Good morning, afternoon, evening. My name is Bhavesh, and I'll be your conference operator today. At this time, I would like to welcome everyone to the NOW Incorporated First Quarter 2023 Earnings Conference Call. All lines have been placed on me to prevent any background noise. [Operator Instructions] Mr.

Brad Wise, Vice President of Digital Strategy and Investor Relations, you may begin your conference..

Thank you, Bhavesh, and good morning, and welcome to NOW Inc.'s First Quarter 2023 Earnings Conference Call. We appreciate you joining us and thank you for your interest in NOW Inc. 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 DistributionNOW and DNOW brands, and you'll hear us refer to DistributionNOW and DNOW, which is our New York Stock Exchange ticker symbol, during our conversation this morning.

Please note that some of the statements we make during the call, including responses to your questions, may contain forecasts, projections and estimates, including, but not limited to, comments during 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 May 4, 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. In addition, this conference call contains time-sensitive information that reflects management's best judgment at the time of the live call. I refer you to our latest forms 10-K and 10-Q that NOW Inc. has on file with the U.S.

Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business. Further information as well as supplemental financial and operating information may be found within our earnings release on our website at ir.dnow.com or in our filings with the SEC.

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 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 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 first quarter today and will also be available on our website.

Now let me turn the call over to Dave..

Thanks, Brad, and good morning, everyone. I'm proud to see the results of our talented team produced again this quarter as we kick off the year, outperforming the sequential revenue guide provided on our last earnings call despite weather-related activity declines, reduced U.S. rig counts and completions and lower oil and gas prices.

The discipline we've maintained as we execute our strategy continues to be constructive to earnings, most recently propelled by our international segment that delivered strong growth in the first quarter with its best quarterly revenue growth percentage sequentially and year-over-year in more than a decade.

We had good growth across all 3 segments, marking the best first quarter EBITDA results since spinning off in May of 2014. Our achievements across the globe are a result of the smart planning, communication, focus and discipline by our employees.

It's a testament to the hard work and dedication of our team, and I'm grateful for their efforts to deliver success. Regarding capital allocation, we continue to make strategic inorganic investments to fuel growth through acquisitions while opportunistically repurchasing shares.

By balancing these 2 approaches or even better pursuing both, we aim to drive sustainable long-term value for our shareholders. In an effort to further bolster our U.S. Process Solutions business, earlier this week, we acquired 2 U.S.

businesses for $33 million, which expand manufacturer territorial exclusivities for key products and provide enhanced revenue opportunities with our existing DNOW customers in those areas.

These new territories are adjacent to DNOW's other existing agreements, widening our geographic reach and deepening our products and solution offerings into the downstream, refining and industrial markets. I'm excited to welcome the employees joining the DNOW family and look forward to the growth we can cultivate together.

We also continue to return value to shareholders through our $80 million share repurchase program. During the quarter, we were active in the market as we purchased 3.3 million shares amounting to $36 million. Through the end of the first quarter, we have consumed 53% of the authorized $80 million repurchase program.

Now I'll hit some of the financial highlights. First quarter revenue was $584 million, sequentially higher by 7% on better-than-expected international growth of 28%, Canada was up 11%, and the U.S. grew 3%, primarily attributable to the December acquisitions.

On a year-over-year basis, revenue was up $111 million or 23%, outpacing the 15% year-over-year increase in global rig count. 1Q 23 gross margins were 23.5%, lower sequentially as expected, primarily due to dilutive project margins.

For example, project margins in 4Q '22 were better than in 1Q '23, given the product mix and reduced vendor consideration was lower in the first quarter following a strong 4Q '22 close. For the first quarter, EBITDA was $47 million or 8% of revenue, solid performance, yielding excellent results.

On a year-over-year basis, EBITDA is up $19 million or 68% resulting from a robust 17% year-over-year EBITDA to revenue flow-throughs.

Free cash flow consumption was $11 million in the first quarter as we invested in working capital to support growth and deployed $5 million in capital investments to round out infrastructure and rental asset enhancements. That said, we expect to produce positive free cash flow in 2023. Now some regional comments.

