DNOW - NYSE

We appreciate you joining us, and thank you for your interest in DNOW. With me today is David Cherechinsky, President and Chief Executive Officer; and Mark Johnson, Senior Vice President and Chief Financial Officer. We operate primarily under the DNOW 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 the outlook of 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 7, 2024, 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 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 the latest Forms 10-K and 10-Q that DNOW has on file with the U.S. Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business. Further information as well as supplemental financial and operating information may be found within our earnings release on our website at ir.dnow.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 DNOW Inc., excluding other costs and diluted earnings per share attributable to DNOW 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 and 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 third quarter of 2024. A replay of today's call will be available on our website for the next 30 days. We plan to file our 2024 Form 10-Q for the third quarter later today and will also be available on our website. Now, let me turn the call over to Dave.

Thank you, Brad, and good morning, everyone. I want to start off highlighting the strength in our performance in 2024, which has been one of our best EBITDA years despite being in a smaller market compared to last year in a period now with ample product availability in the supply chain, intensified pricing pressure and reduced customer activity for the things driving DNOW revenue opportunities. This quarter, we generated significant free cash flow of $72 million, accumulating to $273 million in free cash flow over the trailing 4 quarters or $281 million in cash from operations during that period. We started the year forecasting 2024 free cash flow at $150 million, and raised our full year outlook to approach $200 million in May. Today, we are upgrading that forecast again with 2024 free cash flow to approach $215 million or cash from operations approximately $225 million in 2024. In the quarter, we improved our working capital, excluding cash as a percent of annualized 3Q revenue to 15.7%, a recent best approximating working capital velocity at 7x. Looking at the U.S. market, the number of active rigs, completions and new wells drilled, the primary activities that drive our revenues have each declined more than 12% year-over-year. But we've been able to mute the full impact because of the solutions we offer, fueled by the excitement, passion and competitive spirit of our people. We attribute this revenue resilience to our position in the market, our importance in the supply chain as viewed by our suppliers and customers, our performance against commitments we make to our customers as compared to our competition, our leadership in growing energy evolution revenue streams and our team's adjacent market inroads, all helping to mitigate the impact as oil and gas customer spending has declined. Just one notable example of where our organic investments are paying off in the U.S. at our Williston, North Dakota mega center, which houses our PVF-plus projects execution center, where we do quoting, sourcing, expediting, staging, delivery and project fulfillment. It's also home to our fiberglass composite piping systems to support the region with inventory, technical expertise for their fiberglass piping needs. It's the main service, repair, maintenance and supply stop for Flex Flow for the Rocky Mountain region and our expanding Flex Flow Canadian operations. Power Service, our pump distribution business provides local field service and aftermarket parts out of the Williston mega center as well. Their local service techs, coupled with the industry-leading inside support staff, keep our customers' instrument air skids, SWDs, LACT units and production equipment operational. Finally, EcoVapor uses the Williston mega center as its home base, serving the Bakken play for oil and gas as well as the Northern Rockies-based RNG customers. EcoVapor provides technical support and field service for their units, which are deployed locally for some of our top customers. The wide-ranging Williston mega center offers a bright spot and serves as a robust differentiation against our competition. Contributing to our results in the quarter was U.S. Process Solutions, having its best year ever in terms of financial performance, a business we built from scratch in a series of acquisitions starting in 2015. Over the past 9 years, we integrated 11 businesses to produce an outstanding pump distribution, rental and service business, combined with engineering, design and fabrication of highly sought-after process production and measurement equipment, which naturally complements our U.S. energy centers business. Process Solutions has been a growth lever for the company over the years and is an important part of our strategy to expand further into midstream, grow market share from energy evolution activities and advance into adjacent industrial markets. And now moving to our results. Third quarter 2024 revenue was $606 million, a sequential decrease of $27 million or 4% within our guided range. We generated $42 million in EBITDA or 6.9% of revenue in the quarter, a solid performance. In the U.S., revenue was $482 million, down $30 million or 6% sequentially due to the declining rig count, completions and project activity. We also had approximately $7 million of 3Q orders that were forecast but not processed as they were delayed. For the past several quarters, more customer consolidations were announced and underway. And for some of our customers, those pending deals continue to impact project timing, resulting in funding and approval delays or project time line shifts. I'd like to mention a few project wins that speak to the execution of our strategy. First, we expanded revenue in the Gulf Coast at an LNG facility as we work to further diversify revenue in the midstream and downstream markets. In chemical processing, we provided a large number of valves to an EPC for the construction of our large-scale chemical plant expansion, an example of growing revenue into downstream chemicals processing tied to the reshoring trend of manufacturing. And we grew revenue through the award of a large gas pipeline project for a gas utility customer. Each speaks to winning business through non-upstream markets that