DNOW Q2 2026 Earnings Report

DNOW EPS Results

• Actual EPS: $0.12
• Consensus EPS: $0.09
• Beat/Miss: Beat by +$0.03
• One Year Ago EPS: $0.27

DNOW Revenue Results

• Actual Revenue: $1.31 billion
• Expected Revenue: $1.27 billion
• Beat/Miss: Beat by +$41.28 million
• YoY Revenue Growth: +108.10%

DNOW Announcement Details

• Quarter: Q2 2026
• Date: 8/6/2026
• Time: Before Market Opens
• Conference Call Date: Thursday, August 6, 2026
• Conference Call Time: 9:00AM ET

DistributionNOW (NYSE: DNOW (NYSE:DNOW)) is a global distributor of energy and industrial products, serving a broad range of end-markets including oil and gas, petrochemical, power generation, and industrial manufacturing. Headquartered in Houston, Texas, the company provides solutions across the life cycle of energy and industrial assets, with an emphasis on safety, reliability and operational efficiency.

The company’s core product portfolio includes piping systems and related components (such as valves, fittings, flanges and gaskets), instrumentation, electrical and automation equipment, fasteners, industrial safety supplies, chemicals and composite products. In addition to product distribution, DistributionNOW offers value-added services such as machining, heat-treating, pickling and passivation, kitting, custom fabrication and inventory management programs aimed at reducing on-site costs and improving supply-chain performance.

DistributionNOW maintains an extensive network of distribution centers, service locations and sales offices spanning North America, Latin America, the Middle East, Asia-Pacific and Europe. This global footprint enables the company to support both multinational energy projects and regional industrial operations with on-time delivery and localized technical support.

The business was originally part of National Oilwell Varco and commenced independent trading on the New York Stock Exchange in February 2014. In mid-2023, DistributionNOW completed a merger with MRC Global, further expanding its product offering and geographic reach within the energy distribution sector.

DNOW Q2 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Second-quarter results exceeded expectations, with revenue rising 10% sequentially to $1.3 billion and adjusted EBITDA increasing 54% to $60 million, or 4.6% of revenue.
• Positive Sentiment: Cash generation and working capital improved substantially, including a record $133 million of operating cash flow, a seven-day reduction in DSO, and a $131 million decline in inventory. Management expects an additional $25 million–$50 million inventory reduction during the rest of the year.
• Positive Sentiment: U.S. growth was led by midstream, gas utilities, and upstream, while midstream revenue surpassed a $1 billion annualized run rate and gas utilities revenue reached an 11-quarter high. Data centers, LNG, water solutions, and infrastructure projects were identified as attractive growth opportunities.
• Positive Sentiment: Management raised its full-year outlook to approximately $5.0 billion–$5.1 billion of revenue and EBITDA margin approaching 4.5%; third-quarter revenue is expected to grow at a low- to mid-single-digit sequential rate. The company also expects 2026 exit-rate cost synergies of about $30 million, above its original $17 million target.
• Negative Sentiment: Integration and ERP-related costs remain a near-term headwind, while adjusted gross margin declined to 20.8% due partly to $4 million of aged-inventory charges and lower international vendor consideration. Downstream activity remains mixed, Canada was pressured by seasonal breakup, and Middle East project timing continues to be affected by geopolitical uncertainty.

Presentation

[Operator]

Good day. My name is Greg, and I will be your conference operator today. At this time, I would like to welcome everyone to the DNOW second quarter 2026 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, simply press star one again. Thank you. Mr. Brad Wise, Vice President of Digital Strategy and Investor Relations, you may begin your conference.

[Brad Wise, VP of Digital Strategy and Investor Relations at DNOW]

Thank you, Greg. Good morning, and welcome to DNOW's second quarter 2026 earnings conference call. We appreciate you joining us and thank you for your interest in DNOW. With me today is David Cherechinsky, President and Chief Executive Officer, and Mark Johnson, Senior Vice President and Chief Financial Officer. We operate under the DNOW and MRC brands. DNOW is our New York Stock Exchange ticker symbol. 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, August 6, 2026, which is subject to change.

[Brad Wise, VP of Digital Strategy and Investor Relations at DNOW]

They are subject to risks and uncertainties. Actual results may differ materially. 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-K and 10-Q that DNOW 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.dnow.com or in our filings with the SEC.

[Brad Wise, VP of Digital Strategy and Investor Relations at DNOW]

To supplement the information provided to investors under GAAP, we present certain non-GAAP financial measures in our quarterly earnings releases and other public communications. We encourage you to review our earnings release and securities filings to further details on our use of these non-GAAP metrics for reconciliations to the most comparable GAAP measures. These documents are also available on our website. Unless we specifically state otherwise, references in this call to EBITDA refer to adjusted EBITDA. Our second quarter 2026 earnings presentation is available on the investor relations section of our website. We expect to file our Form 10-Q later today, after which will also be available on our website. A replay of today's call will be available for the next 30 days. Now, let me turn the call over to Dave.

[David Cherechinsky, President and CEO at DNOW]

Thank you, Brad, and good morning, everyone. I want to start by recognizing and thanking our 5,000 DNOW employees who delivered strong second quarter results, which reflect a meaningful improvement from the first quarter of 2026, our first full quarter as a combined organization. The revenue, earnings, and significant cash gains generated in the quarter were the direct result of teamwork and collaboration across the company. Our employees came together with a shared purpose, adding value to our customers and working towards realizing the full potential of DNOW. Our customer-first mindset remains our greatest differentiator and continues to drive growth as we move into the second half of the year. I'm deeply grateful for the commitment, resilience, and hard work of every team member. Thank you for all you do to support our customers and to make DNOW run stronger.

