DNOW Q1 2025 Earnings Report

DNOW EPS Results

• Actual EPS: $0.22
• Consensus EPS: $0.19
• Beat/Miss: Beat by +$0.03
• One Year Ago EPS: $0.21

DNOW Revenue Results

• Actual Revenue: $599.00 million
• Expected Revenue: $587.17 million
• Beat/Miss: Beat by +$11.83 million
• YoY Revenue Growth: +6.40%

DNOW Announcement Details

• Quarter: Q1 2025
• Date: 5/7/2025
• Time: Before Market Opens
• Conference Call Date: Wednesday, May 7, 2025
• Conference Call Time: 9:00AM ET

DNOW (NYSE:DNOW) distributes downstream energy and industrial products for petroleum refining, chemical processing, LNG terminals, power generation utilities, and customer on-site locations in the United States, Canada, and internationally. The company provides consumable maintenance, repair, and operating supplies; pipes, manual and automated valves, fittings, flanges, gaskets, fasteners, electrical instrumentations, artificial lift, pumping solutions, valve actuation and modular process, and measurement and control equipment; and mill supplies, tools, safety supplies, and personal protective equipment, as well as artificial lift systems, coatings, and miscellaneous expendable items. It also offers original equipment manufacturer equipment, including pumps, generator sets, air compressors, dryers, blowers, mixers, and valves; modular oil and gas tank battery solutions; and application systems, work processes, parts integration, optimization solutions, and after-sales support services. In addition, the company provides supply chain and materials management; inventory planning and management, procurement, and warehouse management, as well as solutions for logistics, point of issue technology, project management, business process, and performance metrics reporting services. It serves customers in the upstream, midstream, and downstream sectors of the energy industry, including drilling contractors, well-servicing companies, independent and national oil and gas companies, midstream operators, and refineries, as well as petrochemical, chemical, utilities, RNG facilities, and other downstream energy processors; and industrial and manufacturing companies. The company was formerly known as NOW Inc. and changed its name to DNOW Inc. in January 2024. DNOW Inc. was founded in 1862 and is headquartered in Houston, Texas.

DNOW Q1 2025 Earnings Call Transcript

Key Takeaways

• In Q1 2025, d NOW delivered $599 million in revenue (up 4.9% sequentially and 6.4% year-over-year) with EBITDA of $46 million (7.7% of revenue), marking the second-highest first-quarter EBITDA in company history.
• The company is executing a three-pronged growth strategy: expanding core markets, pursuing “energy evolution” (e.g., CCUS, hydrogen, RNG), and targeting adjacent industrial sectors such as water/wastewater and data centers.
• d NOW strengthened its international footprint with the April acquisition of a Singapore-based industrial lighting and electrical distributor, complementing its McLean International brand and enabling cross-region synergies.
• To counter tariff and inflationary pressures, d NOW sources ~70% of U.S. products domestically, is updating pricing structures, multi-sourcing key commodities, and passing cost increases through to maintain margins.
• With zero debt, $567 million in liquidity, and a $160 million share repurchase program (of which $16 million has been executed), the company reaffirms full-year guidance of flat to high-single-digit revenue growth and near 8% EBITDA margins.

Presentation

[Operator]

Good morning. My name is Janine, and I will be your conference operator for today. At this time, I would like to welcome everyone to the DN Now First Quarter twenty twenty five Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

[Operator]

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

[Brad Wise, Vice President of Digital Strategy & Investor Relations at DNOW]

Well, thank you, Janine, and good morning. And welcome to dNOW's first quarter twenty twenty five earnings conference call. We appreciate you joining us, and thank you for your interest in dNOW. With me today is David Chereczynski, President and Chief Executive Officer and Mark Johnson, Senior Vice President and Chief Financial Officer. We operate under the DNOW brand, which is also our New York Stock Exchange ticker symbol.

[Brad Wise, Vice President of Digital Strategy & Investor Relations at DNOW]

Please note that some of the statements we make during this call, including responses to your questions, may contain forecasts, projections and estimates, including but not limited to comments about the outlook of the company's business. These are forward looking statements within the meanings of The U. S. Federal securities laws based on limited information as of today, 05/07/2025, which is subject to change. They are subject to risks and uncertainties and actual results may differ materially.

[Brad Wise, Vice President of Digital Strategy & Investor Relations at DNOW]

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 the latest Forms 10 ks and 10 Q that DNal has on file with the U. S.

[Brad Wise, Vice President of Digital Strategy & Investor Relations at DNOW]

Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business. Further information as well as supplemental and financial and operating information may be found within our earnings release or on our website at ir.dnow.com or in our filings with the SEC. In an effort to provide investors with additional information regarding our results as determined by U. S. GAAP, you'll note we disclose various non GAAP financial measures in our earnings press release and other public disclosures.

[Brad Wise, Vice President of Digital Strategy & Investor Relations at DNOW]

Those non GAAP financial measures include earnings before interest, taxes, depreciation, amortization, or EBITDA excluding other costs, EBITDA excluding other costs as a percentage of revenue, net income attributable to DNOW Inc. Excluding other costs diluted earnings per share attributable to DNOW Inc. Stockholders excluding other costs and free cash flow. Please refer to a reconciliation of each of these non GAAP financial measures to its most comparable GAAP financial measures 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 twenty twenty five.

[Brad Wise, Vice President of Digital Strategy & Investor Relations at DNOW]

A replay of today's call will also be available on the site for the next thirty days. Now let me turn it over to Dave.

[David Cherechinsky, CEO, President & Director at DNOW]

Thank you, Brad, and good morning, everyone. I'd like to start by acknowledging the solid execution by our team in the first quarter of the year. Their grit, for perseverance and passion, not just for today, but for playing the long game and doing the things today that ensure the enduring success of DNOW inspires me. Thank you for everything you do to support our suppliers and delight our customers. The first quarter of twenty twenty five represents the second best first quarter EBITDA results in our public company history at $46,000,000 up 2% sequentially and up 18% year over year.