we are targeting to diversify our focus. In U.S. Process Solutions, revenue was lower in the quarter due to softer project and completions activity. And as mentioned in my opening remarks, we improved performance sequentially as our teams work to optimize expenses and product costs. On the fabrication side, we vertically integrated a UL-certified panel shop and the packaging of our I&E scope of work on our fabricated products to improve margins in our power service business. Our engineering and product development team updated and shipped our new LACT unit design, incorporating an optimized footprint with the new pipeline pump. For the customer, the new design improves the reliability of the pipeline pump, provides a smaller footprint with shorter lead times and at a more competitive price. We are continuing to grow our mechanical seals business in Montana, Wyoming and Colorado, which helps improve margins and offers less cyclical revenues when compared to drilling and completions-related revenue. At a refinery in the U.S., we helped an operator reduce emissions and eliminate leaks by upgrading their current pump sealing systems by adding and incorporating secondary containment systems. This is a great example of how we're helping our customers reduce Scope 1 emissions in a downstream refinery. During the quarter, we expanded our pump distribution products and service geographies by growing our territory with a top-tier manufacturer who offers a broad range of pumping solutions to the U.S. mining industry. Second, we added an additional new line of pumps targeting chemicals and slurries activity. And finally, we added a more robust API pump line for the process-related chemicals and refining end markets that will help us expand our downstream revenues. In the mining sector, we had a number of wins. For example, we supply vertical turbine pump products to a potash customer used in solar evaporation production mining. In the expanding uranium sector to meet the growing demand for commercial nuclear power generation, we provided pump packages as older mines are being brought into production. In our Flex Flow business, we grew our Canadian market presence by securing a master service agreement with an oil and gas operator. In the refining sector, we have expanded the number of Flex Flow units in service as we execute on our strategy to seek revenue diversification for our H-pump mobile rental units. In Canada, revenue was $65 million for the quarter, an increase of 16% sequentially, primarily due to the recovery in activity from the breakup period last quarter. We saw activity increase with several of our top customers and invested in sales efforts to help target the growing opportunities in RNG, hydrogen and CCUS in Canada. Beginning in the third quarter and continuing into the fourth, we are providing steel and alloy pipe to an industrial gas operator for a hydrogen project in Eastern Canada. For international, revenue was $59 million, a decrease of $6 million or 9% from the second quarter, primarily due to location closures and lower project activity in the Middle East and U.K. We renewed several customer frame agreements for our MacLean electrical distribution business in the U.K. In Australia, we saw an increase in project activity as we provided cable packages and electrical bulks to an IOC for an interconnect and tie-in project at the Gorgon LNG facility. And finally, our export group continues to provide a range of products to support a number of oil and gas operators in West Africa. And now a few comments related to energy evolution. In terms of potential demand for DNOW products within the CCUS space, in 2024, the number of CCUS projects has increased 60% to 628 facilities from 392 facilities last year. 44 projects are in the construction phase this year, an increase of nearly 70% year-over-year. And during the quarter, we had a few notable energy evolution wins. In the direct air capture space, we provided PVF-plus products during the construction phase of a project in Texas. We sold PVF products in gas compression stations to a low-carbon power plant in the U.S. We provided PVF products to expand the capacity of a synfuels plant to capture more CO2 from coal conversion through a pipeline. Operating companies use the CO2 for enhanced oil recovery operations for permanent CO2 geologic sequestration. Finally, we delivered PVF and MRO products to a mining operator who is extracting lithium from a geothermal brine solution. Moving to our digital NOW initiatives. Our digital revenue as a percent of total SAP revenue improved to 52% during the quarter, passing the 50% mark for the first time. We have been working with a number of customers to connect our respective systems to drive efficiencies and lower the cost of transactions as we work with customers, suppliers and partners to extract value from our technology platforms. We began processing orders through a new B2B digital integrated procurement solution from a top 20 customer using our e-commerce punch-out process and digital ordering workflow. This process is a highly efficient method of procurement, enabling the customer to seamlessly order DNOW products through the ERP procurement and requisitioning system. Ultimately, the integration benefit lowers cost per transaction for both parties and ensures when purchasing products from DNOW, the cost to transact compared to nonintegrated suppliers is lower and an advantage for DNOW. In an example of gaining efficiencies, leveraging technology with the supply chain solutions customer, we implemented a customer inventory surplus automation solution for a key customer using automation to streamline and reduce the required systematic processing, resulting in a labor savings of approximately 800 hours per year. And switching to acquisitions with a solid balance sheet, no debt and a strong cash position, inorganic growth is our biggest lever right now and remains a key part of our growth strategy. Historically, we believe acquisitions are the most ripe for us in a market like this. Our strategy prioritizes margin-accretive businesses, aiming to strengthen and diversify our capabilities in serving our customers. We maintain rigorous standards, investing in opportunities where we are the natural operator, poised to create value, increase the contributions of acquired companies and drive long-term shareholder value. We are confident we can get more of these to the finish line in the near term. With that, let me hand it over to Mark.

