Dnow Inc. Q2 FY2025 earnings call

• Second quarter 2025 represents the best second quarter EBITDA results in public company history at $51 million. Revenue was $628 million, up 5% from the first quarter. Gross margins remained resilient at 22.9%.
• U.S. revenue grew 11% sequentially driven by midstream strength and water management solutions. Midstream business accounted for approximately 27% of total DNOW revenue.
• Discussed combination with MRC Global, expecting $70 million of annual cost synergies within 3 years following closing. Integration planning underway, focusing on bringing organizations together and retaining key talent.
• Regionally, U.S. had revenue growth, Canada was affected by seasonal breakup and macro impacts, International was down due to non-repeating projects.
• Highlighted growth in energy evolution, data center, and LNG-related markets. Acquired Natron International in the second quarter to expand electrical products opportunities in Asia Pacific region.
• Capital allocation: Suspended share repurchase program until closing of MRC Global transaction, focusing on merging with MRC Global and pursuing bolt-on acquisitions in Process Solutions.

Second quarter 2025 revenue was $628 million. U.S. revenue was $528 million, up $54 million or 11% sequentially. Canada revenue was $48 million, down $14 million primarily due to seasonal breakup. International revenue was $52 million, sequentially lower by $11 million or 17%. Second quarter EBITDA was $51 million, a second quarter company best, up 11% sequentially. Midstream business in the second quarter grew to approximately 27% of total DNOW revenue, more than doubling its percentage contribution from the end of 2023 over the prior 6 quarters.

• Expect third quarter sequential revenues to increase in the low single-digits percentage range from the second quarter. Third quarter EBITDA expected to approach 8% of revenues.
• Reaffirm full year 2025 revenues will be flat to up in the high single-digit percentage range from 2024 levels, and full year 2025 EBITDA could approach 8% of revenue.
• Target free cash flow in 2025 of $150 million.

• Macro-economic headwinds and market activity decline.
• Tariff uncertainty and political factors affecting customer investments.
• Customers having limited project backlog and adopting cautious approach to additional spending, with budget exhaustion expected in the fourth quarter.

Q: What are the most difficult parts of the integration likely to be? How do you manage the risk? And how do you keep your employees focused during this period?

A: Our orientation is around bringing the notion that the combination will make DNOW and MRC Global combined a better company. Focus on the customer post close, align teams early, and keep everyone focused on external matters like managing supply chain and working closely with manufacturers and customers. Have a high-caliber team focused on integration.

Q: Is it safe to assume the year is heading towards maybe the top half of the current guidance? Any color on if customers are telling you anything about possible budget exhaustion in the fourth quarter?

A: Safer to be in the middle of the range. Some customers will have budget exhaustion, particularly in the fourth quarter, and it will be consistent with the 5% range experienced over the last several years.

Q: Are you seeing opportunities at this early stage that you can drive some synergies with vendors and with customers that ultimately add to those costs and accretion over time?

A: Focus is on growth and the promise of the combination rather than focusing on field consolidations. The focus remains on growing the business and being a better distributor to customers.

Q: As you look at the combined company, are you seeing or do you expect that with less exposure to upstream than DNOW stand-alone has, do you see that as an increased visibility in the future earnings power of the company as you're less tied to the drilling and completion capital cycles?

A: Diversification is the real opportunity. MRC has strong end markets where DNOW plays a small role. Can use complementary locations, sales teams, and customer access to grow both sides of the businesses. Want to grow position in upstream but diversification is key.

Q: Could you talk a little bit about impact from tariffs in the back half of the year and how you guys are sort of thinking about that and navigating those challenges in this environment?

A: Product costs have gone up from tariffs and inflation. Most sales growth has come from volume, not price. Despite tariffs and other challenges, expecting growth and have been successful in growing business organically and through acquisitions.

Q: In the DNOW second quarter, the EBITDA margin was 8.1%, which is the best it's been since the first quarter of 2023. Were there some things in the quarter that drove that outperformance?

A: The biggest driver was growth in midstream. Midstream business has lower gross margins but lower cost to service, leading to improved earnings.