DNOW - NYSE

Good morning. My name is Jeanine, and I will be your conference operator for today. At this time, I would like to welcome everyone to the DNOW First Quarter 2025 Earnings Conference Call. [Operator Instructions] Mr. Brad Wise, Vice President of Digital Strategy and Investor Relations, you may begin your conference.

Well, thank you, Jeanine, and good morning and welcome to DNOW's first quarter 2025 earnings conference call. 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 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 meanings of the U.S. federal securities laws based on limited information as of today, May 7, 2025, 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. 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 or on our website at ir.dnow.com or in our filings with the SEC. In an effort to provide investors with additional information regarding our results as determined by U.S. GAAP, you will note that we disclose various non-GAAP financial measures in our earnings press release and other public disclosures. Those non-GAAP financial measures include earnings before interest, taxes, depreciation, amortization, or EBITDA, excluding other costs, EBITDA excluding other costs as a percentage of revenue, net income attributable to DNOW Inc. excluding other costs, diluted earnings per share attributable to DNOW Inc. stockholders excluding other costs, and free cash flow. Please refer to a reconciliation of each of these non-GAAP financial measures to its most comparable GAAP financial measures 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 first quarter of 2025. A replay of today's call will also be available on the site for the next 30 days. Now, let me turn the call over to Dave.

