer for their carbon capture plant expansion.

We'll capture an additional $1 two metric tons of cotwo per year upon completion.

We continue to grow our carbon capture revenues with both new and legacy customers as.

A third example, we continued to see incremental PBF revenues tied to a carbon capture project from our gas utility customer, who we highlighted last quarter.

We're seeing more investment in <unk> type projects in the U S and we've seen increased opportunities with our current customers, who trust <unk> model of integrity and supply chain expertise to achieve their respective de carbonization goals.

The burgeoning <unk> market is currently at the early stage of a multiyear growth cycle and our strategy is focused.

<unk> positioned <unk> as a leader in this space.

We added revenue from the implementation of a new material management program with an IOC midstream operating gas plant, we expect revenue with this customer to grow as more sites are on boarded.

Also we expanded revenue and market share by securing a new three year MRO contract with the contract with an operator in the Rockies.

Revenue from our Workover rig programs remained steady in the quarter.

Our customers tell us that our Workover rig program not only provides them with efficiencies to get products to market, but it also helps lower scope two emissions.

It would have otherwise been admitted using a more traditional logistics model to support well maintenance programs.

And our Super Center Supercenter model provides us the ability to onboard new customers without increasing roofline expense.

And the northwest our Williston North Dakota in Casper, Wyoming Super centers are growing enabled <unk> to expand regional project revenues.

We experienced revenue growth with several large operators on project wins tied to gathering projects centralized tank battery builds and midstream compressor stations.

We provided actuated valves to several e&ps and midstream companies as well as centralized tank battery projects two operators in the powder River and Uinta basins.

We continue our project and day to day success in the midstream sector, providing a variety of PBF pumps and fabricated equipment to a number of operators.

And we extended it to your line pipe agreement with the gas utility customer.

<unk>.

Midstream inquiries and activity remained high as customers tie in upstream production and evaluate projects.

In the mining industry, we provided pumps compressors and specialty valves in mines, where rare rare earth minerals like lithium trona copper and gold are extracted.

Our industrial air compressors saw demand improve in the food and beverage market as we provided units to customers in several states.

Demand increased for our <unk> zero, two oxygen elimination equipment as we sold a number of units used in the purification of biogas from sources, such as swine in dairy farms as well as gas collected from landfills to be sold as renewable natural gas.

We also sold a number of sulfur central Sentinels Eco papers <unk> removal units to major producers at well site onshore tank battery facilities.

Our eco paper solutions are becoming a key component towards advancing our customers' ability to reduce our emissions footprint from upstream oil and gas sites.

Furthermore, our eco paper product line continues to expand into the renewable natural gas base using their natural gas upgrading technologies to help landfills as well as dairy and swine farm operators convert our biowaste emissions into Sellable RMG.

It was well attended by our customers suppliers internal teams and dignitaries such as the local member of the Legislative Assembly.

A supercenter infrastructure is designed to regionally grow revenues efficiently.

Canada revenues were $68 million for the quarter, a 3% sequential increase in third quarter revenue was lower than expected due to disrupted market activity as crude production fell to the lowest level in several years amid maintenance at oil sands mines and continued takeaway capacity constraints.

Despite that our central Canada fiberglass business strengthened as we added new customers and saw shipments increased the way, we would expect exiting the freeze thaw period free slot period.

For international revenue was $72 million sequentially flat and up $16 million or 29% on a year over year basis.

Most active regions continued to be the U K middle East and Australia, and all three remained essentially flat sequentially.

Rig counts internationally declined three months in a row, but offsetting offsetting that reversal, where specific project deliveries in the third quarter.

Activity in the CIS area saw demand for specialty alloy valves that will be delivered over the next several quarters.

On the notable wins front Dino Mcclain secured a multiyear contract with an IOC to provide light led lighting upgrades and many of their existing operating facilities.

In Australia, we provided electrical cable to an operator for a renewable projects in the middle East we provided coated steel per flow line projects tightening their newly drilled wells and the joint operations <unk> zone, and coiled line pipe for our gathering projects in Abu Dhabi.

Moving on to our digital initiatives, our digital now revenue as a percent of total revenue for the quarter was 46% versus 48% and <unk> 23, a result of customer and project billing mix.

During the quarter, we invested in our day to day operations by modernizing the technology use at our supercenter in branches to improve the productivity of our people.

By deploying a new warehouse mobility device, our employees were able to reduce the time and effort required to create sales orders performed picking packing shipping and receiving activities.

In addition, the mobility devices used to improve inventory accuracy.

The new devices are significantly faster smaller are more efficient and easier to used in the prior units. The new technology enables dana to enhance fulfillment processes by providing improved levels of digital security, while enabling higher levels of efficiency.

And combined these state of the art digital technology with mobility.

In terms of capital allocation, we continue to actively pursue M&A opportunities with focus on larger deals that will allow us to enter new markets and diversify our product offerings.

We are steadfast in our commitment to seek margin accretion accretive opportunities in diverse end markets and emerging technologies to enable us to capitalize on market trends into enhanced durability in our performance in a dynamic and evolving energy landscape.

During the third quarter, we repurchased $5 million worth of shares at an average price of $10 65.

Through the end of the third quarter, we purchased $56 million worth of shares.

Out 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 third quarter, 2023 revenue was $588 million down $6 million or 1% from the second quarter of 2023 on.

On a year over year basis third quarter, 2023 revenue was up $11 million or 2%.

EBITDA, excluding other costs or EBITDA for the third quarter was $46 million or seven 8% of revenue.

And year to date, 2023, EBITDA was $140 million or seven 9% of revenue.

The U S revenue for the third quarter 2023 totaled $448 million.

A decrease of $8 million or 2% from the second quarter of 2023.

In Canada for the third quarter revenue totaled $68 million, an increase of $2 million or 3% from the second quarter of 2023.

International revenue for the third quarter of 2023 was $72 million flat sequentially and up $16 million or 29% when compared to the third quarter of 2022.

Gross margins for the third quarter were 22, 8% or up 20 basis points sequentially.

Warehousing, selling and administrative or WSI for the quarter was $97 million.

Or $1 million lower sequentially.

In the third quarter, we reported $7 million of depreciation and amortization expense.

Moving to income taxes, the effective tax rate for the three months ended September 32023 was five 4% on a GAAP basis.

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.

Given <unk> level of profitability in the U S and abroad. It is possible in the future period, we could release portions of our valuation allowance as reported for GAAP.