NOW Inc. Aktie

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. [Operator Instructions]. Mr. Brad Wise, Vice President of Digital Strategy and Investor Relations, you may begin your conference.

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, and 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. They are subject to risks and uncertainties, and actual results may differ materially. And 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 will refer you to the latest Forms 10-K and 10-Q that now 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.

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 for further details on our use of these non-GAAP metrics for reconciliations to the most comparable GAAP measures, and 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.

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 26 our first full quarter as a combined organization. The revenue, earnings and significant cash gains generated in the quarter with a 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 DNA. 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. 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% and a 13% growth in the United States 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. This cash haul was driven by continued progress on 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 costs related to the MRC Global U.S. ERP implementation and integration activities. These costs are expected to remain a near-term headwind and 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. 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, standardized processes, optimize the footprint, improve service levels and capture the merger synergies identified as part of our 3-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 time lines.

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. Revenue growth was driven by midstream strikes 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. This was especially evident where inventory 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 and 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 is 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., a 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.

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 of 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 MDS momentum reflects customer trust, earned through consistent execution and the ability to convert relationships and project visibility and to repeat opportunities.

Gas Utilities delivered another point of validation. Our gas utilities business grew 15% sequentially and nearly twice the 3-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. 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 cash utility customers, we invested in a new distribution center designed to support 15 customer locations resulting in improved proximity and enhanced customer service as the 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 by removing the impact of a first quarter large non-repeating project paired with market share take-back initiatives despite continued weakness in the chemical processing industry. 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 prebuy 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 Dave 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.

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. 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 developed emulation ships 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. I also want to sign 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 CNO with premium earnings growth while providing our customers a more divested 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. DNOW'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. We saw 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 regions, particularly in U.K. brownfield activity in Australia, where both MRO and project demand strengthened. While customers remain cautious and 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.

We are seeing some customers slow workforce deployment and deferred 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 in second quarter DNOW record. 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 4-quarter trailing EBITDA level target of less than 2. 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 on 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 give us confidence in our ability to continue generating meaningful cash flow.

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.

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 in the first quarter and above the guidance we provided on our last call. The sequential increase was driven by growth across 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. As seasonality drove revenue lower. Historically, Canada's revenue declined 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 compared 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. 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. Interest expense is forecast to decline slightly into the third quarter.

Moving to income taxes. Changes and 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. 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 7 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.

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 4.0x. The reduction reflects measurement period adjustments to opening balance sheet inventory reserves associated with the MRC Global acquisition of $53 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% to 19.4%.

In the second quarter of 2026, we generated $133 million of cash from operating activities, driven by improvements in working capital efficiency and the significant improvement in cash flow reflects the benefits of our ongoing focus on working capital management, inventory optimization and operational execution. 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 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 remained 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 1.7x. Our $850 million revolving credit facility matures in November 23, providing us with long-term financial flexibility. In the second quarter, we continued to make progress on cost synergy realization was our first year expectation to approximate $30 million on a 2026 exit rate basis, significantly exceeding our original year 1 exit rate estimate of $17 million.

Our annualized synergy target remains $70 million by the end of year 3. And overall, the second quarter marked a notable step forward in our transformation as we delivered improved revenue performance, enhanced profitability, disciplined working capital management and strong cash generation. And with that, let me turn the call back to Dave.

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 to 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. We expect sequential third quarter growth in the U.S. as we make additional progress on executing on our integration plan. We cover 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 targeting in the 5% to 5.5% range above our prior guide, which will result in higher EBITDA to revenue flow-throughs that we normally experience. On a full year basis, we are raising our prior guide and expect revenues to approach approximately $5 billion to $5.1 billion, with EBITDA as a percentage of revenue to approach 4.5%. 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 the strongest sequential quarter percentage growth since 2022.

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 2 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, and they continue to take the decisive steps to position DNOW for long-term success. I'm very proud of the progress we've made during the quarter and confident about the second half of the year. With that, let's open the call for questions.

[Operator Instructions] All right. It looks like our first question comes from the line of Alex Rygiel with Texas Capital. Alex.

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

Working capital needs?

Working capital gains.

Okay. So 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 then shows. So 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. But 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.

So 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 7 days which I don't know if we've ever been able to do that before. 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 is additional receivables reductions we expect primarily in the fourth quarter as we see our seasonal decline in revenues in 4Q. So that could be another $25 million to $50 million plus earnings driving significant cash from operating activities. But those would be the 2 main levers.

We expect CapEx to be pretty similar quarter-on-quarter. But otherwise, AR and inventory, we see those as opportunities. and also necessary to have news for additional customer support as we finance receivables and revenue growth, and 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.

And then secondly, you mentioned you are encouraged by the upcoming and turnaround season. Can you comment on or give us a little bit of help in understanding your visibility on that, understanding that sometimes these turnaround projects get pushed when the customer is being still active and unwilling to kind of take systems off-line. But maybe comment on your visibility and confidence that the fall turnaround season is going to play out as planned.

Yes, good question, Alex. Do you want to give some color on that, Brad, in terms of timing and where we are and the crosses.

Yes. Well, Alex, thank you for the question. We track -- we have a lot of downstream refining customers, specifically, and we force 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. But if you look at projects, if you look at what we're tracking, we believe it to be a similar year to last year, but we think our -- and 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.

So we -- 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, kind of more of a bookings backlog starts to build. And then as we get to 4Q with the execution that Dave talked about in 1Q of '27. So we are optimistic about growth there on a year-over-year basis, knowing and 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. So we think this kind of sets up a constructive environment for maybe the next couple of years for us.

Our next question comes from the line of Adam Farley with Stifel.

Good morning, everyone. Maybe starting on MRC. Could you provide an update on how the MRC platform and the IT 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.

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

That's great to hear. And then maybe on the up and midstream conversions SAP completing your 17th locations. 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 holiday performing? And are there any other locations that need to be converted over to SAP?

Yes, 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 side but the real strength, the real power that comes from the combination happens in upstream and midstream. So we focused on that area for those sectors to really provide a system that supports delighting the customer in a way where we could take back market share.

So we've implemented SAP in 17 locations. We've been careful to measure the hand-off of revenues from billings that used to happen in the MRC system on to SAP, and we're measuring to make sure that, that baton passing is working. That were -- the inventories, the revenues, the customer focus, the increased customer focus that comes from those overlap locations is intensifying, and we're benefiting from that. So we're tracking on a per customer basis, are we gaining in that handoff, very important to us in the [indiscernible].

And we saw that in really strong upstream growth in the U.S., which from the first quarter to the second quarter, we haven't seen for 4 years. So we're very excited about that. But 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 request, requirements, fulfillment, et cetera, reporting, et cetera. So we think we're pretty juiced in terms of our ability to grow that business, and that's showing in the numbers.

And our next question comes from the line of Chuck Minervino with Susquehanna.

I was just wondering if you could talk a little bit about the full year guide. It 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 like 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.

Yes. That's a great question. Both companies on a stand-alone basis experienced a fourth quarter decline DNOW's fourth quarter decline tended to be around 6% to 8% of revenues from 3Q to 4Q, MRCs was closer to 10% overall and mean closer to 13% for gas utilities. So we do expect a seasonal time despite what we expect would be additional market share gains, recovered revenues, improvements in sales to data centers, et cetera. Yes, we do -- we are forecasting a fourth quarter decline.

That seasonality will be there. But we -- as each quarter goes by, we expect to be more efficient. We expect to modestly increase gross margin percent, but we do expect some seasonal gravity like we both historically experienced.

And just on that, I'm just kind of curious on the assumption there. Is that just like your baseline assumption? And it's possible it can do better or worse than that, 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?

That's [ not ] a good question. And there is variability. We tend to we know from a project perspective or have a good feel from a project perspective, how much will land in 3Q and 4Q day-to-day business, it's a harder read cup. But it is our going-in assumption 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 2 quarters for our gas utilities, for example, our 2Q and 3Q. And for downstream, 1Q and 3Q are the best quarters there. So we expect an incline gas utilities and downstream in 3Q. And we -- and like Brad talked about earlier, we expect -- we're talking to downstream customers stay reading for the 1Q turnaround. We're doing prebuys.

We're planning for that, but we won't really see the benefits of the downstream degrees of recovery but we will see an uptake treat. But yes, those -- that 4Q decline is we feel pretty comfortable that will happen, but there is variability to your question.

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

Yes. We gained confidence over the last 90 days and 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 is going to grow for those 3 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 revenue growth going into 2027. And then some modest improvements in gross margins and the efficiencies as we exit 2026 staying in place for next year. So 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 of growth and kind of mid the P&L or expense management it takes to get to that kind of earnings growth going into the end year. And we feel really more confident today than we did 90 days ago.

And our next question comes from the line of Chris Dankert with D.A. Davidson.

Again, just given the excitement around data center and Water Solutions, could you remind us just relative to size those businesses and the kind of growth you were seeing in the quarter?

Well, data centers, we forecast could be in the $40 million to $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 as for 2026 anyway, is a growing opportunity, and we're excited about it. We have our sales teams focused on it. In terms of Water Solutions, we said market that $10 $250 million business with premium margins, as we talked about in the opening part of the call.

But it's the business where we've done most of our recent acquisitions and where we hope to do more in the coming years. So I think it's in that range. It's an important diversified element of our process on strategy, and we expect to grow that business.

Got it. That's helpful. And then 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 we're thinking about that roll off?

Yes. On the last call, we estimated that the total of cost for consulting help on E&P stabilization efforts, contract labor, overtime, temps, et cetera. We estimate that to be in about $8.5 million per quarter in the second quarter. We expect that number to come down about $1 million in 3Q and another $1 million in 4Q. In terms of the number of temps we have in place, that number is 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 or realizing those improvements. But like I said last quarter, our FUM is on the scale revenue retrievable over discrete immediate expense management. So we do expect those numbers to come down, as I suggested. And then we expect significant efficiencies as we end the year generally in the business.

And our next question comes from the line of Jeff Robertson with Water Tower Research.

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

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

So 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? And then how -- 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?

Okay. That's a good question. I mean we -- we are seeing some of our customers spending more money. And of course, that's an opportunity for us, no matter how effective our take-back efforts are when customers' demands increase, we tend to benefit. 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 that those revenues. We're working towards that. That's represented in our guide.

We feel 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. And in downstream, when you look at what happened in downstream, we were sidelined in some of the facilities. We're seeing our customers ask us to come back. We were -- had long-term relationships and our customers are asking to come back. We're seeing some real avenue for taking advantage of the turnaround season coming up in a few quarters.

Some will put place for that. In terms of what that means for pricing, there's no doubt that we're capturing 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, but 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 and we'll do that.

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

And our last question today comes from the line of Joshua Jayne with Daniel Energy Partners.

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. So we've seen the private companies drive a lot of the rig count increase. But based on just what you're seeing today, does that momentum continue? Or any insight into how the large publics are thinking about spending over the next 12 to 18 months would be helpful. That's my first question.

Yes, Josh, I'll take that and 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 some offshore in the international area. But U.S. rig count is kind of slowly recovered here, I think it's projected to increase further in '27 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. But yes, I agree with your commentary. I mean some of the smaller and the private companies are taking advantage of price as long as they can get access to high-spec rig equipment and other OFS capability. But we see the upstream is growing this year and certainly potentially growing next year. And as our recovery efforts or kind of some an following the market there. We think that's a good piece of growth opportunity for DNOW. I think that those just that are now 40% of our overall revenue. But we expect that to be growth lever for us in the future.

And then 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? And then 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?

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. So -- so except for project lumpiness and our ability to seize projects, which we see more as an upside in the Middle East than anything. We don't see much negative impact going forward. But we could see some growth as things settle down in the Middle East. But I think it'd be marginal. In terms of where we're underserved internationally, I think we're we had 2 businesses within DNOW, we are focused more so on electrical distribution. At MRC, a much larger business is focused on a I mean I think our opportunity is to marry up a broader product offering for our customers and grow.

I don't think -- 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. And we've organized a new team internationally. And I think we're going to take advantage of what we brought together more than once.

And thank you all for your questions. That does conclude the question-and-answer session of today's call. Mr. Brad is, I will turn it back over to you for final remarks.

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. Everybody have a wonderful Thursday. And with that, I'll turn the call back over to Greg.

Great. Thank you, Brad. And 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.

Good morning. My name is Carrie, and I will be your conference operator today. At this time, I would like to welcome everyone to the DNOW First Quarter 2026 Earnings Conference Call. [Operator Instructions]. Thank you. Mr. Brad Wise, Vice President of Digital Strategy and Investor Relations, you may begin your conference.

Well, thank you, Carrie, and good morning, and welcome to DNOW's First 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 Global Brands, and 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, May 7, 2026, which is subject to change. They are subject to risks and uncertainties, and actual results may differ materially.

Now should we 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 Form 10-K and 10-Q 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. 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 for further details on our use of these non-GAAP metrics and for reconciliations to the most comparable GAAP measures. These documents are available on our website. Unless we specifically state otherwise, references in this call to EBITDA refer to adjusted EBITDA.

As of this morning, the Investor Relations section of our website contains a presentation covering our earnings presentation for the first quarter of 2026. We expect to file our Form 10-Q later today, and it will also be available on our website. A replay of today's call will be available on the site for the next 30 days.