[David Cherechinsky, President and CEO at DNOW]

Our ability to execute our strategic plans across multiple fronts resulted in stellar results for the second quarter, with revenue of $1.3 billion, a sequential improvement of $124 million or 10%, with 13% growth in the U.S. exceeding our expectations. Our teams continue to work tirelessly towards executing our U.S. ERP conversion and optimization plans. Our strong top-line performance helped lift EBITDA to $60 million in the second quarter, a $21 million or 54% sequential improvement, beating our expectations and a key step towards our targeted profitability improvement. EBITDA as a percentage of revenue for the quarter rose to 4.6%, a 130 basis points improvement over the first quarter. We delivered $133 million of cash flow from operations in the second quarter, resulting in a positive $38 million year-to-date cash inflow.

[David Cherechinsky, President and CEO at DNOW]

This cash haul was driven by continued progress on the system optimization and working capital management fronts. The quarter benefited from higher revenue, improved execution, and accelerated synergy actions, while acknowledging that we continue to incur temporary elevated cost related to the MRC Global U.S. ERP implementation and integration activities. These costs are expected to remain a near-term headwind, but should decline as integration milestones are completed and systems are deployed. During the second quarter, we made progress on the most important objective we laid out earlier this year, retrieving the revenue we want while improving profitability and cash generation. In July, we successfully transitioned our 17th MRC Global location to SAP, marking another important milestone in our U.S. ERP conversion and optimization journey.

[David Cherechinsky, President and CEO at DNOW]

With 17 locations now converted, we continue to standardize upstream and midstream operations across the network while enhancing operational efficiency, inventory visibility, and synergy realization. Each conversion advances our ability to grow revenues, standardize processes, optimize the footprint, improve service levels, and capture the merger synergies identified as part of our three-year integration plan. This achievement reflects outstanding cross-functional execution, with teams delivering high-quality results across data preparation, testing, training, system readiness, and cutover activities with accelerated timelines. Now moving to business results. The U.S. business delivered $1.1 billion in revenue, up 13% from the first quarter, representing strong sequential revenue improvement in areas where the combined DNOW and MRC Global platform gives us the best opportunity to recapture customer activity, gain share, and improve operating leverage.

[David Cherechinsky, President and CEO at DNOW]

Revenue growth was driven by midstream strength, gas utility gains, with notable sequential upstream market share improvement, supported by strong execution and deeper customer engagement. The combined product range and geographic coverage help expand our commercial reach and operational capabilities for our customers. In the Permian, for example, where we now operate on optimized ERP platforms, we are supporting larger project activity while strengthening local branch execution, inventory deployment, and customer service. As a result, we are seeing increased project activity, stronger bid conversion, and growing momentum with both existing and new customers. We are seeing clear evidence that the combined organization is winning in the market by bringing together customer relationships, broader product availability, best practices, and stronger execution discipline.

[David Cherechinsky, President and CEO at DNOW]

This was especially evident where inventory depth, local coverage, and targeted customer recovery actions enabled us to respond more effectively. U.S. performance improved across our operating regions, supported by healthy demand in maintenance, production, infrastructure, and project-related activity. In upstream, we made definitive progress recovering customer activity and recapturing share. This is a sector where our combined organization benefits from strong field relationships, deeper product availability, and a broader footprint. Midstream was one of the most attractive areas of our diversified sector portfolio, piercing $1 billion quarter annualized revenue rate for the first time in the U.S., our highest midstream revenue level ever. Investment in natural gas infrastructure, LNG-related activity, power generation, and feed gas infrastructure build-outs for data centers continue to support demand for the infrastructure-type products and services we provide.

[David Cherechinsky, President and CEO at DNOW]

We are seeing strong activity across midstream infrastructure, pipeline-related work, compressor station packages, fabricated solutions, valve automation, and other project-driven demand lanes. Our second quarter performance is a solid example of the type 2 momentum we want to see across the combined DNOW platform. The business continues to benefit from strong customer engagement, recurring project activity, and forward-looking planning and quoting activity with customers. Our midstream momentum reflects customer trust earned through consistent execution and the ability to convert relationships and project visibility into repeat opportunities. Gas utilities delivered another point of validation. Our gas utilities business grew 15% sequentially, nearly twice the three-year second quarter sequential growth average. This represents an 11-quarter revenue high in what we see as a sector with a strong macro outlook.

[David Cherechinsky, President and CEO at DNOW]

Gas utilities is a durable, infrastructure-led market supported by modernization, infrastructure integrity, and meter replacement programs, and utility investment. Sequential revenue growth was driven by improved operational execution, seasonal construction demand, increasing CapEx from top customers, and market share growth from new customers. To meet the growing needs of one of our top gas utility customers, we invested in a new distribution center designed to support 15 customer locations, resulting in improved proximity and enhanced customer service as activity levels expand. Activity across downstream industrial sectors was mixed. The downstream business saw a $12 million sequential revenue decline in 2Q, although activity and revenue was flat sequentially when removing the impact of a first-quarter large, non-repeating project paired with market share takeback initiatives, despite continued weakness in the chemical processing industry.

[David Cherechinsky, President and CEO at DNOW]

Our targeted downstream customer relationships are improving, and we are encouraged by the future revenue opportunities associated with upcoming turnaround activity. We typically begin to see pre-buy activity for seasonal turnarounds toward the end of the third quarter in advance of the first quarter execution, which is traditionally the strongest quarter for downstream turnaround activity. As a result, we expect downstream performance to improve as we move into the coming quarters. On the industrial side, we continue to participate in opportunities tied to data centers, U.S. LNG expansion, mining, and selected industrial markets. Near seasonal high refinery utilization and declining crude inventories point to a constructive future demand environment, supporting ongoing energy and industrial activity and improving demand for maintenance-related products and services.