[David Cherechinsky, CEO, President & Director at DNOW]

For reference, the actual record quarter for first quarter EBITDA was 2023 at 47,000,000 in a period then where we had 29% more active rigs and 18% more new wells completed. I make that reference to illustrate the resilience of the continued earnings power produced by our team. Again, this is notable given the misunderstood perception that the upstream sector alone drives opportunities for DNOW. In the quarter, we delivered top line growth both sequentially and on a year over year basis, beating our February guidance despite headwinds from a slow start to the year, coupled with flat US rigs and lower US completions. Revenue for the first quarter was $599,000,000 up 4.9% from the fourth quarter and up 6.4% year over year.

[David Cherechinsky, CEO, President & Director at DNOW]

Gross margins remained resilient at 23.2%, better than expected in the first quarter. EBITDA as a percentage of revenue was 7.7, beating our first quarter target and demonstrating continued earnings strength. We are focused on opportunities that drive accretive margins while diversifying our market mix. We continue to execute our strategy to invest in and grow our core market, capture additional revenues from energy evolution opportunities, and diversify our customer base by targeting and realizing revenue from adjacent industrial markets, while driving efficiencies across our business. With our current liquidity and capital allocation framework, we have the ability to strike deals at the right time and repurchase shares opportunistically, thus balancing the growth of our business with a return of capital to produce sustainable long term value for our shareholders.

[David Cherechinsky, CEO, President & Director at DNOW]

In April, we closed a small but important international acquisition, which provides industrial lighting and electrical bulk materials to the energy and industrial end markets in Singapore and in the Asia Pacific region. The acquisition is complementary to and further strengthens and expands our McLean International brand, where we have the same electrical manufacturer distribution agreement in The UK and Australia, allowing for increased revenue synergies with this key manufacturer and further positions McLean to capture more market share. Moving to share repurchases under the new upsized 160,000,000 program authorized earlier this year, we have purchased 16,000,000 in shares to date. Before I move to our results on a regional basis, I'd like to take a moment to comment on tariffs, some macro uncertainty and the impact on DNOW. As you are aware, the tariff situation is dynamic.

[David Cherechinsky, CEO, President & Director at DNOW]

As a point of reference, following the first round of tariffs in 2018 and supply chain disruptions faced in 2021 and 2022, In the wake of the COVID-nineteen pandemic, our supply chain and sourcing teams had repositioned our supply and increased sourcing for domestic producers, reducing our dependence on international sources. Today in our U. S. Operations, our rough estimates are that around 70% of the products we sell are sourced domestically, leaving the remaining products sourced internationally. South Korean, Indian and European supply make up the majority of the directly imported product.

[David Cherechinsky, CEO, President & Director at DNOW]

DNOW directly imports a negligible amount for products from China, less than 1,000,000 per year. Approximately 20% of our US operations supply for inventory has some exposure to China, mostly raw materials. Neither DNOW nor our key suppliers have dependency on Chinese imports for pipe, fittings and flanges, inclusive of raw materials and semi finished materials. DNOW valve and pump manufacturers range from 100% US made to varying percentages of critical components to 100% Chinese made. Manufacturers exposed to Chinese specific tariffs have begun altering supply chains and diversifying outside of China.

[David Cherechinsky, CEO, President & Director at DNOW]

In response to this, we are taking the following actions to mitigate the impact and protect our margins. We are passing supplier cost increases through as quickly as we can. We are updating our pricing structures to reflect increases as they occur. We are working with our key suppliers to ensure adherence to advanced notification clauses in our agreements. We are using our purchasing power to continue to multi source key commodity product lines to help our customers.

[David Cherechinsky, CEO, President & Director at DNOW]

We are working closely with our customers on project materials to solidify commitments ahead of procurement. And we are analyzing alternate manufacturers for qualification to our approved manufacturers list. DNOW has the scale, systems, processes, and talent with experience to execute our inflation period playbook. Our suppliers are actively managing this evolving situation alongside us. In conclusion, DNOW is better positioned to navigate these challenges and seize opportunities related to tariff impact.

[David Cherechinsky, CEO, President & Director at DNOW]

Now some comments on a regional basis. In The US, revenue was $474,000,000 up $23,000,000 or 5% sequentially. Growth was driven by a full quarter contribution of our fourth quarter Trojan acquisition and increased midstream demand, most notably from our Witco business. In midstream, we are seeing demand to support continued debottlenecking of midstream takeaway capacity combined with operators' investments in gathering assets. As a result of softening in some areas, we continue to exercise our self help initiatives by optimizing our branch footprint, leading to some location closures.

[David Cherechinsky, CEO, President & Director at DNOW]

As we look into the second quarter, we will continue to drive incremental expense savings as we adjust our model to the market, investing in the areas of growth and pruning underperforming areas. In U. S. Process Solutions, revenue increased sequentially from a full quarter of the Trojan business and due to higher demand for our suite of products and services. Growth was driven by demand for Odessa Pumps packages, aftermarket service and Trojan rental equipment.

[David Cherechinsky, CEO, President & Director at DNOW]

Activity remained strong for our power service and FlexFlow business, while EcoVapor experienced a decrease due to project timing variations as expected. Our FlexFlow and Trojan rental fleets saw increased demand due to some operators favoring leasing over purchasing to support their maintenance production. Given the rental nature of this business, these are higher margin product lines and revenue should increase to the extent customers cut CapEx. Another example supporting our resilient business model. We delivered our first power distribution center or PDC for a midstream company.

