DNOW - Earnings Call - Q3 2019

Transcript

Speaker 0

Welcome to the Third Quarter Earnings Conference Call. My name is Sylvia, and I'll be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. I will now turn the call over to Senior Vice President and Chief Financial Officer, Dave Teratinsky.

Mr. Teratinsky, you may begin.

Speaker 1

Thank you, and welcome to the NOW Inc. Third quarter twenty nineteen earnings conference call. We appreciate you joining us this morning, and thank you for your interest in NOW Inc. With me today is Dick Alario, Interim Chief Executive Officer. NOW Inc.

Operates primarily under the DistributionNOW and Wilson Export 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. Before we begin this discussion on financial results for the 2019, please note that some of the statements we make during this call, including the answers to your questions, may contain forecasts, projections and estimates, including, but not limited to, comments about our outlook for the company's business. These are forward looking statements within the meaning of The US Federal Securities Laws based on limited information as of today, which is subject to change. They are subject to risks and uncertainties, and the actual results may differ materially.

No one should assume that 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 ks and 10 Q that NOW Inc. Has on file with the US 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.distributionnow.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 excluding other costs and diluted EPS excluding other costs. Each excludes the impact of certain other costs and therefore has not been calculated in accordance with GAAP.

A reconciliation of each of these non GAAP financial measures to its most comparable GAAP financial measure is included in 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 quarter. A replay of today's call will be available on the site for the next thirty days. We plan to file our third quarter twenty nineteen Form 10 Q today, and it will also be available on our website. Now please let me introduce and welcome to the call our recently appointed Interim CEO, Dick Valerio.

Speaker 2

Thank you, Dave. Good morning, everyone, and welcome. I wanna kick off this morning letting everyone know that especially with regard to serving our customers and executing on our strategy, it's business as usual at DNOW. Our proven and long serving executive team is very clear about DNOW's vision for the future, and our Board is fully supportive of our current strategy. Because of its enviable balance sheet, a very strong customer base, our global reach, and especially because of our hardworking employees, managers, and executives, the company is well positioned to continue to improve its market position.

I'm grateful for the opportunity and the responsibility that the board has entrusted to me in this interim capacity, and I'm very excited to join outstanding team. As I get up to speed in my new role, I look forward to meeting and working with our dedicated employees and other stakeholders. And let me emphasize, DNow is fortunate to have this proven and long serving leadership team and employee base already in place, and I'm ready to work beside them. Given my brief time in my new capacity, I'll defer to Dave this morning to dive into the details of the third quarter results, but I would like to touch on our strategy and then highlight a few key themes. First, I'd like to talk to you about some reasons the team here perhaps has a more positive outlook than others as we face the current market.

In any market, especially when uncertainty is pronounced, it's paramount to focus on what you can control, and now is no different. DNOW's promise and focus has been and will continue to be delivering superior customer service, financial discipline and exercising sound judgment to deliver results without sacrifice of our core principles or values. Now for a few key themes. Free cash flow generation in the quarter was $97,000,000 enabling the company to return to a zero debt position for the first time since 2015. This important milestone is a testament to the continued working capital discipline by the leadership team and our employees across the globe.

This strong performance was further exemplified by improved collections and inventory turns across all three business segments in the period, driving our working capital as a percent of revenue down to 19% for the quarter, thus beating our 20% target. Moving to growth. Our capital allocation cadence typically follows the ebbs and flows of the overall market, and it will continue to do so. Our appetite in a slowing or contracting market lends itself to acquisitions, while our tendency shifts to organic opportunities during market expansion. Now that we've reduced our debt to zero and continue to exercise financial discipline, our total liquidity exceeds $600,000,000 providing ample ability to deploy capital and seize market opportunities.

We're focused on M and A and we expect the pipeline to grow. Our strategy remains to further differentiate DNOW and generate accretive returns to the company and its stakeholders. As an example, during 2015 and 2016, we acquired Odessa Pumps and Power Service, moves that immediately expanded our product offering and our value to customers while ultimately establishing our U. S. Process Solutions business.