[David Cherechinsky, President and CEO at DNOW]

Simultaneously, across all sectors, we are focused on a number of operational and financial improvement initiatives, including inventory optimization, pricing actions, facility rationalization, and technology upgrades that will deliver stronger working capital performance and process efficiency. Data centers continue to represent an attractive opportunity for us, and we are encouraged by the momentum we are building across both our infrastructure products business and our automation and controls capabilities. Our strategy is focused on developing relationships with the EPC firms, mechanical and general contractors supporting major data center developments, allowing us to establish a meaningful presence in this rapidly expanding market. Through responsive service, supply chain expertise, material management capabilities, and consistent execution, we have earned repeat business and expanded our participation across multiple projects and geographies.

[David Cherechinsky, President and CEO at DNOW]

I also want to shine a spotlight on our Process Solutions business, delivering its highest-ever quarterly revenue, with growth led by our Water Solutions team, with solid contributions from Trojan, FlexFlow, and Edge Controls. What is particularly encouraging is that this performance was not concentrated on a single product line or end market, highlighting the strength of the business' growing portfolio. This breadth is important because Process Solutions provides DNOW with premium earnings growth while providing our customers a more diversified set of advanced fluid, gas, and automation solutions across a diverse set of industrial applications. Strategically, Process Solutions strengthens DNOW's diversification and infrastructure-led growth profile. Canada's revenue for the second quarter was $47 million, or 8% lower than the first quarter, better than expected as a result of the seasonal pressure that accompanies the spring breakup period.

[David Cherechinsky, President and CEO at DNOW]

We saw a more resilient customer and project activity in Canada despite second quarter seasonality, with activity less susceptible to breakup period-related declines across midstream and LNG opportunities. International revenue was $151 million, up $4 million or 3% sequentially, with increased profitability due to project mix. We observed positive activity in certain markets and softer or timing-driven performance in others. We are seeing improving market conditions across several key regions, particularly in U.K. brownfield activity in Australia, where both MRO and project demand strengthened. While customers remain cautious amid geopolitical uncertainty, legislative developments, and ongoing cost and supply chain pressures, these market dynamics also continue to create opportunities for new project awards and market share gains. In our Middle East operations, geopolitical instability continues to impact customer activity and project timing.

[David Cherechinsky, President and CEO at DNOW]

We are seeing some customers slow workforce deployment and defer project execution, resulting in delays in bidding activity and capital spending decisions across the region. While several larger opportunities remain in the pipeline, customer engagement and project progression have been slower than anticipated as uncertainty persists. We remain well-positioned with key customers internationally and are encouraged by long-term opportunity set. Turning to capital allocation. We remain disciplined and focused on creating long-term shareholder value through balanced investments, maintaining a strong balance sheet, and returning capital to shareholders. During the second quarter, we demonstrated the strength of our cash generation capabilities, delivering $133 million of cash flows from operations, a second quarter DNOW record.

[David Cherechinsky, President and CEO at DNOW]

We deployed that cash across multiple capital allocation priorities, repurchasing 25 million of shares while reducing net debt by $95 million during the quarter to be more in line with our net debt to four-quarter trailing EBITDA level target of less than two. We view share repurchases as an attractive means of returning capital to shareholders and continued significant share repurchase levels in the quarter. We are strengthening the balance sheet, which enhances our financial flexibility and our ability to execute our strategic priorities while creating long-term shareholder value. The combination with MRC Global has created a larger, more diversified business with greater participation in markets supported by long-term infrastructure and industrial investment. These characteristics strengthen the durability of earnings and give us confidence in our ability to continue generating meaningful cash flow.

[David Cherechinsky, President and CEO at DNOW]

Looking ahead, we will continue to focus on long-term value creation through our capital allocation, with prioritization of share repurchases, debt reduction, organic investments, and strategic acquisitions while maintaining the financial flexibility to capitalize on attractive opportunities as they arise. With that, let me turn it over to Mark.

[Mark Johnson, SVP and CFO at DNOW]

Thank you, Dave, and good morning, everyone. Total revenue for the second quarter of 2026 was $1.3 billion, up approximately 10%, or $124 million from the first quarter, and above the guidance we provided on our last call. The sequential increase was driven by growth across the midstream, gas utilities, and upstream sectors. On a geographic segment basis, U.S. revenue for the second quarter of 2026 was $1.1 billion, an increase of $124 million, or 13%, from the first quarter of 2026. The upstream sector contributed approximately 36% of total U.S. revenue in the second quarter, followed by gas utilities at 28%, midstream 23%, and downstream and industrial 13%. In Canada, revenue for the second quarter totaled $47 million, down $4 million or 8% sequentially.

[Mark Johnson, SVP and CFO at DNOW]

As seasonality drove revenue lower, historically, Canada's revenue declines in the second quarter during the seasonal breakup period when access to production areas is limited due to road conditions. International revenue was $151 million in the second quarter, up $4 million or 3% sequentially, primarily from increased activity in the U.K. Adjusted gross profit for the second quarter was $272 million or 20.8%, compared to $256 million or 21.6% in the first quarter of 2026. The sequential decline in adjusted gross margin percentage was primarily attributable to $4 million in inventory-related charges associated with aged inventory, paired with approximately $4 million lower vendor consideration in the international segment. Selling, general, and administrative or SG&A expenses were $238 million in the second quarter compared to $243 million in the prior quarter.