[David Cherechinsky, CEO, President & Director at DNOW]

This newly engineered unit is a turnkey 16 by 50 foot packaged unit and insulated building, including variable frequency drives, panel boards, transformers, and HVAC units. We expanded our pump product lines by signing new distribution agreements with a loam style and vertical slack style pump manufacturer, which expands our addressable market and the produced water transfer and industrial end markets. During the quarter, we commissioned our first horizontal H pump rental for a liquid CO2 recycle transfer application in an enhanced oil recovery operation for a Permian operator. The performance exceeded customer expectations and expanded our application capabilities for the rental fleet. As part of our Sable automation solution, we successfully commissioned a water recycling facility for a leading national egg producer.

[David Cherechinsky, CEO, President & Director at DNOW]

This system ensures consistent delivery of high quality water and nutrition in poultry feed, ultimately enhancing egg production. We launched our new Tank Commander EcoVapor product, which addresses the needs expressed by several of our customers. This unit is a vapor management system designed to capture 100% of tank vapor and eliminate venting emissions, thereby enhancing the value of oil and gas assets. This innovation combines our Zero two technology with an automated system to control storage tank pressures, allowing operators to sell valuable high BTU tank vapor gas and reduce Scope one emissions. In Canada, revenue was $62,000,000 for the quarter, down $4,000,000 sequentially as a $4,000,000 project from 4Q did not repeat.

[David Cherechinsky, CEO, President & Director at DNOW]

And in international, revenue was $63,000,000 sequentially higher by $9,000,000 or 17%, primarily due to increased project activity with a $15,000,000 project in 1Q not expected to repeat in the second quarter. For DNow, the energy evolution includes activity primarily associated with carbon capture, utilization and storage, direct air capture, hydrogen and renewable natural gas or RNG related projects. Throughout the quarter, we successfully delivered a range of PVF Plus and EcoVapor products for various projects encompassing CCUS hydrogen and RNG end markets. Regarding capital investments and expansion in data centers to support AI growth, DNOW is positioned to participate in several areas. First, for data centers powered from natural gas, we see growth opportunities in construction of midstream transmission lines to supply natural gas for our PPS plus products, with many of the operators already being customers of DNOW.

[David Cherechinsky, CEO, President & Director at DNOW]

In The United States, our pumping solutions are being used in cooling systems alongside pipe valves and pittings from engineering, procurement and construction firms who design and build the data centers. And internationally, our McLean operations in The UK, Norway, Netherlands, and now Asia Pacific are experienced in increasing bidding activity for our electrical cable supports, basketball, a basket tray system supplies, and lighting for data center projects as well. Moving to our Digital Now initiatives, our digital revenue as a percent of total SAP revenue improved to 53% during the quarter, driving improved efficiencies through integrated systems. We are not only looking to grow revenues by selling our products in the construction of data centers, we are also deploying AI solutions to drive efficiencies in a number of internal processes across DNOW. One project we recently completed uses AI to index and upload manufacturer test certificates, which are provided along with the products we sell to customers.

[David Cherechinsky, CEO, President & Director at DNOW]

This project has taken a highly manual process, which is now powered by the use of AI and machine learning, processing up to 85% of requests without any action or manual intervention required. With that, let me hand it over to Mark.

[Mark Johnson, Senior VP & CFO at DNOW]

Thank you, Dave, and good morning, everyone. Total revenue for the first quarter of twenty twenty five was $599,000,000 up 5% or $28,000,000 from the fourth quarter of twenty twenty four, and up 6% or $36,000,000 from the first quarter of twenty twenty four, exceeding our guide from our February call. EBITDA excluding other costs or EBITDA for the first quarter was $46,000,000 or 7.7% of revenue, up $1,000,000 sequentially. The first quarter marked the twelfth consecutive quarter where DNOW delivered EBITDA at or above the 6.9% level, and is the second highest EBITDA in our company history for first quarter performance. US revenue for the first quarter of twenty twenty five totaled $474,000,000 an increase of $23,000,000 or up 5% from the fourth quarter of twenty twenty four.

[Mark Johnson, Senior VP & CFO at DNOW]

Year over year, US revenue increased $39,000,000 or up 9%. US energy centers contributed approximately 69% of total US revenue in the first quarter, and US process solutions contributed approximately 31%. This quarter marked the highest revenue dollar contribution yet for US process solutions, a new quarterly record. In Canada, for the first quarter, revenue totaled $62,000,000 a decrease of $4,000,000 or 6% from the fourth quarter of twenty twenty four. International revenue for the first quarter of twenty twenty five was $63,000,000 up $9,000,000 or 17% sequentially, driven by higher project activity as expected.

[Mark Johnson, Senior VP & CFO at DNOW]

Overall, DNOW gross margins for the first quarter were 23.2%, similar to the fourth quarter of twenty twenty four and better than expected. Warehousing, selling and administrative or WSA for the quarter was $109,000,000 slightly better than our forecasted level of $110,000,000 This decrease was due to a focus on operational efficiencies and resource alignment activities. We estimate a similar level of WSA for the second quarter of twenty twenty five. Now moving to operating profit. In the first quarter, total company operating profit was $30,000,000 The US generated $22,000,000 of operating profit, and Canada and international each delivered $4,000,000 in the first quarter of twenty twenty five.

[Mark Johnson, Senior VP & CFO at DNOW]

Interest income in the first quarter was $1,000,000 And now moving to income taxes, in the first quarter of twenty twenty five, DNOW's income tax expense was $7,000,000 And our effective tax rate as computed on the face of the income statement was 23.3%. We estimate our 2025 full year effective tax rate to be approximately 26% to 29%. And from a cash income tax perspective, we are not expecting to pay material U. S. Federal cash income taxes in 2025 due to available NOL carryforwards.