In the U.S., revenue was $427 million, an increase of $13 million or 3% sequentially, driven by growth from newly acquired businesses and demand for our U.S. process solutions offerings for process, production and pump packaged equipment. U.S. energy revenues were relatively flat sequentially as U.S.

rig count softened by 2% and was negatively impacted by poor weather in the Northwest. Many job sites were inaccessible due to record snowfalls in the winter. Rig counts and dry gas areas receded in the first quarter as operators sought to balance supply with demand for natural gas as Henry Hub spot gas prices hovered around $2.65 per million Btus.

Across the oily basins, drilling and completion activity drove demand for our seamless and ERW steel pipe as well as our spool-mounted coil line pipe. Our Williston mega center is now fully operational, and we're excited about the growth opportunities and revenue synergies the new center enables.

Key successes in the quarter include agreement renewals for IOCs and gas utility and refinery customers to provide PVF and MRO products for their maintenance CapEx spend.

During the quarter, we grew market share as we implemented a new PBF commitment with an IOC in the Permian, and we expect the increase in market share to contribute to future revenue growth.

Activity improved sequentially with our integrated supply chain services customers as we work to lower their lease operating expenses by managing the demand for products and improving availability of inventory to meet construction and project time frames.

In the downstream market, spending by refining and chemical processing customers remain strong as they ordered product for projects for turnarounds. We are providing PBF products for biodiesel conversion projects at refineries as customers increased their throughput of renewable diesel products. Our U.S.

process solutions business grew to 26% of our U.S. segment due to revenue additions from the December acquired companies, while demand increased for our lapped units and pump booster packages as the midstream activity was up for us in the quarter.

Our vessel fabrication business also remains strong as operators seek to increase their separation capacity for newly completed wells. We are seeing growth in pump packages, air compressors and aftermarket service capabilities in non-oil and gas markets where we are targeting industrial manufacturing and food and beverage producers.

We are providing vertical turbine pumps for mining projects and industrial air compressor dryer package to a serial manufacturer in the food and beverage market. Last quarter, we announced our acquisition of Stealth Pump and Supply.

Looking collectively at the service organizations of Odessa Pumps and Stealth in the Permian, the combined service offering positions DNOW as one of the largest pump service organizations in the oil and gas plays.

This strength has led to successfully securing a win for a preventative maintenance contract with a large IOC to service over 800 installed pump package units.

And outside of oil and gas, we won an additional service contract for a preventative maintenance program for pumps and municipal water districts, further unlocking revenue opportunities in the water, wastewater markets.

Our Flex Flow business saw increases in demand for water transfer applications as operators sought to expand their use of water recycling as opposed to water disposal to offsite permitted disposal sites.

During the quarter, we deployed several of our mobile horizontal pumping units to Canada to support pipeline pressure testing for a new LNG pipeline under construction. We saw demand increase for products that mitigate emissions as onshore production operators find solutions to mute their overall environmental footprint.

Increased regulation and industry standards around flaring and emissions drive greater demand for many of the natural gas emission reduction products DNO provides to our customers. Furthermore, we see demand improving for our recently acquired EcoVapor oxygen removal systems applied to oil and gas tank batteries.

During the quarter, our EcoVapor business expanded their ZerO2 lease fleet as contracted units grew despite a challenged sub-$3 per million Btu gas environment.

The growth during the period speaks to the value proposition of the ZerO2's ability to reduce customers' routine gas flaring at tank battery installations by removing oxygen from the collected gas venting in the oil and produced water storage sinks.

While EcoVapor has traditionally supplied oxygen removal equipment to oil and gas operators, we are seeing an increase in demand for our products in the renewable gas industry, renewable natural gas industry.

Similar to oil and gas, RNG operators must address oxygen contamination within the collected waste gas from landfills and biowaste gas sources in order to sell the gas to the midstream market. This challenge is solved using our EcoVapor ZerO2 units and opens up the growing market as we see RNG demand increasing.

We achieved a notable success and winning a large project for EcoVapor ZerO2 units with water separation equipment to swine farm operators who collect and process the biogas to sell to the midstream gas market.And since March 31, we were successful in securing the largest EcoVapor/RNG order from a large landfill gas customer.