[Mark Johnson, SVP and CFO at DNOW]

The decrease was primarily driven by elevated bad debt expense recorded in the first quarter that did not recur at the same levels, as well as additional synergy realization and operating efficiency initiatives associated with the integration of MRC Global. Adjusted EBITDA for the second quarter was $60 million or 4.6% of revenue, up $21 million sequentially. The increase in EBITDA was primarily driven by the combination of higher revenues and lower SG&A expenses. Depreciation and amortization expense was $23 million in the second quarter and is forecasted to be approximately $24 million in the third quarter of 2026. Interest expense was $9 million in the second quarter of 2026, consistent with our expectations. The $1 million sequential increase primarily reflects a higher average debt balance during the second quarter.

[Mark Johnson, SVP and CFO at DNOW]

Interest expense is forecast to decline slightly into the third quarter. Moving to income taxes, changes in geographic mix of projected earnings, including first half 2026 LIFO charges led to a revision of our forecasted annual effective tax rate. Applying this revised rate to our year-to-date results generated second quarter income tax expense of $12 million, producing an effective tax rate of negative 133% for the quarter and a year-to-date effective tax rate of 5.8%. For modeling purposes, we currently expect the full year 2026 GAAP effective tax rate in the mid to high single digits. However, the actual rate may vary depending in part on the level of earnings, including LIFO adjustments during the second half of the year. Net cash taxes for the quarter were $9 million.

[Mark Johnson, SVP and CFO at DNOW]

Net loss attributable to DNOW for the second quarter was $21 million or $0.11 per fully diluted share. On a non-GAAP basis, second quarter adjusted net income attributable to DNOW was $21 million or $0.12 per fully diluted share. Moving on to the balance sheet, at the end of the second quarter, accounts receivable was $889 million, flat sequentially, an impressive feat despite revenue increasing 10% from the first quarter, driving day sales outstanding or DSO to 62 days, down seven days sequentially. This improvement was accelerated and ahead of our prior expectations as intentional initiatives by our credit, sales, and operations team members paired with ERP optimization efforts yielded greater improved working capital efficiency.

[Mark Johnson, SVP and CFO at DNOW]

Inventory was $1.1 billion at the end of the second quarter, down $131 million from the first quarter, with an annualized turn rate of 4.0 times. The reduction reflects measurement period adjustments to opening balance sheet inventory reserves associated with the MRC Global acquisition of $53 million, $19 million in increased LIFO reserve, and continued execution of inventory optimization initiatives. Accounts payable was $711 million at the end of the second quarter or 61 days payable outstanding. Working capital excluding cash as a percentage of annualized second quarter revenue improved 19%-19.4%. In the second quarter of 2026, we generated $133 million of cash from operating activities, driven by improvements in working capital efficiencies and the significant improvement in cash flow reflects the benefits of our ongoing focus on working capital management, inventory optimization, and operational execution.

[Mark Johnson, SVP and CFO at DNOW]

During the quarter, we invested $9 million in capital expenditures, and additionally, we repurchased $25 million in shares in the second quarter. To date, we've repurchased $112 million under the current share repurchase program and a total of $192 million cumulatively across the current and previous share repurchase programs. Our balance sheet remains strong with total liquidity of $472 million, including $358 million in availability under our revolving credit facility and $114 million of cash at quarter end. Our total debt balance was $474 million at the end of the second quarter. Net debt was $360 million, resulting in a trailing 12-month EBITDA net debt leverage ratio of 1.7 times. Our $850 million revolving credit facility matures in November 2030, providing us with long-term financial flexibility.

[Mark Johnson, SVP and CFO at DNOW]

In the second quarter, we continued to make progress on cost synergy realization with our first-year expectation to approximate $30 million on a 2026 exit rate basis, significantly exceeding our original year-one exit rate estimate of $17 million. Overall, our annualized synergy target remains $70 million by the end of year three. The second quarter marks a notable step forward in our transformation as we delivered improved revenue performance, enhanced profitability, disciplined working capital management, and strong cash generation. With that, let me turn the call back to Dave.

[David Cherechinsky, President and CEO at DNOW]

Thank you, Mark. Now switching to our outlook for the third quarter and full year 2026. As we reach the halfway point of 2026, we are focused on execution across numerous opportunities and end markets while simultaneously capturing the merger benefit realization. I'm pleased with what we have accomplished, and I'm excited about the future. The second quarter represented an important step forward. We expect the business to continue benefiting from revenue recapture, gas utility durability, midstream infrastructure demand, and opportunities across data centers, LNG, mining, water, and broader infrastructure-led markets. At the same time, we expect downstream and industrial revenues to remain more timing sensitive. I'm encouraged by the level of engagement and progress we are making to better position us for the upcoming turnaround season.

[David Cherechinsky, President and CEO at DNOW]

We expect sequential third quarter growth in the U.S. as we make additional progress on executing on our integration plan, recover the revenue we want, and continue our path to optimize the MRC Global U.S. ERP. We also expect sequential growth in the international and in Canada. Taken together, we expect DNOW's third quarter revenues to be up sequentially in the low to mid-single digit percentage range, compounding the solid second quarter growth, with EBITDA targeted in the 5%-5.5% range above our prior guide, which will result in higher EBITDA to revenue flow throughs than we normally experience. On a full year basis, we are raising our prior guide and expect revenues to approach approximately $5 billion-$5.1 billion, with EBITDA as a percentage of revenue to approach 4.5%.