[Mark Johnson, Senior VP & CFO at DNOW]

Net income attributable to DNOW Inc. For the first quarter was $22,000,000 or $0.20 per fully diluted share. And on a non GAAP basis, Q1 twenty twenty five net income attributable to DNOW Inc. Excluding other costs was $24,000,000 or $0.22 per fully diluted share. Moving to the balance sheet, at the end of the first quarter, we had zero debt and a cash position of $219,000,000 We ended the quarter with total liquidity of $567,000,000 comprising our net cash position of $219,000,000 plus $348,000,000 in additional credit facility availability.

[Mark Johnson, Senior VP & CFO at DNOW]

Our existing $500,000,000 revolving credit facility extends into December of twenty twenty six, providing DNOW with immediate access to capital under the facility. Accounts receivable was $439,000,000 at the end of the first quarter, an increase of $51,000,000 from year end. Days sales outstanding or DSO was sixty seven days at the end of the first quarter, up from the fourth quarter, partially due to the cadence of project deliveries in the quarter and a couple of customers working through system upgrades and conversions at quarter end. We expect improvements in the DSO picture next quarter. Inventory was $385,000,000 at the end of the first quarter, an increase of $33,000,000 from year end, with an annualized turn rate of 4.8 times.

[Mark Johnson, Senior VP & CFO at DNOW]

In our most recent earnings call, we outlined our strategic approach to intentionally build our inventory levels as we start the new year. This decision was made to support our customers' growth while effectively navigating the challenges posed by tariffs. Our focus was particularly on the midstream and fluid management businesses where we're seeing increased demand. Accounts payable was $329,000,000 at the end of the first quarter, an increase of $29,000,000 from the fourth. And for the first quarter of twenty twenty five, working capital, excluding cash as a percentage of annualized first quarter revenue was 16.2%.

[Mark Johnson, Senior VP & CFO at DNOW]

In the first quarter of twenty twenty five, net cash used in operating activities was $16,000,000 better than expected as we build inventory to organically invest in the business. We generally consumed cash in the first quarter. And in the first quarter we invested $6,000,000 in capital expenditures to support growth, primarily in Process Solutions. Over the last four quarters, we've completed a 114,000,000 acquisition, generated $187,000,000 in free cash flow, and converted over 100% of our EBITDA to free cash flow, while returning over the past four quarters thirty million dollars to our shareholders through share repurchases and increased our cash balance by $31,000,000 In January, we announced a new $160,000,000 share repurchase program that is double our inaugural program that we completed in the fourth quarter of twenty twenty four. This new program enhances our ability to opportunistically return capital to shareholders as market and business conditions warrant, all while maintaining our focus on investing in accretive organic growth and strategic acquisitions, while adhering to our disciplined approach to balance sheet management.

[Mark Johnson, Senior VP & CFO at DNOW]

In the first quarter, we repurchased $8,000,000 of common stock, and so far in the second quarter, we have repurchased an additional $8,000,000 of common stock or $16,000,000 year to date or approximately 950,000 shares under the $160,000,000 share repurchase program. Maintaining a disciplined approach to capital allocation remains a core priority. We continue to balance accretive organic and inorganic growth with opportunistic share repurchases, all while sustaining a strong and flexible balance sheet to drive long term shareholder value. We continue to be debt free, have no interest payments, while keeping cash flow generation a top priority. And with that, let me turn the call back to Dave.

[David Cherechinsky, CEO, President & Director at DNOW]

Thank you, Mark. Before switching to our outlook for the second quarter and full year 2025, I would like to revisit and make a few additional comments on the market. As I mentioned earlier, recent U. S. Tariffs together with retaliatory measures has significantly contributed to market uncertainty.

[David Cherechinsky, CEO, President & Director at DNOW]

Furthermore, OPEC plus has targeted increased production levels, exerting downward pressure on global oil prices. The dynamics of this environment remain volatile, leading to fluctuations in market sentiment. Currently, we have not observed a notable impact on customer spending. In The U. S, we expect sequential second quarter growth driven by increased midstream activity and from key supply chain solution customer spend.

[David Cherechinsky, CEO, President & Director at DNOW]

We have seen an increase in gas rig related activity in the area poised for some recovery. In Canada, expected seasonality will drive sequential revenue lower. Canada's revenue historically declines approximately 15% to 20 from the first quarter to the second quarter due to the second quarter breakup period where heavy equipment access to production areas is restricted. Internationally, we expect top line sequential decline of about $10,000,000 due to $15,000,000 in projects delivered in the first quarter that will not repeat. Taken altogether, we expect DN Now second quarter revenues to be flat to up in the mid single digit percentage range from the first quarter.

[David Cherechinsky, CEO, President & Director at DNOW]

On a full year basis, we are reaffirming our full year guidance for 2025 revenues to be flat to up in the high single digit percentage range from 2024 levels. And full year 2025 EBITDA could approach 8% of revenue. And we are targeting free cash flow in 2025 of $150,000,000 In closing, following our second best fourth quarter in history, we built on that and beat first quarter expectations with revenue growth of 5% sequentially to $599,000,000 and delivered our second best first quarter EBITDA of $46,000,000 in a market with fewer operating rigs and completions. We executed adroitly on our capital allocation initiatives, closing on a small strategic acquisition in Singapore to expand our McLean international offering. We repurchased $16,000,000 of common stock on a year to date basis under our new $160,000,000 share repurchase program, while strategically adding inventory for organic growth ahead of the April tariffs, which should set us up favorably in this environment.

[David Cherechinsky, CEO, President & Director at DNOW]

We are uniquely well capitalized with a significant cash balance and no debt or interest payments and can be selective and patient at the acquisition bargaining table while benefiting from our fortuitous inventory planning. While future market conditions are difficult to predict, given uncertainty stemming from the decline in oil prices and tariff induced trade disruptions, we believe we are well positioned to seize organic, adjacent and inorganic growth, pursuing more efficient and cost effective ways to execute operationally. I want to extend my sincerest gratitude to the women and men of DNOW who distinguish us in the market in how we promote our key manufacturers and work tirelessly to delight our customers as we build upon a great start to the year. With that, let's open the call for questions.

