Earnings Call: Q2 2021

Aug 4, 2021

Welcome to the Second Quarter 2021 Earnings Conference Call. My name is John. 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. And I will now turn the call over to Vice President, Marketing and Investor Relations, Brad Wise. Mr. Wise, you may begin. Well, good morning, And welcome to NOW Inc. Q2 2021 Earnings Conference Call. We appreciate you joining us and thank you for your interest in NOW Inc. With me today is David Czerochinski, President and Chief Executive Officer and Mark Johnson, Senior Vice President and Chief Financial Officer. We operate primarily under the DistributionNOW and DNOW brands. 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 this call, Including the responses 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 U. S. Federal securities laws based on limited information as of today, which is subject to change. They are subject to risks and uncertainties and actual results may differ materially. No one should assume that 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 ks 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. Denow.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 earnings per share excluding other costs, each The impact of certain other costs and therefore have 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 our site for the next 30 days. We plan to file our Q2 2021 Form 10 Q today and it will also be available on our website. Now, let me turn the call over to Dave. Thanks, Brad. Good morning, everyone, and thank you for joining us. The Q2 marked another strong quarter for DistributionNOW. From a top line perspective, while global rigs in the quarter were unchanged compared to the same quarter in 2020, our revenues grew 8%. Sequentially, global rigs increased 2% and our revenues grew 11%. Gross margins on the back of 1Q 2021 record highs And against our expectations of a modest contraction due to increased project activity and downward pressure from Canadian breakup, Gross margins again reached a new high of 21.3%. It's easier to grow revenues by conceding price. It's harder to grow the business and improve gross margins at the same time. Yet we did so for a second consecutive quarter. Moreover, 2Q 2021 marks the 3rd sequentially quarterly market expansion since the 3Q 2020 bottom, Our U. S. Rigs had declined by 2 thirds from the Q1 of 2020. The spending discipline exhibited by our customers, which limits their purchases and in turn our revenue opportunities in the short term also moderates the extreme volatility we experience through the cycles. Customer spending restraint curbs the feast or famine shocks our industry has experienced historically, enabling better inventory management and reduced product obsolescence inevitably resulting from the wild swings a lack of spending discipline creates. In 2020, our push was to recompose the company amid the steep decline in market activity. While we have work left to do To align our cost structure to our strategy and to the market, the focus in 2021 is prioritized around revenue retention, Market share gains, end market diversification and inorganic expansion. We believe the restraint exhibited by public operators lays the groundwork for expanded domestic rig activity for 2022 as E and P balance sheets improve this year providing more opportunity to finance capital investment. This environment sets up well for DNOW if demand continues to recover. As part of the end market diversification strategy, we are tapping into municipal water and mining customers, while targeting growing markets like carbon capture, Renewables and hydrogen tied to a shift in capital investment towards the energy transition movement. We are designing for the future Fueled by a strong balance sheet, we are leveraging technology, application know how and streamline supply chain and technical process workflow to enhance our solutions and drive incremental sales of the products we offer to achieve levels of differentiation in the market. We are focused on delivering value to our customers and applying inventive solutions while diversifying our end markets. Now to a regional look. In the U. S, revenue was up $44,000,000 sequentially or 17%. U. S. Energy revenue increased sequentially due to increases in drilling and completions activity. We expanded sales with E and P operators, driven by growth in spending by some of our largest customers and due to rigs being added by private operators. Notably, Revenue gains with private E and Ps outpaced sequential rig additions for public companies as most publicly traded operators held to their capital discipline. In the Rockies area, we expanded our relationship with an independent energy company who uses CO2 captured from industrial resources that would have otherwise been vented into the atmosphere. In the DJ Basin, we expanded PBF market share with a regional independent On new facility construction projects and in the Bakken, we provided PBF for several new tank battery builds for an Oklahoma based independent oil producer. Other key wins included growing sales with a large regional operator in West Texas, providing PVF material for multiple projects and maintenance on a variety of facilities centered around tank batteries. In the Northeast, we delivered line pipe Orders to regional gas utility customers as well as PVF for wellhead hookups to gas operators in the Ohio Valley region. In the midstream sector, we provided valve solutions for a large regional petroleum products pipeline leveraging a