Last quarter, we added two more businesses to bolster the momentum in U. S. Process Solutions. These businesses continue to capture market share and differentiate DNOW in the marketplace. In Canada, revenue was up 12% sequentially due to increased market activity as it exited spring breakup.

We continue to outperform in Canada and win business in a depressed market. We're scaling our organization to match market conditions by consolidating our branch footprint to reduce operating costs while maintaining our ability to provide superior customer service. And we remain excited about the long term prospects in the international arena, and we want to congratulate our international employees, in particular, McLean Electrical for driving international revenue to its highest level since the 2018. So before moving on to discuss the outlook for the remainder of 2019, I'll turn the call back over to Dave so he can review the quarter financials.

Speaker 1

Thanks Dick. For the 2019, we generated $751,000,000 in revenue, down $71,000,000 or 9% compared to the same period in 2018. Sequentially, revenue declined $25,000,000 or 3%. The US represents approximately three quarters of our revenue. And in The US, rigs declined 7% sequentially, while our revenues fared better than that, declining 6%.

And when compared to the same quarter in 2018, US rigs declined 12% with our revenues dropping less by 10% year over year. Sequential and year over year growth in power service, part of US process solutions, limited the revenue decline. It is worth noting that US rigs declined twelve to thirteen weeks in the third quarter, now with 124 fewer active rigs since our last earnings call and two sixty fewer rigs since year end twenty eighteen. U. S.

Revenues were $567,000,000 where U. S. Energy centers contributed 51%, U. S. Supply chain services 29% and U.

S. Process solutions 20% of third quarter twenty nineteen revenue. We have successfully completed the integrations of two second quarter U. S. Process Solutions acquisitions.

And customer interest in our recently acquired Houston area fabrication business continues to grow. As an example, during the quarter, we booked an order from a top customer for 30 test separators destined for the Eagle Ford. This additional fabrication capacity allows for shorter lead time deliveries, which are more attractive to our customers with the work done closer to the action. In the quarter, we won a new multiyear midstream customer contract in the Permian estimated to be 20,000,000 to $30,000,000 a year. We will be providing solutions as well as all the midstream products like high yield fittings, valves, and line pipe.

This new customer will have numerous midstream projects that will be continuing throughout 2020 as they as they will be very active in the Northern Delaware Basin as they complete multiple processing plants. U. S. Energy Centers revenue was down 8% sequentially, primarily due to steel line pipe project sales, which softened in the quarter due to project cycles and a market oversupply with pipe. Replacement costs for welded and seamless pipe continued to drop, putting continued pressure on pipe pricing.

Turning to U. S. Supply Chain Services, revenue was down 4% sequentially as E and P customers continue to focus on capital discipline to generate free cash flow resulting in lower purchases to DNOW. U. S.

Process Solutions revenue was down 4% sequentially as expected, coming off a record 2Q revenue quarter. Activity for our pump packages, fabricated process and production equipment was led by the Permian, Bakken, Rockies and Eagle Ford for orders on vessels, lack units, pumps and midstream gas and measurement units. We delivered a large pipeline booster pump package to a midstream customer for a crude oil pipeline in the quarter. Odessa Pumps is expanding our field service technician program to expand our customer capabilities to service pump equipment after the sale. As customers reduce capital budgets, they are more likely to repair existing equipment than to replace it.

More technicians mean shorter customer wait times and the opportunity for increased product sales and repair work. Power service growth year over year in the quarter was driven by large LACT packages delivered in the Permian, Bakken and Powder River Basin for major midstream gathering customers as well as E and Ps. Our added vessel capacity in the Houston area also helped us gain additional quick turnaround ASME package deliveries in the Eagle Ford and Bakken. Revenue gains from our Piping Specialties acquisition yielded additional growth in the Southwest Wyoming soda ash mines and power plants. Canada revenues were $83,000,000 down $10,000,000 or 11% year over year against a 37% decline in rig count.