Thank you, Brad, and good morning, everyone. I'd like to start by acknowledging the solid execution by our team in the first quarter of the year. Their grit or perseverance and passion, not just for today, but for playing the long game and doing the things today that ensure the enduring success of DNOW inspires me. Thank you for everything you do to support our suppliers and delight our customers. The first quarter of 2025 represents the second-best first quarter EBITDA results in our public company history at $46 million, up 2% sequentially and up 18% year-over-year. For reference, the actual record quarter for first quarter EBITDA was 2023 at $47 million in a period then where we had 29% more active rigs and 18% more new wells completed. I make that reference to illustrate the resilience of the continued earnings power produced by our team. Again, this is notable given the misunderstood perception that the upstream sector alone drives opportunities for DNOW. In the quarter, we delivered top-line growth both sequentially and on a year-over-year basis, beating our February guidance despite headwinds from a slow start to the year, coupled with flat U.S. rigs and lower U.S. completions. Revenue for the first quarter was $599 million, up 4.9% from the fourth quarter and up 6.4% year-over-year. Gross margins remained resilient at 23.2%, better than expected in the first quarter. EBITDA as a percentage of revenue was 7.7%, beating our first quarter target and demonstrating continued earnings strength. We are focused on opportunities that drive accretive margins while diversifying our market mix. We continue to execute our strategy to invest in and grow our core market, capture additional revenues from energy evolution opportunities and diversify our customer base by targeting and realizing revenue from adjacent industrial markets while driving efficiencies across our business. With our current liquidity and capital allocation framework, we have the ability to strike deals at the right time and repurchase shares opportunistically, thus balancing the growth of our business with a return of capital to produce sustainable long-term value for our shareholders. In April, we closed a small but important international acquisition, which provides industrial lighting and electrical bulk materials to the energy and industrial end markets in Singapore and in the Asia Pacific region. The acquisition is complementary to and further strengthens and expands our MacLean International brand, where we have the same electrical manufacturer distribution agreement in the U.K. and Australia, allowing for increased revenue synergies with this key manufacturer and further positions MacLean to capture more market share. Moving to share repurchases. Under the new upsized $160 million program authorized earlier this year, we have purchased $16 million in shares to date. Before I move to our results on a regional basis, I'd like to take a moment to comment on tariffs, some macro uncertainty and the impact on DNOW. As you are aware, the tariff situation is dynamic. As a point of reference, following the first round of tariffs in 2018 and supply chain disruptions faced in 2021 and 2022 in the wake of the COVID-19 pandemic, our supply chain and sourcing teams have repositioned our supply and increased sourcing from domestic producers, reducing our dependence on international sources. Today, in our U.S. operations, our rough estimates are that around 70% of the products we sell are sourced domestically, leaving the remaining products sourced internationally. South Korean, Indian and European supply make up the majority of the directly imported product. DNOW directly imports a negligible amount for products from China, less than $1 million per year. Approximately 20% of our U.S. operations supply for inventory has some exposure to China, mostly raw materials. Neither DNOW nor our key suppliers have dependency on Chinese imports for pipe, fittings and flanges, inclusive of raw materials and semi-finished materials. DNOW valve and pump manufacturers range from 100% U.S. made to varying percentages of critical components to 100% Chinese made. Manufacturers exposed to Chinese-specific tariffs have begun altering supply chains and diversifying outside of China. In response to this, we are taking the following actions to mitigate the impact and protect our margins. We are passing supplier cost increases through as quickly as we can. We are updating our pricing structures to reflect increases as they occur. We are working with our key suppliers to ensure adherence to advanced notification clauses in our agreements. We are using our purchasing power to continue to multi-source key commodity product lines to help our customers. We are working closely with our customers on project materials to solidify commitments ahead of procurement. And we are analyzing alternate manufacturers for qualification to our approved manufacturers list. DNOW has the scale, systems, processes and talent with experience to execute our inflation period playbook. Our suppliers are actively managing this evolving situation alongside us. In conclusion, DNOW is better positioned to navigate these challenges and seize opportunities related to tariff impact. Now, some comments on a regional basis. In the U.S., revenue was $474 million, up $23 million or 5% sequentially. Growth was driven by a full quarter contribution of our fourth quarter Trojan acquisition and increased midstream demand, most notably from our Whitco business. In midstream, we are seeing demand to support continued debottlenecking of midstream takeaway capacity combined with operators' investments in gathering assets. As a result of softening in some areas, we continue to exercise our self-help initiatives by optimizing our branch footprint, leading to some location closures. As we look into the second quarter, we will continue to drive incremental expense savings as we adjust our model to the market, investing in the areas of growth and pruning underperforming areas. In U.S. Process Solutions, revenue increased sequentially from a full quarter of the Trojan business and due to higher demand for our suite of products and services. Growth was driven by demand for Odessa pumps packages, aftermarket service and Trojan rental equipment. Activity remains strong for our Power Service and Flex Flow business, while EcoVapor experienced a decrease due to project timing variations as expected. Our Flex Flow and Trojan rental fleets saw increased demand due to some operators favoring leasing over purchasing to support their maintenance production. Given the rental nature of this business, these are higher-margin product lines, and revenue should increase to the extent customers cut CapEx, another example supporting our resilient business model. We delivered our first power distribution center, or PDC, for a midstream company. This newly engineered unit is a turnkey 16x50-foot packaged unit, an insulated building, including variable frequency drives, panel boards, transformers and HVAC units. We expanded our pump product lines by signing new distribution agreements with a lobe style and vertical slack style pump manufacturer, which expands our addressable market in the produced water transfer and industrial end markets. During the quarter, we commissioned our first horizontal H-pump rental for a liquid CO2 recycle transfer application in an enhanced oil recovery operation for a Permian operator. The performance exceeded customer expectations and expanded our application capabilities for the rental fleet. As part of our Sable Automation Solution, we successfully commissioned a water recycling facility for a leading national egg producer. This system ensures consistent delivery of high-quality water and nutrition in poultry feed, ultimately enhancing egg production. We launched our new Tank Commander EcoVapor product, which addresses the needs expressed by several of our customers. This unit is a vapor management system designed to capture 100% of tank vapor and eliminate venting emissions, thereby enhancing the value of oil and gas assets. This innovation combines our