Now let me turn the call over to Dave.

Thank you, Brad, and good morning, everyone. It's been almost 11 weeks since our last earnings call with 1Q 26 representing DNOW's first full quarter as a combined entity with MRC Global. Our teams have been focused on merger integration and two key parallel ERP initiatives, stabilizing the MRC Global U.S. ERP platform and accelerating a migration of locations and activities to the DNOW SAP platform.

As such, I want to recognize the exceptional performance of our ERP conversion teams and the collaboration across numerous functions, including IT, operational excellence, finance and supply chain. Most notably, our on-the-ground customer-facing sales and operations teams have played a crucial role.

Together, these groups have worked in true choreography driven by a strong sense of urgency, made possible by their deep understanding of our systems, workflows and customer requirements, all with a singular focus on serving our customers.

I'll begin with an update on the MRC Global U.S. ERP stabilization initiative. At this point, the system has stabilized to a level that allows us to conduct business, though it has not yet optimized. Importantly, we have removed much of the ERP-related friction with meaningful improvements in system responsiveness, customer service levels and operating cadence. We're making good progress under our sequence remediation plan that continues to improve system performance and operational throughput across the MRC global U.S. locations.

This is a critical area of focus as the MRC Global U.S. business represented approximately half of our U.S. revenues and 42% of our consolidated global revenue in the first quarter. We are pleased that the ERP system is now supporting consistent daily operations and our focus is shifting from recovery to business enablement, improving efficiencies across the "Cash cycle".

We're seeing progress across quoting, pricing, fulfillment and invoicing, which is translating into better service levels, reduced, rework and improved cash collections though there is still work ahead and we continue to absorb considerable temporary costs to stabilize and enhance the ERP. We expect these temporary stabilization costs will continue to moderate as remediation progresses through the year.

In terms of accelerating a migration of activities to the DNOW SAP platform, as discussed on our February call, we are migrating 20 U.S. MRC Global locations. These locations are almost entirely focused on upstream and midstream markets, where there is significant overlap in both customer and inventory profiles across the legacy businesses. This move is driving improved customer service and better visibility while unlocking access to a substantial upstream and midstream inventory investment.

I'm excited that as of late April, all MRC Global Permian operations are now transacting on an optimized SAP platform. This conversion is already producing tangible commercial benefits. For example, we now have easy access to approximately $40 million of additional MRC global inventory that is now visible and deployable, supporting faster fulfillment and improved service levels.

Our teams view this unlocked inventory in the Permian as a powerful commercial lever, giving us a speed to customer advantage, supporting revenue and margin recovery and positioning the business to return to growth.

Looking ahead, we have 14 additional upstream midstream location scheduled for migration with approximately half targeted for completion in the second quarter. Most of these also involve service facility consolidations which sharpens regional focus and contributes to cost synergies earlier than initially expected, which I'll touch on later. A key consideration in this process is the one-to-one digital integration with our customers' ERP and procurement systems.

These integrations take time to replicate and validate, and we are managing them carefully to minimize disruptions. From a commercial standpoint, we are taking targeted actions to recover leakage and reinforce margin discipline as system performance improves. Cash generation remains a priority, supported by inventory rationalization, improved collections and tighter working capital discipline.

Now moving to business results. In the U.S., Legacy DNOW first quarter revenues were up sequentially and year-over-year despite rig counts being down 7% and completions showing no growth year-over-year. MRC Global U.S. revenues on a stand-alone basis were down $94 million or 16% year-over-year. About 3/4 of the decline was in upstream and downstream, while gas utilities and midstream were more resilient with declines of 5% and 9%, respectively.

MRC Global U.S. revenue sector declines were most pronounced in upstream driven primarily by ERP disruptions and rig count decline driven volumes in the U.S. upstream space. Legacy DNOW is well positioned to recover upstream revenues. Specifically, those which carry the margin profile we desire. We have held a very strong position in this sector for decades and that now has only improved as we integrate talent, systems, locations and inventory.

More than 40% of our U.S. upstream revenues occur in the Permian. And now as of last week, all of the Permian locations are on optimized ERP platforms. Our downstream industrial, about 2/3 of the decline was attributable to ERP frustrations, the balance due to general market declines in the chemicals market. A downstream recovery is more challenged, but our view on upstream, midstream and gas utilities is much more optimistic with the revenues being easier to recover.

In midstream, DNOW, MRC Global and Whitco supply, each enjoys strong customer relationships. And we're combining their capabilities into a more focused, competitive force as we optimize the tools and talent we've added. In midstream, demand continues to be a bright spot, supported by customer investments in natural gas infrastructure driven by LNG-related export activity, power generation demand and data center-driven load growth.

Gas Utilities distribution is the sector that MRC Global pioneered and expertly cultivated in the market very well. We are expecting demand growth from several of our gas utility customers, some of whom have issued positive updates to their longer-term spending plans. As we improve the systems that support our business, we expect to capitalize on that growth. For some additional insight, nearly all of the year-over-year MRC Global U.S. revenue decline is concentrated across two-dozen customers. This gives us clear line of sight and targeted action plans to recover those sales over time.

We continue to make steady progress on cost synergy realization and have increased the pace of delivery for this year. As we head into the second quarter, with additional actions implemented and better visibility into the run rate, we are raising our annualized synergy expectation again to approximately $30 million, significantly higher than our original estimate to realize run rate savings and (sic) [ of ] $17 million by the end of the first year. This reflects a full pull forward of timing rather than a change in scope. Our 3-year annualized synergy target of $70 million remains unchanged at this time.

In the first quarter, we acquired Edge Controls, our 26th acquisition, a leading U.S. regional automation and control business. Edge Controls is a key differentiator within our Process Solutions Business. An offering which is inherently fungible across many of the end markets we serve today. They design and install technology that controls and monitors operations including PLCs, touchscreens and a range of measurement devices while enabling customers to securely monitor, visualize and manage their systems through SCADA platforms.

These capabilities are not asset class specific. Rather, they are application-driven, allowing us to deploy similar automation, controls and integration solutions across energy, industrial and infrastructure-oriented markets with minimal modification. This flexibility is particularly valuable in fast-growing, infrastructure-intensive end markets such as data centers, where customers have complex requirements around power management, fluid handling, redundancy, uptime and system reliability.

Edge is highly complementary to both our process solutions platform and our broader PVF+ business. Enabling us to better leverage our existing customer relationships while expanding our addressable market. We welcome and I'm excited to work with the leadership and team from Edge as we chart this next chapter. As Process Solutions expands, it creates more opportunities to pull through our pipe valve and fittings products. The merger with MRC Global further enables our teams to introduce products -- Process Solutions products and services into downstream, industrial and gas utility markets.

Turning to capital allocation. Let me start by saying that I think this is one of the most important topics we discussed with our shareholders. as we continuously and critically evaluate our capital allocation priorities against the opportunities in front of us. Our capital allocation strategy is driven by a disciplined and pragmatic framework, focused on driving long-term value for our shareholders.

We invest organically in the business to support growth, maintain a strong and flexible balance sheet and allocate excess capital towards opportunities that generate the most attractive returns for shareholders. Because free cash flow and capital allocation go hand in hand, let me give you some context about our cash flow generation. As a reminder, we historically consumed cash during the first quarter due to working capital timing. And as expected, our first quarter use of cash increased further due to the U.S. ERP conversion challenges.

I want to be clear that the U.S. ERP challenges are transitory and our confidence in DNOW's medium- and long-term cash generation profile remains high. The combination with MRC Global has created a more diversified and less cyclical business. We are now more aligned with attractive structural growth markets, which gives me confidence in the durability and visibility of future free cash flow.

Against this backdrop, our Board of Directors and management believe our current equity valuation presents a compelling opportunity to return capital to shareholders. We see this opportunity with a record $50 million in stock repurchases made during the first quarter. At March 31, we now have purchased $87 million or 54% of our $160 million share authorization program.

Since late 2022, we have repurchased $167 million in stock so far. At the lower share price levels like we experienced in the quarter, we expect share repurchases to play an increasingly important role in our near-term capital allocation priorities. I want to place high emphasis on this next part. We are currently in a unique situation in which our free cash flow is temporarily suppressed, and our stock is trading at what we believe is a meaningful discount to intrinsic value. We are taking advantage of this deep valuation gap caused by the stock market's reaction to our ERP conversion challenges.

In the first quarter, we used our balance sheet, specifically debt, for the first time in our history to fund share repurchases at prices that will likely look highly attractive in hindsight. Moving now to managing our debt leverage. DNOW's net debt position grew to $455 million at March 31. We expect our EBITDA results to improve meaningfully in the coming quarters. And consequently, we expect our net debt leverage to be in the 1x to 2x range as early as year-end depending on share buyback volume.

We believe this range appropriately balances DNOW's financial resilience with efficient capital deployment, while preserving our strategic flexibility. We have meaningfully reduced our exposure to hyper cyclical end markets and have grown our presence in sectors which exhibit durable, secular demand characteristics, areas where customer relationships are stickier and growth is not as dependent on a favorable rig count-driven backdrop.

Let me turn now to another key element in our capital allocation strategy. Executing M&A as an important long-term growth lever, while we continue to evaluate potentially accretive acquisitions, we recognize that M&A may not always represent the highest return of capital versus resolving U.S. ERP challenges and pursuing share repurchases. The Board and management regularly review our strategy, capital structure, portfolio optimization and deployment priorities in the context of market conditions, shareholder feedback and long-term value creation objectives.

We maintain an active dialogue with our shareholders and continuously evaluate opportunities to enhance returns, improve capital efficiency and ensure alignment between business performance and shareholder returns. Our intent is straightforward, allocate capital pragmatically, act opportunistically during valuation disconnects and compound shareholder value over time, while preserving financial flexibility to pursue attractive growth opportunities. With that, let me hand it over to Mark.

Thank you, Dave, and good morning, everyone. Total revenue for the first quarter of 2026 was $1.2 billion, an increase of 23% or $224 million from the fourth quarter of 2025 and up $584 million from the first quarter of 2025. The increase was primarily driven by a full quarter contribution from MRC Global.

We provided a view of 1Q 2025 revenue and adjusted EBITDA figures of DNOW and MRC Global as they were separately reported for 1Q 2025 for total companies and using segment estimates illustrating a bridge to our first quarter 2026 results. This view represents a $128 million year-over-year first quarter revenue decline. Approximately 3/4 of that decline was attributable to MRC Global U.S., where upstream and downstream end markets saw the steepest year-over-year declines.

I'll also note the adjusted EBITDA bridge highlights a higher-than-normal decremental of 31% for the MRC Global U.S. business, as gross margin pressure and temporary yet considerable costs to stabilize the ERP environment impacted profitability in the first quarter of 2026.

Moving to the geographic segment results for DNOW. U.S. revenue for the first quarter of 2026 was $985 million, an increase of $220 million or 29% from the fourth quarter of 2025. Year-over-year, U.S. revenue increased $511 million. The upstream sector contributed approximately 37% to total U.S. revenue in the first quarter followed by the gas utility sector contributing 27%, midstream 20% and downstream and industrial, 16% for the U.S.

In Canada, revenue for the first quarter totaled $51 million, flat sequentially. And international revenue was $147 million in the first quarter, up $4 million or 3% sequentially, as the full period contribution from MRC Global was offset by $35 million of MRC Global project-related revenue in the fourth quarter that did not repeat in 1Q 2026, as I mentioned in February. That project revenue was tied to the completion of a multiyear project award cycle in Europe, contributing close to $200 million in revenue over a 2-year period ending in 2025 for MRC Global International.

These project cycles go in waves as customers initiate life extensions on existing platforms or incremental development in response to the energy needs in the region. Adjusted gross profit for the first quarter was $256 million or 21.6% compared to the $217 million or 22.6% in the fourth quarter of 2025. The decline in margin percentage was primarily attributable to the inclusion of a full quarter of MRC Global's historically lower gross profit margin profile paired with reduced higher-margin international project sales.

In addition, margin compression was experienced in the first quarter in the U.S. as MRC Global works to better recapture various costs from tariffs, freight and pricing enhancements through system optimization initiatives, among other things. SG&A expense for the first quarter was $243 million compared to $226 million in the fourth quarter, reflecting a full quarter of MRC global expenses, increased bad debt expense of $5 million in the quarter, partially offset by reduced transaction-related costs.

Moving to operating profit by geographic segment. In the first quarter, the U.S. reported a $54 million operating loss, while international delivered $3 million operating profit with both segments impacted by transaction costs in the quarter. The Canadian segment reported $1 million of operating profit.

Adjusted EBITDA for the first quarter was $39 million or 3.3% of revenue, down $22 million sequentially. The decline in EBITDA dollars was primarily driven by MRC Global U.S. operating at a loss, reflecting higher costs on lower than historical revenue levels. Our reduced international bottom line contribution due to the absence of project revenue recognized in the fourth quarter and an increase of bad debt expense mentioned earlier.

Depreciation and amortization expense totaled $23 million in the first quarter with approximately $24 million forecast for the second quarter depreciation and amortization. Interest expense was $8 million in the first quarter of 2026 compared to $4 million in the fourth quarter, reflecting higher average debt balances. Our effective tax rate for the quarter was 26.7%.