The order units will ensure the project meets the customers' stringent pipeline specifications for their RNG streams. In Canada, revenue was $83 million for the quarter and increased 11% sequentially.

Our Canadian team continues to perform well as we supply and service a diverse mix of oil and gas operators, midstream companies, projects through a number of EPC customers and land-based drilling contractors. Highlights include strong demand for our valve and actuation solutions for a number of capital projects as well as daily MRO demand.

Outside of oil and gas, we saw revenue improve from an agribusiness customer with demand for pipe fittings and flanges for a processing plant project. For international, revenue was $74 million, a sequential increase of $16 million or 28%.

For the past few quarters, volume has increased in our International segment as long cycle projects were being budgeted. We are now seeing DNOW win those competitive inquiries, converting those to orders and driving higher revenue in the first quarter.

In the U.K., MRO activity increased with Electrical distribution products, industrial and safety equipment and valve products to our McLean business. We are seeing growing activity tied to increased customer investment in the North Sea as reinvestment in existing fields and new investment in greenfields and FPSOs expand.

Revenue expanded with the major IOC as we provided a variety of products for them in the U.K., Middle East, West Africa and Asia Pacific.

During the quarter, we renewed a 5-year frame agreement for electrical products with the customer base out of the Middle East and an additional agreement for PPE products with a major IOC with downstream refining and petrochemical assets.

In Norway, activity increased as customers seek to expand their natural gas exports to Europe to replace a portion of the previously imported Russian gas. In On several projects, we supply low-voltage electrical cable and instrumentation to an EPC to support a subsea tieback project for an offshore production platform.

In Australia, inquiries are improving for both MRO and greenfield activity as we secured a sizable project for electrical cable in the carbon capture space and secured orders for pumps for an FPSO development with a major IOC. Moving to our DigitalNOW initiatives.

Our digital revenue as a percent of total SAP revenue for the quarter was 43%, lower sequentially due to customer and project billing mix on the top line growth.

During the quarter, in Canada, we began receiving purchase orders digitally with a new round trip punchout customer, enabling procurement simplicity and driving efficiencies for both parties. This preferred order method delivers incremental revenue efficiently, alleviating costs linked to nondigital ordering. Within our U.S.

Process Solutions organization, we began rolling out our new field service app that allows our pump mechanics to document and perform service work through an all-digital interface. We will continue to expand the training and the use of this technology to help drive efficiencies and improve customer service.

Last quarter, we talked about our Flex Flow OptiWatch solution as a digital real-time asset monitoring tool used to measure the performance and health of the horizontal pump working asset.

We are happy to see that our Optowatch software solution is gaining popularity with customers as we actively monitor over 100 customer-owned horizontal pump units in the field. This provides additional revenue opportunities for field service, maintenance and asset replacement. With that, let me hand it over to Mark..

Thank you, Dave, and good morning, everyone. Total first quarter 2023 revenue was $584 million, up $37 million or 7% from the fourth quarter of 2022 and reaching the highest revenue quarter since the pandemic. On a year-over-year basis, first quarter revenue was up $111 million or 23%.

EBITDA excluding other costs or EBITDA for the first quarter was $47 million or 8% of revenue. The U.S. revenue for the first quarter 2023 totaled $427 million, a $13 million increase or 3% higher than the fourth quarter of 2022. Year-over-year, U.S. revenue increased $93 million or 28% from the first quarter of 2022. Our U.S.

energy centers contributed approximately 74% of total U.S. revenue in the first quarter and our U.S. process solutions contributed 26%. In Canada, for the first quarter, revenue totaled $83 million, an increase of $8 million or 11% from the fourth quarter of 2022.

And year-over-year, Canada first quarter revenue was relatively flat, increasing $1 million or 1%, limited by a 7% negative foreign currency revenue impact of approximately $6 million. International revenue for the first quarter of 2023 was $74 million, up $16 million or 28% sequentially.

And year-over-year international first quarter revenue was up $17 million or 30% despite a 9% negative foreign currency revenue impact of approximately $5 million. As anticipated, our first quarter gross margins were down from their recent highs to 23.5%, but remain above the 2021 and 2022 combined gross margin of 22.9%.