Thank you, Dave, and good morning, everyone. Total revenue for the first quarter of 2025 was $599 million, up 5% or $28 million from the fourth quarter of 2024 and up 6% or $36 million from the first quarter of 2024, exceeding our guide from our February call. EBITDA, excluding other costs or EBITDA for the first quarter was $46 million, or 7.7% of revenue, up $1 million sequentially. The first quarter marked the 12th consecutive quarter where DNOW has delivered EBITDA at or above the 6.9% level and is the second highest EBITDA in our company history for first quarter performance. U.S. revenue for the first quarter of 2025 totaled $474 million, an increase of $23 million, or up 5% from the fourth quarter of 2024. Year-over-year, U.S. revenue increased $39 million, or up 9%. U.S. energy centers contributed approximately 69% of total U.S. revenue in the first quarter, and U.S. Process Solutions contributed approximately 31%. This quarter marked the highest revenue dollar contribution yet for U.S. Process Solutions, a new quarterly record. In Canada for the first quarter, revenue totaled $62 million, a decrease of $4 million, or 6% from the fourth quarter of 2024. International revenue for the first quarter of 2025 was $63 million, up $9 million or 17% sequentially, driven by higher project activity, as expected. Overall, DNOW gross margins for the first quarter were 23.2%, similar to the fourth quarter of 2024 and better than expected. Warehousing, selling and administrative, or WSA, for the quarter was $109 million, slightly better than our forecasted level of $110 million. This decrease was due to a focus on operational efficiencies and resource alignment activities. We estimate a similar level of WSA for the second quarter of 2025. Now, moving to operating profit. In the first quarter, total company operating profit was $30 million. The U.S. generated $22 million of operating profit, and Canada and International each delivered $4 million in the first quarter of 2025. Interest income in the first quarter was $1 million. And now moving to income taxes. In the first quarter of 2025, DNOW's income tax expense was $7 million, and our effective tax rate as computed on the face of the income statement was 23.3%. We estimate our 2025 full year effective tax rate to be approximately 26% to 29%. And from a cash income tax perspective, we are not expecting to pay material U.S. federal cash income taxes in 2025 due to available NOL carryforwards. Net income attributable to DNOW Inc. for the first quarter was $22 million, or $0.20 per fully diluted share. And on a non-GAAP basis, Q1 2025 net income attributable to DNOW Inc., excluding other costs, was $24 million, or $0.22 per fully diluted share. Moving to the balance sheet. At the end of the first quarter, we had zero debt and a cash position of $219 million. We ended the quarter with total liquidity of $567 million, comprising our net cash position of $219 million plus $348 million in additional credit facility availability. Our existing $500 million revolving credit facility extends into December of 2026, providing DNOW with immediate access to capital under the facility. Accounts receivable was $439 million at the end of the first quarter, an increase of $51 million from year-end. Days sales outstanding, or DSO, was 67 days at the end of the first quarter, up from the fourth quarter, partially due to the cadence of project deliveries in the quarter and a couple of customers working through system upgrades and conversions at quarter end. We expect improvements in the DSO picture next quarter. Inventory was $385 million at the end of the first quarter, an increase of $33 million from year-end, with an annualized turn rate of 4.8 times. In our most recent earnings call, we outlined our strategic approach to intentionally build our inventory levels as we start the new year. This decision was made to support our customers' growth while effectively navigating the challenges posed by tariffs. Our focus was particularly on the midstream and fluid management businesses, where we're seeing increased demand. Accounts payable was $329 million at the end of the first quarter, an increase of $29 million from the fourth. And for the first quarter of 2025, working capital, excluding cash as a percentage of annualized first quarter revenue, was 16.2%. In the first quarter of 2025, net cash used in operating activities was $16 million, better than expected as we build inventory to organically invest in the business. We generally consume cash in the first quarter, and in the first quarter, we invested $6 million in capital expenditures to support growth, primarily in Process Solutions. Over the last four quarters, we've completed a $114 million acquisition, generated $187 million in free cash flow and converted over 100% of our EBITDA to free cash flow while returning, over the past four quarters, $30 million to our shareholders through share repurchases and increased our cash balance by $31 million. In January, we announced a new $160 million share repurchase program that is double our inaugural program that we completed in the fourth quarter of 2024. This new program enhances our ability to opportunistically return capital to shareholders as market and business conditions warrant, all while maintaining our focus on investing in accretive organic growth and strategic acquisitions while adhering to our disciplined approach to balance sheet management. In the first quarter, we repurchased $8 million of common stock. And so far in the second quarter, we have repurchased an additional $8 million of common stock, or $16 million year-to-date, or approximately 950,000 shares under the $160 million share repurchase program. Maintaining a disciplined approach to capital allocation remains a core priority. We continue to balance accretive organic and inorganic growth with opportunistic share repurchases, all while sustaining a strong and flexible balance sheet to drive long-term shareholder value. We continue to be debt-free, have no interest payments while keeping cash flow generation a top priority. And with that, let me turn the call back to Dave.