[David Cherechinsky, President and CEO at DNOW]

In closing, I'm encouraged by the progress and meaningful step change we made in the second quarter. I am thrilled with our significantly improved performance, highlighted by $133 million of cash flow from operating activities, a record second quarter achievement. Strong collections improved the quality and liquidity of accounts receivable, while inventory streamlining further enhanced exceptional cash generation. Revenue increased to $1.3 billion during the quarter, representing a 10% sequential increase and a strong 13% increase in the U.S. segment. Adjusted EBITDA rose substantially to $60 million, up 54% sequentially, reflecting stronger volumes and execution of the integration and cost management initiatives. For the first time, U.S. midstream revenues surpassed $1 billion on an annualized basis, while both the gas utility and upstream sector revenues delivered their strongest sequential quarter percentage growth since 2022.

[David Cherechinsky, President and CEO at DNOW]

During the quarter, our net debt leverage ratio improved while we returned capital to shareholders through our share repurchase program, demonstrating the strength of our cash generation and commitment to disciplined capital allocation. Total repurchases reached $75 million in the first half of 2026, representing more shares purchased in these two quarters than in the previous 10 quarters combined. The continued investment in our own shares reflects our confidence in the execution of our strategy and long-term growth prospects. I would like to thank our entire team for their efforts to deepen relationships with customers and suppliers, advance our integration initiatives, and drive greater operational efficiency with dedication and commitment to growth. Our actions are producing encouraging results, we continue to take decisive steps to position DNOW for long-term success.

[David Cherechinsky, President and CEO at DNOW]

I'm very proud of the progress we've made during the quarter and confident about the second half of the year. Let's open the call for questions.

[Operator]

Thanks, Dave. At this time, I would like to remind everyone, in order to ask a question, press star and then the number one on your telephone keypad. Once again, star one. In the interest of time, we ask that you please limit your questions to one primary and one follow-up. Thanks for understanding. We will pause just a moment to compile the Q&A roster. All right. It looks like our first question comes from the line of Alex Rygiel with Texas Capital. Alex, please go ahead.

[Alex Rygiel, Managing Director at Texas Capital]

Thank you. Good morning. Nice quarter.

[David Cherechinsky, President and CEO at DNOW]

Thank you, Alex.

[Alex Rygiel, Managing Director at Texas Capital]

Could you speak to additional working capital gains that could be achieved over the coming quarters or so?

[David Cherechinsky, President and CEO at DNOW]

Working capital needs? Alex, is that the question?

[Alex Rygiel, Managing Director at Texas Capital]

No, gains.

[David Cherechinsky, President and CEO at DNOW]

Gains.

[Alex Rygiel, Managing Director at Texas Capital]

Working capital gains.

[David Cherechinsky, President and CEO at DNOW]

Okay. Our two big primary assets are inventory and accounts receivable. We talked on our last call about really using our excess level of inventory as a commercial lever, and we did that in the second quarter, and that shows. We're careful about making sure we replace the stuff we need to grow our gas utility, midstream, all of our sector businesses, but we're careful about that. We recognize we have excess inventory in the system. We're going to bring that down by another $25 million, $50 million during the rest of the year. Inventory streamlining is a big focus for us. In terms of accounts receivable, we made really nice gains in our DSOs in the quarter. They improved by seven days, which I don't know if we've ever been able to do that before.

[David Cherechinsky, President and CEO at DNOW]

Of course, we had some long, sluggish, unpaid invoices due to system issues, which we've resolved. We're making very nice progress there, but still, there's additional receivables reductions we expect, primarily in the fourth quarter, as we see our seasonal decline in revenues in Q4. That could be another $25 million-$50 million plus earnings driving significant cash from operating activities. Those would be the two main levers. We expect CapEx to be pretty similar quarter-on-quarter. Otherwise, AR and inventory, we see those as opportunities, and also necessary avenues for additional customer support as we finance receivables with revenue growth. We want to make sure we have the right inventory to capitalize on growth in data centers and LNG and really strong progression in all the sectors, except for downstream, as we talked about earlier in the call.

[Alex Rygiel, Managing Director at Texas Capital]

Secondly, you mentioned you were encouraged by the upcoming turnaround season. Can you comment on or give us a little bit of help in understanding your visibility on that, understanding that sometimes those turnaround projects get pushed when the customer is being so active and unwilling to take systems offline? Maybe comment on your visibility and confidence that the fall turnaround season is going to play out as planned.

[David Cherechinsky, President and CEO at DNOW]

Yeah. Good question, Alex. You want to give some color on that, Brad, in terms of timing and where we are in the process?

[Brad Wise, VP of Digital Strategy and Investor Relations at DNOW]

Yeah. Well, good morning, Alex. Thank you for the question. We have a lot of downstream refining customers specifically, and we, of course, track turnarounds and timing of turnarounds. Over the last couple of years, or last year was a pretty good turnaround season, for the MRC Global business. We've seen, obviously, with the challenges we had with the ERP system, we have spoken previously about the inability to participate meaningfully in that prior turnaround season last year. If you look at projects, if you look at what we're tracking, we believe it'll be a similar year to last year. Dave talked about us repairing our relationships with those refineries, with those customers, as we improve our systems, as we talk about stabilize and optimize the MRC platform.