Thank you, Dave, and good morning, everyone. Total third quarter 2024 revenue was $606 million, up 3% or $18 million year-over-year. EBITDA, excluding other costs or EBITDA for the third quarter was $42 million or 6.9% of revenue. And year-to-date, we produced $131 million or 7.3% of revenue, our second best EBITDA level since going public. U.S. revenue for the third quarter 2024 totaled $482 million, an increase of $34 million or 8% year-over-year. U.S. energy centers contributed approximately 3/4 of total U.S. revenue in the third quarter, and U.S. Process Solutions contributed the remainder. In Canada, for the third quarter 2024, revenue totaled $65 million, down $3 million or 4% year-over-year. And when comparing to the second quarter of 2024, Canada revenue increased $9 million or 16%. International revenue for the third quarter of 2024 was $59 million, down $6 million or 9% sequentially, partly impacted by some restructuring of our international operations to align with where our customers see the most value. In the quarter, we identified and took action on a handful of locations that had suboptimal financial returns and outlook. Year-to-date, revenue across the closed locations accounted for approximately $10 million of the $186 million in international revenue through the third quarter of 2024 or roughly 5% with minimal profit contribution. Through this recalibration, we continue to focus and invest in areas where our strength lie, specifically in the regions of U.K., Norway, Netherlands, Australia, the Middle East and export. Now moving back to the income statement. Gross margins increased 50 basis points from the second quarter of 2024 to 22.3% as inventory step-up charges in the first half of 2024 did not repeat. Warehousing, selling and administrative, or WSA for the quarter was $107 million, up $2 million from the second quarter as expected, primarily related to favorable WSA impacts in the second quarter. We forecast the fourth quarter WSA level could lower towards $103 million as we focus on operational efficiencies and resource alignment to regional market activity. In the third quarter, we reported $8 million of depreciation and amortization expense. And for the fourth quarter, we forecast depreciation and amortization to be approximately $9 million. Now moving to operating profit. In the third quarter, total company operating profit was $23 million. The U.S. generated $25 million and Canada delivered $3 million of the operating profit in the third quarter of 2024. The International segment recorded a $5 million operating loss in the third quarter of 2024, driven by $8 million of charges related to the restructuring. And those items are excluded for non-GAAP reporting. With the largest component being a noncash $5 million charge from the customary reclassification of foreign currency translation losses, which is a component of our accumulated other comprehensive income and loss to the P&L in the quarter. This noncash charge is presented within the impairment and other charges inline of our income statement. Our interest income in the period was $1 million. And moving to income taxes. In the third quarter of 2024, DNOW's income tax expense was $9 million and $25 million year-to-date. Our effective tax rate as computed on the face of the income statement was 29.8% year-to-date 2024. Our third quarter tax rate was higher than the U.S. federal statutory rate, primarily due to noncash restructuring charges in our International segment with no associated tax benefit. We estimate our 2024 full year effective tax rate to be approximately 28% to 30% as reported for GAAP or approximately 27% to 28%, excluding the impact of those restructuring charges. Net income attributable to DNOW Inc. for the third quarter was $13 million or $0.12 per fully diluted share. And on a non-GAAP basis, Q3 2024 net income attributable to DNOW Inc., excluding other costs, was strong at $22 million or $0.21 per fully diluted share. Moving to the balance sheet. At the end of the quarter, we had a cash position of $261 million and 0 debt. Cash increased by $64 million in the third quarter, driven by our cash generation from operating activities, partially offset by $7 million of stock repurchases in the quarter and $2 million in capital expenditures. We ended the third quarter with total liquidity of $622 million, comprising our net cash position of $261 million and $361 million in additional credit facility availability. Our existing $500 million revolving credit facility extends into December 2026, providing DNOW with immediate access to capital under the facility. Ending accounts receivable was $405 million and days sales outstanding, or DSO, was 61 days at the end of the third quarter. Inventory was $364 million at the end of the third quarter, a decrease of $35 million from the second quarter. Our operating model, incredible talent in the field, partnered with our inventory planning teams have done an outstanding job to ensure the right products on hand that the market demands are located in proximity to our customers, all while managing the perishable risk that comes with inventory. The results of this orchestration can be measured in an impressive and improved inventory velocity of 5.2 turns in the quarter, beating our prior quarter's high mark. Accounts payable was $278 million at the end of the third quarter, flat from the second quarter. And for the third quarter of 2024, working capital, excluding cash, as a percentage of annualized third quarter revenue was 15.7%. In the third quarter, cash provided by operating activities was $74 million and $280 million for the trailing 4 quarters ending September 30, 2024. We invested $2 million in capital expenditures in the third quarter, bringing our third quarter free cash flow to $72 million. And for the trailing 12 months, free cash flow has totaled $273 million. We continue to execute on our share repurchase program that is authorized through December 31, 2024. And as of September 30, our cumulative repurchases under our $80 million authorized share repurchase program totaled $74 million. Our commitment to growing the company through a combination of organic initiatives and margin-accretive M&A remains a key priority, while also having the ability to repurchase shares opportunistically as we use the tools in our capital allocation framework to generate attractive shareholder returns without deviating from our disciplined approach to balance sheet management. We continue to be debt-free and keep cash flow generation a top priority. And with that, let me turn the call back to Dave.