Thank you, Mark. Before switching to our outlook for the second quarter and full year 2025, I would like to revisit and make a few additional comments on the market. As I mentioned earlier, recent U.S. tariffs, together with retaliatory measures, has significantly contributed to market uncertainty. Furthermore, OPEC+ has targeted increased production levels, exerting downward pressure on global oil prices. The dynamics of this environment remain volatile, leading to fluctuations in market sentiment. Currently, we have not observed a notable impact on customer spending. In the U.S., we expect sequential second quarter growth driven by increased midstream activity and from key supply chain solution customer spend. We have seen an increase in gas rig-related activity in the area poised for some recovery. In Canada, expected seasonality will drive sequential revenue lower. Canada's revenue historically declines approximately 15% to 20% from the first quarter to the second quarter due to the second quarter breakup period where heavy equipment access to production areas is restricted. Internationally, we expect top line sequential decline of about $10 million due to $15 million in projects delivered in the first quarter that will not repeat. Taken all together, we expect DNOW's second quarter revenues to be flat to up in the mid-single-digit percentage range from the first quarter. On a full year basis, we are reaffirming our full year guidance for 2025 revenues to be flat to up in the high-single-digit percent range from 2024 levels, and full year 2025 EBITDA could approach 8% of revenue. And we are targeting free cash flow in 2025 of $150 million. In closing, following our second-best fourth quarter in history, we built on that and beat first quarter expectations with revenue growth of 5% sequentially to $599 million and delivered our second-best first quarter EBITDA of $46 million in a market with fewer operating rigs and completions. We executed adroitly on our capital allocation initiatives, closing on a small strategic acquisition in Singapore to expand our MacLean International offering. We repurchased $16 million of common stock on a year-to-date basis under our new $160 million share repurchase program while strategically adding inventory for organic growth ahead of the April tariffs, which should set us up favorably in this environment. We are uniquely well-capitalized with a significant cash balance and no debt or interest payments and can be selective and patient at the acquisition bargaining table while benefiting from our fortuitous inventory planning. While future market conditions are difficult to predict, given uncertainties stemming from the decline in oil prices and tariff-induced trade disruptions, we believe we are well-positioned to seize organic, adjacent and inorganic growth, pursuing more efficient and cost effective ways to execute operationally. I want to extend my sincerest gratitude to the women and men of DNOW who distinguish us in the market in how we promote our key manufacturers and work tirelessly to delight our customers as we build upon a great start to the year. With that, let's open the call for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Nathan Jones from Stifel. Please go ahead.

Yeah. Good morning, guys. This is Adam Farley on for Nathan.

Hi, Adam.

Good morning, Adam.

Hey, good morning, guys. I wanted to start on tariffs. How is inflation tracking in the business? What product areas have seen the most tariff-related price increases from suppliers? And then, how should we think about how that impacts gross margin as we move through the year?