new valve supplier partnership targeting midstream liquids applications. In South Texas, we saw sequential growth from public and private E and Ps As activity ramped up producing orders for PVF for tank batteries and flow lines, while midstream companies acquired line pipe for gathering lines offshore marine transportation and logistics company as well as provided fiberglass pipe per flow lines to a Haynesville shale operator. We captured revenue gains with our large integrated supply customers. Revenue was driven by increased winterization products projects in the Bakken, Plant turnarounds day to day business associated with drilling programs increased level of central tank battery builds and large line pipe orders for gathering systems. For workover rigs, our workover trailers enabled our customers to maximize inventory availability and eliminate downtime associated with stockouts, while using our mobile app to acquire MRO products that deliver cost savings and efficiency gains for the operator. At U. S. Process Solutions, revenue expanded sequentially with increased completions activity from drilling operations and duct drawdowns yielding higher demand for our fabricated engineered equipment packages in addition to pump packages for fluid handling. We are seeing an increase in customer interest and order wins for our fabricated equipment solutions. Activity in the quarter was primarily focused in oil producing regions, while diversified end market business was captured in the midstream and municipal water markets. Key wins included 15 production separators and vessels for the Powder River Basin for a large independent E and P operator And multiple air compressor units as operators seek to eliminate the venting of gas from direct gas compression, Replacing old compressors with much lower emission compressed air systems in an effort to support our ESG initiatives relating to lowering of greenhouse gas emissions. Our investment in digital solutions is bearing fruit. Using our e spec engineered equipment configuration and budgeting tool, we were able to successfully secure an order for 90 air compressor units from a large independent E and P operator. E spec enabled a richer contextual discussion with the customer providing enhanced configuration and pricing options that added value through a compressed sales order cycle. On the Packaged Pumping Unit side, we were successful in a variety of applications, including water handling, transfer and treatment applications for non oil and gas markets related to waste management and industrial water treatment. In the renewable space, we provided pumping solutions to geothermal power plants And also expanded into the recreational market where we delivered water handling equipment for snowmaking applications at ski resorts. And we deployed our pumping rental fleet assets for our regional operator in the Midland Basin used to protect child wells, while parent wells are to mitigate subsurface communication. With increasing flows of produced water, we expect operators to continue to turn on Pump rental services to support the disposal capacity increases. As completions grow and saltwater disposal activity increases, The deployment of DNOW's mobile horizontal pumps will ensure the operational support that's needed when disposing of newly produced fluids. In Canada, the 2nd quarter revenue was $51,000,000 a sequential decrease of $7,000,000 or 12% Better than what we normally experience. Leveraging a new supplier relationship strengthened our value proposition in several focus areas for pipe Fittings and Flanges or for a sourcing strategy that resulted in several key project wins. Building on the success of our sourcing initiatives, we established a new partnership on valves that increased our market competitiveness in several material types that produced wins during the quarter. This success is a direct result of strategic sourcing where being selective in Partnering with top tier suppliers drives market share gains. During the quarter, we extended a 2 year agreement with the top 20 Canadian customer Expanding the agreement to now include valves. Another project win during the quarter included large actuated valves from an EPC for a major operator used in the bitumen extraction process in the oil sands market. With one of our top customers, we expanded market share in our artificial lift product line and captured a variable frequency drive automation project for our automation product line. We continue to capture market share through leveraging our service model and technical application support with EPCs, Notably, winning a large project for an operator who hadn't historically participated with in their day to day business. Furthermore, we renewed a key fiberglass pipe contract with the top customer and delivered flow lines and tie ins to an oil gas operator's mature oil asset. For international, in the second quarter, international revenue was up $2,000,000 sequentially or 4%. Recoveries continue in Australia, Asia and Latin America. In Australia, orders increased from a major offshore drilling company With several rigs contracted for a large domestic natural gas producer, in Singapore, we secured a notable project valve order for a refinery customer. In Asia, with the expansion of our electrical cable product line where we onboarded a new supplier, we generated new business to an industrial automation fabricator who produces assembly solutions for traditional and electric vehicles. In Latin America, we leveraged our