Cash taxes for the quarter were $2 million, whereas we expect to pay approximately $11 million in the second quarter. The majority of this expected cash taxes in the second quarter are outside the U.S. from Europe. For modeling purposes, we expect a full year 2026 effective tax rate of approximately 26% to 27%.

Net loss attributable to DNOW for the first quarter was a loss of $44 million or a loss of $0.24 per diluted share, and was unfavorably impacted by $41 million in inventory step-up to fair value -- the fair market value amortization charges related to the merger, reduced margins and increased SG&A expenses. On an adjusted non-GAAP basis, Q1 2026 adjusted net income attributable to DNOW was $3 million or $0.01 per fully diluted share.

Now moving to the balance sheet. At the end of the first quarter, accounts receivable was $889 million, an increase of $15 million from the prior quarter. days Sales Outstanding, or DSO, was 69 days. Inventory was $1.2 billion at the end of the first quarter, relatively flat from year-end with an annualized churn rate of 3.3x.

As we move through 2026, inventory reduction and optimization are key focuses as we continue to realize integration synergies and align working capital and demand trends. Accounts payable was $662 million at the end of the first quarter or 61 days payable outstanding. With working capital excluding cash as a percentage of annualized first quarter revenue was 25.5%.

In the first quarter of 2026, net cash used in operating activities was $95 million due to changes in working capital balances, most notably the reduction in accrued liabilities as merger-related costs including change of control severance payments were made in the first quarter.

Consistent with historical seasonality, we typically consume cash in the first quarter and expect improving cash generation in the second half of the year, supported by improved working capital efficiency and synergy realization. During the quarter, we invested $46 million in acquisitions and $8 million in capital expenditures.

Additionally, we opportunistically return capital to shareholders by repurchasing $50 million in shares, retiring 4.2 million shares in the quarter. To date, we've repurchased $87 million under the current share repurchase program and a total of $167 million in shares under both the $160 million current share repurchase program and the previous $80 million completed share repurchase program.

Our total debt balance was $571 million at the end of the first quarter and net debt was $455 million, resulting in a trailing 12-month net debt leverage ratio of 2.3x. Turning to liquidity. Our balance sheet remains strong with total liquidity of $379 million, including $263 million in availability under our revolving credit facility and $116 million of cash at quarter end.

Our $850 million revolving credit facility was access to a $500 million recording and matures into November 2030, providing us with long-term financial flexibility. And with that, let me turn the call back to Dave.

Thank you, Mark. Today, our priority is to reinforce the fundamental strength of the business by reclaiming safeguarding and expanding revenue streams that optimize earnings to support growth and durable free cash flow. We are pursuing opportunities where customers clearly perceive differentiated value, avoiding commoditization to drive higher gross margins through an efficient operating model and achieve stronger flow-through to profitability.

We are actively addressing the defined set of customer relationships where revenue attrition has been the most acute implementing targeted account level initiatives aimed at a resting linkage while ensuring the economics of these relationships are aligned. We have an ample supply of inventory and are aligning inventory with demand to drive cash generation in 2026.

We have targeted efforts to speed collections, currently aggravated by ERP challenges to produce cash. We are aligning our cost structure with revenue on a phased basis to maximize revenue recovery, maintain organization agility in response to market dynamics. Alongside this focus on the fundamentals, we are executing a set of offensive initiatives designed to grow revenues and expand market share.

An important opportunity lies in the growth of midstream, feed gas infrastructure driven by rising power generation needs particularly from expanding data centers while we simultaneously increase our broader exposure to midstream markets in line with continued investment in natural gas infrastructure supported by power demand and growing LNG exports.

This growth highlights the need for midstream PVF infrastructure to support additional demand. Our products and service offerings match both current and future investments, putting us in a strong position to benefit from this multiyear demand trend. At the data center level, we are successfully targeting opportunities to supply industrial PVF and pumps that are critical to cooling systems and associated infrastructure.

We are also ramping revenue opportunities tied to gas meters for our INTECH solution to grow share in gas utilities, except or we expect to continue expanding. We are focused on unlocking revenue synergies across the portfolio by extending Process Solutions pump products into downstream markets, expanding fabrication capabilities into gas utilities and increasing EcoVapor product penetration in Europe.

Overall, we are committed to executing a clear strategy, strengthening the core of the business and positioning the company for sustainable profitable growth going forward. Now switching to our outlook for the second quarter and full year 2026. 2026 is a transition year focused on execution on both the DNOW's home field and emerging markets alongside merger benefit realization.

We expect sequential second quarter growth in the U.S. as we continue on our path to stabilize and optimize ERP issues for our U.S. businesses. We also expect sequential growth in the International segment. In Canada, seasonal factors are expected to result in a sequential revenue decline. Historically, second quarter breakup conditions have driven an approximate 20% decrease from first quarter levels.

However, we expect the decrease to be less pronounced this year. Taken together, we expect DNOW's second quarter revenues to be up sequentially in the mid- to high single-digit percentage range from the first quarter with EBITDA flow-throughs to revenue approaching 25% of this revenue growth rate, well above our normal expected flow-throughs of 10% to 15%.

On a full year basis, we expect 2026 revenues to approach $5 billion with EBITDA as a percentage of revenue to approach 4.5%. In closing, I am confident that the overall DNOW business has bottomed in 1Q '26, and we expect EBITDA dollars to improve as we progress throughout the year when compared to the first quarter.

Finally, we anticipate 2026 full year cash from operating activities could range from $100 million to $200 million. As we look ahead, we are increasingly confident in the trajectory of the business and the strength of the platform we are building. I'm excited that we are beginning to see tangible benefits of operating together.

Our combined capabilities are enabling us to compete for and win opportunities that would not have been accessible to either company on a stand-alone basis. For example, the integration of our customer relationships, supplier partnerships and expanded inventory visibility is already translating into incremental wins and a broader project pipeline.

At the same time, we are making deliberate progress in aligning our physical footprint. The consolidation and co-location of facilities is not simply about efficiency, it's about enhancing our ability to deliver a more comprehensive suite of solutions. We are also seeing encouraging signals from our core product and service offerings.

Growth in areas such as valve automation and actuation continues to support both our upstream and midstream exposure while improving manufacturer activity levels are creating additional coning opportunities for the team. Taking together these factors reinforce our view that the foundation we are building today through integration, expanding capabilities and disciplined execution position us well to capture growth and create value over time. With that, let's open the call for questions.

[Operator Instructions]. Your first question will come from Adam Farley with Stifel.

Good morning, everyone.

Good morning, Adam.

First on the ERP optimization. Can you quantify the impact of the temporary pause to stabilize the ERP system in 2026? What additional resources are required to optimize the system? And then how long in duration do you expect these temporary costs to persist?

Okay. So let me give some color a little more than I did in the last quarter. So in terms of the cost of the teams in place to stabilize and enhance the MRC Global platform, that's around $4.5 million a quarter. That's going to be pretty stable for much of the year. And then there are additional costs, some of which I did talk about in the last call, which are we have additional overtime.

We have additional temp costs and we've added warehouse people, for example, as one of the big bottlenecks was experienced at the warehouse level. Now that number has come down a bit. On the last call, I said we had about 200 additional people that we added to cope with the system issues. That number is almost half, that's about 115.

But those costs over time, temps, added personnel at the warehouse costs about $4 million a quarter. So there's the stabilization cost of about $4.5 million and $4 million for overtime temps in and warehouse people. So in terms of looking at those costs on a go-forward basis, I expect that $4.5 million quarter to be pretty stable during the year. But the $2 million for overtime, temps, et cetera, that number will come down.

We saw some progress there in the first quarter. I expect that to come down. We characterize the Oracle platform that MRC uses primarily has stabilized. And as such, you should see some of those costs come out of the system, which is part of the reason we're talking about pretty generous flow-throughs going into the second and third quarters.

In terms of what additional resources we need, I think the answer is none like I said, I expect some of those operating costs to decline as we go through the year. And in terms of -- what was the last question, Mark? The las part of your question. Adam, and sorry.

Just the duration. I mean, should we expect this issue to be almost fully resolved by the end of the year? Or should we expect that to continue into '27?

That's a good question. I think I talked about us being on dual tracks. We are migrating as fast as possible, all upstream and midstream activity to an optimized platform. In the meantime, we're making improvements to the systems that MRC uses primarily on the downstream and gas utility side, and we think we'll make substantial progress by year-end. An exact end dates, I don't have that right now.

But we are seeing progress in our ability to compete and we're forecasting some growth on the MRC side, and we expect that to stabilize as we go through the year. In terms of a better -- 2027 is going to be where we'll start to see real meaningful change in ERP not being a standard conversation around here. We're going to be moving into growing market share and gross margins and becoming more efficient and driving significantly improved earnings. But I don't have an exact time to that question, Adam.

That's really helpful, Dave. Thank you for that color. And to that point, if we look ahead into the medium-term future, say the separate ERP issue costs are resolved, the growth environment is relatively stable. How should we think about the normalized earning potential of the DNOW business?

Let me talk a little bit about what I expect to happen in the sectors. And then we gave some color on 2026, and maybe I'll give a glimpse into 2027. But where we're seeing some real strength in our business today is in midstream. We're seeing nice growth there. And when you combine the MRC talent from us centralized perspective on relationships, manufacturers around the world, the procurement talent, the negotiating talent, the inventory that MRC has with DNOW's presence in the Permian and key basins especially in the upstream and midstream space.

MRCs, VAMI or Valve Actuation Shops around the country. We expect midstream to be a big opportunity for growth for us. So we grew year-over-year in midstream in 1Q, we grew sequentially. We see some real opportunity there. Gas Utilities is probably the second sector we're most interested in. Well, actually it's upstream and midstream is what I was speaking to initially.

Upstream and midstream, we will gain market share and upstream and midstream from here forward. Gas utility has been the most durable sector impacted in the first quarter due to ERP issues, and we expect growth in that sector in 2026. And as we improve our ability to service our customers, we expect to capitalize on that growth. So that's a sector perspective.

Downstream is going to be one of the trickier end markets for us. We to recover revenues. And we think we have a shot at significantly improving our credibility in that space come later in the year when we start bidding on early next year turnarounds. But then in terms of sectors, it's going to be upstream, midstream as a real powerhouse for regaining lost revenues and gas utilities for -- in terms of sector growth.

Now in terms of -- a look forward into what happens with earnings, so we gave some guidance on how 2026 ends. And we'll update the guidance each quarter, of course. But in terms of 2027. So in 2027, I expect meaningful improvements in the systems that support how we delight the customer. And going into next year, as we regain revenues -- as we're better able to regain revenues, we could see revenue growth in the 7% range, especially as we expect midstream growth to continue.

Gas utility growth to continue and the recovery of revenues, you need set revenues could grow 7% going into next year. If you look at gross -- adjusted gross margins, we can improve that by 30 basis points, which would be about 60 basis points in the MRC arena, where we've lost the most in terms of gross margins. And then we get more efficient at the SG&A line, we could be at $350 million in EBITDA next year. We're not guiding to that. But those are the internal marching orders we're discussing how do we align, how do we -- I alluded to it in my prepared remarks, we'll keep being some extra costs in the business because we want to go and retrieve that revenue.

That's our first order of business. We create revenue, grow gross margin in absolute dollar terms, get pricing right and increase gross margins and they become more efficient in part due to more revenues in part because we're going to be on a platform that makes it easier for us to perform. So -- but I'm looking forward to -- or looking at 2026 as a transition year and 2027 to be where things start to really kick in.

Your next question will come from Alex Rygiel with Texas Capital.

Do you quantify the potential improvement in working capital by year-end?

I'll take a shot and then Mark might chime in. Good morning, Alex. So right now, although we view our inventory position and pardon, in the term as a commercial weapon. We -- on the one hand, we really like all the inventory we have. On the other hand, we have excess months of supply. So we think we could generate $100 million by reducing inventory by year-end. We think most of that's going to happen in the second half of the year.

In terms of collections, I think I said this on our last call, MRC was better at collecting bills than -- was, in terms of the metrics. Some of their customers pay faster, their DSOs were lower. We expect to revert back to a better DSO picture for the MRC side of the business, which is 50% of our U.S. business. So we think we can generate at least $50 million in cash from AR. Of course, these are approximations.

And then finally, as we march through the rest of the year, earnings improve, driving increased Earnings and cash being generated from post improved activity in the meantime, we'll be buying back shares and paying down debt. So I think there like I said on our last call, I think we'd be able to generate cash this year in the $100 million to $200 million range. We're sticking with that range right now. But I think those are the main movers for generating that kind of cash.

And then you mentioned data center demand and load growth a couple of different times. Any chance you could kind of bracket the revenue opportunity in that sector?

I'll give a little color on that. So this is we've generated orders, most of which will ship this year in the $30 million range. And this is kind of early going. We were able to do so because of MRC Global, connections, with manufacturers, relationships DNOW didn't have. And in the meantime, over the last 3 or 4 years, our team has been cultivating relationships with the companies that are going to drive these revenues and DNOW sales efforts for these particular customers, MRC's ability to negotiate the right kind of product availability, timing and pricing enabled us to significantly improve our position guests and data centers. So this is early going.

We expect we'll generate at least $30 million this year and we expect that will grow. And I said earlier that we see our inventory position is a competitive tool, a softer term, and that's -- we're going to be helped by our inventory position in terms of having market share in this emerging market.