We continue to outperform market. Revenue was up 12% sequentially due to increased activity as we exited spring breakup. Our Canadian team continues to win business in a down market with activity in the Cardium and Viking plays. Government imposed production limits are driving lower oil and gas investment and tightening access to credit for customers. Takeaway capacity constraints are leading to high levels of inventory, resulting in production curtailments by the Alberta government.

This environment continues to impact DNOW's Canadian business growth opportunities, but we are concentrated on on improving our position. And the team there is winning, as you can see by the three q revenue result. Due to reduced activity levels in the Canadian market, we are scaling our organization by consolidating and reducing our branch footprint where warranted. International revenues were 101,000,000 in the 2019, up 2,000,000 from a year ago, net of a 3,000,000 impact from unfavorable foreign exchange rates. Our international segment revenue was up 4% sequentially on increased project activity.

In Latin America, we capitalized on an increase in drilling activity in Mexico and Brazil, resulting in MRO equipment sales. We are also seeing an uptick in OEM and MRO product sales exported to West Africa. We experienced some softness in the Asia market and flatness in the Middle Eastern market sequentially with a slowdown in rig load outs and credit tightening across the international region. We are evaluating international activity to bolster resources or pull out costs as needed. In the third quarter, gross margins were 20%, a 30 basis improvement sequentially due primarily to product and geography mix.

Pipe sales, which are trading at lower margins today, declined as a percent of sales. And Canada, which is trading at better than average product margins, grew as a percent of sales. These mix effects enabled a welcome overall gain in gross margins. Gross margins were 19.9% year to date September 2019 and twenty 0% year to date September 2018. We're pleased with the results of the strategies that emphasize higher margin product lines and employ technology to maximize order win rates and product margins, enabling the kind of year to date price stability we've seen this year amid an otherwise deflationary environment.

We expect gross margins to be choppy in the near term as the market reacts to reduced activity levels, oil and gas commodity prices, and more directly to observe steel price declines. Warehousing, selling, and administrative expenses or WSA was $136,000,000 or flat sequentially and down $6,000,000 from the 2018 as we made expense adjustments in the period to reflect market trends. WSA is down 15,000,000 year to date September 2019 versus year to date September 2018. We continue to focus on efficiencies and have reduced headcount by about 75 in the third quarter, an additional 75 reductions in October or 150 reductions since the end of the second quarter. When considering the locations closed or consolidated in 2018 and through the 2019, the revenue generated in those locations approximated 4,000,000 more in 03/2018 than in 03/2019 or twenty six million more on a year to date basis.

While we did recent retain some of the revenue by supporting customers from other locations, we were able to move resources elsewhere and improve earnings and returns on working capital. This remains key at DNOW, grow the business while demanding improved productivity and working capital velocity. This is the tactical side of us scaling the business to meet market demand. In the fourth quarter, we expect WSA to be in the mid to low $130,000,000 range. Operating profit was $14,000,000 or 1.9% of revenue.

Net income for the third quarter was $10,000,000 or $09 per diluted share. On a non GAAP basis, EBITDA excluding other costs was $24,000,000 or 3.2% of revenue for the 2019. Net income excluding other costs was $9,000,000 or $08 per diluted share. Other costs after tax for the quarter included the benefit of approximately $2,000,000 from changes in the valuation allowance recorded against the company's deferred tax assets, offset by approximately $1,000,000 in other costs after tax in the period for severance. Our effective tax rate for the three months ended September 3039, as calculated for U.

Purposes was 15.2%. Moving on to operating profit. The U. S. Generated operating profit of $9,000,000 or 1.6% of revenue, a decline of $12,000,000 when compared to the corresponding period of 2018, primarily due to a decline in revenue, partially offset by reduced operating expenses.

Canada operating profit was $4,000,000 or down $1,000,000 when compared to the corresponding period of 2018 as a result of the revenue decline mentioned earlier. International operating profit was $1,000,000 or up $1,000,000 when compared to 3Q twenty eighteen due to the increase in revenue coupled with a decline in operating expenses. Turning to the balance sheet, cash totaled $113,000,000 at the end of the third quarter with $76,000,000 located outside The U. S. During the 2019.