valve solution offering for offshore producing assets We secured a 3 year contract award for MRO material for a large gas producer in the North Sea. We won a valve and electrical project win in Europe that will start to deliver later this year for a state of the art steam and power generation facility At an integrated refinery and petrochemical complex, this new business expands our end market diversification in the downstream sector internationally. And before I turn it over to Mark, I want to discuss a few points with regards to inflation and its impact on our business. We are seeing inflationary pressures on most of the product lines we offer, driven by a combination of tight steel and resin markets, Exacerbated by tight labor markets and rising transportation costs, while lead times continue to lengthen. Additionally, importers of finished goods and raw materials have been diligent in pushing through increased ocean transportation costs. Pipe prices began to increase in late 2020 and have continued to move higher. This has been caused by an increase in OCTG demand, The primary product pipe mills produce in a tight scrap and iron ore market. Behind this, the broader steel markets have seen a rather dramatic increase in demand from all other sectors such as the industrial and housing markets. U. S. Inventories and products we provide were much higher than normal in 2020 and have come down substantially. This includes Our manufacturer's raw and input material stock as well as width and finished goods. The majority of our suppliers are still delivering reliably, But lead times have increased and some gaps on certain products have become more prevalent. With that, let me hand it over to Mark. Thank you, Dave, and good morning, everyone. Total revenue for the Q2 of 2021 was $400,000,000 an 11% increase over the Q1, Outperforming our guided range of mid to high single digit percentage growth. The U. S. Revenue for the Q2 2021 was $296,000,000 up $44,000,000 or 17% from the Q1 on increased drilling and completions activity. Our U. S. Energy Centers and Process Solutions revenue were up 16% and 23%, respectively, with U. S. Energy Centers revenue contributing Approximately 80% of total U. S. Revenues in the 2nd quarter were relatively in line with the 1st quarter levels. Moving to the Canadian segment. Canada revenue for the Q2 of 2021 was $51,000,000 down $7,000,000 or 12% from the Q1 due to seasonal breakup. International revenue was up to $53,000,000 an increase of $2,000,000 or 4% from the Q1, primarily from increased project activity. In addition to DNOW growing revenue 11% in the quarter, our gross margins improved sequentially 50 basis points to 21.3%. This increase was primarily from inventory charges declining sequentially from $5,000,000 in the Q1 to $1,000,000 this quarter, partially offset by lower product margins due to product mix and increased transportation costs. Inventory charges in general vary as A product of many factors, including customer demand changes, both in volume and preference the incline or decline in the market specification changes on available products and actions taken to adjust our business model to support current and future activity. We continue the evaluation of our products and locations to align to the changing market conditions and our customer preferences, which could impact the level of inventory charges going forward. In the Q2 of 2021, warehousing, selling and administrative expenses or WSA was within our forecasted range at $85,000,000 or up $6,000,000 sequentially. Half of the increase is driven by the impact of the first and second quarter acquisitions. In addition, we had the sequential WSA headwind from the non recurrence Of the Q1, dollars 2,000,000 bad debt credit from the collected aged receivable, with the remaining balance of the increase primarily driven by the resumption of certain discretionary costs and the reduction in COVID related government subsidies. The 2nd quarter government subsidies, which totaled approximately $1,500,000 are expected to continue their phase out through the second half of the year. This marks the 4th consecutive quarter we've improved our WSA as a percent of revenue. Considering this and other actions underway, we expect WSA to remain relatively flat into the Q3 as we continue to streamline our organization and invest in our strategy. Operating profit was breakeven in the 2nd quarter as we realized favorable year over year operating margin flow throughs across all three segments, driven by improved gross margins and our lower cost structure. Sequentially, the U. S. Delivered 23% incremental flow throughs to operating margins and a $3,000,000 operating loss in the Q2. In the Q2 of 2021, the International segment reported $1,000,000 in operating profit or 2% Encanda delivered $2,000,000 in operating profit or 4% of revenue, despite facing the customary seasonal breakup headwinds. This is a notable improvement for the Canadian segment when compared to the Q2 of 2019, a period with double the revenue yet produce lower operating profit dollars than 2Q 2021. The GAAP net loss for the Q2 was $2,000,000 or a loss of $0.02 per share. On a non GAAP basis, net income excluding other costs was nil or 0 per share. Non GAAP EBITDA excluding other costs was a positive 6,000,000 1.5% for the Q2 of 2021. We reported $6,000,000 of depreciation and amortization in the period and expect similar levels in the 3rd quarter. At the onset of the pandemic, we swiftly identified and implemented initiatives