Thank you, Mark. Now switching to our outlook for the fourth quarter and full year 2024. In the U.S. and Canada, we expect oil and gas activity to be lower sequentially due to customer budget exhaustion, with normal fourth quarter seasonality. Internationally, we expect activity to be relatively flat sequentially due to favorable project timing offsetting some of the location closures. Taken together, 4Q '24 sequential revenue is expected to be down seasonally in the high single digits from 3Q '24, while anticipating modest full year 2024 revenue growth compared to 2023. Full year 2024 EBITDA as a percent of revenue could approach 7%. And our full year 2024 cash from operations could approach $225 million with CapEx approaching $10 million. By having a good deal of cash and a strong, reliable business that can make more, our strategic options are numerous and obviously well funded. We can use the cash for expansion to upgrade or expand infrastructure, either by opening new locations, promoting new manufacturers or their products, acquiring complementary businesses or new competencies, entering adjacent markets or increasing earnings per share by repurchasing shares or bolster our digital channels and implement or refine our existing e-commerce platforms. And we are doing all of the above. We could also use the cash to pay down debt and reduce interest costs. But right now, we're not burdened with either. And while the upstream market finds its footing with some analysts calling for a reset, moving forward, DNOW possesses a number of growth levers to pull. We continue to focus on expanding our midstream business, now approximately 20% of DNOW revenues. We're excited about the prospects of our existing and new customer investments in energy evolution and see that revenue growing on a year-over-year basis. And we are gaining momentum in our pursuit of growth in industrial adjacent markets like mining, water and wastewater, chemical processing and food and beverage. We expect a reduction in interest rates and improvements in the economic outlook, which is positive for energy companies and in turn, energy supply companies. Finally, we achieved solid results this quarter with year-over-year revenue growth despite project delays in the period, thanks to the hard work of our dedicated employees who provide a differentiated level of service and products to our customers every day. We generated an additional $72 million in free cash flow during the quarter, yielding $273 million for the trailing 4 quarters, driven by record performance in our U.S. Process Solutions business, strong acquisition contribution and robust inventory velocity. These results were produced in a challenging oil and gas environment with the backdrop of lower commodity prices and a wave of customer consolidations. We repurchased $7 million in shares during the quarter and are on a path to complete the $80 million share repurchase program this year as planned. In conclusion, we are well positioned with $261 million in cash and no debt, employing a range of options to pursue growth, deploy capital, drive efficiencies and generate improved returns for our shareholders. With that, let's open the call for questions.