We repatriated $5,000,000 from our Canadian operations in the period. We exited the quarter with no outstanding borrowings under our revolving credit facility achieving a zero debt position. At September 3039, our total liquidity from our credit facility availability plus cash on hand was $620,000,000 Working capital, excluding cash as percent of revenue from the 2019, was 19%, under 20 for the first time since spin off. Accounts receivable were at $466,000,000 at the end of the third quarter, down $30,000,000 sequentially, improving DSO to fifty seven days. Third quarter inventory levels were $548,000,000 resulting in improved inventory term rates to 4.4x.

And accounts payable were $326,000,000 at the end of the third quarter with days payable outstanding to forty nine days. Net cash provided by operating activities was $101,000,000 in the third quarter with capital expenditures of approximately 4,000,000 in the third quarter and $7,000,000 year to date, resulting in $97,000,000 in free cash flow in the quarter and $212,000,000 in free cash flow for the trailing twelve months. I'd like to close with a summary of where we stand through three quarters. In our February guidance, we said that we expected 2019 revenues to be flat to a decline in the low single digits year over year. And through nine months, 2019 revenue is within that range.

We said free cash flow would be similar to 2018, maybe better. And free cash flow is actually more than double the twenty eighteen 3Q year to date level at $143,000,000 or $212,000,000 on a trailing twelve month basis through September. We said we'd be strengthening our market position, and we did that markedly in Canada and in U. S. Process Solutions.

We said we would work towards our goal of 20% working capital, excluding cash as a percent of revenue, and we achieved 19% in the quarter. We said we would maintain price discipline and that we'd have to defy gravity on price if the market were to slow down to maintain gross margins. And it has and we did. After nine months in 2019, year to date gross margins were 19.9% in a deflationary period, just barely below the nine month 2018 level of 20% in an inflationary period. We said we'd expect quarterly WSA to be in the low 140s, high 130s, yet we're in the mid 130s and making adjustments towards the low 130s.

We said 2019 EBITDA could mirror 2018 levels, and EBITDA is at 82,000,000 through 03/2019, eclipsing the 78,000,000 through 03/2018. So we're pleased with where we are after nine months, having produced solid earnings, the best working capital velocity, no debt, and bright inorganic prospects. With that, I'll turn the call back to Dick.

Speaker 2

Thanks, Dave. Looking ahead, we expect seasonal and rig count declines, customer budget exhaustion and CapEx discipline to continue to impact the top line of our business during the remainder of the year. Through the first nine months of the year, our revenues declined 51,000,000 or 2% compared to the same period in 2018, within the range we guided to back in February. Given persistent North American active rig declines, we expect the fourth quarter to be down seasonally from the third quarter, normally a 5% to 10% decline, and now expect that it will be at least at the high end of that range. Before I move on to recognize one of our dedicated employees, I'd like to emphasize some of the progress the team here at DN Now made in the execution of our strategy in the third quarter.

We continue to optimize our footprint with facility consolidations, focus on margin discipline in a challenging U. S. Land market and invest in technology to increase our quote to order time. We're leveraging our distribution centers and optimizing our logistics, which is resulting in reduced inventory and better turns. Our sourcing strategy is structured to respond to changes in import tariffs, reducing working capital as a percent of revenue and leveraging our acquisitions through cross selling opportunities.

The success of these is evidenced by generating $97,000,000 in free cash flow in the quarter. And so it's easy to see that the outstanding leadership team and employees at DNOW have made excellent progress on our strategic objectives. Our healthy balance sheet provides the wherewithal for inorganic growth options such as the two small acquisitions that we closed last quarter. And now it's my pleasure to continue the DNOW tradition and recognize one of the employees whose daily hard work and dedication enable us to deliver on our promises. Forty four years ago, in August 1975, in Shreveport, Louisiana, a young man accepted a position as a warehouseman and truck driver working for Wilson Supply.