focused on transforming our operating model and maximizing customer service. The results of these actions can be recognized today in our financial performance as DNOW delivered 2Q EBITDA flow throughs year over year of 70%, As we delivered 8% higher revenue year over year while reducing WSA over 12%. Now to move to the balance sheet. At the end of the second quarter, we have a net cash position of $293,000,000 down $81,000,000 from March, Driven by the $90,000,000 cash payment for our 2nd quarter acquisition we discussed on our last call, our debt position remained at 0 and included 0 draws in the quarter. Total liquidity, which is calculated as total availability from our undrawn credit facility plus cash on hand was 528,000,000 as of June 30, 2021. Accounts receivable ended at $271,000,000 an increase of $26,000,000 from the Q1 And inventory ended at $250,000,000 substantially unchanged from the Q1 with inventory turns reaching 5 times, a quarterly best. Our accounts payable ended the 2nd quarter at $217,000,000 And as of June 30, 2021, Working capital excluding cash as a percentage of our 2nd quarter annualized revenue was 12.3%. With some of the working capital reduction attributable to the estimated fair value of contingent consideration, which is subject to change. We do expect this working capital ratio to revert some as we intentionally add working capital to grow the business. And our focus on working capital efficiency is reflected in a new quarterly best cash conversion cycle of 71 days. The primary driver Efficiency gains over the year has been increased inventory turns that help to minimize the cash needed to fund our sequential revenue growth of 11%. Free cash flow in the period was $7,000,000 reflecting net cash provided by operating activities of $8,000,000 reduced by $1,000,000 in capital expenditures. When looking back over the last 2 years, we've generated approximately $350,000,000 in free cash flow and we will continue our commitment to balance sheet management, make investments in good inventory, pursue strategic acquisitions and maximize asset health to fuel the future. Our team is focused on profitable market share gains. We're actively deploying technology to augment labor content, automating and digitizing processes and reducing infrastructure costs. We are intent on continuously developing a more agile business and increasing productivity. We continue into 2021 with optimism for the future, and we possess the talent, resources and fortitude to grow our bottom line and create sustained value for our customers and shareholders. With that, I'll turn the call back to Dave. Thank you, Mark. Now a bit on how our Digital Now Our business in order to manage the scale of transactions and capture efficiencies across the procure to pay cycle, We offer our customers and suppliers a digital solution for catalog browsing, transacting sales orders, Purchase orders and invoices across the procure to pay process. Many of these processes are unique to the customer's ERP procurement system or involve a 3rd party middleware vendor, demonstrating the flexibility and tailored solutions our digital platform provides our customers. During the Q2 of 2021, 43% of our SAP transactions are digital. We are leveraging technology to drive increased efficiencies across our business for our employees, customers and our suppliers. And as incremental transactions and revenue are captured and processed, they provide an increase in employee productivity and system efficiencies. We continue to increase adoption across our digital platform by adding new customers during the quarter. During our last few earnings calls, you heard us talk about e spec and e track tools. As a refresher, e spec Helps customers select, configure and create budgetary prices for 10 unique power service fabricated engineered equipment packages. Our tool automatically generates a real time budgetary estimate, plus a detailed working bill of material, which is used to produce a formal quote. Last quarter, we introduced Etrack, our asset tracking that simplifies operators' asset management processes by geo locating an asset, Accessing specifications and engineered drawings, compliance certifications and provides the ability to view maintenance and service work history information. For our customers, eTrak improves asset transfer timeliness and accuracy, while the inventory report facilitates asset audits. This simplifies our customers' inventory control process, makes cycle counting easier and enables the tracking of assets in and out of holding yards is to become working assets. Etrack provides DNOW with a platform that enables our sales and operations teams the ability to expand and extend value to our customers within our materials management programs, improving our efficiency, expediting future service requests and enables parts orders to expand after market sales. During the Q2, we on boarded multiple E and P operator Customers by identifying and logging hundreds of assets. Going forward, all engineered equipment packages shipped from our U. S. Process solution locations Will be equipped with Etrack, giving customers the ability to more effectively manage their assets. By using our Etrack mobile app, Customers have the ability to create service work orders and order parts through our shop. Deno.comecommerceplatform. And as a final note, Etrack provides customers with a historical repository of asset record keeping, thus leveraging technology Combined with our engineered products, aftermarket