And then one last question, if you don't mind. Last year, you had sort of the one-off kind of project in the international markets. Do you -- on your radar right now, do you see any potential uplift from project opportunities that sort of pop into sort of backlog or visibility in the next kind of 6, 9 months that could generate revenue in later in 2026.

Well, we do have -- data sense is one of those projects. And discretely to the international arena, that was MRC, one of their European operations have a $200 million project that spanned primarily 2024 and 2025. We don't expect a project like that to occur and certainly not this year, maybe not next year. Of course, we're working to secure position in big projects like that.

But no, we don't have any large international project along those lines, but we are seeing increased -- significantly increased bidding in the U.S. for projects. We're starting to see some bigger ones. And then, of course, the most attractive near-term new revenue line for us is in data centers, but not in particular in terms of the international projects.

Your next question will come from Chuck Minervino with Susquehanna.

You touched on some of the expenses. I think you said something like $4.5 million a quarter related to ERP and then something like $2 million related to temps on top of that. I'm sure there was even more of an EBITDA impact from maybe lost revenues. I don't know if you have a thought there or an estimate on how much maybe sequentially 4Q to 1Q, was the EBITDA in total impacted related to ERP.

Well, in terms of SG&A, and what I said was we had about $2 million we have in the first quarter, about $2 million in overtime, temps and another $2 million in terms of additional personnel to, I call it, coking with the more burdensome system compared to an optimized platform. So that's about $4 million a quarter in SG&A. But that doesn't consider -- on the MRC side, and if you look at the deck we published, you get some pretty good specificity of where revenues changed per segment, give some granularity between MRC and DNOW.

That will give you some flavor for it. But there is excess cost in the business on a relative basis because revenues are down. And like I said earlier, we've largely kept our cost structure in place, although we do have about 100 fewer people in the business today than we did weeks ago. But we see excess cost in the business, which is an opportunity to the extent we don't see the revenue growth we expect later in the year and in 2027.

But there's at least $4 million in excess costs, it's probably much higher than that if you consider the relative increase in SG&A expense as a percent of revenue, given the drop in revenues.

Got you. And the cash flow from operations range the $100 million to $200 million for the year. Can you just talk about what needs to happen for the bottom end of that to be hit versus what you think could happen for the top end for that to hit? Is there -- is there a time line on ERP that you're kind of using as your baseline there? Or is it a collections issue? Just any kind of thoughts there.

I think the main difference between I feel pretty good about the bottom number. I think we're going to get there just through collecting bills faster and some inventory declines. I think the biggest opportunity there is how much inventory can we reduce. Now again, there's a -- as a distributor, inventory is very important. It's the lifeblood of the business, but we have some excess inventory. So we have an estimate for how much we're going to pull out of the system. But all the same, we want to win every project out there. And so the -- whether that number is 200, 175, 150, it's going to be probably most dependent on our success in reducing inventory.

And then just one last one for me. The -- you made some comments there about upstream or the U.S. market inquiries picking up? And it sounds like the business might be strengthening there? Or are there some prospects of the business strengthening in there? Obviously, given the commodity environment. Can you just give us a little bit more detail on what you're seeing there potentially on the upstream side?

Yes. I think the biggest opportunity for us is to reprove loss activity during the disruption period of the ERP. So I think that's going to be the biggest opportunity for us as we go through the year. So in the U.S., 40% of our upstream business happens in the Permian. Now all of our overlap DNOW MRC locations are on our optimized SAP platform. So our teams have access to a lot more inventory than they did.

So I see the opportunity for growing the cooling lost upstream. I mean, I said earlier in the call that our biggest percentage revenue time happened in upstream on the MRC side. We see that's prime targeting. We can get most -- we can get so much of that revenue back because we're -- we have combined organizations. We've co-located. We've begun synergies at the field level by combining locations to consolidating locations, and we're focused on the customer I see upstream growth is going to be mostly organic or mostly coming from efforts to recoup what we've lost on a temporary basis.

But we do -- we could see some upstream momentum going into 2027. We're not forecasting that. We don't sense we'll have the market expanding much in 2026. But we think most of that is going to come from us combine now no longer competing in the Permian, where we were going to head to head against each other, we're going to grow organically. We do expect, as we see oil prices in the $90 range, we do expect the majors to kind of stick to their capital disciplined strategies. We expect the smaller firms and larger independents to start spending too much. We do expect some benefits there. And we're seeing a little bit of that so far.

There are no further questions at this time. I will now...

Well, thank you, Carrie, and thank you for everybody joining us today and your interest in DNOW. We look forward to discussing our second quarter 2026 results on our next earnings call in August. We hope everybody has a wonderful Thursday. With that, we'll turn it back to the operator.

Thank you for joining today's conference call. You may now disconnect.

Good morning. My name is Jeannie, and I will be your conference operator today. At this time, I would like to welcome everyone to the DNOW Fourth Quarter and Full Year 2025 Earnings Conference Call.

[Operator Instructions]

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

Well, thank you, Jeannie, and good morning, and welcome to DNOW's Fourth Quarter and Full Year 2025 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 brand, which is also our New York Stock Exchange ticker symbol.

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 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, February 20, 2026, which is subject to change. They are subject to risks and uncertainties, and actual results may differ materially. No one should assume that these forward-looking statements remain valid later in the quarter or later in the year. We do not undertake any obligation to publicly update or revise any forward-looking statements for any reason.

In addition, this conference call contains time-sensitive information that reflects management's best judgment at the time of the live call. I refer you to the latest Forms 10-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. 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 for further details on our use of these non-GAAP metrics and for reconciliations to the most directly 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, and earnings per share or EPS refer to adjusted diluted EPS and net income refer to adjusted net income. Please be advised that we have enhanced our reporting across all 3 geographic reporting segments by disclosing revenues for each of the 4 reporting sectors: upstream, midstream, gas utilities and downstream and industrial. Also note that the references for legacy DNOW pertaining to the business, excluding contributions from MRC Global, while consolidated DNOW figures included contributions from MRC Global during the stub period. As of this morning, the Investor Relations section of our website contains a presentation covering our results and key takeaways for the fourth quarter and full year of 2025.

We expect to file our Form 10-K in the coming week and will also be available on our website. A replay of today's call will be available on our site for the next 30 days. Now let me turn the call over to Dave.

Thank you, Brad, and good morning, everyone. I want to begin this morning with what matters to me most, our people and the strength of the team we're building. On November 6, we completed the merger with MRC Global. Today, we are operating as one company, united by shared values, complementary strengths and a common ambition to win in the market. I want to extend a warm and enthusiastic welcome to our new fellow team members as we begin this next chapter.

Both MRC Global and DNOW have built strong, respected well-established franchises shaped by years of hard work, resilience and winning in our respective markets. In some areas, we've spent decades competing, pushing each other to be better. But in 2026, that changes. We are now together, building our strengths, talent and collective ambitions under one roof. And what we will achieve together will be far greater than anything we've accomplished apart. Without a doubt, we are better together. One thing I noticed right away as I visit with our new team members is the relentless passion our people share for serving our customers and winning in the market. I am impressed with the deep technical expertise and integrated solutions MRC Global brings to the market, especially in gas utility, downstream industrial sectors and the valve powerhouse of its international business.

It is clear we start off with a strong cultural alignment immediately around the importance of the people who differentiate us in the market, how we care for advance and promote our top talent, and how we singularly organize to delight our customers and win their business. Our new team excels by fanatically focusing on our customers. I'm honored to work with the leadership and team members from MRC Global. Their style is growth oriented with a strong forward leaning sales posture. Our new family members are a great addition too and clearly in the same league as our heritage DNOW team who have just delivered DNOW's stand-alone best 4 years ever from 2022 through 2025 since we became a public company nearly 12 years ago. Mark will be discussing the financial performance of the business but I'd like to close out 2025 with some pointed comments acknowledging our heritage DNOW business.

As a preview, in 2025, Legacy DNOW achieved a record full year EBITDA of $199 million, establishing a new annual record for EBITDA results. Our teams around the world performed well, but most notably at [ Whitco, Flexo and Trojan ] brands and businesses who produced in record-level territory making for legacy DNOW's best year yet. This is a tremendous achievement by our team, given that U.S. upstream market activity has contracted. I want to take a moment to express my appreciation and celebrate this achievement in the face of challenging market dynamics. For the full year, legacy DNOW EBITDA as a percentage of revenue reached 8.2% and eclipsing our guided target approaching 8%. The outstanding performance by our teams was driven by the execution of our strategy, centered on our strong commitment to service, dependability and customer relationships, coupled with our reliable and differentiated service models that our customers have come to value. Equally significant, this achievement boost our confidence for long-term success as we move forward with the next stage of our strategy.

Beyond these record-breaking results, 2025 was headlined by the completion of the merger with MRC Global in November. The merger significantly increases our scale diversifying our sector reach, expanding our addressable market, while solidifying our position as the premier distributor of energy, industrial products and solutions. The merger strengthens DNOW competitive position across upstream, midstream, gas utilities, downstream and industrial markets, while also expanding our geographic footprint and product offering. I'm excited about the long-term value of the combination with MRC Global will provide. Just as importantly, the combined company is well positioned to generate stronger and more consistent cash flow over the long term. Our increased scale, improved purchasing power, future operational efficiencies and a more balanced mix of end markets, enhance our value creation through the cycle. On our merger announcement conference call on June 26, 2025, we established a goal to generate value through cost synergies between the 2 companies.

We said we could achieve $70 million in cost savings within 3 years of closing. We are on track to achieve year 1 cost synergies faster than planned and now expect to reach $23 million in cost savings by the end of the first year compared to the $17 million we set we achieved for 2026. And now shifting to comments about the MRC Global U.S. ERP project, which is fair to characterize as an obstacle. Prior to the merger, previous MRC Global Management had disclosed that they had encountered challenges that adversely impacted the third quarter revenues, profitability and cash flows. They had guided fourth quarter sequential revenue growth in the mid- to high single-digit percentage range in their third quarter earnings release. However, the fourth quarter actually actuals declined due to persistent ERP challenges. For context, U.S. MRC Global represents about 40% of DNOW's business. Conversely, 60% of our business is not affected by ERP challenges, including the legacy MRC Global International business, nor energy or any of the legacy DNOW businesses.

While we have been making progress bringing together DNOW and MRC Global, including with our people, customers and suppliers, we have identified the ERP challenges to be a much heavier lift than previously known. Design architecture is resulting in inefficiencies for certain core processes continuing negative operating and financial impacts. Observed limitations across the system are that it is slow impedes customer service requires more resources, increases safety stock and difficulty in processing orders. I am encouraged by the teamwork occurring around the clock as we collaborate on resolving the issues. We have targeted actions to address the impact of ERP implementation. The Heritage DNOW IT and operational excellence teams are mobilized to execute a comprehensive remediation plan to capture and resolve the most critical obstacles. These teams have extensive operations knowledge and experience implemented ERP systems as DNOW has concluded more than 2 dozen acquisitions in spin with a solid understanding of end-to-end business processes and solutioning customer requirements.

In collaboration with the Heritage MRC Global implementation team and our external service providers, our immediate focus is the normalization of all remaining critical processes. By focusing our efforts on hypercare and stabilization now, we are working to remove these obstacles to better support our customers. We sincerely appreciate our customers' patience and our team's relentless dedication. We have seized this opportunity to accelerate integration efforts as we pursue operational improvements towards our sector strategy, including branch footprint optimization, investments in inventory, systems and how we better service our customers to enhance service levels. Where appropriate, we are now actively servicing select legacy MRC Global customers through DNOW systems. And we are managing larger projects where possible through legacy DNOW operating systems to maximize transaction flows from order to payment.

One of the most compelling advantages of this merger is the meaningful expansion and diversification of our business across 4 core sectors, strengthening our resilience through the cycle, and positioning us for sustained growth. In upstream markets, customer spending is increasingly focused on the preservation of existing production and reduced lifting costs rather than growth-oriented expansion. Activities centered on maintenance, workovers and reliability initiatives designed to offset natural production declines consistent with industry expectations for a largely flattish production environment. Capital discipline remains firmly intact with operators prioritizing efficiency, uptime and cash flow durability over the incremental volume growth. While upstream activity is expected to remain flat to down, this dynamic is balanced by growth opportunities across other parts of DNOW's portfolio. The midstream sector continues to benefit from structural growth drivers including natural gas infrastructure expansion, LNG and power generation-related development.

These markets are supported by longer-cycle projects, providing improved visibility and a more durable demand profile. Gas utility system modernization is set to continue, and we expect the gas utilities market to grow in 2026. Our IMTEC gas meter solution, which began pilot testing last year, aims to increase customer wallet share and accelerate adoption with our gas utility clients. Furthermore, we are pursuing revenue synergy opportunities with MRC Global's gas products portfolio leveraging our footprint and existing gas utility customers where DNOW itself has historically provided -- only provided steel pipe products. Data centers continue to represent an attractive growth opportunity. We entered this market in January 2025 with no prior data center experience and have made meaningful progress in a short period of time. We are now supplying our core product offerings, pumps, pipe, valves, fittings and flanges to 11 new customers across 4 key data center markets, and we are also proactively entering additional markets. Importantly, our success in data centers has also led to incremental opportunities within the broader industrial market.