[Operator Instructions] Your first question will come from Nathan Jones with Stifel.

I wanted to start off, Dave, maybe with some questions on the M&A environment and the potential impact of the results of the election here this week. I know you said that when you're in an environment like this of maybe a bit soft on the demand side that that's a good environment for DNOW to be acquiring in. Does the result of the election change that at all? Obviously, a Republican administration would be considered more favorable to oil and gas markets, particularly when it looks like they're going to sweep House, Senate and the presidency and could potentially have some more favorable policy positions that they could get through for the oil and gas market. Does that kind of make those targets want to hang on for better days ahead? Or do you think that it's not really an issue?

Well, I do think that the results of the election would be a much more business -- provide a much more business-friendly climate for participants in our industry, we would benefit from that as well. I think we've done -- we did a deal this year that required government approval. There was very little overlap, and it was not an issue. But there'll be some deals where more favorable administration would make us look at something differently in the first place rather than reject it out of hand. So I think there's a lubricant that comes from a different policymaking body, and we would benefit from that. Now we are pretty unique right now when we're at the table pursuing target companies, and we're in those conversations now. So we generally have a leg up to begin with, especially for the $100 million, $200 million deals. But I think in a more favorable environment, we'll simply accrue to our benefit and our shareholders as well.

Maybe then just talk about the pipeline, how mature it is, how actionable it is, how likely you think getting some more deals done here over the next 12 months?

Well, we're -- in a few of them, we're at various stages of negotiation. So I don't like to accelerate the possibility. I want us to have total flexibility when we are negotiating deals. So I'm not going to kind of broadcast that. But we do have some active positive conversations where we would be the right suitor, the natural operator. We're one of the few at the table. And we -- for the right price for the right terms, we can pounce. So now those deals are going to generally fit the pattern we've employed for the last several years, which is really a focus on growing process solutions. I said in my opening comments, that's a building -- a business we built from scratch. And we -- I've said since I became CEO, that's where we're going to focus our investment capital, and that's where we're going to focus. We bought Whitco early in the year. It was a PVF-plus or energy centers-related business. That was unique, and we're very happy about that deal. But our sweet spot is going to be in the pumping solutions arena. And that kind of limits the range of the companies we're talking to right now.

Got it. And then maybe just one more on the -- you talked about some project deferrals out of the third quarter. Just maybe a bit more detail of the circumstances of those pushouts, whether or not you think that kind of stuff is going to ship in the fourth quarter or gets pushed out to 2025? Just any color there, please.

Yes. In North America, there were about $10 million in projects, $7 million, $7.5 million in the U.S. and the rest in Canada. And there was a couple of million in international. But in North America, product availability, I believe, drove all of the deferrals. And we effectively saw a $10 million push in projects in DNOW from the third quarter. And those largely should ship going into the fourth quarter. We are seeing a similar phenomenon for fourth quarter projects pushing into 1Q. But those projects we missed, again, about $10 million in North America should occur fully within the fourth quarter. And... Yes. And about half of that was energy evolution-oriented projects and the rest were pretty standard just projects that happened in our pipe valves and fittings business.

[Operator Instructions] You have a question from Nathan Jones from Stifel.

Okay. All right. Well, I'll keep going if there's no other questions there. Maybe just talk about the potential impact. I mean, you guys have talked over the last few years of the oil and gas E&Ps showing more capital discipline during the up cycle. Now we're in a bit of a down cycle here. Are you expecting that or do you continue to expect that to kind of mute the level of the downturn relative to what we've seen in past kind of boom and bust oil and gas cycles?