Warehousing, selling and administrative, or WSA for the quarter was $109 million, up $5 million sequentially, primarily from a full quarter of operating expenses from our fourth quarter acquisitions and the resetting of limit-based payroll tax expense in the new year.

We continue to make progress on reducing WSA as a percent of revenue with our first quarter WSA as a percent of revenue improving sequentially and when compared to the first quarter of 2022. In the second quarter, we expect WSA to approximate the first quarter level. Moving to operating profit by our geographic segments. In the first quarter, the U.S.

delivered $23 million in operating profit or 5.4% of revenue. Canada delivered $8 million in operating profit or 9.6% of revenue, and the International segment reported $4 million in operating profit or 5.4% of revenue in the first quarter of 2023. Moving to income taxes.

On a GAAP basis, the effective tax rate for the 3 months ended March 31, 2023, was 8.6%. I remind you, this is the effective tax rate is calculated from the face of the income statement and is below the typically expected tax rate at these earnings levels.

As our income tax expense provision on the income statement 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 1Q 2023.

And for estimating an effective tax rate for the go-forward quarter and year for modeling net income, excluding other costs, a 26% to 28% tax rate is a good estimate and excludes the favorable impact from changes in the valuation allowance. Net income attributable to NOW Inc. for the first quarter was $31 million or $0.28 per fully diluted share.

And on a non-GAAP basis, Q1 2023 net income attributable to NOW Inc., excluding other costs, was $28 million or $0.25 per fully diluted share. Moving to the balance sheet. At the end of the quarter, we had 0 debt and a cash position of $168 million.

Cash decreased by $44 million in the first quarter as we invested in the growth of our business with strategic inventory purchases and capital investments, and we repurchased common stock in the quarter to return value to shareholders.

In the first quarter, we reported $6 million of depreciation and amortization expense in line with our expectations following our fourth quarter 2022 acquisitions. In the second quarter of 2023, we expect quarterly depreciation and amortization expense to be between $6 million to $7 million.

We ended the quarter with total liquidity of $555 million, which comprises our net cash position and $387 million in additional credit facility availability. Our existing $0.5 billion revolving credit facility extends into December 2026, providing DNOW with ample access to capital for more than the next 3.5 years.

Accounts receivable was $422 million, an increase of $24 million or 6% from the fourth quarter. And inventory was $406 million at the end of the first quarter as we invested $25 million in additional inventory, while churn rates remained flat sequentially at 4.4x.

A portion of this inventory investment was specifically procured to support several of our process solutions customers with forecasted project growth. Accounts payable was $323 million at the end of the first quarter, an increase of $19 million from the fourth quarter.

And for the first quarter of 2023, working capital, excluding cash as a percentage of our first quarter annualized revenue was approximately 17.6%.In the first quarter, net cash used in operating activities was $6 million as we invested more than $50 million in working capital to support growth.

In the first quarter free cash flow consumption was $11 million with capital expenditures for the first quarter of $5 million as we invested in operating equipment and facilities to enhance efficiencies and increase service levels to our customers.

In 2023, we are actively investing and upgrading the utility of key facilities, expanding our rental fleet for the Flex Flow and EcoVapor businesses. And with these commitments, we estimate our capital expenditures for full year 2023 to be in the $20 million range. We are looking to generate $100 million in cash from operations in 2023.

And when looking back at the trailing 12 months through 1Q 2023, we are free cash flow positive, having generated $16 million in cash from operations and invested $14 million in the business.

This free cash flow generation was achieved on approximately $500 million in annual revenue growth when comparing the trailing 12 months ended 1Q 2023 to the corresponding period ended 1Q 2022.

This shows how our focus on the fundamentals and discipline managing the business has positioned DNOW to generate cash through the cycles, which bodes well for future growth and capital allocation plans.

We continue to execute on our share repurchase program that is authorized through December 31, 2024, with additional repurchases of $36 million in the quarter or 3.3 million shares of common stock. As of March 31, 2023, we have repurchased $43 million under our $80 million authorized share repurchase program.

