Release Date: May 10, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Strong free cash flow generation of $80 million in Q1 2024, surpassing the full-year target and potentially reaching $200 million for the year.
- Successful acquisition and integration of Whitco Supply, enhancing service levels and expanding the U.S. footprint in the midstream energy sector.
- Robust balance sheet with $188 million in cash and no debt, providing financial flexibility for future growth and acquisitions.
- Positive revenue growth in the U.S. by 4% sequentially, driven by acquisition activities and strong market presence.
- Strategic focus on revenue diversification and operational efficiencies, aiming to capture additional revenues from the growing energy evolution market.
Negative Points
- Seasonal and weather-related challenges impacted Canadian operations, leading to sluggish activity and revenue delays.
- International segment revenue declined by $10 million sequentially due to non-repeating projects, indicating potential volatility in project-based revenue streams.
- Gross margins slightly declined due to inventory step-up amortization charges related to the acquisition, impacting profitability.
- Potential uncertainty in achieving revenue synergies with Whitco Supply, as integration and market penetration efforts continue.
- Dependence on market activity for achieving upgraded financial targets, with inherent risks if market conditions do not improve as expected.
Q & A Highlights
Q: Can you provide details on the annual revenue and margin profile of the Whitco acquisition, and your plans for leveraging your business model to improve their operations?
A: David Cherechinsky, President and CEO of DNOW, stated that Whitco was purchased for around $185 million, with EBITDA performance similar to DNOW's, possibly slightly stronger. The focus post-acquisition is primarily on revenue synergies, especially since Whitco operates with a significant midstream component and has a customer base that does not significantly overlap with DNOW's. The aim is to introduce DNOW's process solutions and fabrication competencies to Whitco's customers.
Q: Could you discuss the main contributors to the strong free cash flow generated in the first quarter, which is typically a seasonally weak quarter?
A: David Cherechinsky explained that about half of the free cash flow came from earnings and the other half from improved organic accounts receivable collections. The significant cash flow was unexpected as the first quarter generally consumes cash. The acquisition of Whitco is expected to further enhance cash generation.
Q: What are the expectations for DNOW's revenue and growth for the second quarter and the rest of the year?
A: David Cherechinsky noted that the majority of the revenue increase in the second quarter would come from a full quarter's contribution from Whitco. Internationally, there will be some growth, with a seasonal decline in Canada. The third quarter is expected to be the strongest, followed by a typical seasonal decline in the fourth quarter.
Q: What gives you confidence that margins will improve throughout the year?
A: Mark Johnson, CFO, mentioned that the first quarter margins included some temporary impacts from the Whitco acquisition accounting. These are expected to normalize by the third quarter, returning to the previous year's levels.
Q: Can you talk about any cost synergies with Whitco, especially since they follow a supercenter model similar to DNOW?
A: David Cherechinsky emphasized that the focus with Whitco is on revenue synergies rather than cost synergies. There might be some cost savings on the product side, particularly for pipe and valve brands where both companies overlap with suppliers. However, the primary goal is to grow market share and drive revenue.
Q: Does the addition of Whitco alter the types of acquisitions or product lines that make sense for DNOW going forward?
A: David Cherechinsky clarified that while Whitco is a unique acquisition due to its midstream strength, future acquisitions are likely to be more focused on process solutions, continuing the trend of the past several years.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