Okay. So, we've got a few shifting tectonic plates here. We've got -- in the inventory world, we're at kind of low points in terms of costing for inventory as we've gone through a couple of years of deflation. So, inventory is arguably under-costed to what's coming down the pipeline. In terms of incoming product with we're seeing a resumption of normal inflationary pressures resulting from longer lead times starting to emerge from some of our manufacturers, we're starting to see normal price increases being passed through. And then, we're seeing a layering on top of that of tariffs. So, we really haven't begun to experience the tariff impacts that much. It's mostly the impacts from normal inflation, but we see that in some of the projects we're quoting, we're starting to see some of the impacts there. Now, for much of the products we buy, stock and sell, pipe fittings and flanges, for example, which is in the 40% range of our revenues, we're not seeing much tariff impacts there. There's a lot of domestic production supporting those revenues. In valves, it's a little different story. There's -- we have heavy U.S. production for some of our key suppliers, and then we have import production otherwise where we're starting to see some tariff impacts there. Depending on the manufacturer, depending on the product line or the size material, we're seeing product line increases from 3% to 5%, some of them 25% to 35%. That's newly introduced activity, which we really didn't see in the first quarter, of course, but we'll start to see in the second quarter. How that impacts gross margin? We think net-net, it'll be favorable, as we said on prior calls, but there are also competitive forces at play that will impact that as well. So, I can't tell you to what extent we'll see favorable gross margin increases. I expect them to be favorable, or I expect to see the revenue benefit of higher cost of material. But in terms of the timing and the degree, we don't have a real good read on that just yet.

Thank you, Dave. That's really helpful color. Just following up on that, as it stands today, are smaller competitors staying rational in the market, or is it more you expect maybe heightened competitive pressures going forward?

I think in terms of commenting on how other people are behaving in terms of pricing, I don't want to say too much about that, but I think people are being careful about their inventory. And they see that. We certainly see it. And I think most of our competitors see our inventory as a competitive tool or really a weapon depending on how much you have. The more you have right now ahead of the tariffs, the better. I think people are being careful, but there's still excessive intensified bidding on projects. So, I think that's kind of a normal effect that we're seeing and nothing special really happening there. But it's an intensely competitive business, always has been. But I think that behavior hasn't changed much during the cycle so far.

Okay. And then, just given the moves you've done with your supply chain following 2018 tariffs, the inventory build in the quarter, maybe just a little more color on some of the opportunities to maybe drive market share gains going forward? And then also any color on adjacent market growth? And I'll leave it there. Thank you.

In terms of market share gains, only a few national or global companies have the global buying power we do. So, I think against the smaller competitors, the regional PE-backed competitors, we do have an advantage, and we intend to take advantage of that. And that's primarily due to volume. We buy a lot more from a lot more suppliers, and we have a bigger say at the table in terms of product availability, which of course being the most important thing, seconded by product cost, rebates, return privileges, et cetera. So, we have an advantage in that regard. In terms of how that plays out during the rest of the year, I'm not sure. But what was your second question, Adam? I want to make sure I got it.

Yeah. Just any additional color on adjacent market growth? Maybe an update on the energy evolution space, industrial, et cetera?

Okay. Got you. Brad, do you want to hit that?

Yeah, Adam. On the adjacent markets, we define those and have defined those previously. Water, wastewater, the mining industry, chemical process, those really set up well with our U.S. Process Solutions business on the fluid movement side. Each quarter, we're winning business in each one of those markets. We expect those to be fairly steady. There are projects in there that cause some lumpiness as we move forward. Dave called out a real interesting project that the Trojan group won on the agricultural processing side with water and an egg producer. We're excited about that one. That's our first project there. We think there's more of those to come in the future. So we're opportunistic and optimistic about that one. We talked a little bit about data centers. There's been an awful lot of investment in data centers. You see it almost daily, I think, in the news. And so, we gave a little color on where DNOW can participate in that industrial market, both on the natural gas power generation side that are feeding high-reliability data centers. So that feed gas and natural gas suits up really well for DNOW. We expect to secure some projects in the future. We're chasing those today. And then, with the data center themselves, depending on where we are, our MacLean group's got some electrical and lighting capabilities on top of our new acquisition in Singapore. So we think we'll be able to chase additional opportunities there as well as in the U.S. with our PVF+ side. And then, maybe a final comment on energy evolution. Carbon capture -- well, the decarbonization business seems pretty steady. Our customers are still looking to reduce methane emissions. So, we see that continuing. The carbon capture businesses are certainly kind of lumpy. And we expect projects in the future, but they're still kind of slower and smaller in size here in the early part of 2025. And then, RNG. RNG tends to be a little bit kind of lumpy with our EcoVapor product. In the last really couple of years, we've had probably more EcoVapor sales on the RNG side probably in the second half of the year than the first half of the year. But there's some additional color on the adjacent markets. It's certainly an area we're looking to grow, we expect to grow and excited about the future there.