Six months later, Murphy Greer was promoted to inside sales. And in 1979, he moved to Bryan, Texas to be the operations manager for the Bryan branch. Over the years, Murphy's held several roles including branch manager, operations manager, and warehouse manager. And the team here tells me that whenever a branch got behind on invoicing or needed some sort of expert help, Murphy was the guy that ran toward the fire. Some of Murphy's support stops included Evanston, Wyoming, Tuscaloosa, Alabama, and Dillon, Texas.

They always returned to Bryan, Texas. Murphy's an early riser, often in the office around 3AM. In 1998, Murphy received an employee recognition for countless hours of dedication and continuous support to meet our customers' requirements. Murphy and his wife, Lynn, enjoy spending time with their eight grandchildren. And Murphy, I'm very proud that on my first earnings call here at DN Now, I can thank you for your continued dedication and service to our company.

And we have one last thing, Murphy, especially this week, go Tigers. We'll turn the call back to Sylvia now for questions.

Speaker 0

Thank you. We will now begin the question and answer session. And our first question comes from Walter Liptak from Seaport Global. Please go ahead.

Speaker 3

Hi, thanks. Good morning,

Speaker 1

Good

Speaker 3

morning, And a good job on the EBITDA this quarter.

Speaker 1

Thank you.

Speaker 3

I wanted to ask about some of the numbers with cash flow. And the cash flow was really strong this quarter, and I wonder what the fourth quarter is going to look like. Typically, accounts payable, those come down in the fourth quarter. And with your DSOs, it looks like there could be more room on DSOs. Where do think you can get those?

Speaker 1

Okay. In terms of, you know, we're we're going into the fourth course quarter, and, you know, we talked about the seasonal seasonality effect and and and the expected decline in revenue. So so we we think we'll continue to reduce inventory meaningfully. Our teams have done an excellent job at that all year long. We had the the highest, term rates in in the third quarter we've had since we've spun, and we've made very nice progress there.

In terms of accounts receivable, you know, I think I think the way the the quarter will go is we'll start the the quarter off with October being the highest in revenues and things slowing down as you'd expect throughout the season. In the meantime, rig counts are declining and, you know, so things will really slow down towards the second half. So collections will be better in the fourth quarter than usual given the timing of revenues. Accounts payable, you know, we'll we'll we'll maintain those probably at the same number of days we usually do. So we expect a strong cash generation quarter given the decline in revenues and the focus our whole organization has on managing the balance sheet.

Speaker 3

Okay. Okay. That sounds good. And I think one of the things that we're all learning about is the cost control and the discipline that you guys have had. And I wondered if we could talk a little bit more about the WSA and your comment of getting below the $130,000,000 level because you've working hard on cost discipline for a number of years now.

How much more costs can come out in 2020? What kind of costs are coming are left? Like is there more facility costs? And as you optimize logistics, what do you think is a target run rate for that?

Speaker 1

Okay. Yes, you're right. We've been focused on being more efficient as we approach the market. And while we were growing during the, if you can call them, the up years of twenty seventeen-twenty eighteen, grew and really became a lot more productive. Now we're in a different scenario where really all year long The U.

S. Market has shrunk. So we've been pulling up cost. And in the last call, we said we'd have $138,000,000 in WSA in the third quarter, and it was 136,000,000 because we've begun to make cost adjustments. And those include facility closures, reduced rent and lease cost resulting from that, you know, personnel reductions.

And we've been doing, you know, we've been doing those globally and, you know, kinda more stridently giving, you know, the North American, you know, activity direction. So that's where you're gonna see most of the cost savings are are in personnel, rent, the peripheral costs that come with that. That's a big focus for us. You know, so that's that's you know, we're not really really ready to talk about what's what the levels are gonna be for 2020. We'll be more elaborative about that on the February call.

Speaker 3

Okay. All right. Fair enough. And if I could ask one on just do you have a look yet into customer budgets for 2020? What's your outlook for rigs or for what customers are telling you about spending for next year?