[Operator]

Thank you. Our first question comes from the line of Nathan Jones from Stifel. Please go ahead.

[Adam Farley, Associate Analyst at Stifel Financial]

Yes. Good morning, guys. This is Adam Farley on for Nathan.

[David Cherechinsky, CEO, President & Director at DNOW]

Hi, Adam.

[Adam Farley, Associate Analyst at Stifel Financial]

Good guys.

[Adam Farley, Associate Analyst at Stifel Financial]

Wanted to start on tariffs. How is inflation tracking in the business? What product areas have seen the most tariff related price increases from suppliers? And how should we think about how that impacts gross margin as move through the year?

[David Cherechinsky, CEO, President & Director at DNOW]

Okay, so we've got a few shifting tectonic plates here. We've got in the inventory world, at kind of low points in terms of costing for inventory as we've gone through a couple of years of deflation. So, inventory is arguably under costed to what's coming down the pipeline. In terms of incoming product, we're seeing resumption of normal inflationary pressures resulting from longer lead times starting to emerge from some of our manufacturers. We're starting to see normal price increases being passed through.

[David Cherechinsky, CEO, President & Director at DNOW]

And then we're seeing a layering on top of that of tariffs. So we really haven't begun to experience the tariff impacts that much. It's mostly the impacts from normal inflation. But we see that in some of the projects we're quoting, we're starting to see some of the impacts there. Now, for much of the products we buy, stock and sell, pipe fittings and flanges, for example, which is in the 40% range of our revenues, we're not seeing much tariff impacts there.

[David Cherechinsky, CEO, President & Director at DNOW]

There's a lot of domestic production supporting those revenues. In valves, it's a little different story. We have heavy US production for some of our key suppliers and then we have import production otherwise where we're starting to see some tariff impacts there. Depending on the manufacturer, depending on the product line or the size of the material, we're seeing product line increases from 3% to 5%, some of them 25% to 35%. That's newly introduced activity, which we really didn't see in the first quarter, of course, but we'll start to see in the second quarter.

[David Cherechinsky, CEO, President & Director at DNOW]

How that impacts gross margin, we think net net it'll be favorable, as we said on prior calls. But there are also competitive forces at play that'll impact that as well. So I can't tell you to what extent we'll see favorable gross margin increases. I expect them to be favorable, or I expect to see the revenue benefit of higher cost material. But in terms of the timing and the degree, we don't have a real good read on that just yet.

[Adam Farley, Associate Analyst at Stifel Financial]

Thank you, Dave. That's really helpful color. Just following up on that, as it stands today, smaller competitors staying rational in the market or is it more you expect maybe heightened competitive pressures going forward?

[David Cherechinsky, CEO, President & Director at DNOW]

I think, in terms of commenting on how other people are behaving in terms of pricing, I don't want to say too much about that. But I think people are being careful about their inventory. And they see that, we certainly see it. And I think most of our competitors see our inventory as a competitive tool, or really a weapon, depending on how much you have. The more you have right now ahead of the tariffs, the better.

[David Cherechinsky, CEO, President & Director at DNOW]

I think people are being careful, but there's still excessive, intensified bidding on projects. So I think that's kind of a normal effect that we're seeing, and nothing special really happening there. But it's an intensely competitive business, always has been. But I think that behavior hasn't changed much during the cycle so far.

[Adam Farley, Associate Analyst at Stifel Financial]

Okay. And then just given the moves you've done with your supply chain following twenty eighteen tariffs, the inventory build in the quarter, maybe just a little more color on some of the opportunities to maybe drive market share gains going forward and then also any color on adjacent market growth? And I'll leave it there. Thank you.

[David Cherechinsky, CEO, President & Director at DNOW]

In terms of market share gains, only a few national or global companies have the global buying power we do. So I think against the smaller competitors, the regional PE backed competitors, do have an advantage. And we intend to take advantage of that. That's primarily due to volume. We buy a lot more from a lot more suppliers.

[David Cherechinsky, CEO, President & Director at DNOW]

And we have a bigger say at the table in terms of product availability, which of course being the most important thing, seconded by product cost, rebates, return privileges, etcetera. So we have an advantage in that regard. In terms of how that plays out during the rest of the year, I'm not sure. But what was your second question, Adam? I'm to make sure I got it.

[Adam Farley, Associate Analyst at Stifel Financial]

Yeah, just any additional color on adjacent market growth, maybe an update on energy evolution space, industrial, Okay,

[David Cherechinsky, CEO, President & Director at DNOW]

got you. Brad, do want to hit that?

[Brad Wise, Vice President of Digital Strategy & Investor Relations at DNOW]

Yeah, Adam, on the adjacent markets, we define those and have defined those previously, water, wastewater, the mining industry, chemical process, those really set up well with our U. S. Process solutions business on the fluid movement side. Each quarter, we're winning business at each one of those markets. We expect those to be fairly steady.

[Brad Wise, Vice President of Digital Strategy & Investor Relations at DNOW]

There are projects in there that cause some lumpiness as we move forward. Dave called out a real interesting project that Trojan Group won on the agricultural processing side with water and egg producer. We're excited about that one. That's our first project there. We think there's more of those to come in the future.

[Brad Wise, Vice President of Digital Strategy & Investor Relations at DNOW]

We're opportunistic and optimistic about that one. We talked a little bit about data centers. There's been an awful lot of investment in data centers. See it almost daily, I think in the news. So we gave a little color on where DNOW can participate in that industrial market, both on the natural gas power generation side that feeding high reliability data centers.