Since completing the merger, we have begun realizing revenue synergies across multiple channels. These early benefits include incremental orders driven by improved access to core product inventory as well as better product margins resulting from expanded in-house capabilities and access to a broader customer base and contract portfolio. Near-term revenue synergy initiatives include cross-selling newly available offerings, including the process solutions portfolio into downstream and gas utility sectors, leveraging the company's expanded geographic footprint to support new customer wins in these markets, and using combined purchasing scale to improve win rates and margin performance. Further, we are leveraging DNOW regional supercenters and legacy MRC Global regional distribution centers to support larger, fast-turn project requirements. We are seeing areas of improved win rates, driven by enhanced inventory access in several cases, opportunities would not have been viable without the combined inventory position.

DNOW having access to MRC Global in-house valve automation capabilities is enabling faster turnaround times and can improve margins. Reduced lead times contributed directly to successful customer awards. Process Solutions businesses, including Odessa Pumps and Power Service are actively engaged and have identified target opportunities across refining, chemical and mining markets. Initial engagement with downstream customers is underway to establish key points of contact and to coordinate execution with Process Solutions teams. Early stage assessment of opportunities within the gas utility market is in progress, leveraging combined footprint to support gas utility and downstream growth. Midstream growth opportunities are enhanced in the areas of large bore valves, larger outside diameter pipe, measurement and instrumentation, valve actuation and automation.

We are also pursuing cross-selling opportunities across the combined customer base. Many customers expect activity to improve as 2026 progresses with momentum building into the back half of the year. In the chemical sector, market conditions have softened as customers postpone project expenditures. Conversely, downstream refining is preparing for an active turnaround and maintenance season in 2026 which is expected to drive demand for valves, fittings, flow control equipment and other reliability-oriented MRO products. We continue to see upside from data center-related infrastructure investment particularly where it intersects with power generation and gas infrastructure. Investments in this growing sector represent an incremental tailwind alongside our core focus on midstream gas speed infrastructure demand in industrial PBF and pumps demand within the 4 walls of the data centers.

Turning to capital allocation. We will continue to pursue our long-term priorities, enabled by our focused and disciplined approach to cash flow generation. First, we will continue to invest in our business as we integrate with MRC Global while supporting organic investment in areas of growing sectors like water management solutions, midstream, gas utilities and data centers. Second, we will focus on deleveraging and reducing the debt incurred in connection with the MRC Global merger working towards a net cash position. Third, we will continue to pursue strategic M&A by continuing fortification of our pumps, production and process solutions business in addition to foraging opportunities in gas utilities, downstream sectors and international. Lastly, with the commitment to delivering value to our shareholders, we will opportunistically repurchase shares under our reactivated $160 million share repurchase program. With that, let me hand it over to Mark.

Thank you, Dave, and good morning, everyone. Revenue for the fourth quarter of 2025 was $959 million, up 51% or $325 million from the third quarter of 2025. The driven by $388 million of MRC global contribution from the close date of November 6 through the year-end 2025, referred to as the stub period. On a full year basis, total 2025 revenue was $2.8 billion, up $447 million or 19% from 2024. With and without the contribution from MRC Global, this marks DNOW's fifth consecutive year of growth. Adjusted EBITDA or EBITDA for the fourth quarter was $61 million or 6.4% of revenue. On a full year basis, total 2025 EBITDA was $209 million or 7.4% of revenue.

U.S. revenue for the fourth quarter of 2025 totaled $765 million. with MRC Global contributing $298 million in revenue during the stub period. In the U.S., legacy DNOW fourth quarter revenue was $467 million, down approximately 10% sequentially and when looking at MRC Global U.S. activity in the period, it was down similarly as all sectors historically contract in the fourth quarter with seasonality. Now moving to Canada. Revenue was $51 million for the fourth quarter, down $2 million or 4% sequentially. For the full year 2025, Canadian revenue was $214 million. Although revenue growth faced challenges from low commodity prices, tariff uncertainty and customer consolidation, our Canadian operations protected margins by exercising rigorous cost management, as customer budgets recalibrate and measures are made for improved profitability. For consolidated DNOW, International revenue was $143 million in the fourth quarter and $312 million for the full year. with approximately $90 million contributed by MRC Global in the stub period.

For the legacy DNOW International segment, fourth quarter revenue was $53 million, down $1 million sequentially. For the full year 2025, legacy DNOW International revenue was $222 million, down 7.5% on a year-over-year basis, primarily due to a combination of fewer projects, and the exits of certain countries in our previously discussed cost restructuring activities and service location optimization to improve long-term profitability. In conjunction with the merger of MRC Global during the fourth quarter of 2025, legacy DNOW changed its inventory valuation method for U.S. inventories from the moving average cost method to the last in, first out or LIFO method. This change was applied retrospectively beginning in the fiscal year 2023, and the financials will reflect the revised figures where appropriate.

The company determined that LIFO is preferable under ASC 250 because it better reflects the current cost of inventory and cost of goods sold. Given the commodity-like nature of denounced products and the frequent price fluctuations driven by pricing pressure, global supply dynamics, tariffs and inflation. LIFO inventory benefits or charges are adjusted in the non-GAAP reconciliation tables to arrive at adjusted gross profit, net income, EPS and EBITDA. Cost of products in the fourth quarter includes $135 million of acquisition-related costs from the partial burn-off of inventory that was stepped up to fair value as part of the MRC Global merger purchase accounting and also includes LIFO charges of $9 million for the fourth quarter and $27 million in the full year 2025. The Overall, DNOW adjusted gross profit for the fourth quarter was $217 million or 22.6% compared to $147 million or 23.2% in the third quarter of 2025. The variance in adjusted gross profit percentage is primarily due to the contribution from MRC Global in the fourth quarter of 2025. Selling, general and administrative, or SG&A expense for the quarter was $226 million, up $114 million sequentially from the third quarter.

Approximately $75 million of the increase is attributable to the partial period activity of MRC Global, paired with approximately $50 million of transaction-related expenses, partially offset by favorable asset sales of approximately $5 million in the quarter. In the fourth quarter, we reported $20 million of depreciation and amortization expense. And considering a full period of MRC Global, we anticipate the first quarter depreciation and amortization to be approximately $25 million. As part of our previously announced international restructuring activities, in the fourth quarter, the International segment recorded a $12 million noncash charge related to the liquidation of a foreign entity. This charge reflects the reclassification of cumulative foreign currency translation losses from accumulated other comprehensive income and loss or CTA to the P&L in the quarter. This charge is presented within the impairment and other charges line of our income statement. Moving to interest expense for the quarter was $4 million.

And now to income taxes. In the fourth quarter of 2025, DNOW's income tax benefit was $29 million. our effective tax rate, as computed on the face of the income statement was 16.5%. When reconciling our tax rate in the fourth quarter, stand-alone and year-to-date, to our projected 27% effective tax rate for 2025 or even to the U.S. statutory rate of 21%, you have to consider that due to the transaction-related costs, both periods are in an overall loss position. In the fourth quarter, we incurred transaction-related costs and foreign currency translation adjustments that are not deductible for tax purposes. The disallowed expenses, losses erode that expected tax benefit as a percentage of our pretax loss when reconciling the U.S. statutory rate of 21% and reducing our effective tax rate for the periods reported at 16.5% benefit. A few additional comments on the MRC Global merger. The merger was structured as a tax-free transaction. And as a result, DNOW received a carryover tax basis in all assets and liabilities of the company. The U.S. GAAP purchase accounting rules require DNOW to recognize the deferred tax liability for book tax basis differences on assets that were stepped up to fair value for financial reporting purposes. DNOW also acquired certain legacy tax attributes from MRC Global, including tax loss carryforwards in the U.S. and international.

While MRC Global's net operating losses in the U.S. are likely going to be subject to limitation going forward, DNOW [indiscernible] expect any limitation to have a material impact on its financial results. For modeling purposes, we expect DNOW's effective tax rate to be approximately 26% to 27% for the full year 2026. Net loss in the fourth quarter was $147 million, and was unfavorably impacted by the fourth quarter merger-related costs, including approximately $50 million of transaction-related costs, $12 million CTA reclassification charges and $135 million in inventory step-up to fair value amortization charges related to the MRC Global merger. We estimate the remaining $41 million in inventory step-up charges will be reported in the first quarter. Our adjusted net income for the fourth quarter attributable to DNOW Inc. on an average cost basis normalizing for LIFO adjustments and other items was $23 million or $0.15 per fully diluted share, compared to $28 million or $0.26 per fully diluted share in the third quarter 2025. Moving to liquidity and capital structure. Our balance sheet remains healthy with ample liquidity of $588 million, including $424 million in availability on our credit facility, and [ $164 ] million of cash at the end of the fourth quarter. Our leverage ratio based on net debt of $247 million was 1.2x and our total debt balance was $411 million at year-end 2025.

We continue to target deleveraging by year-end while also executing on select M&A and being opportunistic on our share buyback program. Our existing $850 million revolving credit facility extends into November 2030. Accounts receivable was $874 million at the end of the fourth quarter with days sales outstanding or DSO of 83 days, impacted by the incongruent contribution between the full balance sheet of the acquired accounts receivable and only a partial quarter of sales contribution. DSO for the legacy DNOW business were relatively flat at 63 days in the fourth quarter of 2025. Inventory was $1.192 billion at the end of the fourth quarter up $833 million from the third quarter of 2025 based on the contribution from MRC Global, with 4Q annualized churn rates of 3x. Accounts payable was $653 million at the end of the fourth quarter, an increase of $348 million from the third quarter, impacted by the acquired payables. And for the fourth quarter of 2025, working capital, excluding cash as a percentage of annualized fourth quarter revenue was 29.7%, which is higher due to the partial period impact of MRC Global revenue compared with the ending balance sheet.

Without MRC Global activity and working capital contribution, Legacy working capital as a percentage of revenue was approximately 15.8% consistent with prior quarters and also represents the average of the 4 quarters of 2025. As we look forward to 2026, we modeled working capital as a percentage of revenue to approach 25% as we blend the historical MRC Global with legacy DNOW going forward. In the fourth quarter of 2025, we generated $83 million of cash from operating activities and invested $7 million for capital expenditures to support growth initiatives, primarily in Process Solutions and midstream areas paired with investments to support MRC Global. On a full year basis, cash flows provided by operating activities was $155 million with $25 million in capital expenditures.

Considering the transaction-related cash charges paid in the fourth quarter, cash flow was negatively impacted by approximately $30 million. In the fourth quarter, under our previously approved share repurchase program, we repurchased $10 million of common stock. As of December 31, our cumulative repurchases under our $160 million authorized share repurchase program totaled $37 million. And with that, I turn the call back to Dave.

Thank you, Mark. Before I close, I'd like to highlight legacy MRC Global's international business, which has delivered its fourth consecutive year of growth averaging 10% annual growth over the 4 years ended December 31, 2025. This group achieved its strongest year since 2018 for revenue, marking the best year ever for profitability. Worth noting the fourth quarter of 2025 benefited from strong MRC Global international project execution, contributing approximately $35 million of DNOW revenue in the fourth quarter, not repeating at the same level in 1Q '26.

Longer term, we see strategic benefits from our expanded international platform. The combination of MRC Global's international business has strengthened our global footprint and technical capabilities, while the April 2025 acquisition of [ Natron ] International in Singapore enhances our exposure to electrical and data center-related opportunities position us well for growth. In closing, I have confidence that our team will overcome the obstacles and resolve U.S. MRC Global ERP system issues in this transition year. Our priorities will center on integration, execution aligning commercial strategies, consolidating systems, optimizing the supply chain and capturing identified cost synergies while maintaining a strong focus on serving customers to minimize further disruption.

And before talking about the rest of the year, I want to close our pre MRC Global chapter by signing results, which represent stand-alone DNOW figures in all instances. 2025 represents our fifth consecutive year of growth, where our core markets have actually contracted in each of the last 3 years. This is DNOW define gravity. In 2025, we delivered our most profitable year ever since going public 11.5 years ago. These last 4 years from 2022 to 2025 have been our best years ever in terms of absolute dollar EBITDA performance. 2021 was our business transformation period coming out of COVID where we developed and executed on the strategy for growth, sustained profitability and strong cash generation. In these last 4 years, we produced 81% of the EBITDA DNOW has delivered over the last 11.5 years since going public. EBITDA averaged better than 7.9% over these last 4 years with 2025 EBITDA above that at 8.2%. After this consistent, stellar and contrary to the way the wind was blowing performance, we had 0 debt and plenty of cash for growth.

I want to thank my team for these results and this track record. I say this to convey what's been done and what's possible with this team of leaders and add that will now be a better team with the additional MRC Global leadership who will help us take our company to the next level. Finally, we have decided to delay sequential and full year guidance exercising a disciplined approach given persistent challenges related to our ERP implementation within legacy MRC global U.S. operations, while we are simultaneously operating in a critical phase of integration following this recent business combination. The relative newness of the combined organization limits our ability to produce forecast with the level of confidence we expect to provide to investors. Importantly, we are taking decisive actions to address these challenges and are executing against a stabilization road map.