All right. Thank you for taking my questions.

Thanks, Adam.

Thank you. [Operator Instructions] Our next question comes from the line of Chuck Minervino from Susquehanna. Please go ahead.

Hi, good morning.

Hi, Chuck.

Good morning, Chuck.

Hey. So, I was just wondering, maybe you can give us your updated thoughts on the geographic kind of growth for the year. You reaffirmed the full year revenue growth, I guess, flat to up high-single-digits, but just kind of your updated thoughts here on U.S. versus Canada versus international, how they should shape up for the year?

Okay. So, international, I think we talked last year about year-over-year, pretty flat. We made some restructuring moves in international last year, and the idea there was to take out some risk. Add some focus for our management team to focus on where we're strong, which is in the U.K. and Australia and parts of the Middle East and Asia Pacific area, and to unfocus on the things where we get paid late and we have too much inventory and we're not kind of -- we're not making the returns that we expect. So, we want international focused on profits and cash flow versus volume. So, we expect year-over-year general flatness with international. Canada, it's a highly competitive business. We expect the second quarter decline, of course, going into breakup, a strengthened 3Q and then some seasonal moderation, maybe a decline going into the fourth quarter. But I think where we're really going to see the most action is in the U.S. We talked on our last call about where we're going to see growth in midstream, and midstream is actually tracking better than we expected. So, we're excited about the growth there. We're going to see a benefit from tariffs in the United States. We won't see that benefit elsewhere. And that should boost revenues. And we think we have an advantage against most of our competition there because of our size and the volumes we produce. Trojan, a new acquisition, is tracking better than expected, and that's going to be a boost to the U.S. business. Our April bookings were really strong, and April tends to be the shortest revenue month of the quarter. So, we're optimistic about making our plan in the second quarter and that parlaying into later in the year. And we are poised to do more M&A. It's a matter of the parties coming to the right price and terms, et cetera. And we think most of that M&A is going to happen in the U.S. and most likely in the Process Solutions Group, which is becoming a bigger and more important part of our U.S. business. So, a lot of optimism in the U.S., but general flatness elsewhere around the world.

Got you. And I just thought maybe you can give us a little bit more detail on this new acquisition you're doing, this Natron International. I don't know if you can help us with kind of the revenues that that brings in. It sounds like it's a small one, but just kind of how you're thinking about that and how it's going to contribute?

Yeah, it's small. Revenues are going to be in the 12% to 15% range. The multiples are in our standard 4% to 6% range, probably closer to the 4%. But in terms of particulars about the business, Brad, do you want to give some color on it?

Sure. I mean, yeah, they're headquartered out of Singapore. They're highly aligned with our MacLean Electrical Distribution business. We call it MacLean International now, based out of the U.K., but also Australia, too. So, having that expansion to Singapore and then those Southeast Asia and Asia Pac markets is something that we were really excited about. They distribute lighting, cable glands, electrical bulk materials. And service -- Chuck, they service kind of a broad different market space from offshore to marine to petrochemical. There's a pharmaceutical business there. Pretty diversified. Shipyards, FPSOs, some data centers. So, we like the diversified end markets that they bring, and really just excited to bring them on board and look at revenue synergies with our MacLean leadership team.

Got it. And just one last one for me. I think you mentioned a $15 million kind of one-time revenue in the quarter or something that's going to not continue. That sounded big to me. I don't know, are your projects normally that large? I was just wondering if you could give us a little bit more color on, or if there's other opportunities like that one out there in the future.