service and e commerce platform for the lifecycle of the asset. And now our view of the Q3. Looking ahead, fundamentals in our business continue to improve with oil in the $16.7 range as global rig counts and completions are expected to grow. The summer months in North America usually set up the Q3 to be our most active quarter of the year. The impact on oil and gas demand due to the COVID delta variant adds a degree of uncertainty as more stringent actions are taken to contain the spread. In the U. S, E and P companies continue to add rigs, increase completions and drawdown DUCs. The growth in rigs driven by private operators expands the market for our products as we look to grow sales related to flow lines, gathering lines and tie ins. Demand for PVF and our fabricated and packaged engineered process solutions offerings increases as incremental production drives tank batter construction And increased saltwater disposal capacity. With the pullback in production throughout the pandemic, producers have Midstream takeaway capacity open up, therefore delaying large capital transmission projects that would add incremental takeaway capacity. Canada emerged from breakup and rigs are expected to grow sequentially at the current oil price. We have observed an increase in activity with several projects related to energy transition in the form of carbon capture and CO2 pipelines. We are working with our customers as they evaluate and budget carbon capture type projects to support their net zero carbon emission goals. Internationally, there are some cause for caution as countries grapple with an acceleration in delta variant COVID Economic growth in most countries could be metered as public officials consider more stringent lockdowns that will drive less consumption of energy. As OPEC Plus manages supply additions over the near term and spare capacity returns to pre COVID levels over the next year, We see a structurally supportive macro environment depending on the pace of economic recovery. Taking this into account, our view is that revenue in the 3rd quarter will grow in the mid single digit percentage range sequentially. Further, we expect to see sequential 2Q to 3Q 2021 EBITDA to revenue incrementals To be at the lower end of our historical 10% to 15% flow through range, as we expect gross margin compression in 3Q, as inventory and freight charges may be higher than the Q2 and projects will serve as a pricing headwind in 3Q. With regards to mergers and acquisitions, working capital discipline continues to provide flexibility as we evaluate the list of opportunities in our pipeline. After 2 acquisitions closed so far this year, our position remains strong With total liquidity ending the first half at $528,000,000 including $293,000,000 in cash, 0 debt, which provides maneuverability in the evolving energy space. We remain focused on M and A as a lever for inorganic growth, targeting accretive margin businesses that provide non commoditized solutions that fit within our strategy. We continue our active engagement with several potential targets and are foraging for opportunities. We are focused on strengthening our process solutions product lines By adding companies which expand customer appeal, create competitive advantage, differentiation and build barriers to entry for DNOW. Furthermore, we are evaluating businesses that help diversify our end markets to provide greater market differentiation for the company. In closing, I'd like to thank our employees and acknowledge their hard work, their dedication to serving our customers and supporting our key suppliers for making safety a priority and for their perseverance that has enabled the bright future that lies ahead. We remain focused on generating greater operating efficiencies, while enhancing our differentiated offering to customers. Our size and scale strengthen our value proposition that customers can depend on as they navigate industry consolidation, supply disruptions and the energy transition. With that, let's open the call for questions. Thank you. And I'll begin the question and answer And our first question is from John Hunter from Cowen. Hey, good morning, everyone. Good morning, Jonathan. How are you? I'm doing well. Thank you. So first question I had is just on the revenue progression into 3rd quarter and then 4th quarter, mainly on the U. S. Side, I'm curious what is embedded in your revenue expectation in the U. In the U. S. For the Q3 versus your expectation for completions. And then as we move into the Q4, it Seems like E and Ps have been relatively disciplined in their approach to capital spending this year. So I'm wondering what you're expecting in terms of a seasonal drop off or a muted seasonal drop off in the Q4? Okay. So in terms of the Q3, we're basically hearing from our customers what they expect to spend in that period. We expect a seasonal incline like we've talked about. But when we look at their what they're Forecasting for the Q3, we're getting into that low to mid single digit range for our customers generally. We think we can make some further ground with the private E and P companies. That's been a big focus for us. They tend to be adding more rigs and doing more of the completions So that's a target area for us where we're laser focused on picking up share from traditionally Lower or higher hanging fruit for us. We tended to focus on the larger customers historically. So that's where we see our revenue shaking out in the 3rd quarter. In terms of the Q4, it's hard to say. It