[Brad Wise, VP of Digital Strategy and Investor Relations at DNOW]

Our salespeople are focused on targeting that business, and we think we will go into the turnaround season. Which really, we're looking at more pre-buys toward the end of the third quarter. More of a bookings backlog starts to build, and then as we get into Q4 with the execution that Dave talked about in Q1 of 2027. We are optimistic about growth there on a year-over-year basis, talking with our sales and ops team about the opportunity looks similar to last year. Now, we're all seeing refineries utilization run very high. We made reference to that in our prepared remarks, and any time refineries are run hard for a long time with high utilization, they're going to need more maintenance. We think this kind of sets up a constructive environment for maybe the next couple of years for us.

[Alex Rygiel, Managing Director at Texas Capital]

Great. Thank you.

[Operator]

Thanks, Alex. All right. Our next question comes from the line of Adam Farley with Stifel. Adam, please go ahead.

[Adam Farley, Analyst at Stifel]

Good morning, everyone.

[David Cherechinsky, President and CEO at DNOW]

Morning, Adam.

[Adam Farley, Analyst at Stifel]

I'm going to be starting on MRC. Could you provide an update on how the MRC platform and ERP system is performing? Are you seeing improved performance in the system? Are you seeing improved service levels to customers? Maybe just talk about some of the internal metrics you track to gauge ERP improvement.

[David Cherechinsky, President and CEO at DNOW]

Yeah. We're seeing really widespread performance improvements as it relates to picking materials in the warehouse, to processing paperwork more timely, to data analysis for back office review of what's working, what's not working. We continue to see operational benefits from the improvements we've invested in making the systems that support Oracle at MRC work better. We're seeing nice gains there. Basically, speed has been the gains we've made over the last 90 days.

[Adam Farley, Analyst at Stifel]

Yeah, that's great to hear. Maybe on the up and midstream conversions SAP, you noted completing your 17th location. Can you just remind us on what's left in the pipeline to convert over to SAP? How are those locations that have been converted, how are they performing and are there any other locations that need to be converted over to SAP?

[David Cherechinsky, President and CEO at DNOW]

Yeah, that's been one of the most promising areas. Like I said in the last couple of calls, kind of a nexus of strength from DNOW and MRC really happens less on the Process Solutions, gas utilities, and downstream sides. The real strength, the real power that comes from the combination happens in upstream and midstream. We focused on that area or those sectors, to really provide a system that supports delighting the customer in a way where we could take back market share. We've implemented SAP in 17 locations. We've been careful to measure the handoff of revenues from billings that used to happen in the MRC system onto SAP.

[David Cherechinsky, President and CEO at DNOW]

We're measuring to make sure that baton passing is working, that the inventories, the revenues, the customer focus, the increased customer cost focus that comes from those overlap locations is intensifying, and we're benefiting from that. We're tracking on a per-customer basis, are we gaining in that handoff? Very important to us, and we are gaining. We saw that in a really strong upstream growth, in the U.S. which from the first quarter to second quarter, we haven't seen for four years. We're very excited about that. That process is working. We internally call it, these are locations that have been liberated. They're on a system that is optimized, that's been in place for several years, that makes it very easy to be responsive and fast in terms of customer requests, requirements, fulfillments, et cetera, reporting, et cetera.

[David Cherechinsky, President and CEO at DNOW]

We think we're pretty juiced in terms of our ability to grow that business, and that's showing in the numbers.

[Adam Farley, Analyst at Stifel]

That's great to hear. I'll hop back in queue.

[David Cherechinsky, President and CEO at DNOW]

Thanks, Adam.

[Operator]

Great. Thank you, Adam. Our next question comes from the line of Chuck Minervino with Susquehanna. Chuck, please go ahead.

[Chuck Minervino, Analyst at Susquehanna]

Hi. Good morning.

[David Cherechinsky, President and CEO at DNOW]

Morning. Hi, Chuck.

[Chuck Minervino, Analyst at Susquehanna]

Was just wondering if you could talk a little bit about the full-year guide. Seems like it would imply a bit of a decline in 4Q, a decent-sized decline. Just wondering if you guys are kind of just anticipating seasonality there, if that's just the baseline assumption, and we'll see how things go, just given some of the momentum in the business. Just kind of curious what you're thinking about there for 4Q.

[David Cherechinsky, President and CEO at DNOW]

That's a great question. Both companies on a standalone basis experience a fourth quarter decline. DNOW's fourth quarter decline tended to be around 6%-8% of revenues from 3Q to 4Q. MRC's was closer to 10% overall, and maybe closer to 13% for gas utility. We do expect a seasonal decline despite what we expect would be additional market share gains, recovered revenues, improvements in sales to data centers, et cetera. Yes, we are forecasting a fourth quarter decline. That seasonality will be there. As each quarter goes by, we expect to be more efficient. We expect to modestly increase gross margin percent. We do expect some seasonal gravity like we both historically have experienced.

[Chuck Minervino, Analyst at Susquehanna]

Just on that, just kind of curious on the assumption there. Is that just your baseline assumption, and it's possible it can do better or worse than that? Or do you pretty much have the purchase orders in hand at this point that gives you that visibility into 4Q? Just kind of curious how much variability there is to that number.

[David Cherechinsky, President and CEO at DNOW]

That's another good question. There is variability. We know from a project perspective or have a good feel from a project perspective how much we'll land in 3Q and 4Q. Day-to-day business, it's a harder read, Chuck. It is our going-in assumption that 4Q will largely track. Well, we've modeled it a little bit better than the expected seasonal declines, but that's our going-in expectations. We know that the best two quarters for gas utilities, for example, are 2Q and 3Q. For downstream, 1Q and 3Q are the best quarters there. We expect an incline in gas utilities and downstream in 3Q. Like Brad talked about earlier, we're talking to downstream customers today, readying for the 1Q turnaround. We're doing pre-buys. We're planning for that.