Yes. And I think we've experienced that through the last 7 quarters or so where we've seen rigs decline, completions decline. I think we've enjoyed the discipline our customers exhibited as the market was taking off in 2022 and early 2023 when oil prices got to over $100, I think they showed great restraint. And I think we're seeing and benefit from that restraint on the downside, too. Now, oil -- I mean, so I think that helps us where we're at right now. We're in a -- however, you characterize this market, it certainly has been declining from a revenue opportunity perspective from DNOW, but we've been able to keep our inventory in really good shape. And by that, I mean strong product availability, and very low excess inventory charges, obsolete inventory charges, inventory risk. And so that one big benefit for a vital asset for us has been helped by the careful behavior of our customers as the market was very strong and as it declined. So yes, we benefited both ways.

You also made some comments about customer consolidation, and I understand how the integration of customers' businesses can disrupt yours for a period of time. Can you maybe just provide some details on what's going on there? How long you think that disruption lasts and whether you are favored by the consolidation or not?

Okay. So first of all, there's the period where the 2 companies come together. There is -- well, first of all, it has to be approved by the government. Some of these are bigger deals, so that takes time. And there's some jockeying that happens. In the meantime, some people leave the customer where we're real strong with and we'll pick them up from another customer. So we experienced that. Once there's an integration process, there is some tiptoeing around. There isn't real strong direction on how procurement is going to happen. Some companies have different procurement strategies like some of our supply chain customers, supply chain services customers, they're advanced in their thinking around partnerships and value and less concerned about unit price for products. So sometimes you'll have customers with varying degrees of maturity along those procurement lines. That takes time to integrate the thoughts and those to take shape in the company. Sometimes we win the business of the combined company and had neither of the parties or one of the parties and sometimes we lose the business. So there's a chance of both of those things happening. In a market like this, in the short term, at least, companies are focused on unit cost of product, and we generally don't play in that low-margin business. So with these consolidations, things can go both ways. But our position is we're pretty set in this thinking that these big consolidations, we will benefit from those long term, because there's only a few people with the -- few companies with the capabilities that DNOW has, especially in North America to satisfy large customer combinations. So that's kind of our thinking of how we address those. But there is -- there are bumps in the road. There are projects deferred simply as that integration process unfolds.

And then I'll just do one more on working capital. Obviously, the last few years we've seen very significant improvements in working capital. I want to just focus primarily on inventory and inventory turns. I mean, you guys are a distributor having product available is a good chunk of what you guys do in that business. Where do you kind of run up against the maximum kind of turns that you can get out of the business where you start risking not having product available for customers and service levels dropping or something like that? Like is there further improvement you can make? Or are we kind of getting to that limit?

Well, I've been asked this question over the years. And I've said -- I've always said 4 to 5 turns is a pretty good overall turn rate for the business. And now at least for this quarter, we're above 5 turns. I think we're 5.2 turns. There comes a point where you can strain product availability, diminish or harm your position in the market if you don't have ready access to the products your customers need. So I think 5 turns is actually a really good turn rate. And I think the fact that the revenues or the market is declining a little bit and because we're pulling out inventory smartly, I think we benefit from that, and it shows in the turns. My point is I don't think they could get much better than this. You might be able to get 5.5 turns, which is a really good turn for us. You include commodities like pipe and steel products, fittings and flanges. And this is a real good term rate. And I don't think there's too much upside, Nathan. But of course, we're always striving to improve our working capital velocity.

Your next question will come from Jeff Robertson with Water Tower Research.

Dave, in your prepared remarks, I think you mentioned that midstream is about 20% of revenues.

That's right.

Was that in the quarter? And does that -- or is that what you expect for the full year? And my questions really is where do you see that going in, say, 2025 with the benefit of Whitco and having had that business under your umbrella now for 2 or 3 quarters?

Yes. Good question, Jeff. Thanks for calling in. I think -- so that 20% is a quarter. I think where 22% of our business was midstream last quarter, it's 20% this quarter. So that's probably where our stable level of midstream right now. Going into 2025, and we're not really ready to give guidance there, but we do think midstream activity will be a little bit more buoyant, a little stronger than what we expect in upstream. So I would expect that midstream component of sales to increase. Now whether it gets to 23%, 25%, I don't know, but we've said for some time that midstream is a target focus for us given the low cost to service large transactions. The gross margins tend to be a little bit lower, but you can service large transactions. We've got all the supplier relationships, access to all the products, and it's just a real nice coupling with what we do in the upstream. So that's a target environment for us. We'll grow that, and we should benefit in 2025.