We will reinstate guidance when we have greater operational stability and predictability in MRC Global U.S. operations once we have more clarity. We didn't pursue this merger to stay the same. We did so to become meaningfully better. The integration and systems work in front of us are real, but so is this opportunity to unlock scale, innovation and performance that neither organization could achieve on its own. Our teams are aligned. Our strategy is clear and our ambition is high. We're ready for what comes next, and we're glad to have our new team members with us on this journey. With that, let's open the call for questions.

[Operator Instructions]

Your first question comes from the line of Adam Farley with Stifel.

Good morning, everyone. Let me starting first on a little bit more color on MRC's ERP transition. What was the impact in 4Q from the transition? Any color on when we should expect these headwinds to resolve going into '26? Were is so broad-based across MRC's business in the U.S.? Or was it specific to certain sectors?

Okay. In terms of the impact, let me give some timing on a quarterly basis. Again, as I mentioned in my prepared remarks, the ERP issues are limited to U.S. MRC only, not the international MRC business. And of course, the ERP impacts don't affect the legacy business for DNOW. In terms of the impact from the second quarter, the system was implemented August 6, 2025. And the revenue decline from the second to third quarter was pronounced and MRC issued a press release when they announced their earnings and talked about that significant sequential decline. They also talked about the notable recovery in revenues in September and October, and they forecasted growth going into the fourth quarter in the mid- to high single-digit range.

I think what we've experienced in reality -- it was a decline in revenues going into the fourth quarter. So there has been revenue loss attributable fully to the ERP implementation, both in the third and fourth quarters. So that impact is notable. In terms of the resolution for the system issues, we have all hands on deck to resolve the core infrastructure issues with Oracle for MRC Global U.S. We're not really sure when the resolution happens, but here's what we're doing to mitigate in the short term. So we've -- immediately, we have DNOW, DNOW systems focused on handling projects, especially bulky projects with a lot of deliveries that are cumbersome to move through the Oracle system in MRC. We're trying to push projects to the DNOW system to eliminate that those snags that happen in Oracle.

We've stood up, we've added over 200 personnel in the field to maximize customer service, to mitigate customer frustration and to get products out the door, and improve how we service our customers. We've stood up a help desk solely focused on handling issues as they emerge in the field while we have a parallel team working on resolving matters with our external partners. And we've now taken the DNOW IT and operational excellence teams, who have integrated 24 companies over the acquisitions we've made since we've spun. We've put every company we bought on SAP or sight line except for all 24 companies, we've migrated them. We're very good at this. That team is now playing a major role in mitigating the disruptions and rectifying the problems we're experiencing there.

In terms of how broad-based, interestingly, we're seeing stable revenues in the gas utility space. I think the prior management in MRC Global pointed that out in the third quarter. earnings release, very stable revenues there. Those are probably the stickiest relationships we have in our business. We're integrated with many of these customers. We are one of the bigger suppliers in gas utilities, distribution, and we've been able to mitigate much of the disruption there. Where we're seeing the biggest negative impacts are in upstream and downstream. Now I'm very comfortable about the recoverability in the upstream space because that's a no sweet spot. MRC's legacy strength has been in gas utilities and downstream and certainly in their international business. But in the upstream space, we have a plan to migrate 20 locations on to SAP, off-Oracle onto SAP. That process has begun. Again, we're handling projects in the SAP environment. And so we're doing all of these things to maximize our revenue recovery as we move forward. But that's some color on your questions, Adam, thank you.

Thank you very much. it's really helpful. It's pretty good 2026 growth expectations. I understand the delay in issuing guidance, but can you maybe just help frame how you're thinking about maybe organic growth for the year, either by sector or for legacy DNOW?

Okay. Well, I'll give some kind of some market assessments that we kind of made and then I'll see if I'm answering your question. But in terms of the upstream space, we expect upstream generally to be flat to down, like we've experienced for the last 3 years. And we managed our response to that reality very well. We do expect some water management and disposal growth in upstream. That will be a positive, and we're seizing that.

We have a real strong Flex Flow Trojan team that's focused on seizing market share there and pursuing growth and they're primarily focused on upstream, but generally, upstream will be flat to down. The midstream space, we focused on midstream for the last 3 years, the Whitco acquisition from early 2024, really leapfrog best in that space, combining with MRC now we're a real powerhouse in that area. We should see midstream growth the market itself, and we should be able to take advantage of that as well, especially in national I'm sorry, natural gas infrastructure, feed gas for data centers, for example, LNG feed gas, et cetera.

Gas utilities, our customers will be growing. And we see that as an opportunity especially as we relieve the issues were experienced with Oracle. We have [ IMTEC ] solution meters that we're promoting to the market. We expect to take more wallet share from our customers and we're pursuing revenue synergies, like I talked about on the call for gas utilities. Downstream, industrial, we think downstream will have a real strong turnaround a couple of quarters coming up. We expect chemicals to be down a little bit. But in terms of end market opportunities, we see some real strength except for the midstream space, which represents about 40% to 50% of our business going forward. So that's kind of some end market focus. Again, in the U.S. MRC Global's arena, we like prior MRC Global Management and we're saying today, we've lost some revenue momentum there, but I'm confident we'll get it back, especially as we alleviate the issues we're experiencing today.

All right. And then if we look at the cost synergy target, and some expected acceleration in year 1? And what are the main drivers driving that improved cost synergy target in '26? And if we look further out, I mean, do you expect the total cost synergy target to move up over time?

Yes. Let me address the first half of the question in terms of what's driven the improvement in the and expected realized savings in the first year. That's primarily due to -- this is one of the positive offshoots of having had issues with the ERP implementation in U.S. MRC Global. There's a real urgency to be able to take care of our customers through a system that can accommodate normal activity. So for the first time in my career, I've seen locations clamoring to get on SAP, for example, the DNOW standard for communicating commerce in the business.

So we're going to fast track I wanted to take kind of a longer extended period to migrate movement to in the upstream space, but we're going to be able to fast track that. And with that, we'll see cost synergies. We'll see the relief of revenue leakage that came from the implementation of the system, and we're seeing real closeness between our leadership in the field, our sales talent and the folks are on both sides from MRC Global and DNOW. So I think that's the main thing is we're seeing some of the realization of those cost savings coming from a faster track on bringing those organizations primarily in upstream together. In terms of long term, what the opportunities are, we said over 3 years, we would get to $70 million in savings I'm not prepared to say we'll surpass that. My instinct is there are opportunities to do so.

One of the things that -- the reason why most of the savings in our original projections would happen in the third year as we need to decide how we're going to manage the business holistically going forward from a systems perspective. It's possible that, that gets ironed out earlier than expected. So I think we'll see real strength in the momentum with cost savings. But I've said from the beginning, since our first call in June, that the real promise here is in growth and focusing on what we bring to our customers, what we bring to our customers as they consolidate, how we become uniquely suited to service our customers as they grow and as they grow from an M&A perspective. So I think that's where we're at on that front, Adam.

Your next question comes from the line of Alex Regal with Texas Capital.

Thank you, and gentlemen. David, David, I appreciate your decision regarding guidance. But maybe I could ask it in a different way. Can you maybe talk about strategically your longer-term vision for sort of revenue growth for the consolidated company and profit margins. And maybe if you're not yet ready for that, maybe if you could kind of give us some directional guidance, maybe just the DNOW business for 2026 and how you're thinking about revenue growth and margins in just that core business?

Well, let me try this. we kind of gained on how we would answer a question like this. We're going to give select guidance on parts of the business. I really don't want to do that. But let me just give you some color on how we saw movement into the new year, whether we have these disruptions or not. Generally, we see our overall business with kind of a flattish revenue that's how I saw going into 2026, flattish revenue, very little revenue change organically. We saw the opportunities around cost synergies, integration of the businesses, revenue synergies that comes from us working closer together and using each other's inventories and locations where one entity didn't have geographic coverage, but the other does.

So we saw revenue upside to mitigate some of that overall revenue flatness. I gave some color on the end markets. DNOW is a very acquisitive company. We will do deals this year, and that would augment and kind of excite some of the bottom line implications. But that's been deferred a bit, given what we're seeing with the ERP issues. Long term, the real benefits from DNOW and MRC coming together, on these things. If you look at -- we're a distributor. Our relationships with our customers are almost -- I mean, our rivaling in importance with our suppliers. In many cases, especially with the top manufacturers, DNOW or MRC was the #1 or #2 distributor in the supply chain or sometimes DNA was over 12 and MRC was #1, we're going to take advantage of that.

Our ability to be competitive, and we have numerous competition everywhere we operate, and -- but sometimes, our competition is very specialized on a product line, one manufacturer. We're going to be able to better compete and with the cost synergies, we'll be able to pull out costs and further improve our competition. So I think the long game is a better situated with our top -- the top manufacturers, our customers' demand. A lot more volume, exciting suppliers about being key team DNOW, combined DNOW, MRC Global as the main source of pushing their products into the market. So better buying, better product availability, standardization, customers clamoring for access to products. All that is going to conspire to long term, enable us to grow the end markets together where we couldn't have done them separately. So I think that's the main plan volume, better costing, better competitiveness. And then earnings ultimately in that 8% EBITDA range, where DNOW has enjoyed over the last 4 years, but bringing the whole organization up over the next several years.

That is helpful. And then in the past, you've discussed the importance of the people at DNOW and the people at MRC and how important it is to give them a lot of attention. So can you speak with regard -- speak on your activities to retain and incentivize these key employees during this time of kind of ERP headwinds?

Yes, that's a good question. So as you'd expect with any merger of equals, there will be some turnover. And then there's a situation where there's a disruption like this the -- there's a heightened sense of concern over that. So we've been very intentional about making sure our top talent is awarded from a financial perspective with various forms of tools used to take -- to do so, but also from a long-term perspective of making sure we put the top -- the best people, the best salespeople, the best sales talent the best IT talent in the leadership positions to drive the future.

So in terms of incentives, the things that are going to drive keep -- enable us to keep our people is to show that long term, we're going to pay bigger bonuses, bigger commissions. We're going to be more important to suppliers. We're going to have better leverage with the customers, will benefit from how we manage the supply chain and our personnel will as well. So with the mix of financial remuneration challenging our folks rewarding them, making them part of our solutions, including them in our decision-making. I think all that long term has got us where we are today and will get us where we're going. We brought on some top leadership, sales and ops talent from MRC Global, and they have the same mentality we do. And we're deploying all the arrows in our quiver to make sure we excite, retain, grow our top talent and win in the market because of that organization.

And your next question comes from the line of Chuck Minervino from Susquehanna.

If you could touch on the ERP issues a little bit more. Can you tell us, do you feel like you've kind of hit worst of it and are working your way past that? Or is the worst of it still in front of you? Just trying to gauge how long this lingers through 2026, at least kind of what you know right now?

Yes. I think -- and this is -- may not be the best way to answer the question. But I think we're an organization very good at coping. We have hard chargers working over time, taking care of our customers to really conceal the imperfections in the system. So how we coped is through hard work and that's helping. Things are better. I've met -- I visited several of our locations, several U.S. MRC global locations, talked to a lot of the leadership, a lot of people in the warehouses warehouse activities are hard to push through the system right now, but just sheer force is how we're working to overcome some of this stuff.

In the meantime, in the background, we're working with external partners to fix some of the snags that slow things down. But we still have issues where it takes they are our old invoices from earlier in the implementation where it takes 20 minutes to process paying one invoice for a supplier. Those are some older activities that we believe some of that stuff is be resolved on a go-forward basis, but there's still some lingering effects that still slow us down. So in terms of when this gets resolved, we'll probably have our next earnings call in the next 80 days Chuck, and I'll get a better feel for it. In the meantime, we're doing things to simply bypass the obstacle that this implementation presents, and I talked a little bit about it. We're handling more transactions to SAP. We are sitting down. We are having an MRC Global inside salesperson sit next to the DNOW salesperson, entering orders in SAP to take care of their customers to reverse the revenue losses we've experienced in the first few quarters after go live.

So we are coping. We are cleaning up old problems. We're fast-tracking solutions to improve process flow in the system. And we've stood up a help desk to help with anecdotal one-off kind of problem. So we are -- we've triage the situation. We're working it hard and I'll be able to talk more about it in the next 80 days or so.

And then just my other question is on free cash flow. Can you talk a little bit about free cash flow in 2026? Maybe if you're not quite ready talk about numbers there, just some of the puts and takes as well?

Yes. I think I will say this, we're going to generate cash in the $100 million to $200 million range, could be better. We've got pent-up inventory, uncollected receivables. But to me, I see those as in the moment near-term problems, but those are opportunities, too. We're going to level our inventory as we stabilize the system. We're going to collect those bills. I think from a cash flow perspective, it's going to be a good year for us. So that's how I answer that question. I think it's going to be a good year for us. And we'll try to give more color on our next call, if we can, hoping to, of course.

That concludes the question-and-answer session of today's call. Mr. Brad Wise, I turn the call back over to you for final remarks.

Well, thank you for joining us today and your interest in DNOW. We look forward to discussing our first quarter 2026 results on our next conference call in May. Hope everybody has a wonderful Friday. And with that, we'll turn it back to you, Jeannie.

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" Stifel, Nicolaus & Company, Incorporated, Research Division

" Water Tower Research LLC

" Stifel, Nicolaus & Company, Incorporated, Research Division

Good morning. My name is Van, and I will be your conference operator today. At this time, I would like to welcome everyone to the DNOW Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Thank you.