[David Cherechinsky, President and CEO at DNOW]

We won't really see the benefits of the downstream degrees of recovery until 1Q, we'll see an uptick in 3Q. Yeah, that 4Q decline is, we feel pretty comfortable that'll happen. There is variability to your question.

[Chuck Minervino, Analyst at Susquehanna]

Just one last one on the guidance. I think last quarter, it wasn't guidance, but you kind of talked about maybe a $350 million EBITDA number for 2027. Just curious if you gained some confidence in that, lost confidence, just any sort of update there and how you're feeling about that number.

[David Cherechinsky, President and CEO at DNOW]

Yeah. We gained confidence over the last 90 days in our ability for that glimpse into 2027. Again, we caveated it as not guidance, but we see the possibility of growth in sector expansion in upstream, midstream, and gas utilities next year. We see the market's going to grow for those three sectors next year. We expect to take back market share, to grow market share in upstream and midstream. We expect midstream to expand, and gas utilities to get better again next year. Plus, we're going to be taking back revenues as kind of the fourth leg there in our confidence in a 6.5%-7% revenue growth going into 2027. Some modest improvements in gross margins, and then efficiencies as we exit 2026 staying in place for next year.

[David Cherechinsky, President and CEO at DNOW]

We see that $350 million as plausible and our teams are focused on that target. How much revenue are we going to be able to get back? How much expense are we going to need to keep in place? What's the right nexus of growth and mid P&L or expense management it takes to get to that kind of earnings growth going into the new year? We feel really more confident today than we did 90 days ago.

[Chuck Minervino, Analyst at Susquehanna]

Thank you very much.

[David Cherechinsky, President and CEO at DNOW]

You're welcome.

[Operator]

All right. Thanks, Chuck. Our next question comes from the line of Chris Dankert with D.A. Davidson. Chris, please go ahead.

[Chris Dankert, Managing Director at D.A. Davidson]

Hey, morning guys. Thanks for taking the question. Again, just given the excitement around data center and Water Solutions, could you kind of remind us just relative size of those businesses and the kind of growth you were seeing in the quarter?

[David Cherechinsky, President and CEO at DNOW]

Data centers, we forecast could be in the $40 million-$50 million this year. I think the last number we cited was around $30 million expectations, I think we said in May. We see that, for 2026 anyway, as a growing opportunity, and we're excited about it. We have our sales teams focused on it. In terms of Water Solutions, Mark, is that a $100 million-$150 million business with premium margins as we talked about in the opening part of the call. It's a business where we've done most of our recent acquisitions, and where we hope to do more in the coming years. I think it's in that range. It's an important diversified element of our Process Solutions strategy, and we expect to grow that business.

[Chris Dankert, Managing Director at D.A. Davidson]

Got it. That's helpful. Just on some of the ERP mitigation efforts. I know we had some extra hands helping out. I guess, how are we thinking about either those positions rolling off, moving to other roles, just relatively speaking, the cost to mitigate, how are we thinking about that roll-off?

[David Cherechinsky, President and CEO at DNOW]

On the last call, we estimated that the total of costs for consulting help on ERP stabilization efforts, contract labor, overtime, temps, et cetera, we estimated that to be in about $8.5 million per quarter in the second quarter. We expect that number to come down to about $1 million in 3Q, and another $1 million in 4Q. In terms of the number of temps we have in place, that number's pretty stable. I think we said around 115, 119 last quarter. I think it's still in that range. We grew substantially. We're still working through system improvements. We're realizing those improvements. Like I said last quarter, our thumb is on the scale for revenue retrieval over discrete, immediate expense management. We do expect those numbers to come down as I suggested.

[David Cherechinsky, President and CEO at DNOW]

We expect significant efficiencies as we end the year, generally in the business.

[Chris Dankert, Managing Director at D.A. Davidson]

Got it. Very helpful and definitely encouraging. Thanks, guys.

[David Cherechinsky, President and CEO at DNOW]

Thanks, Chris.

[Operator]

Thank you, Chris. All right. Thank you, Chris. Our next question comes from the line of Jeff Robertson with Water Tower Research. Jeff, please go ahead.

[Jeff Robertson, Managing Director at Water Tower Research]

Thank you, Dave. With respect to recapturing revenues, can you talk a little bit about what you see the size of that opportunity being in the sense that that could be independent of customers increasing their activity? How does that play into your margin thinking as you look out into 2027?

[David Cherechinsky, President and CEO at DNOW]

Jeff, I'm sorry, I missed the first part of your question. I'm sorry. Can you repeat it, please?

[Jeff Robertson, Managing Director at Water Tower Research]

Sure. When you think about recapturing revenue from customers, can you talk a little bit about the opportunity there that would be independent of customers increasing their own activity levels? If you focus on recapturing the revenues that you want, which implies the higher margin revenues, how does that play into your thinking about margins in 2027?

[David Cherechinsky, President and CEO at DNOW]

Okay. That's a good question. We are seeing some of our customers spending more money, and of course, that's an opportunity for us no matter how effective our takeback efforts are. When customers' demands increase, we tend to benefit from it. We have a lot of locations, plenty of inventory, the best people in the business, so we're going to benefit regardless. In terms of our ability to take back those revenues, we're working towards that. That's represented in our guide. Like I said last quarter, and we'll reaffirm today, we feel very solid about our ability there in upstream, midstream gas utilities, as evidenced by strong sequential growth from 1Q to 2Q. In downstream, when you look at what happened in downstream, we were sidelined in some of the facilities.