So Nathan's question around the election this week, do you think midstream is an area that could benefit as you -- just from some sort of changes in the approval process for permit applications?

Brad, do you want to take that?

Yes, Jeff, thanks for dialing in. Yes, I think from what we've heard from the Trump campaign was the general bias toward increasing oil and gas development that may be in federal lands, but also a reduction in kind of the bureaucracy, and that kind of takes you to the permitting side, can we expedite and can our customers get permits quicker, faster. So we think that might be the case. And then the Biden administration had the LNG pause. We all have been watching carefully and what that does to the long-term prospects of natural gas development in the U.S. where DNOW is very favorably positioned to take advantage of dry gas basin production and takeaway capacity to LNG exports. So if we can expand the LNG export capacity, I think that will help us in the upstream and help us in the midstream and kind of caveats back to your midstream comment, potentially grow our midstream revenue beyond the 20%. So we see those as positives. Maybe last comment on carbon capture, Dave had some notes around carbon capture. We're seeing projects grow, a little unclear whether those -- how the Trump administration is going to address those. But a lot of the projects that we're aware of, I mean, a number of them are in kind of the red states, if you want to put it that way. And I think there would be some support to continue with carbon capture and some possible initiatives there. So kind of baking that all in, we see upside from the administration changeover in January and hope to see that transfer the revenues down the road in 2025, 2026.

There's been a lot of discussion around the power grid and the need for increased generation capacity to meet the expectations of data centers and things like that. Are those areas where DNOW could maybe develop or expand some new revenue streams?

Yes, I think so. With respect to data centers, and really, the reshoring of manufacturing, I think, will have also a big impact on the ability of the U.S. to provide, I would say, continuous electrical power on the nationwide grids. And to be able to do that, we're going to need more reliable sources for that electrical generation. We've seen some comments around increase in nuclear capability. We've seen some comments around growth in nuclear -- excuse me, and natural gas production for power generation. I think both of those could be beneficial to DNOW as new development, new CapEx is spent to be able to accommodate the growing need that reshoring and the data center growth is forecasted for the foreseeable future. So yes, we see those as positives. There's not -- I've heard comments about utilities comparing -- if the utility is going to sign an agreement with the data center, the data center wants 24/7 uptime support. And if you think about are they going to get that through wind and solar with battery backup, I think it's still early there. So I think that speaks to higher reliability of sources and that bodes well for natural gas.

On consolidation, Dave, you mentioned some of the resetting that you're seeing among the companies that have completed major transactions. Does that give DNOW -- or does it help DNOW's digital businesses and just your supply chain strategic partnerships? Are you starting to see some traction there that could help out in 2025?

Well, I think because we have -- we have a different level of products. We actually sell a range of products for our customers, but the quality control requirements for some of these combined companies, the digital necessity that they -- how they interact with their suppliers, those are things that a lot of our competition doesn't have the capacity to do. So we'll benefit from that. Now some of these big combinations are still underway, but we expect as they come together, we'll benefit especially from the -- from our strength in digital competencies, et cetera.

And lastly, on the share returns, I think you all -- your cumulative share repurchases so far, $74 million on your $80 million authorization. Can you talk about how you think about continuing to repurchase shares versus an ordinary dividend in light of your strong free cash flow generation?

Yes. I mean, I think just in terms of how we use the cash we generate, I just want to reiterate, our first priority always is to organic growth, less risky. It's -- we know what we're doing. We can grow, flow through stronger with less risk. Secondarily, it's M&A. That's our -- that's really the essence of DNOW is the cobbling together of great talent and new companies over a period of time. And third would be a capital allocation strategy beyond that. We've talked about dividends over the years. We generally favor a share repurchase. We have been modeling how much cash we would generate over time. We'll generate $225 million from operations this year, over $170 million last year. Our strength in earnings, coupled with our continually improved very strong balance sheet management affords us the ability to do a broad range of things, but primarily organic growth, M&A and probably share repurchases. I mean I think over time, we're inclined to use that as the third tranche of value provided to shareholders over something like that dividends.

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

Well, thank you for your questions today and your interest in DNOW. We look forward to talking with everyone on our fourth quarter and full-year 2024 earnings conference call in February. Let's turn it back to the operator to conclude the call.