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

We continue to be debt-free, have no interest payments on debt while we keep cash flow generation of priority. And with that, let me turn the call back to Dave..

Thank you, Mark. Now switching to our outlook for the second quarter of 2023. In the U.S., we expect market share gains, revenue from acquisitions and the beginning of revenue synergies derived from those acquisitions to drive mid-single-digit sequential quarter growth in the second quarter in the U.S.

Internationally, we expect approximately $4 million in projects not to recur in the second quarter, driving a sequential decline in that segment. And in Canada, the expected seasonality will drive sequential revenue lower.

Canada's revenue historically declined approximately 20% sequentially from the first quarter to the second quarter due to the second quarter freeze thaw, muddy breakup period where heavy equipment and access to production areas is restricted.

Taken all together, we expect DNOW's second quarter sequential revenues to increase in the low single-digit percentage range from 1Q '23 in spite of the expected Canadian seasonal decline, approximating year-over-year second quarter growth to 10% for DNOW. We expect second quarter EBITDA to approximate our 1Q 23 EBITDA dollar level.

And for the full year 2023, we reaffirm our view that revenue will increase 8% to 12% compared to the full year 2022 revenue and our 2023 full year EBITDA is targeted at 8% of revenue.

We anticipate free cash flow will gather momentum as the year progresses, and we expect to deliver cash flow from operations of approximately $100 million for the full year 2023. Before we open it up for questions, I'm going to close with some comments about the business.

Our year is off to a nice start, including strong top and bottom line performance in the first quarter, with revenue growing 7% sequentially, driving 8% first quarter EBITDA as a percent of revenue. Again, solid results. We achieved these better-than-expected results despite headwinds related to inclement weather, lower U.S.

rig counts and completions and weaker oil and gas prices in the first quarter. We are excited about our International segment posting strong sequential revenue growth of 28% and operating profit levels not seen since 2014.

In the first quarter, we returned cash to shareholders by repurchasing $36 million of shares with the cumulative purchase levels exceeding $43 million through March 31. And earlier this week, we completed 2 additional acquisitions further strengthening our U.S. Process Solutions business.

We are in a great place as a company on solid financial footing with incredible talent, singularly focused on our customers. We remain debt-free with ample liquidity and possess an advantageous variety of tools to further advance DNOW's position in the market. With that, let's open the call for questions..

[Operator Instructions] Your first question comes from the line of Tommy Moll from Stephens Inc..

Dave, I wanted to start on the second quarter outlook you provided, if I heard and read correctly, on a sequential basis, revenue up WS&A dollars, flattish EBITDA dollars flattish. So I presume that means you're giving back a little bit on the gross margin rate. If I'm correct on that, any drivers there you could point us to would be helpful..

Yes. Good question, Tommy. Yes, that's a good read. That's kind of how we're modeling in the second quarter. We're going to see a full quarter of now 4 recent acquisitions in the last 4 months. We're starting to see some of the gross margin erosion, I've been speaking about the last several quarters, which finally hit in the first quarter.

So I've been talking about gross margins and really pricing as a priority because we're always working on high-grading our businesses and focusing on the higher-margin products, et cetera. But there was a layer of premium pipe margins, which we enjoyed for a number of quarters because we had product availability where our competition didn't.

We were able to command higher margins. We've been guiding to that layer of premium margins dissipating, and it's begun to do so. So we do expect a little margin compression in the second quarter, primarily due to Canada. Canada is going to move into a breakup period. Canada tends to be our highest gross margin segment.

And as we see that kind of geographic mix kick in, in the second quarter, we'll see a little slippage there. We still expect very strong margins this year. We talked last quarter about a 30 basis points full year decline. From 2022 to 2023, we saw about 20 basis points decline from a full year '22 to the first quarter of 2023.

So we do expect a little more taming of the overall margins, but we're doing everything we can to high grade, like we talk about. So in terms of the second quarter, that's how we get there. Like you said, the 3 big inputs, WSA largely being flat and gross margins eroding a little bit as expected and really seasonally impacted from Canada..

That's helpful. As a follow-up, I wanted to ask about the 2 acquisitions you closed in May. It sounds like they're in the pump and seal distribution space.