Speaker 1

I think the early reads are 2020 is going to see some contraction, some further contraction. There are some prelim numbers being put out there. I don't think the budgets are formalized and certainly not to a position where we're ready to comment on what our outlook looks like. But it looks like in North America anyway, the market will shrink. Then it could be you know, so I I don't wanna really say much more than that, but that's kind of how we're viewing things.

So we've gotta, you know, position our business to shine in 2020 like we have in 2019.

Speaker 3

Okay. Sounds good. Okay. Good luck, guys.

Speaker 1

Thanks, Paul.

Speaker 0

Our following question comes from Blake Hirschman from Stephens Inc. Please go ahead.

Speaker 4

Yes. Good morning, guys.

Speaker 1

Good morning, Blake.

Speaker 4

On the 4Q commentary, I was curious if you could give a little bit more by way of geographic trends and that kind of at the upper end of sequential historical declines, kind of that 10% or so. How does that break out by different geographic market?

Speaker 1

Okay. I'll I'll start with international because, you know, that's one area where, you know, there is ultimately some optimism there. And so so we expect, you know, for the fourth quarter at least, our international business to be flat with some project revenue moving, you know, up or down to, you know, which might make it down a few million or up a few million, but flattish internationally. In Canada, whereas as you know, historically, fourth the fourth quarter used to be better than the third, that has not been the case for the last couple of years. So we do expect revenues to slow down there.

I don't have a good feel for it in Canada, but we do expect a decline in revenues overall. In The US, if you look at last year, for DNOW, we had, you know, a stellar 03/2018. We had 822,000,000 in revenues, you know, just, you know, just a perfect storm of of great revenue news in that period. And then things really slowed down in The US, and I think our revenues overall went down 7%. And that was throughout 04/2018, rig counts were going up throughout the quarter and peaked at December 28.

The the opposite is true here. So we're going into the fourth quarter with, rig counts probably gonna drop at least 10% from the third quarter level, and the sentiment is sour. Customer budgets are exhausted, and people are waiting until the 2020 budgets to refresh. So so we talked about where we normally see a five to 10% decline. We think it'll be at the high end of that range or possibly higher.

So that's kind of the flavor. The US being 75% of our revenues, that's the one I think we have the most color on how the revenues are gonna trend.

Speaker 4

Got it. Thanks for that. And then on the gross margins, nice sequential pickup there. You called out mix, it sounded like it was probably the key driver. I think the slides also talk about better pricing.

Could you kind of frame up the drivers behind that sequential gain?

Speaker 1

Okay. So interestingly, we saw pretty stable margins across most product lines except pipe. In some product lines, we actually saw some product margin gains. So you could argue we're seeing price stability where the market is right now except for pipe. What impacted our second quarter to third quarter gains in gross margins was we simply sold less pipe in the third quarter.

So as a percent of sales, the what what is a lower margin product was reduced in the third quarter. And in Canada, right now, have better than average margins on a segment level, and Canada revenues increased and US revenues declined. So that all that's kind of a geographic and product mix, which drove overall improvement in gross margins. But otherwise, we're seeing some margin stability except for steel related products.

Speaker 4

Got it. And then just lastly on debt, it looks like you paid down all of it. How should we be thinking about that? Do you guys want to stay debt free into the 4Q and maybe into the next year? Or are you just going to tack on a little mainly for M and A as opportunities come?

Speaker 2

Yeah. Blake, it's Dick. Look. As as you heard, it it it's enviable to be in our position with the state of the oilfield service business as it is today. So we're gonna continue to exercise discipline.

But I mean, is prime time or the sweet spot what we see coming for the DN Out strategy. We have been acquisitive. The acquisitions have been accretive. Everybody here is focused on what we can do with the balance sheet, but the I think the the great thing here is that we are able and have demonstrated, this management team has, they're able to use the balance sheet as its bank account and then quickly pay it back and get ready for the next round. So I think the message here is we stay the course.

We continue to do what we've done successfully. And we just wait for this pipeline to build some more and take advantage of our strengths.

Speaker 4

Got it. I'll hop back in queue. Thank you.