depends on we generally see A 4th quarter slowdown, especially in the month of December. At this point, it's hard to gauge that. We are still seeing We've seen rigs go up, for example, for almost every week for the last 50 weeks, slow but steady growth. We're seeing product delays especially in the pipe area now, which Could kind of combine with the normal seasonal dip we expect because we might not have the pipe available for the Q4, which is a bigger product line for us in this period. We're not guiding to the 4th quarter. There's still a lot of uncertainty with COVID and its impacts, But it could go either way. It just depends on a variety of factors. Understood. Thanks for that, David. And then shifting to margins, I understand there are some Headwinds in the Q3 in terms of supply chain and perhaps some inflationary cost pressure. So I'm curious as we look into the Q4 and perhaps into 2022, if you're able to quantify how much of a headwind Those types of things are to Q3. And then as we look into next year, what's a more Normalized type gross margin level we should be thinking about once these things are past us? Okay. So in the short term, we're seeing the biggest influencer In gross margins for us over the last five quarters has been inventory charges. Now those tend to be higher in a downturn, Which we are out of and lower in a recovery, which we're in. So in the Q1, like Mark had said, we had 5 dollars in inventory charges in the 2nd quarter. They dropped quite a bit to the Q1. That all depends on the timing of purchases, customers, But kind of product preferences, obsolescence, damaged products, etcetera, that's the number one impact. Freight has been a big impact to the Q2 and it probably will continue into the 3rd. I don't expect that to be a permanent I do believe as a company we're much more thoughtful about product acquisition, about inventory risk, About having what the customer needs, but not getting too heavy into speculating the purchases. So I think over time And into 2022, we'd see inventory charges, which like I said was a big part of our gross margin variability Being fairly low, especially compared to 2020, especially compared to that. So one thing that's been a positive For us in the last few quarters inventory charges coming down, I expect that to persist. Freight charges which were high in the second quarter, I expect to continue into the 3rd maybe throughout the rest of the year, but that will ease and that will I believe correct itself. In terms of product margins, which is The main driver for gross margins, we remain very resilient across our product lines, including Pipe. Now, Pipe is growing as a percent of our activity and expect it to grow into the Q3 as we see more projects. And Pipe is a lower margin product relative to valves and fittings, etcetera. So those are kind of the puts and takes. In terms of where we would be next year, Again, not guiding to 2022, but this 20.5 plus range is a good bet And maybe it could be better than that. We continue a process, which we've done for years now, where we focus on higher margin businesses, Customers, product lines, etcetera that continues. The acquisitions we made this year will have margins in excess of what we normally experience. The acquisitions we do later in the year should we be successful, we'll continue that pattern. So High grading gross margins is a big focus around here. Exiting low margin products, Disfavoring them is part of that process as well. So I see more upside in terms of gross margin, Jonathan. Thanks for that, Dave. I'll turn it back. Okay. Our next question is from Doug Becker from Northland Capital Markets. Good morning Doug. Thanks. Just following On the line of question about gross margin, as revenue starts to approach $2,000,000,000 the changes you're doing in terms of mix and the efficiencies, Is a 22% gross margin unrealistic off of a $2,000,000,000 revenue base? Well, I don't think it's outrageous. I mean, I think it's plausible. I think there are many things that would impact that. But we're at 21. And like we alluded to in our opening comments, we do expect a little downward pressure in the Q3 because of the very low inventory charges. But 2022 is within the realm of possibility, of course. And again, I said we're very particular about and if you look at the trend of Gross margins for DNOW over the last few years bringing that number up, focusing on higher margin activity and intentionally not focusing on lower margin stuff. And we need to do that because we still need to pull cost out of the business and Mark alluded to that as well. So I do think 22% is in the realm of possibility and it's a target for us for sure. No, that makes sense. And how does that play into the M and A opportunities? Obviously, looking for margin accretive, but any particular areas of focus? Well, The companies we're looking at, of course, our most important metric is how much earnings power they have. So you could have a Higher gross lower gross margin business, but very strong EBITDA. We would not walk away from those possibilities. Those could be dilutive to gross margins. But all the deals But accretive to EBITDA margins. Of course, of course, yes. Got it. But all the deals we're looking at, I believe have gross margins in excess of where we And that's not the main determinant. EBITDA percentages would be the main determinant. But But we're focused on higher margin products as kind of a mainstay of the organic and inorganic opportunities. Okay. And then just another