If you could just talk generally about your appetite for additional deals in that space, why you like it? What the pipeline looks like? Are there any sizable deals you're chasing anything along those lines would be helpful..

Yes. I'll start it off, and then I'm going to hand it to Brad. So I think the 2 deals we closed Tuesday this week, I think it was Tuesday, represents the 10th consecutive process solution acquisition we've made.

So we're really focused on growing that business, growing primarily our pump business and the seal business as well that came from these 2 acquisitions. So that's a big part of our focus. We will do deals like that this year. In terms of larger deals, we are talking to companies to try to affect larger ones.

And we think that the multiples on these deals could get a little better as interest rates rise and some of the uncertainty kind of happens in the market. So we are looking -- and that's a big part of our focus. And like I said in my opening comments, we're in a position to really pull all the levers. We are focused primarily on growing organically.

The market itself isn't growing at the rate as it was last year. Secondarily, we focused on M&A, and we've done 4 deals in 4 months. And thirdly, we're focused on share repurchase and the way our balance sheet -- the way we manage our balance sheet, we can do all 3.

But in terms of details on the acquisitions, Brad, do you want to give some color?.

Yes, Dave. Just some additional color. Back in 2019, DNOW acquired a company called PSI out of Wyoming.

And it really was kind of a really good relationship with a top-tier pump manufacturer that we sell a lot of pumps in the market as far as new pump packages, but that acquisition in 2019 took us into the mechanical seal area and really expanded our service capability with that manufacturer in addition to some other benefits that, that acquisition provided.

The 2 acquisitions we closed really earlier this week kind of build upon that strategy of securing, broadening our geographic footprint in Wyoming and Montana, in Colorado with that same very large pump manufacturer, broadens our capability on the mechanical seal line, significantly expands our aftermarket service capability.

They're really kind of the leader in the pump service and repair business, very high gross margins, high EBITDA margins. So accretive to our current kind of core base business, and that's been part of our acquisition strategy going forward. So we're really excited about these 2 businesses. They are bolt-ons, as Dave mentioned in his prepared remarks.

And we're going to extract synergies out of that as the year progresses. And really excited about expanding our footprint there in that area..

And just one comment on the synergies we're going to focus on revenue synergies. We want to grow that business. We are not looking at really cost savings from those deals. We're looking at leveraging the sales talent, the competencies of some of the services they provide to customers.

We want to grow that business for the rest of Process Solutions and DNOW from a revenue synergy perspective. Anyway, thanks..

The next question comes from the line of Doug Becker from Capital One..

So following along the same lines of questioning, Dave, you highlighted that market share gains, acquisitions, some synergies should drive revenue growth in 2Q, even as the North America rig count is going to be down.

Just wanted to get your thoughts on organic growth for the quarter and the full year, just given the very fluid nature of what's happening in the U.S..

Yes. I think most of the organic growth we're going to see in the second quarter is going to happen in the U.S. Of course, we're going to see, like I said, in Canada, seasonal decline in international, we had a really strong quarter. We do expect a number of projects totaling about $4 million, not to repeat in the second quarter.

So that will kind of moderate the level of activity there. In the U.S., wherever we're going to see most of our organic growth is with really new customers or having penetrated customers in different regions of the North American footprint.

So we're going to see continued growth in South Texas, in the Permian and in the Bakken, where we just stood up our mega-center there really to leverage multiple DNOW businesses from our Flex Flow business to EcoVapor to our fiberglass enterprise, et cetera. So we see those as the 3 main areas of growth, and it's mostly market share drive.

We've seen kind of rig count decline, same thing with completions. We've seen some of the market fundamentals kind of slowed down a little bit. And as it turns out, we have simply a better mousetrap with how we service our customers and then a sales team that can base the value with our customers.

So we believe market share gains are going to be the primary fuel for us in the second quarter..

Now that's really encouraging. How would you characterize DNOW's current exposure to end markets outside North America upstream, just given some of the recent acquisitions and initiatives.

And just your commentary, it sounds like the end market exposure really has broadened and I guess, at the same time, international and offshore activity seems to be increasing as well. So really just exposure outside North America upstream..