That particular was multiple projects in the Kazakhstan area, which happens to be one of the countries we're pulling out of. Those were pent-up projects, but overall, the business wasn't strong. These projects ended up being at the tail end of our residence there. But we do have the occasional $10 million, $15 million project. We used to have more of them internationally. We see a lot less of that today internationally, but they do occur from time to time. And international, as you probably recall, Chuck, has been lumpy in terms of quarterly revenues in part due to the timing of projects. But that won't recur. We'll see some growth outside of that, outside of Kazakhstan, and our core MacLean business offsetting some of that $15 million decline. But that's kind of the read on that project and how they occur in size, et cetera.

Got it. Thank you.

You're welcome. Thank you.

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

Thank you. Good morning. David, a lot of the E&P companies are talking about possibly curtailing drilling and completion activity given the macro environment. Can you talk about how DNOW's recent efforts to diversify the revenue stack away from just D&C insulates you partially from a potential slowdown in that area?

Okay. So, our focus there is really to grow with the E&C customers and take market share. And we think our position enables us to do that, and we've seen gains that in more recent quarters. Our focus otherwise has been on growing our energy transition business, we call it energy evolution, and it's a five-year strategy focused on pursuing growth in those newer energy sources. And we've made nice gains there, and we expect that to continue. In terms of adjacencies, most of the deals we're looking at today afford some adjacency benefits that would help us grow our pump business generally, our water and wastewater business specifically, and other mining and other end markets that we're focused on outside of strict oil and gas. But where we're seeing the most benefit to offset some of the upstream declines, which we talked about last quarter and we're still experiencing today, we're seeing nice gains in midstream. And we've aligned our inventory, our sales focus, our most recent -- our largest acquisition in our history with the purchase of Whitco to focus on growing our position there. So, we're becoming a real powerhouse in that area, and we expect that to pick up some of the slack we'd lose in the upstream-focused areas. Brad, anything you want to add there?

No, I think you captured it.

Okay.

Dave, you've talked about a couple of produced water projects I think this quarter and maybe last. Is that an opportunity for DNOW to expand its activity with producers or some of the water businesses just on the production side of the equation?

Jeff, I'll take that one. This is Brad. Yeah, I think we've -- since our Flex Flow acquisition a few years ago and then the PMF acquisition on top of that, we've been very interested in the produced water side, especially in the oily areas, obviously, with a large amount of produced water that has to be either transferred, recycled or reinjected in the subsurface with an SWD. Traditionally, with our fabricated business, we've sold permanent units, permanent SWD units. We've supplied kind of permanent water transfer units, but we haven't been on the rental side. As customers are looking to preserve cash and save CapEx, they're increasingly more interested in leasing and rentals. And so, getting involved in that rental business with Flex Flow and PMF was timely, and I think it's really paying dividends for us. And then, on top of that is the Trojan acquisition we did late last year, which really kind of fit a gap in our portfolio with a combination of layflat hose, combination of water transfer pumping units that are highly portable, in addition to an automation package that allows us to turnkey the solution for a lot of these water kind of mid -- produced water companies out there that are offering water management as a turnkey service for the operators. Those companies have become a big piece of our customer base in addition to the operators. But we see that business, as long as completions are active and continuing, we're going to have to deal with water, whether it's recycle or reinjection. And then, those businesses lend themselves to adjacent markets. I mean, we've rented a few units in the downstream refining applications for our Flex Flow business. We talked about Trojan getting into the agricultural processing business. So, we really like the portability of the solution into these industrial adjacent markets. And it's really just a matter of getting our sales team focused on those industrial opportunities in addition to the kind of the upstream opportunities as well.

I think you said Digital Solutions represented about 53% of SAP revenue. Was that -- and I think you said that's a high watermark. Is that correct?

Yeah, I believe so. That's a high watermark. That's on our SAP revenue, which is roughly about 80% of our total revenue. That will fluctuate with customer activity on a quarterly basis. I believe the last -- the prior period, we were below 50%. But we were pleased to see that number slowly tick up. If you trend it over eight to 12 quarters, we're seeing that number increase. Our digital transformation and IT teams are working hard with customers to continually look for solutions to integrate to make doing business with DNOW much more efficient, much more easier. And so, we're seeing both sides, really. Our customer and us are seeing kind of the benefits of that and really increased efficiencies and higher levels of productivity.