really strong quarter on managing working capital. Last quarter, you were talking about trying to keep Net working capital as a percent of revenue closer to 15% came in at 12.3% this quarter. How much of that was a function Maybe delays receiving some of the inventory and should we still be thinking about inventories growing $30,000,000 to $40,000,000 over the course of the year? Well, I said it in my opening comments, I think a small part of it's due to delays in inventory, not a big part of it. We've been I said it before that if you look at our experience in 2020, Our EBITDA for the year, I believe, was 57 minus $57,000,000 for 2020, the worst year in our history. And we We lost $57,000,000 EBITDA and our inventory charges were $54,000,000 So that tells us we need to be very smart about inventory. Mark told you earlier that we had a 5 turn in the Q1 and the Q2. We've never had a 5 turn, I don't believe. So we're focused on making sure that we can keep those margins high, keep those turns strong. And we believe we were able to fulfill customer requirements in the Q2 and didn't have pent up goods receipts issues. We do expect that to begin to trickle into the Q3. We are finding some of the pipe we're ordering taking longer to get here, which could have a negative impact in the second half relative to the growth we projected in the Q3. But we're starting to we may start to feel a little bit on pipe and less so in the other product categories. In terms of our working capital percent of revenue at 12% or 12.3% which is a working capital turn of 8% that is a And we guided that to expand a little bit. That's just a function of collecting our bills as fast as possible, Working with our suppliers in terms of paying a little bit later and being good at managing inventory, which historically we've Less than good. So, I still think 15% to 20% working capital to December revenue is a good range, Please standby. All participants, please stand by. So, what in the whole Arcadine system is just our line? Are we out there? Yes, we are back. Okay. So I think I answered that last question. Sorry, we had some technical difficulties. Did you have any other questions, Doug? Doug, if you could re prompt if you did. Have further questions? Okay. We have Doug back. Doug Sorry about that. No problem. So just wanted to tie a bow on that. A 15% to 20% of revenue is still a reasonable target going forward? I believe so. Okay. That's it. Thank you. You're welcome. Sorry about the technical snafu. Okay. And we have next is Nathan Jones from Stifel. Good morning. This is Adam Farley on for Nathan. Good morning, Adam or good evening wherever you might be. Good morning out here in Denver. Back onto the gross margins and pricing, how accepting is the market of price increases associated with inflation. And do you think, higher prices have impacted demand at all? Well, here's what we're seeing so far. Our customers, like we've talked about exhaustively are very focused on cash maximization and that includes good Price of goods. So we are getting pushback from customers on increasing price. We are seeing that. Now, so far, we've been able to push customers Substitutes, which might which would enable us to capture the sale, and to keep them interested in the transaction. So but we are seeing some As lead times expand, we'll see less of that resistance from customers, because they'll be more interested in getting the product than paying a few pennies more than they had historically, but there is a little pressure along those lines. Okay. That makes sense. Turning over to the WSA spend, I believe you gave us a run rate outlook for 2021. But Maybe longer term, how do you expect expenses to layer back in with growth? So in the short term, so in 2020, we were very focused On resizing the business in a market that had shrunk by 70% in 5 months. So and you talk about the metaphor catching a falling knife and how difficult that is. We believe we caught That knife. And I said up 2 or 3 quarters ago that we're going to be circumspect, we're going to be thoughtful, we're going to be careful To preserve our position in the market, when you reduce your workforce by 45% and when you close 50 out of 2 50 You forego revenue opportunities. So right now, we're focused primarily on growing the business, taking market share and making smart inorganic purchases. And we're secondarily over a period of time Realize and are focused on modernizing our branches, relying more so on Central distribution where we can push more volume across fewer people with better flow throughs and better WSA. But over time, our that WSA number needs to come down relative to the current level of revenues. So it's not just WSA needs to come down as a percent of revenue. The absolute value needs to come down all other things equal. So In the coming quarters, we're still working on a I call it a migration to a centralized model. I call it migration because it takes some time. And so we'll see those numbers come down in the future, but they won't like Mark said, we expect them at least for the Q3 to be about work where they were And we have no further questions at this time. I'll turn the call back over to David Cherchinsky, CEO and President for closing statements. I want to thank everyone for joining us today. I apologize for the technical snafu, but we look forward to seeing you in a few months and have a great quarter. Thank you. Ladies and gentlemen, that concludes today's call. Thank you for participating and you may now disconnect.