[Brad Wise, Vice President of Digital Strategy & Investor Relations at DNOW]

So that feed gas and natural gas suits up really well for DNOW. We expect to secure some projects in the future. We're chasing those today. And then with the data center themselves, depending on where we are, our McLean Group has got some electrical and lighting capabilities on top of our new acquisition in Singapore. So we think we'll be able to chase additional opportunities there as well as in The U.

[Brad Wise, Vice President of Digital Strategy & Investor Relations at DNOW]

S. With our PVF Plus side. And then maybe a final comment on energy evolution, carbon capture, Well, the decarbonization business seems pretty steady. Our customers are still looking to reduce methane emissions. So we see that continuing.

[Brad Wise, Vice President of Digital Strategy & Investor Relations at DNOW]

The carbon capture businesses are certainly kind of lumpy and we expect projects in the future, but they're still kind of slower and smaller in size here in the early part of twenty twenty five. And then RNG, RNG tends to be a little bit kind of lumpy with our EcoVapor product. In the last really couple of years, we've had probably more EcoVapor sales in the RNG side probably in the second half of the year than the first half of the year. But there's some additional color on the adjacent markets. It's certainly an area we're looking to grow, we expect to grow and excited about the future there.

[Adam Farley, Associate Analyst at Stifel Financial]

All right. Thank you for taking my questions.

[David Cherechinsky, CEO, President & Director at DNOW]

Thanks, Adam.

[Operator]

Thank you. Our next question comes from the line of Please go ahead.

[Charles Minervino, Equity Research Analyst at Susquehanna International Group]

Hi, good morning.

[David Cherechinsky, CEO, President & Director at DNOW]

Hi, Chuck.

[Brad Wise, Vice President of Digital Strategy & Investor Relations at DNOW]

Good morning, Chuck.

[Charles Minervino, Equity Research Analyst at Susquehanna International Group]

Hey, so I was just wondering maybe you can give us your updated thoughts on the geographic kind of growth for the year. You reaffirmed the full year revenue growth, I guess, flat to up high single digits. But just kind of your updated thoughts here on U. S. Versus Canada versus international, how they should shape up for the year?

[David Cherechinsky, CEO, President & Director at DNOW]

Okay, so international, I think we talked last year about year over year pretty flat. We made some restructuring moves in international last year. And the idea there was to take out some risk, add some focus for our management team to focus on where we're strong, which is in The UK and Australia and parts of the Middle East and Asia Pacific area and to unfocus on the things where we get paid late and we have too much inventory and we're not making the returns that we expect. So we want international focused on profits and cash flow versus volume. So we expect year over year general flatness with international.

[David Cherechinsky, CEO, President & Director at DNOW]

Canada is a highly competitive business. We expect a second quarter decline, of course, going into breakup, a strengthened 3Q, and then some seasonal moderation, maybe a decline going into the fourth quarter. But I think where we're really going to see the most action is in The US. We talked on our last call about where we're going to see growth in midstream. Midstream is actually tracking better than we expected.

[David Cherechinsky, CEO, President & Director at DNOW]

So we're excited about the growth there. We're going to see a benefit from tariffs in The United States. We won't see that benefit elsewhere. And that should boost revenues. And we think we have an advantage against most of our competition there because of our size and the volumes we produce.

[David Cherechinsky, CEO, President & Director at DNOW]

Trojan, a new acquisition, is tracking better than expected. And that's going to be a boost to The US business. Our April bookings were really strong. And April tends to be the shortest revenue month of the quarter. So we're optimistic about making our plan in the second quarter and that parlaying into later in the year.

[David Cherechinsky, CEO, President & Director at DNOW]

And we are poised to do more M and A. It's a matter of the parties coming to the right price and terms, etcetera. And we think most of that M and A is going to happen in The US and most likely in the Process Solutions Group, which is becoming a bigger and more important part of our US business. So, a lot of optimism in The US, but general flatness elsewhere around the world.

[Charles Minervino, Equity Research Analyst at Susquehanna International Group]

Gotcha. And I just thought maybe you can give us a little bit more detail on this new acquisition you're doing, this Natron International. I don't know if you can help us with kind of the revenues that that brings in. It sounds like it's a small one, but just kind of how you're thinking about that and how it's going to contribute?

[David Cherechinsky, CEO, President & Director at DNOW]

Yes, it's small. Revenues are going to be in the 12 to 15 range. The multiple are in our standard four to six range, probably closer to the four. But in terms of particulars about the business, Brad, do you want to give some color on

[Brad Wise, Vice President of Digital Strategy & Investor Relations at DNOW]

Sure. I mean, yes, they're headquartered out of Singapore. They're highly aligned with our McLean electrical distribution business. We call it McLean International now based out of The UK, but also Australia too. So having that expansion to Singapore and then those Southeast Asia Pac markets is something that we were really excited about.

[Brad Wise, Vice President of Digital Strategy & Investor Relations at DNOW]

Distribute lighting, cable glands, electrical bulk materials service Chuck, they service kind of a broad different market space from offshore to marine to petrochemical, there's pharmaceutical business, they're pretty diversified shipyards, FPSOs, some data centers. So we like the diversified end markets that they bring and really just excited to bring them on board and look at revenue synergies with our McLean leadership team.

[Charles Minervino, Equity Research Analyst at Susquehanna International Group]

Got it. And just one last one for me. I think you mentioned a $15,000,000 kind of onetime revenue in the quarter or something that's going to not continue. That sounded big to me. I don't know, are your projects normally that large?

[Charles Minervino, Equity Research Analyst at Susquehanna International Group]

Was just wondering if you could give us a little bit more color on or if there's other opportunities like that one out there in the future.

[David Cherechinsky, CEO, President & Director at DNOW]

That particular was multiple projects in the Kazakhstan area, which happens to be one of the countries we're pulling out of. Those were pent up projects, but overall the business wasn't strong. These projects ended up being at the tail end of our residents there. But we do have the occasional $10,000,000 15 million dollars project. We used to have more of them internationally.