Is that what underlies, Dave, your comment about, in some ways, growing with your customer by being able to offer them more efficient procurement solutions, which lowers the cost of the transaction to them and generates more business opportunity for DNOW?

I think so. And I think it's most important and the timing is great for what's happening generally with price indexing across all imported products.

Thank you.

Thank you, Jeff.

Thank you. Our last question comes from the line of Josh Jayne from Daniel Energy Partners. Please go ahead, sir.

Thanks. Good morning. First question, just when we think about what's going on in the U.S., and it was helpful for you guys to lay out guidance for not only Q2, but for the full year, could you remind us first how much of your U.S. business today is upstream levered? And then, second, embedded in your guidance, what are you expecting from the rig count or completions count in the second half of this year as we've heard some operators come out and start to cut CapEx? Thanks.

Our U.S. business is probably in the 70% range in terms of upstream. And now it's -- there's some co-mingling with midstream. Sometimes we're not exactly sure what is midstream and upstream. But we see that midstream piece as a key target for growth. In terms of -- what was the second half of the question?

The second half was just given that you have some positives going on in your business. So, when we think about midstream and then also tariffs positively impacting the business. But I'm just curious what your assumption was and how you're thinking about activity in the back half of the year on the rig count and completion count in the U.S.

Yeah. Thanks for reminding me. So, in terms of rig count, there are various estimates of what could happen to rigs over the coming quarters from one report we read the other day, and I think it came from your firm, Josh, is rig counts could drop 60 to 75 by year-end. If you factor that in, that could mean a rig count decline of 10%, which could mean -- there's not a perfect correlation with our revenues, but that could drive some revenue declines there. Although we've seen support outside of rigs for completions and for total production, so it's probably even a lesser correlation. But we could see some revenue declines there. In the meantime, we have tariffs coming into play that could offset completely the impacts of any kind of rig count declines, which haven't yet begun. So, I think it's speculative for me to guess at what rigs could do, but I think there are two kind of competing realities. One is cost increases driving price increases, which could be offset partially by a decline in rigs. But guessing what that decline, if it occurs, could be is -- we don't have a feel for that yet. A lot of customers are saying they're going to maintain production. Some customers are saying they're going to reduce their rig and reduce their budget by a small percentage. So, it's early. I think the thing driving that, of course, is oil prices. And that's a tentative, new metric which can change. One of the things about uncertainties is it cuts both ways, and that we could see oil prices go back up in the next 30 days for other reasons. So, don't have a good read on what that impact could be, Josh.

Understood. Thanks. And then maybe just one follow-up. You obviously closed the acquisition. And then I believe you highlighted that the M&A market could potentially be active in the U.S. over the course of this year. I'm just curious, maybe you could comment on when you see some volatility like this in the energy market, does that make things more difficult to get across the finish line? Have you seen an increase in opportunities? Maybe just speak to the M&A landscape in a little more detail would be great. Thanks.

Well, in terms of the landscape where we're at right now, we have several active conversations. Varying degrees of interest and seriousness. Sometimes we're a natural operator and we can come to terms on price, and we can get a deal done in a number of months. And sometimes we're not necessarily the natural operator, but we have similar customers, overlaps with suppliers, and we can make a deal work at the right price. So, those are various levels of conversations happening with companies. I do think people are going to be a little cautious about the timing of completing a sale. We're not necessarily seeing that. But I think this would be a time where there'd be a little bit of caution in terms of timing, primarily from the oil price news, which is really fairly fresh. But otherwise, I think the conversations we're having are active and kind of a normal level of activity there. So, no real tangible evidence of sellers sitting on the sidelines, but I think naturally, there'd be a little caution.

Appreciate you taking my questions. Thanks. I'll turn it back.

Okay. Thanks, Josh.

Thank you, Josh.

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

Well, thank you, everyone, for joining us today and your interest in DNOW. We look forward to discussing our second quarter 2025 results on our next earnings conference call in August. I hope everyone has a wonderful Wednesday. And with that, we'll turn it back to the operator and conclude the call. Thank you.