Speaker 1

Thanks, Mike.

Speaker 0

Our following question comes from Bebs Vajna from Howard Weil. Please go ahead.

Speaker 1

Good morning, Bebs. Phebbs, are you out there?

Speaker 5

Can you hear me now?

Speaker 1

Yes. Yes.

Speaker 5

Sorry about that.

Speaker 1

Can. Good morning. Morning.

Speaker 5

I guess, just want to address the elephant in the room. Want to speak about if you can provide some color around the recent management changes, that would be helpful.

Speaker 2

Yeah, Betsy. It's Dick. Look. Let me start here. After very careful consideration, the DNOW board determined that a change at the CEO position was was best for the company.

Speaker 1

And if you go

Speaker 2

back and look at our press release and the Form eight k that we filed, I wanna emphasize the board terminated Robert's employment without cause. There's no change in our strategy, And his resignation from the board was not due to a disagreement. Look, that that you know, it often the case in business, there are times when the board determines that it's necessary to make a change in leadership when there is a when there's not a for cause termination. Let me be clear. When there's not a for cause termination event and there's no financial irregularities or business disagreements, which is the case here.

So look, I would wrap it up by saying that the board and I recognize there's ample runway for DNOW to advance its market position and generate incremental value. And that I've given you something incremental there, so I hope that we can can put that matter to bed and move on.

Speaker 5

Okay. Okay. I guess going back to some of the financial guidance that you guys talked about for fourth quarter, maybe Dave. If we think about first of all, when you guys talk about 5% to 10% decline and maybe higher end, you are talking about overall revenues, not U. S.

Specifically. I want to make sure of that.

Speaker 1

That's right. And and really, that five to 10% is where we tend to land historically. And we were saying that, you know, that that's normally a good benchmark. But given the decline or the erosion of activity in the fourth quarter and customer discipline, really, like we haven't seen before, discipline and focus on free cash flow, we expect to potentially go beyond that range. But that's global.

That's not just The US view.

Speaker 5

Got it. Is it if And you can provide some color around, like, should is it more energy center, or is it more supply chain that's driving that?

Speaker 1

That that's a good question. So I think it would be more energy center, more, you know, e E and P related, and that and and supply chain is gonna be part of that. So if if our top big supply chain customers reduce their spending, which some of them have notably, then that impacts impacts us directly similar to how it would at branch level. Now where we have some some offsets and where we've been making gains recently is in the midstream arena. Most of that project related, but a but a bunch of it's related to increasing activity in our power service business.

You know, we talk a lot about Odessa Pumps and Power Service as as as a unit that makes up our process solutions US process solutions. You know, they've just been making, you know, great headway. So they'll they'll you know, they might fall at a lesser rate in the fourth quarter than than we'll see in supply chain or in energy centers. But even there, we expect some revenue declines in US process solutions, perhaps with stability in the power service area.

Speaker 5

Got it. And last question, if I may squeeze in. I think you touched upon this, but was very surprised to see U. S. Revenues down and margins up.

Is it and I couldn't really see a whole lot of change in the business mix. Could you just address it one more time for me, please?

Speaker 1

Yeah. I think primarily in The US, what happened is we had so in The US, we had lower pipe sales. Most of our pipe sales actually happened in The US. And those margins have been declining. Where they peaked in 2018, they've been declining in 2019.

But because pipe sales themselves declined absolutely as a percent of US sales and a percent of global sales, that improved US margins and and global gross margins. But on on a DNOW basis, also, Canada right now has higher product margins than we're experiencing in The US. In part, because we do more midstream work down here and we sell more pipe down here and Canada sales went up in the period. So those are the main drivers for the 30 basis points improvement in the third quarter.

Speaker 5

All right. That's all for me. Thank you for taking my questions.

Speaker 1

You're welcome.

Speaker 0

Our following question comes from Sean Meakim from JPMorgan. Please go ahead.

Speaker 1

Good morning, Sean.