[David Cherechinsky, CEO, President & Director at DNOW]

We see a lot less of that today internationally. But they do occur from time to time. And internationals, as you probably recall, Chuck, has been lumpy in terms of quarterly revenues, in part due to the timing of projects. But that won't recur. We'll see some growth outside of that, outside of Kazakhstan and our core McLean business offsetting some of that $15,000,000 climb.

[David Cherechinsky, CEO, President & Director at DNOW]

But that's kind of the read on that project and how they occur in size, etcetera.

[Charles Minervino, Equity Research Analyst at Susquehanna International Group]

Got it. Thank you.

[David Cherechinsky, CEO, President & Director at DNOW]

You're welcome. Thank you.

[Operator]

Thank you. Our next question comes from the line of Jeff Robertson from Water Tower Research. Please go ahead.

[Jeffrey Robertson, Managing Director at Water Tower Research LLC]

Thank you. Good morning. Dave, there's a lot of the E and P companies are talking about possibly curtailing, drilling and completion activity given the macro environment. Can you talk about how DNOW's recent efforts to diversify the revenue stack away from just D and C insulates partially from a potential slowdown in that area?

[David Cherechinsky, CEO, President & Director at DNOW]

Okay, so our focus there is really to grow with the E and C customers and take market share. And we think our position enables us to do that, and we've seen gains in more recent quarters. Our focus otherwise has been on growing our energy transition business, we call it energy evolution. It's a five year strategy focused on pursuing growth in those newer energy sources. And we've made nice gains there and we expect that to continue.

[David Cherechinsky, CEO, President & Director at DNOW]

In terms of adjacencies, most of the deals we're looking at today afford some adjacency benefits that would help us grow our pump business generally, our water and wastewater business specifically, and other mining other end markets that we're focused on outside of strict oil and gas. But where we're seeing the most benefit to offset some of the upstream declines, which we talked about last quarter and we're still experiencing today, we're seeing nice gains in midstream. And we've aligned our inventory, our sales focus, our largest acquisition in our history, the purchase of Witco, to focus on growing our position there. So we're becoming a real powerhouse in that area and we expect that to pick up some of the slack we lose in the upstream focused areas. Brad, anything you want to add there?

[Brad Wise, Vice President of Digital Strategy & Investor Relations at DNOW]

No, I think you captured it.

[Jeffrey Robertson, Managing Director at Water Tower Research LLC]

Dave, you've talked about a couple of produced water projects, I think this quarter and maybe last. Is that an opportunity for DNOW to expand its activity with producers or some of the water businesses just on the production side of equation?

[Brad Wise, Vice President of Digital Strategy & Investor Relations at DNOW]

Jeff, I'll take that one. Is Brad.

[Brad Wise, Vice President of Digital Strategy & Investor Relations at DNOW]

Yes, I think

[Brad Wise, Vice President of Digital Strategy & Investor Relations at DNOW]

since our FlexFlow acquisition a few years ago and then the PMF acquisition on top of that, We've been very interested in the produced water side, especially in the oily areas, obviously, with a large amount of produced water that has to be either transferred, recycled or reinjected in the subsurface with an SWD. Traditionally with our fabricated business, we sold permanent units, permanent SWD units. We've supplied kind of permanent water transfer units, but we haven't been on the rental side. As customers are looking to preserve cash and save CapEx, they're increasingly more interested in leasing and rentals. And so getting involved in that rental business with FlexFlow and PMF was timely, and I think it's really paying dividends for us.

[Brad Wise, Vice President of Digital Strategy & Investor Relations at DNOW]

And then on top of that is the Trojan acquisition we did late last year, which really kind of fit a gap in our portfolio with a combination of lay flat hose, combination of water transfer pumping units that are highly portable in addition to an automation package that allows us to turnkey the solution for a lot of these water, kind of produced water companies out there that are offering water management as a turnkey service for the operators. Those companies have become a big piece of our customer base in addition to the operators. But we see that business as long as completions are active and continuing, we're going to have to deal with water, whether it's recycle or reinjection. And those businesses lend themselves to adjacent markets. Mean, we've rented a few units in the downstream refining applications for our FlexFlow business.

[Brad Wise, Vice President of Digital Strategy & Investor Relations at DNOW]

We talked about Trojan getting into the agricultural processing business. So we really like the portability of the solution into these industrial adjacent markets. And it's really just a matter of getting our sales team focused on those industrial opportunities in addition to the kind of the upstream opportunities as well.

[Jeffrey Robertson, Managing Director at Water Tower Research LLC]

I think you said digital solutions represented about 53% of SAP revenue.

[Jeffrey Robertson, Managing Director at Water Tower Research LLC]

Was that and I think you said that's a

[Jeffrey Robertson, Managing Director at Water Tower Research LLC]

high watermark, is that correct?

[Brad Wise, Vice President of Digital Strategy & Investor Relations at DNOW]

Yes, I believe so. That's a high watermark that's on our SAP revenue, which is roughly about 80% of our total revenue. That will fluctuate with customer activity on a quarterly basis. I believe the last the prior period, we were below 50%, but we were pleased to see that number slowly tick up. If you trended over eight to twelve quarters, seeing that number increase.

[Brad Wise, Vice President of Digital Strategy & Investor Relations at DNOW]

Our digital transformation and IT teams are working hard with customers to continually look for solutions to integrate, to make doing business with DNOW much more efficient, much more easier. And so we're seeing both sides really, our customer and us are seeing kind of the benefits of that and really increased efficiencies and higher levels of productivity.

[Jeffrey Robertson, Managing Director at Water Tower Research LLC]

Is that what underlies, Dave, your comment about in some ways growing with your customer by being able to offer them more efficient procurement solutions, which lowers the cost of the transaction to them and generates more business opportunity for DNOW?