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

Well, good morning, and thank you, Van, and welcome to DNOW's Third Quarter 2025 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 brand, which is also 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, November 5, 2025, which is subject to change. They are subject to risks and uncertainties, and actual results may differ materially. No one should assume these forward-looking statements remain valid 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.

In an effort to provide investors with additional information regarding our results as determined by U.S. GAAP, you'll note that we disclose various non-GAAP financial measures in our earnings press releases and other public disclosures. These are non-GAAP financial measures and 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 measure 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 third quarter of 2025. A replay of today's call will be available on the site for the next 30 days. Please note that the results presented today are for DNOW only and do not include any results from MRC Global, which remains a separate independent company until our merger transaction with them is completed.

Now let me turn the call over to Dave.

Thank you, Brad, and good morning, everyone. I am impressed with the performance our DNOW team has delivered and confident 2025 will mark the fifth consecutive year of revenue growth despite 3 years of market softness. The third quarter delivered our strongest revenue since 4Q 2019, and we converted that revenue far more efficiently, producing greater than 7x the EBITDA dollars achieved on a comparable revenue in that prior period. Our performance continues to be driven by a steadfast focus on customers, disciplined cost management and greater operational leverage while focusing our resources and our strengths where the customer sees value. The announced merger with MRC Global has yet to close, but we have received shareholder and regulatory approvals. I'm excited about collaborating to build a stronger, more durable and more impressive future together.

Regarding our third quarter results, revenue for the third quarter grew in line with our guided forecast to $634 million and to a level we haven't seen since before 2020. In the third quarter, we delivered EBITDA of $51 million or 8% of revenue, reflecting continued earnings durability and a marked improvement year-over-year. Activity resulting in demand for our products and services remained healthy. Operators continue to prudently deploy capital with a keen focus on production volume economics and deployment of resources. As crude oil production, natural gas and produced water volume modestly grew, this requires infrastructure and together drove customer demand for our pipe, valves, fittings, pumps and fabricated process, automation, production and measurement equipment.

In today's market, improved capital efficiency and customer consolidation has led to a period of operators optimizing their production portfolio and cautiously evaluating market growth opportunities. It's encouraging to see continued capital investment in the gathering and transmission midstream sectors, primarily driven by increased demand for power and LNG exports.

A continued strength is this team's disciplined approach to working capital management. During the quarter, we improved our inventory turn rates and days sales outstanding, demonstrating efficient use of our balance sheet. When combined with earnings, we delivered $39 million in free cash flow for the third quarter, elevating our year-to-date free cash flow to $58 million, which we expect could approach $150 million for the full year 2025. Our overall achievements are representative of the strong focus by our teams to deliver a solutions-oriented approach to our customers' challenges.

Now to some comments on our results by region. In the U.S., revenue was $527 million, lower by $1 million sequentially despite a 5% sequential contraction in U.S. rig count and a 6% decline in U.S. completions in the third quarter. Our U.S. Energy Centers business increased in the Permian and in the Northeast, combined with steady activity in the Northwest and Southeast.

Operator improvements in drilling efficiency, combined with the incorporation of digital tools and AI are extending the economic life of existing acreage. As a result, we remain in a period of industry optimization and experts believe rig counts are at or below levels needed to maintain current U.S. onshore production. In the Haynesville, demand for our products improved, primarily tied to the new construction of tank batteries, gathering lines, storage and distribution of natural gas linked to increased demand for power generation and LNG exports.

DNOW is positioned well to capture revenue and market share from these opportunities. Operators remain focused on leveraging drilling and completions efficiencies, driving the need for more -- for larger, more centralized tank batteries with specialized equipment. This shift tends to favor DNOW due to our fabrication capacity, inventory and service capabilities.

The midstream sector is active with customers allocating capital to gathering, transmission and takeaway projects to meet the growing downstream demand. During the quarter, the midstream sector accounted for 24% of overall DNOW revenue. Midstream activity was strong and held steady with demand for pipe, valves and fittings supporting several capital projects. One project consisted of a new 400-mile 42-inch pipeline and corresponding lateral to connect the processing plant project, which provides more flexibility for the operator to deliver natural gas to premier markets and trading hubs and its ability to support power plant and data center growth.

Moving to U.S. Process Solutions. Demand for aftermarket pump services remained strong and has grown on a year-over-year basis. We remain focused on expanding our pump and service revenue to additional downstream markets winning orders with numerous chemical processing companies along the Gulf Coast. For our water management business in Flex Flow and Trojan, rental activity remained steady with strong performance in the U.S. and Canada. We see increased demand for higher horsepower rental pumping units where operators are requesting larger assets to move greater volumes of produced water. Our Flex Flow engineering teams are working on retrofitting several existing H-pump units to take advantage of the shift in customer preference. We have secured orders for several H-pump rental units targeting the growing CO2 sequestration space. As more operators look to expand enhanced oil recovery applications as well as fund future CCUS projects, we believe there will be prospects to rent and sell these pumps.

Since acquiring EcoVapor in December of 2022, we have expanded our product offering to drive increased market opportunities for our gas treating technology. I'm delighted to highlight the great work our product development team has done over the past year to unlock several opportunities. First, during the quarter, we shipped a O2E 2000 unit to a landfill gas operator. The E2000 is a much higher capacity unit designed to treat larger volumes of landfill gas by removing oxygen, allowing the treated gas to be moved to the midstream market for sale.

Second, several of our customers have requested a combined gas treating and liquids removal process unit to handle larger volumes of saturated gas. In response, we developed the DryOxo and delivered our first unit to an RNG customer in the quarter. The DryOxo product is suitable for many RNG applications from small dairies and swine farms to large landfills, unlocking revenue growth for EcoVapor. And finally, we designed and shipped several new Oxygen Sentinel units, which enable operators to treat gas with higher H2S concentrations found in natural gas applications.

In Canada, revenue was $53 million for the quarter, up $5 million or 10% sequentially, in line with our guide. Activity increased from the second quarter breakup period. Third quarter Canada rig count compared to the same period in 2024 was 15% lower year-over-year. As such, we are optimizing our footprint to improve our cost structure. Despite lower activity on a year-over-year basis, we see opportunities for several top operators and EPCs to drive future growth.

For international, revenue was $54 million, sequentially up by $2 million or 4%. During the quarter, we saw growth in the Middle East and Singapore. Singapore activity in the fabrication yards remained strong, driven by high demand for FPSO conversions for Brazil, West Africa and Guyana alongside LNG module fabrication aligned with the global emphasis on energy security.

Moving to digital. I'd like to share an example of how we are using digital technology to provide real-time information for our customers to provide better planning, improving on-time deliveries and yield higher fill rates from inventory to help improve inventory turn rates and customer satisfaction. For one of our larger customers, our DigitalNOW analytics team built a solution that provides real-time data and visibility to their demand for pipe in comparison to DNOW's on-hand and on-order inventory. This digital tool has enabled better planning and communication to fulfill customer pipe demand, resulting in a more efficient supply chain.

Turning to capital allocation. Our long-term priorities remain unchanged. We will invest in organic growth in additional market sectors to help drive diversification of revenue, coupled with inorganic opportunities that drive accretive results where we are the national natural operator. A key area of interest for us is acquisitions, primarily in Process Solutions to further build out our service and product offering to better serve the needs of our customers.

With that, let me hand it over to Mark.

Thank you, Dave, and good morning, everyone.

Total revenue for the third quarter of 2025 was $634 million, up 1% or up $6 million from the second quarter of 2025 and marks the highest revenue quarter in almost 6 years. EBITDA, excluding other costs or EBITDA for the third quarter was $51 million or 8% of revenue, marking the 14th consecutive quarter where DNOW has delivered approximately 7% EBITDA or better. Another notable improvement in performance can be seen when we compare the period starting when we became a stand-alone public company in the second half of 2014 through the end of 2019. That 5-plus year period delivered accumulated EBITDA performance of less than 1% of revenue. And now comparing this to the period after our transformation years of 2020 and 2021, we've averaged 7.8% EBITDA as a percent of revenue, which clearly speaks to solid execution of our strategy to improve profitability and grow earnings.

U.S. revenue for the third quarter of 2025 totaled $527 million, effectively flat sequentially and an increase of $45 million or 9% from last year. U.S. Energy Centers contributed approximately 73% of total U.S. revenue in the third quarter, and U.S. Process Solutions contributed approximately 27%. In Canada, for the third quarter, revenue totaled $53 million, an increase of $5 million or 10% sequentially. The international revenue of $54 million for the third quarter was up $2 million or 4% sequentially. Overall, DNOW gross margins for the third quarter were 22.9%, flat sequentially and up 60 basis points compared to the third quarter of 2024. Now warehousing, selling and administrative or WSA for the quarter was $112 million, unchanged from the second quarter. We anticipate various other merger transaction costs in the future quarters.

In the third quarter, we reported $11 million of depreciation and amortization expense and total company operating profit was $33 million, led by our U.S. segment that generated $28 million with the balance derived from our Canada and International segments, generating $2 million and $3 million, respectively.

Now moving to income taxes. In the third quarter of 2025, DNOW's income tax expense was $7 million. And our effective tax rate as computed on the face of the income statement was 21.9%. We estimate our 2025 full year effective tax rate to be approximately 26% to 27%. Net income attributable to DNOW Inc. for the third quarter was $25 million or $0.23 per fully diluted share. And on a non-GAAP basis, Q3 2025 net income attributable to DNOW Inc., excluding other costs, was $28 million or $0.26 per fully diluted share.

Moving to the balance sheet. At the end of the third quarter, we had 0 debt and an improved cash position of $266 million, an increase of $34 million sequentially. We ended the quarter with total liquidity of $629 million, comprising our net cash position of $266 million plus $363 million in additional credit facility availability.

Accounts receivable was $429 million at the end of the third quarter with -- days sales outstanding or DSO of 62 days, a 2-day improvement from the second quarter. Inventory was $377 million at the end of the third quarter, down $6 million from the second quarter of 2025, with a strong annualized turn rate of 5.2x and a record high since 4Q 2021. Accounts payable was $305 million at the end of the third quarter, a decrease of $13 million from the second quarter. And for the third quarter of 2025, working capital, excluding cash as a percentage of annualized third quarter revenue was 15.6%.

In the third quarter of 2025, we generated $43 million of cash from operating activities and invested $4 million of capital expenditures to support growth initiatives, primarily in Process Solutions and midstream areas. Year-to-date, share repurchases were unchanged from the second quarter at $27 million. And since our inaugural buyback program began, we have repurchased over 8.7 million shares of common stock, returning capital to shareholders.

Over the last 12 months, we've completed acquisitions totaling $122 million, generated $177 million in free cash flow, which represents an EBITDA to free cash flow conversion of over 90%, while returning $32 million to our shareholders through share repurchases and increasing our cash balance by $5 million. Our commitment to growing the company through a combination of organic initiatives and M&A remains a key priority.

And with that, let me turn the call back to Dave.

Thank you, Mark. Before I get to the outlook for the fourth quarter, I'd like to make some additional comments on the announced merger with MRC Global. We see the combined company bringing together unparalleled access to industry-leading energy, gas utility and industrial products, service and solutions from both companies to serve a broader and more diversified mix of customers. This combination enhances DNOW's earnings durability, cash flow, financial position and ability to capitalize on growth across a broad range of attractive sectors. We expect the transaction to generate $70 million of annual cost synergies within 3 years following the closing through public company costs, corporate and IT systems and operational and supply chain efficiencies. Combined with synergy realization, we project a solid free cash flow business and we will pursue deleveraging, having previously noted a target of a net cash position by the end of the first full year post close, timing subject to change based on future M&A.

Recently, we publicly announced our future leadership team comprised of respected leaders from both companies who collectively possess deep industry knowledge, bringing with them serious tenure, meaning they've endured and learned from the rigors in our industry and know how to avoid pitfalls and seize opportunities in our business. Their experience, expertise and proven track records in talent management, their deep respect for fellow team members and a strong focus on the customer will enable us to grow in the energy, gas utility and industrial sectors. Our integration teams have been hard at work to determine how to best bring our two companies together, including how to harness the combined company talent to position us for success as we move forward.

Capitalizing on the deep supplier and customer affection, we will retain the MRC Global brand in multiple sectors to include gas utility, downstream and will be a strong additional brand in our international segment. While there remains work ahead, I am confident that as we progress, our customers and suppliers will recognize DNOW for providing an expanded range of products, comprehensive solutions and greater value to support the efficiency of their operations.

Now I'd like to switch to our outlook for the fourth quarter. In the U.S. and Canada, we expect typical fourth quarter seasonality. Therefore, we expect a seasonal decrease in revenue sequentially. Internationally, we expect activity to be relatively flat sequentially. And we expect DNOW's fourth quarter revenue compared to the fourth quarter of 2024 to be up in the mid-single-digit percentage range, but down sequentially seasonally. We expect full year 2025 EBITDA could approach 8% of revenues, and our 2025 full year free cash flow could approach $150 million.