Speaker 6

Thank you. Good morning. So maybe just to touch on the midstream a bit more. You've been highlighting some wins there. At the same time, transmission companies are feeling the pressure from investors to become more capital disciplined.

As you've noted, line pipe pricing has been very weak. So a lot of cross currents there. Can you maybe just talk a bit about the progress you've made in midstream in the context of what seems like a more challenging environment for spending in that stream?

Speaker 1

Yes. Generally, we're going to see fourth quarter declines across all of those up, down and midstream markets. And midstream in particular is going to be a function of demand by our customers. But we recently won new business. And if you look at it on a year over year basis and the progress that we've had with our power service business, that's where we're limiting the decline in revenues because we're gaining some market share there.

So we expect even midstream to decline in the fourth quarter, but at a lesser rate from the other revenue streams. We don't have a great feel for that. Customer budgets are still being formulated or exhausted in the fourth quarter. But we have seen resilience in new contracts, largely led by our our our solutions offering in process solutions.

Speaker 6

Got it. Okay. Thank you for that. And and I'm glad that the elephant in the room has been acknowledged, but I was hoping to take a bit more of a forward outlook on that topic. So as Dick's leading the search for the full time CEO, could you maybe just give us some broad strokes of what you and the board are looking for in terms of internal versus presumably external candidate?

What what are the type of characteristics that you think are needed in the next CEO?

Speaker 2

Well, first of all, we're gonna select the candidate, you know, under a very broad search program. So we're gonna take our time. And I think it's fair to say that given the very, very strong culture here, we're not gonna be seeking a change agent. I think that we're gonna seek someone that can facilitate the success of this existing very, very strong management team and prosecute the strategy that has been a winner for us so far. And then I guess the last thing I would say is, you know, we're not gonna go fast.

We're gonna be very patient and bring and and select the best candidate that accomplishes those things, you know, for the for the company.

Speaker 6

Fair enough. I appreciate that feedback, Dick. Thanks.

Speaker 1

Thank you, Sean.

Speaker 0

Our following question comes from Evan Jones from Stifel. Please go ahead.

Speaker 7

It's Adam Farley on for Nathan.

Speaker 1

Good morning, Adam. How are you?

Speaker 7

Doing well. My first question is regarding the Canadian market. Clearly, the macro environment there is weak. But it sounds like you guys making solid progress and maybe gaining share. So I was wondering if you could provide any color on what that market share gain is coming from.

Speaker 1

We talked a little bit about it on opening comments, Cardium and Viking plays, and, you know, kind of the oil sands. So we're picking up revenue streams that that other competitors are, you know, kind of walking away from. We've got an established presence in Canada, good coverage. Although we made, you know, closures in the in the quarter, we're able to scoop up some of the revenues that others are are walking away from. You know, and and we talked a lot about our management team in Canada.

They're they're a scrappy, customer focused group of folks. And we've been, you know, repeatedly able to to to gain ground up there while maintaining margins in a in a really kind of miserable environment. So I I think it's, you know, kind of related to those those areas I talked about, but it's also just the attitude of our people. And the scrapping nature of how they do business. We're really excited about not just the revenues, but the earnings of that business as well.

Speaker 7

Okay. That's helpful. And then just switching over to international, it sounds like there's a couple of bright spots, project work. Maybe just from a high level as we move into 2020, how do you look at that business? Are you seeing any increased activity in maybe offshore?

Any color there would be helpful.

Speaker 1

Yes. I think we're seeing some positive movement in Latin America, in Mexico and in Brazil. We're seeing revenues increase there. We're starting to see some interest in our export group, most notably to West Africa. So things are starting to percolate a little bit.

Still a project business, still in the early goings of what you probably can't even characterize as a recovery internationally yet. But, you know, we see optimism there where we're kind of preparing for other possibilities in North America.

Speaker 0

Ladies and gentlemen, we have reached the end of our time for question and answer session. I will now turn the call over to Mr. DiGalerio, Interim CEO for closing statements.

Speaker 1

Okay. Thank you for calling in today, and we will see everyone on the next call. Have a good quarter.

Speaker 0

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.