[David Cherechinsky, CEO, President & Director at DNOW]

I think so. And I think it's most important and the timing is great for what's happening generally with price indexing across all imported products.

[Jeffrey Robertson, Managing Director at Water Tower Research LLC]

Thank you.

[David Cherechinsky, CEO, President & Director at DNOW]

Thank you, Jeff.

[Operator]

Thank you. Our last question comes from the line of Josh Jain from Daniel Energy Partners. Please go ahead, sir.

[Josh Jayne, Managing Director at Daniel Energy Partners]

Thanks. Good morning. First question, just when we think about what's going on in The U. S, and it was helpful for you guys to lay out your guidance for not only Q2, but for the full year. Could you remind us first how much of your U.

[Josh Jayne, Managing Director at Daniel Energy Partners]

S. Business today is upstream levered? And then second, embedded in your guidance, what are you expecting from the rig count or completions count in the second half of this year as we've heard some operators come out and start to cut CapEx? Thanks.

[David Cherechinsky, CEO, President & Director at DNOW]

Our U. S. Business is probably in the 70% range in terms of upstream. And now there's some commingling with midstream. Sometimes we're not exactly sure what is midstream and upstream, but we see that midstream piece as a key target for growth.

[David Cherechinsky, CEO, President & Director at DNOW]

In terms of what was the second half of the question?

[Josh Jayne, Managing Director at Daniel Energy Partners]

The second half was just given that you have some positives going on in your business. So when we think about midstream and then also tariffs positively impacting the business. But I'm just curious what your assumption was and how you're thinking about activity in the back half of the year on the rig count and completion count in The U. S?

[David Cherechinsky, CEO, President & Director at DNOW]

Yes. Thanks for reminding me. So in terms of rig counts, there are various estimates of what could happen to rigs over the coming quarters from one report we read the other day, I think it came from your firm, Josh, is rig counts could drop 60 to 75 by year end. If you factor that in, that could mean a rig count decline of 10%, which could mean there's not a perfect correlation with our revenues, but that could drive some revenue declines there. Although we've seen support outside of rigs for completions and for total production, so it's probably even a lesser correlation.

[David Cherechinsky, CEO, President & Director at DNOW]

But we could see some revenue declines there. In the meantime, we have tariffs coming into play that could offset completely the impacts of any kind of rig count declines, which haven't yet begun. So I think it's speculative for me to guess at what rigs could do. But I think there are two kind of competing realities. One is cost increases driving price increases, which could be offset partially by declining rigs.

[David Cherechinsky, CEO, President & Director at DNOW]

But guessing what that decline, if it occurs, could be is we don't have a feel for that yet. A lot of customers are saying they're going to maintain production. Some customers are saying they're going to reduce a rig and reduce their budget by a small percentage. So it's early. I think the thing driving that is, of course, is oil prices.

[David Cherechinsky, CEO, President & Director at DNOW]

And that's a tentative new metric which can change. One of the things about uncertainties is it cuts both ways, and that we could see oil prices go back up in the next thirty days for other reasons. So don't have a good read on what that impact could be, Josh.

[Josh Jayne, Managing Director at Daniel Energy Partners]

Understood, thanks. And then maybe just one follow-up. You obviously closed the acquisition and then I believe you highlighted that the M and A market could potentially be active in The U. S. Over the course of this year.

[Josh Jayne, Managing Director at Daniel Energy Partners]

I'm just curious, maybe you could comment on when we do see some volatility like this in the energy market. Does that make things more difficult to get across the finish line? Have you seen an increase in opportunities? Maybe just speak to the M and A landscape in a little more detail would be great. Thanks.

[David Cherechinsky, CEO, President & Director at DNOW]

Well, in terms of the landscape, where we're at right now, we have several active conversations. Varying degrees of interest and seriousness. Sometimes we're a natural operator and we can come to terms on price and we can get a deal done in a number of months. And sometimes we're not necessarily the natural operator, but we have similar customers, overlaps with suppliers, and we could make a deal work at the right price. So those are various levels of conversations happening with companies.

[David Cherechinsky, CEO, President & Director at DNOW]

I do think people are going to be a little cautious about the timing of completing a sale. We're not necessarily seeing that, but I think this would be a time where there'd be a little bit of caution in terms of timing, primarily from the oil price news, which is really fairly fresh. Otherwise, I think the conversations we're having are active and kind of a normal level of activity there. So no real tangible evidence of sellers sitting on the sidelines. But I think naturally there'd be a little caution.

[Josh Jayne, Managing Director at Daniel Energy Partners]

Appreciate you taking my questions. Thanks. I'll turn it back.

[David Cherechinsky, CEO, President & Director at DNOW]

Okay. Thanks, Josh.

[Brad Wise, Vice President of Digital Strategy & Investor Relations at DNOW]

Thank you, John.

[Operator]

Thank you. There are no further questions at this time. Mr. Bradweiss, I'll turn the call over back to you.

[Brad Wise, Vice President of Digital Strategy & Investor Relations at DNOW]

Well, thank you everyone for joining us today and your interest in DNOW. We look forward to discussing our second quarter twenty twenty five results on our next earnings conference call in August. Hope everyone has a wonderful Wednesday. And with that, we'll turn it back to the operator and conclude the call. Thank you.

[Operator]

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

Participants

Executives

• Brad Wise, Vice President of Digital Strategy & Investor Relations
• David Cherechinsky, CEO, President & Director
• Mark Johnson, Senior VP & CFO

Analysts

• Adam Farley, Associate Analyst at Stifel Financial
• Charles Minervino, Equity Research Analyst at Susquehanna International Group
• Jeffrey Robertson, Managing Director at Water Tower Research LLC
• Josh Jayne, Managing Director at Daniel Energy Partners