In closing, I'd like to thank our DNOW team for their stellar performance. In a year that has had its share of macro challenges, including a continuation of customer consolidations, geopolitical uncertainty tied to tariffs and OPEC+ policy shifts impacting our industry, we are excited about how well we have navigated and grown our business. We ended the quarter adding to an already stellar balance sheet with $266 million in cash and 0 debt. We will continue to focus on what sets DNOW apart, our team members, our culture and proven track record of improving business unit performance, prioritizing customer service, innovation and supply chain management, combined with a solutions-oriented approach that delivers value for our customers and suppliers while maintaining a balance sheet, which provides a solid foundation for continued growth. We believe 2025 will represent our fifth consecutive year of growth and are forecasting our best full year earnings ever as a public company in terms of total EBITDA results. I would like to thank all the women and men of DNOW for their continued hard work and dedication to our pursuit of excellence.

With that, let's open the call for questions.

[Operator Instructions] Your first question comes from the line of Nathan Jones from Stifel.

This is Adam Farley on for Nathan. Starting on MRC, with another quarter to explore the merger, have you gained any new insight into the opportunities to drive additional cost synergies or maybe give you more confidence in achieving your cost synergy target?

Well, our focus -- really since we announced the proposed merger in June, late June, our immediate priorities are around connecting our sales teams to grow the business once we come together. Our integration teams have been focused on itemizing those things that can enable us to achieve the $70 million in synergy savings. We've asked them to identify how much is available, what the timing would be and they're pursuing that $70 million target. That number, we don't have a change for that number. We're focused on delivering that. But the immediate priorities, and I really want our employees to hear this, is we want to retain the top talent in our company on both sides to be a better distributor, to the suppliers we support and a better supplier to our customers. Our focus is on growing the business while we achieve those savings. And by retaining the top talent and having a singular focus on our customer, we can maximize our performance at the top line and the bottom line in that regard, whether we get there through $70 million in savings or more.

Okay. Fair enough. Maybe following up on that last point. What do you think are going to be the most difficult parts of the integration? How do you manage the risk? And do you think you have all the systems and processes in place to limit disruption during the integration and really focus on growth here?

I think that the opportunity is to sell the story to our fellow team members about the future for the company. By doing so, we can keep them engaged in the future, focused on the future. We'll be a company better able to address the wide array of challenges our customers face. We'll be better able to do that. And we need the top talent in the industry to stay with us on a go-forward basis. The biggest challenge is to motivate, promote the future, get folks engaged. And we'll do that the moment we close, we'll be on the ground in key locations, promoting the story and the future and the promise of these two great companies coming together.

The challenge is to then leverage that enthusiasm, grow our relationships with customers, avoid the spotty revenue leakage, which we will experience and then we'll get it back as we prove to the customers we're better as a combined company, and then we'll provide a platform for growth. Our sales teams can work together on revenue synergies and the possibilities of selling from locations that they didn't have access to before for product lines we didn't support within DNOW or MRC didn't support and sell those to their current customers. So I think the opportunity is for growth and the vehicle and to avoid the risk is to keep our top talent engaged and focused on the future.

[Operator Instructions] Our next question comes from the line of Jeff Robertson from Water Tower Research.

Dave, it sounds like from your comments with respect to U.S. revenue that you continue to gain share with your E&P operator customers. Is there still a lot of room for that as you look into 2026?

Well, I think as the two companies come together, we can grow that in a combined sense better than we can separately. We talked a little bit about this. Adam asked about it a bit ago about savings as we come together, we will have resources -- we'll have some overlap resources, which we can deploy more efficiently to grow business with our existing customers and prospective customers. So I think that's going to be one of our top opportunities is to take advantage of where we see some crossover primarily in upstream to be -- to become a more powerful, more beneficial supporter for our customers, prove that to them and win that business, take that market share in the combined sense. So that's a big focus for us, Jeff.

And you called out Flex Flow and EcoVapor and then highlighted the midstream growth opportunity. Can you provide any visibility as you think about that into 2026 and what impacts those types of opportunities have on D&O's margins?

Brad, do you want to speak to Flex Flow and Trojan.

Yes, Jeff, thank you for the question. With regard to Flex Flow and Trojan, they make up our water management solutions group, which is primarily focused on the upstream produced water infrastructure. And as you know, year-over-year barrels grew in the U.S. And so especially in areas of the Permian, there's increasingly a number of barrels of produced water per barrel of oil, requiring assets to be able to transfer that water and then pump those at off-site locations, usually miles away to a permitted SWD location. So that presents opportunities for DNOW to provide water management solutions. We package that also with an automation package that came with the Trojan acquisition.

So our solutions offering is kind of growing as those produced water barrels are growing. Now in prior calls, I think we've called out opportunities where we've been able to leverage those solutions from the upstream into different market sectors. Dave talked a little bit about CO2 and CCUS projects. And as those ramp up, -- we've successfully deployed some of our Flex Flow H-pump rental units into CO2 applications. We've also got additional Flex Flow units at some refining locations, so kind of in the downstream firewater service locations. We've deployed some Trojan assets into agricultural processing. So there certainly is opportunities to leverage our knowledge and our asset base from that upstream into additional sectors.

As far as 2026, still early to kind of forecast that, but our plans are to continue to evaluate the business to grow, to invest organically in those assets to grow our fleet and footprint. And certainly, there's more opportunities not only in the U.S., but Canada and international.

Brad, Dave highlighted the DigitalNOW and some of the things you're doing with your -- to integrate your customers with supply chain solutions. Does the MRC Global customer base offer margin accretive opportunities to extend that platform and bring them -- or to bring some of their customers onto that platform?

Yes, I think so. I'll start and maybe Dave or Mark might have a comment. But as far as understanding MRC Global's technology, I think it's early for us, but we're during this period before the completion of the merger or kind of having a better understanding. But if you review their release this morning, they talked about the ERP deployment and -- the ERP certainly offers long-term benefits to the company going forward. It's a state-of-the-art system that really lends itself to improved inventory management and visibility, order processing efficiency, supply chain optimization, improved financial control, customer service enhancement and then certainly more data-driven solutions.

So I think collectively, we're really excited about that investment and the future of what that ERP system could do to the combined company. Within DNOW, we operate on SAP. We've got our technology stack as well. We've invested and deployed solutions through our DigitalNOW initiative. And so we're excited about the future as we bring these companies together and really kind of put together a digital strategy going forward that allows us to better serve our customers and differentiate DNOW in the marketplace versus our competitors.

And Mark, if I can ask one question. I think you said for the full year 2026, the effective tax rate would be 26% to 27% compared to 21.9% in the third quarter. Does that imply that there's an increase in the effective rate in the fourth quarter?

Yes. That range is for 2025. And you're right, yes, we expect some discrete items in the fourth quarter having a little higher tax burden. So that tax rate is probably is in line with kind of where we've estimated it over the last several quarters for the full year.

Van, this is Dave.

Dave, please go ahead, sir.

If we don't have a question or queued up, I want to hit a couple of additional topics before we break.

Okay. I think Nathan Jones has a follow-up question.

Maybe we can talk about gross margins, came in strong again, up 60 basis points year-over-year. Maybe some color on how price cost is tracking in the business, maybe your expectations for product line inflation for the balance of '25 and into 2026.

I'll take a crack at that, Adam. Our focus has always been on maximizing gross margins. We provide a lot of services to our customers. We try to gain reciprocation, provide the kind of value that drives greater margins. And we focus on higher-margin product lines, higher-margin services, et cetera. The companies we buy tend to have gross margins, sometimes much better gross margins than our core business. So that's a focus for us. That's enabled us for us to see significant legacy improvement in gross margins over the years and to sustain markets -- margins in a low inflation environment.

I think we are in an inflationary environment. Lead times for a while were extending and helped gross margins. Tariffs have helped pricing or have helped increase resale prices. And we try to navigate that real well to drive improved gross margins over time, although we're in a pretty competitive environment right now, I'd call it hypercompetitive. A lot of bidding. We've got strong competition out there who focus on price, sometimes as the weapon to feed a more service-oriented company. And we're still doing very well in that space.

So that's going to be our continued focus into 2026. It's going to really depend on end market growth. We expect LNG and midstream and other components of our business to grow, we'll focus on growing gross margins there. And then we'll have to be a little bit more tactical about how we maximize gross margins in the more flatter sectors, which we'll talk about on our next call.

Okay. That's helpful. And then Brad hit on this a little bit earlier, but can you provide an update on your growth opportunities in adjacent industrial markets? And maybe remind us what your exposure is to data centers and maybe the opportunity set there to go after the opportunities that require cable pumps and PVF for cooling in data centers?

Yes, Adam, I'll start and maybe Dave or Mark or have a follow-up comment. But as we've talked about in the last couple of earnings calls, we've really made an intentional effort to grow our midstream business. This quarter and the third quarter amounted to 24% overall DNOW revenue, largely aided by our acquisition of Whitco. And we're seeing continued investment in midstream.

A lot of it's on the natural gas side, right, of course, tied to increased export flows of LNG and then power gen, the ability to generate power, whether on the grid or off the grid and temporary power seems to be a pretty hot commodity in the investor side right now, obviously leading to the growth in data centers and the demand for power that's needed there.

For DNOW, on the data center side, if you think about the feed gas going into permanent power locations, natural gas-fired turbines to generate power, that's a sweet spot for us, providing pipe valves and fittings and fabricated equipment. Dave highlighted a success story we had there in the midstream sector with a customer that is kind of in the Southwest in the Texas area, growing their opportunities to be able to provide more natural gas for power gen for to feed data centers. And then internationally, we have opportunities with MacLean Electrical on the cable side.

Coming back to the U.S. within the data center four walls, they tend to be more industrial PVF product lines. We've been successful in selling valves in some of the data centers that have been built through general contractors. We're anxious to see how successful MRC Global has been in that area. I think combined, that could be a real sweet spot for the combined company.

And then really on the cooling side, I mentioned the PVF on the cooling side, but also with our U.S. Process Solutions business, being able to offer pumps, the cool, the servers within the data center lends us -- lends certainly growth opportunities. But if we look at outside of upstream, we really got some bright spots in midstream for growth. I think we feel like that's a growth area for 2026 as well.

RNG, we talked about the 3 products that our product development group within our EcoVapor business has developed to really seize opportunities in the RNG side, which is landfill gas and swine farm dairy farm. And then also tied to the data center growth, we think dry gas areas in the future may see an increase in rig count, whether that's Haynesville, whether it's Marcellus. We're seeing data centers grow in investments in the Northeast with traditional stranded takeaway assets in the Northeast, I think being able to find a home for that gas in the Northeast out of the Marcellus to data centers, I think that's certainly a growth opportunity for us in the future. So we're excited about all those prospects.

And let's not forget about Energy Evolution and CCUS, those are projects coming down the future for us. And then, of course, we know MRC Global is very big in gas utilities. We're excited about gas utilities future and what growth that might be able to provide for us in the future as our companies come together.

There are no further questions. Mr. David Cherechinsky, you may now proceed with your remarks. Thank you.

Okay. So there's a few things I wanted to cover. I expected them to come up on the call if they didn't, and I've been getting some off-line questions about them. So I'm going to address them.

Number one, we just got the green light from the regulatory bodies that our merger has been cleared from those bodies. We're working on finishing off customary closing conditions. Our teams are working to get closed as soon as possible, and it's possible to be closed in the coming days. So we're very excited about that.

MRC Global just released their earnings this morning. I do want to make some comments on it, a little awkward on a DNOW earnings call. We are two separate companies, but we're close enough to the finish line that I'll take some small liberties here. MRC Global implemented an ERP system across a large distribution network of at least 130 locations by my count. MRC Global's business, like DNOW's is a high transaction volume, low dollar value business, and with that, an ERP implementation is a complicated exercise. MRC characterized their issues with implementing the ERP as an isolated onetime event. We see it as a moment in time and recoverable. DNOW implemented SAP in a similar context after making two large acquisitions, and we experienced something very similar, and we recovered, and it seems MRC is already on the path to recovery.

I encourage folks to read the MRC Global earnings release on the third quarter 2025 results. They did a real nice job explaining what happened with the language like experienced significant challenges that adversely affected their results. Financial and operating performance improved dramatically by the end of the third quarter and more normalized performance continued through the month of October. So very encouraging words. They anticipate to grow in the mid- to high single digits going into the fourth quarter where they normally decline like we do. That's a very nice encouraging sentiment in their earnings release.

So I'm encouraged by where MRC Global is. They will get past this. We experienced a similar issue and recovered. And I want to add this, MRC Global is a 100-year-old successful enterprise. They're smart business people. And finally, they just implemented a world-class ERP. The opportunity is where I see this as an opportunity. They're now on a truly modern enterprise-wide system, linking all of their U.S. businesses. This will help them be more efficient, assess inventory requirements, allow for more fluid movement of inventory across the large network, help with pricing and price optimization to win more business and help with pricing to improve margins as well. So MRC Global has done the heavy lifting, and we're very excited about having kind of gone through this cauldron and coming out a much better company going forward.

So I wanted to make those comments. I'm excited about our imminent coming together with another great company, and I'm excited that they've gotten the pain behind them. Anyway, I'll close with that. Brad, do you want to close this out?

Sure. And thank you, Dave. Appreciate the additional comments, and thank you, everybody, for joining us today and your interest in DNOW. We look forward to discussing our fourth quarter and full year 2025 results on our next earnings call in February of 2026. Hope everybody has a wonderful Wednesday. And with that, we'll turn it back to the operator to conclude the call.

Thank you for joining today's conference call. You may now disconnect.