DNOW Q3 Earnings Call Highlights

Key Points

• Revenue and profitability improved: Q3 revenue rose 2.3% sequentially to $1.34 billion, and adjusted EBITDA increased to $76 million from $60 million. Better margins and lower operating costs helped counter freight pressure and international project delays.
• Cash generation strengthened the balance sheet: DNOW generated $106 million in free cash flow during the quarter and reduced net debt by $95 million to $265 million. It expects full-year operating cash flow to approach $200 million, the top end of its prior guidance.
• Management expects a seasonal Q4 slowdown: Revenue is projected to decline by a high-single-digit percentage sequentially, with adjusted EBITDA targeted at 4.5% of revenue. CEO David Cherechinsky discussed possible 2027 adjusted EBITDA scenarios of $300 million to $350 million, stressing these are not a formal forecast and depend on customer budgets and business growth.

DNOW NYSE: DNOW reported higher third-quarter revenue and profitability as improvements in margins, working capital and operating costs helped offset rising freight expenses and international project delays.

Revenue rose 2.3% sequentially to $1.34 billion, while adjusted EBITDA increased to $76 million from $60 million in the second quarter. The company generated $120 million in operating cash flow and reduced net debt by $95 million.

On the Nov. 5 earnings call, President and CEO David Cherechinsky said DNOW was prioritizing more profitable business rather than pursuing sales volume at the expense of margins. He also outlined potential 2027 adjusted EBITDA scenarios of $300 million to $350 million, while emphasizing that customers had not yet provided their budgets and the figures were not a formal forecast.

Margins improve despite freight pressure

Third-quarter adjusted gross margin rose to 21.2% from 20.8% in the second quarter. Chief Financial Officer Mark Johnson attributed the improvement to a more favorable geographic and sector mix and progress on margin initiatives, which helped offset higher logistics costs.

Cherechinsky said DNOW had intensified its focus on higher-margin products and transactions as freight costs rose. The company is seeking to recover those costs through customer pricing and contractual freight mechanisms, alongside vendor support and logistics efficiencies.

Johnson said higher fuel costs and a shortage of drivers were contributing to transportation expenses. He said DNOW can pass some costs on to customers, although recovery may take time.

Selling, general and administrative expenses declined $6 million sequentially to $232 million. Net income attributable to DNOW was $26 million, or 14 cents per diluted share. Adjusted net income was $34 million, or 18 cents per diluted share.

Gas utilities, downstream and midstream drive growth

Revenue increased across all three geographic segments. U.S. revenue rose $16 million sequentially to $1.1 billion, while Canada revenue increased 19% to $56 million as activity recovered after the seasonal breakup period. International revenue rose 3% to $156 million.

Cherechinsky said gas utility revenue increased 4% from the second quarter, reaching its highest quarterly level in three years. Downstream and industrial revenue grew 10% sequentially as customers prepared for turnaround work, while midstream revenue rose by about $20 million.

International growth was held back by approximately $15 million in project delays, Johnson said. Cherechinsky said up to half of the delayed work could occur in the fourth quarter, with the remainder in 2027 or later. One wind power project previously expected to ship in the third quarter is now slated for 2027.

Cherechinsky said DNOW had recovered the revenue lost in midstream following an enterprise resource planning system transition and was at or near recovery in gas utilities. Downstream recovery was progressing, he said, while the company was being selective about upstream business.

All upstream and midstream locations had moved from MRC Global’s platform to SAP, Cherechinsky said. DNOW is planning further moves to SAP in the new year while continuing to improve the Oracle system used by gas utilities and downstream operations.

Cash generation supports debt reduction

Operating cash flow reached $158 million for the first nine months of 2026. DNOW now expects full-year operating cash flow to approach $200 million, at the top end of its previous guidance.

Inventory fell $74 million sequentially to $988 million, and accounts receivable declined $11 million to $878 million. After $14 million in capital expenditures, third-quarter free cash flow was $106 million.

DNOW ended the quarter with $265 million in net debt and a net leverage ratio of 1.1 times trailing 12-month adjusted EBITDA. It repurchased $17 million of shares during the quarter, bringing repurchases for the first nine months of the year to $92 million.

Johnson said first-year cost synergies were expected to approximate $32 million, compared with an original year-one exit-rate estimate of $17 million. Cherechinsky said costs associated with system improvements and related support declined by about $1 million from the second quarter.

Seasonal decline expected in fourth quarter

DNOW expects fourth-quarter revenue to fall by a high-single-digit percentage sequentially, with adjusted EBITDA targeted at 4.5% of revenue. Cherechinsky cited fewer business days, holidays and customers approaching the end of their annual budgets. Modest international growth and downstream recovery are expected to partially offset the decline.

For 2027, Cherechinsky said annualizing third-quarter adjusted EBITDA provides a theoretical starting point of about $300 million, while noting that the third quarter is typically the company’s strongest. Reaching $350 million could depend on growth in upstream, gas utilities and midstream, further revenue recovery and margin improvement.

Cherechinsky cautioned that DNOW does not yet know customers’ 2027 spending plans. If revenue grows by 6% to 7%, as the company has previously contemplated, cash flow could be lower as DNOW adds inventory and receivables to support growth, he said.

About DNOW (NYSE:DNOW)

DNOW Inc NYSE: DNOW is a global distributor of products and services used in the energy and industrial sectors. The company supplies equipment and materials for upstream, midstream and downstream oil and gas operations, as well as related industrial, utility and infrastructure markets.

Its offerings include pipe, valves, fittings, flanges, and other mechanical products; production and artificial-lift equipment; electrical and instrumentation products; and maintenance, repair and operating supplies.

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