Yes, Doug, this is Brad. I'll take a shot at that and maybe Dave or Mark might layer on top. But going back, since we spun off from NOV in 2014, our international business was highly levered to the upstream really drilling segment having to be kind of a core distributor for NOV OEM equipment.

Since the downturn in international offshore, we've done a good job diversifying our international business. So we're more land-based in key areas in the Middle East, in the U.K., in Asia and Australia. We're more project-centric, executing projects through EPCs, but also large capital projects associated with NOCs and IOCs in different areas.

Of course, our McLean Electrical group, which is a previous acquisition we did as a very good top management team is driving the business as we expand our electrical distribution capabilities, not only in the U.K. and Australia, but also exporting that to IOC relationship, global relationships we have in West Africa.

So we're seeing that export side of the business pick up. So from a diversification, it's a lot healthier business. We're starting to see the offshore business day rates increase -- that's a small part of our business now. I would say probably 5% of our international revenue where at one time, it was much higher than that.

So it's a healthier, more end market diverse, geographically diverse business. And like we pointed out this quarter, really excited about the growth. We've been waiting for this segment to grow. I think we're seeing that. The backlog is picking up. The activity is picking up. So it's finally hitting on all cylinders and excited about the future.

As we think we're seeing more investment in CapEx in the Middle East, certainly with Saudi Arabia and Kuwait and Abu Dhabi and UAE as well as Norway, all around energy security. They really kind of driving investment in those areas that we have a pretty good foothold.

We're obviously looking to expand, certainly would be open to M&A activity internationally as well. So that kind of sums it up..

And just any commentary on, say, downstream exposure or kind of new energy exposure really hit on the international not very well, but maybe some of the other..

Sure. Yes. So downstream internationally, if that was the question specifically, I think Brad....

Not just internationally, just broadly..

Sure. Yes. I think really across all geographies, we're seeing expansion in the downstream sector, which has been great. Brad kind of alluded to kind of the offshore overreliance in prior cycles of our business.

And now for the International segment, we're seeing the downstream sector play predominantly larger part of that market where before if you look back 9 years ago, it was single-digit percentages probably. And so being able to grow that into double-digit, 20% plus of international is a bright spot for us.

And I do think some of the large projects Dave talked about on the call give us a lot of optimism for this space for energy evolution and to be able to provide those products that our customers are needing in that arena..

Our next question comes from the line of Nathan Jones from Stifel..

This is Adam Farley on for Nathan. I wanted to follow up on the gross margin line of questioning.

Are you still seeing inflation in any of your product categories? I understand that line pipe prices are coming down, but have you seen moderation in line pipe given some of the recent moves in other steel prices?.

So on the first part about inflation, I think we're seeing kind of a return to the norm on general inflation. We're not seeing the kind of -- we're seeing long lead times for certain types of valves and certain product lines we're seeing but a normalization otherwise, we're starting to see kind of normal pricing with our manufacturers.

Manufacturers are trying to push some price increases through, some of them stick. Some of them don't, which is kind of a normal tenor for a less stretched supply chain.

So I think we're starting to see more balance in terms of product availability for most products, especially MRO products and biddings and flanges and routine type of valve sales, et cetera. So kind of a reversion to the norm there. So I would say that inflation is kind of normalized now. And it's back to a normal behavior for most product lines.

We are seeing some product availability issues internationally, and that is slowing some projects down. We're seeing less of that in North America. In terms of pipe pricing, what we're seeing primarily in pipe is kind of margin compression as pipe pricing has stabilized. Some pipe prices might have come down, but that margin squeezing a little bit.

And that's due to simply improved product ability for products that only the biggest suppliers could acquire a year ago. Today, it's much more liquid supply chain there. So we're seeing higher cost in inventory, creating that margin squeeze.

But inflation is more normal -- back to kind of the normal range, I would say, despite some product lines having long lead times, but that's something we experience on a kind of a regional basis..

Okay. And I did want to call out -- you called out weather in the press release, in fact, in the quarter.

Was it meaningful enough to quantify the impact from weather? And if it was, do you expect to make up any of that revenue in the near term?.