[David Cherechinsky, President and CEO at DNOW]

We're seeing our customers ask us to come back. Our customers are asking us to come back. We're seeing some real avenues for taking advantage of the turnaround season coming up in a few quarters, we're poised for that. In terms of what that means for pricing, there's no doubt that recapturing some of these projects with those customers, gaining back some of the market share did require some teaser level margins to get back in the door. We see that as an opportunity now. As we reestablish ourselves as the premier provider of solutions for our customers, as our ability, especially as we grow those revenues, grow those purchases with our suppliers, achieve greater levels of vendor consideration and support from our suppliers, we expect to be able to push price, we'll do that.

[David Cherechinsky, President and CEO at DNOW]

We're focused on volume and then gross margins, and then efficiencies to drive significantly improved cash flows and earnings. That's kind of the progression. We feel good about that. The sequencing will get us to where we want to be as we gave with the glimpse at 2027.

[Jeff Robertson, Managing Director at Water Tower Research]

Thank you.

[David Cherechinsky, President and CEO at DNOW]

Thanks, Jeff.

[Operator]

Thank you, Jeff. Our last question today comes from the line of Josh Jayne with Daniel Energy Partners. Josh, please go ahead.

[Josh Jayne, Managing Director at Daniel Energy Partners]

Thanks. Good morning.

[David Cherechinsky, President and CEO at DNOW]

Morning.

[Josh Jayne, Managing Director at Daniel Energy Partners]

Morning. First one is just on the U.S. upstream business. Could you discuss your outlook for the back half of the year and into 2027? We've seen the private companies drive a lot of the rig count increase. Based on just what you're seeing today, does that momentum continue? Any insight into how the large publics are thinking about spending over the next 12 to 18 months would be helpful as my first question. Thanks.

[Brad Wise, VP of Digital Strategy and Investor Relations at DNOW]

Yeah, Josh, I'll take that, maybe Dave or Mark can follow up. We've certainly seen steady improvement in the upstream market. Domestically in the U.S., we're majority land, not necessarily offshore. Offshore has become an increasingly smaller piece of our overall portfolio. We do do some offshore in the international area. U.S. rig count has kind of slowly recovered here. I think it's projected to increase further in 2027 from an outlook standpoint. However, a lot of our customers are still exhibiting capital discipline. As WTI price has been higher, we have seen a lot of the large publics kind of maintain their CapEx for the full year, maintain their production guides. Yeah, I agree with your commentary. I mean, some of the smaller and the private companies are taking advantage of price.

[Brad Wise, VP of Digital Strategy and Investor Relations at DNOW]

We see the upstream as growing this year, certainly potentially growing next year. As our recovery efforts are kind of simultaneously following the market there, we think that's a good piece of growth opportunity for DNOW. I think that was just under, now, 40% of our overall revenue. We expect that to be a growth lever for us in the future.

[Josh Jayne, Managing Director at Daniel Energy Partners]

Thanks for that. Moving on internationally as my follow-up, maybe you could just talk a bit more about the impact of the Middle East and just your view there of what it will ultimately take for activity to get back to, I guess, what we would call normal post-conflict. On top of that, what are the international regions where you would say you're underserved today that you think could be growth drivers for you over the next couple of years? Thanks. I'll turn it back.

[David Cherechinsky, President and CEO at DNOW]

I'll take that. In terms of the Middle East particularly, we're a pretty small player there. Our revenues in the Middle East are going to be really in the 2% or lower range. Except for project lumpiness and our ability to seize projects, which we see more of as an upside in the Middle East than anything, we don't see much negative impact going forward. We could see some growth as things settle down in the Middle East. I think it'd be marginal. In terms of where we're underserved internationally, I think we had two businesses within DNOW. We were focused more so on electrical distribution. At MRC, a much larger business is focused on valves. I think our opportunity is to marry up a broader product offering for our customers and grow.

[David Cherechinsky, President and CEO at DNOW]

We don't see any obvious areas of footprint, underserved areas internationally. We think we're pretty well-positioned. Even though we're small in the Middle East, we're well-positioned in the North Sea, in the U.K., in Australia, and Singapore, and elsewhere. I think we're poised to really take advantage of each other's complementary strengths. We've organized a new team internationally, and I think we're going to take advantage of what we've brought together more than anything.

[Josh Jayne, Managing Director at Daniel Energy Partners]

Thanks. I'll turn it back.

[Brad Wise, VP of Digital Strategy and Investor Relations at DNOW]

Thank you.

[Operator]

Thanks, Josh. Thank you all for your questions. That does conclude the question and answer session of today's call. Mr. Brad Wise, I will turn it back over to you for final remarks.

[Brad Wise, VP of Digital Strategy and Investor Relations at DNOW]

Well, thank you to everyone for joining us today and your interest in DNOW. We look forward to discussing our third quarter 2026 results at our next earnings conference call in November. Hope everybody has a wonderful Thursday. With that, I'll turn the call back over to Greg.

[Operator]

Great. Thank you, Brad. Thank you, ladies and gentlemen, for joining us today. That does conclude today's conference call. You may now disconnect. Have a great day, everyone.

Participants

Executives

• Brad Wise, VP of Digital Strategy and Investor Relations
• David Cherechinsky, President and CEO
• Mark Johnson, SVP and CFO

Analysts

• Alex Rygiel, Managing Director at Texas Capital
• Adam Farley, Analyst at Stifel
• Chuck Minervino, Analyst at Susquehanna
• Chris Dankert, Managing Director at D.A. Davidson
• Jeff Robertson, Managing Director at Water Tower Research
• Josh Jayne, Managing Director at Daniel Energy Partners