I think we estimate about $7 million in revenues lost or deferred, how much of that gets deferred into the second quarter. I don't know. Probably some of it would. But it's probably a number along those lines, which would amount to 1.5% or so. But that was one of the drags in the first quarter.

Some of that could slip into the second quarter or sort into April already. That wasn't the primary, but that was kind of the third reason or the third kind of headwind in addition to oil and gas prices, completions, et cetera..

Our last question comes from Jeffrey Robertson from Water Tower Research..

Dave, you mentioned -- You mentioned Process Solutions represented 26%, I think it was of U.S. revenue in the first quarter. Can you talk about where you see that segment revenue going over the next several quarters? And I believe I'm correct, that's generally tends to be a higher margin mix of business for you..

Yes. So I get that question from time to time. It's hard for me to pinpoint kind of a target number, but I think when we first put together Process Solutions, it accounted for about 18% of our U.S. revenues. Now it's up to 26%. And that was several years back. But like I said earlier, the last 10 businesses we purchased have been in that space.

We think there are revenue synergies for each deal we're doing. Every deal we're doing has better gross and operating margins. But -- so -- and overall, that reporting unit, I guess, or that business line has better net margins. So that's a big focus for us.

What that percentage can get to we joke about that around here because we have 2 pretty strong leaders in those businesses who want to both grow their business. But I'd like to see that business get to be 1/3 of the U.S. business and grow beyond that. But I also want to grow our energy business as well. But that's a big target for us.

It's an area where we're moving more into really high-margin kind of rental assets business lines, which we really like. So the bottom line really becomes really more attractive to me than the top line, but we want to grow that business for sure..

So in terms of the rental businesses, so those are stickier businesses than -- or maybe not stickier, but a longer-duration revenue stream than what you might see on the energy centers?.

Well, it's just primarily better gross margins and that allows for pull-through sales of our other businesses. It's complementary to the product lines we already service those customers for. So it just simply gives us a bigger share of the wallet makes us more important to the customer and it provides better margins as well.

So I think that's the primary motivation for growing that rental business, and there's a repair business that we focus on as well that simply provides better margins and complementary suite of solutions to the customer..

In your comments, you mentioned some biodiesel project and some landfill gas projects and I think even a project on a swine farm.

Can you just talk about the opportunity in renewable natural gas and landfill gas and biodiesel and is that something that could become increasingly material for DNOW?.

I'm going to let Brad -- Brad has his hands up. So he wants to grab this one. Brad..

Jeff, yes, we're -- obviously, we're fairly levered to upstream oil and gas, but we're looking to diversify and we really like the RNG market for a number of reasons. We've sold historically some pipe bows and fittings into the RNG market.

But with -- and also into the biodiesel as some of these refineries in certain states take advantage of opportunities to convert the refining capacity to process by diesel. Where we have agreements and relationships, we're able to provide products for those biodiesel projects at refineries.

On the RNG side, the EcoVapor acquisition we did in the fourth quarter, really kind of cements a really good product solution that fits a lot of the demand that we see on the horizon as we see the RNG end market growing at a higher rate than certainly than oil and gas and the immediate future.

So we're excited about what EcoVapor can bring to that, whether it's dairy farms, swine farms as they're capturing RNG and having to meet the same stringent requirements that oil and gas operators have to, to put gas free of oxygen into the midstream takeaway section as well as landfill gas.

Traditionally, we haven't done a whole lot in the landfill gas applications, but we see, again, that opportunity kind of unlocked for DNOW with what EcoVapor can provide from a leading project, and we think that might open up additional products across process solutions for use with other fabricated pieces of equipment, our pump packages as well as fiberglass pipe as well as just our regular PVF business.

So we're pretty bullish on RNG. We're not ready to name a number yet on that, but we're excited about the growth and the growth potential that DNOW has in that end market..

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

Okay. Thank you, Bhavesh, and thank you, everyone, for joining for your questions today and your interest in NOW Inc. We look forward to talking with everyone on the second quarter 2023 earnings conference call in August. Have a nice day, and I'll turn it back to the operator to conclude our call..

Thank you. This concludes today's conference call. You may now disconnect..