Dnow Q3 2026 Earnings Call Transcript

Dnow (NYSE:DNOW) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Dnow reported third-quarter revenue of $1.34 billion, a 2.3% increase from the second quarter, with adjusted gross margins improving 40 basis points to 21.2%.

The company’s EBITDA grew to $76 million, or 5.7% of revenue, reflecting a $16 million sequential improvement driven by disciplined pricing, cost management and operational execution.

Dnow’s diversified portfolio showed strength across various sectors, with notable growth in midstream infrastructure, gas utilities and downstream industrial customers.

Cash flow from operations was strong at $120 million for the quarter, with year-to-date cash flow reaching $158 million and exceeding expectations.

The company reduced net debt by $95 million, ending the quarter with net debt of $265 million and a leverage ratio of 1.1 times trailing 12-month EBITDA.

Dnow repurchased $17 million of shares in the third quarter, with total repurchases over the past three quarters amounting to $92 million.

Management expects revenue to seasonally decline in the fourth quarter but anticipates continued momentum into 2027, with potential EBITDA scenarios ranging from $300 million to $350 million.

Operational highlights include improved customer service, better inventory management and a successful transition of upstream and midstream locations to the SAP ERP platform.

Full Transcript

Rebecca (Conference Operator)

Good morning. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dnow third quarter 2026 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad.

If you would like to withdraw your question, press the star key. Thank you. Mr. Brad Wise, Vice President of Digital Strategy and Investor Relations, you may begin your conference.

Brad Wise (Vice President of Marketing & Investor Relations)

Well, thank you, Rebecca, and good morning, and welcome to Dnow’s third quarter 2026 earnings conference call. We appreciate you joining us, and thank you for your interest in Dnow. With me today is David Cherachinski, 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 responses to your questions, may contain forecasts, projections, and estimates, including but not limited to comments about the outlook of the company’s business. These are forward-looking statements within the meaning of the U.S. federal securities laws based on limited information as of today, November 5, 2026, 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. 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 release 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, and these documents are also available on our website. Unless we specifically state otherwise, references in this call to EBITDA refer to adjusted EBITDA, and our third 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 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. With that, now let me turn the call over to Dave.

David Cherachinski (President and Chief Executive Officer)

Thank you, Brad, and good morning, everyone. I want to start by thanking our 5,000 Dnow employees for their dedication and continued commitment to each other and our customers. Your efforts helped us deliver another solid quarter as we took meaningful steps forward, driving higher revenue, profitability and strong cash flows enabled by our increasingly diversified portfolio and focused execution. We continue to make progress on growth, margin improvement, working capital efficiency and cost actions while remaining focused on improving the quality of our earnings instead of pursuing volume at the expense of profits.

Revenue for the third quarter was 1.34 billion, an increase of 30 million or 2.3% from the second quarter within our guided range. Customer project deferrals in the international segment were the principal governor of revenue growth in the quarter, followed by the intentional high-grading of revenue tied to our improved profitability initiatives. Driving improved profitability was a 40-basis-point sequential increase in adjusted gross margins to 21.2% as high-grading efforts more than offset increased headwinds of rising logistics costs.

Higher inbound freight costs are creating pressure on gross margins as price increases work their way through our inventory and customer price update cycles. Additionally, higher outbound delivery, trucking and fuel costs are also creating margin pressures. We are working to mitigate these impacts through customer pricing actions and contractual freight recovery mechanisms while also leveraging vendor support and logistics efficiencies. Our focus remains on disciplined pricing, cost management and operational execution to help offset these inflationary pressures while maintaining our competitive position and customer service levels.

We continue to execute on our operating and financial priorities, delivering bottom line results that exceeded our expectations. EBITDA for the third quarter grew to 76 million or 5.7% of revenue, reflecting a $16 million sequential improvement marching towards our profitability goals. This progress reflects the collective efforts of our teams to focus on the fundamentals, make better day-to-day decisions and consistently execute priorities within their control.

We are seeing execution reflected in better customer service, improved collections and inventory turns yielding greater working capital efficiency. These improvements, along with stronger earnings, helped drive solid cash from operations of 120 million in the third quarter. In addition, cash from operations through the first three quarters of 2026 reached 158 million, well above our expectations. While there is still work to do, we are building greater consistency and accountability across the organization and translating those improvements into tangible financial results.

I am encouraged by our momentum as we remain focused on sustaining these improvements, continuing to strengthen our operating model and create a more efficient, disciplined and profitable business over the long term. Our improved third quarter results demonstrated the value of our diversified portfolio and disciplined execution across multiple end markets. Growth was driven primarily by midstream infrastructure, gas utilities, downstream industrial customers where demand remained healthy across infrastructure projects, maintenance programs, facility upgrades, water infrastructure investments and various capital projects. This broad-based multi-sector performance enabled the company to generate solid earnings flow-throughs.

Midstream operators continued to invest in gathering, processing, transmission and related infrastructure. Gas utility customers continued spending on modernization, integrity and expansion programs while downstream customers drove activity through reliability work, MRO and capital projects. Industrial demand was supported by LNG infrastructure investment and data center related opportunities. Together, these markets created multiple avenues for growth and reinforced the resilience of our diversified business model.

In our upstream sector, underlying field activity and customer engagement trends are constructive as U.S. land activity levels begin to improve. Customers are realizing efficiency gains, creating demand for flow lines, line pipe, pumps, valves, fittings, fabricated process and production equipment, controls and related infrastructure products, all core DNOW offerings. Upstream revenues benefited in the second quarter from six projects approximating 24 million that were not replaced in the third quarter.

Paired with high-grading or sidestepping revenue that doesn’t bring the value we seek. Process Solutions delivered the strongest quarterly revenue performance in its history. Consistent growth across revenue and earnings metrics highlights the strength of the business and the success of our strategic investments. Demand for produced water management, water infrastructure development, fabricated equipment, automation and controls, pumps, rentals and services remained strong throughout the quarter.

Water Solutions, primarily led by Flexflow and Trojan Rentals brands, continues to expand as water-related infrastructure projects create attractive opportunities across multiple product lines, increasing customer demand for our Process Solutions integrated suite of solutions, which deliver advanced fluid, gas and automation products and services, enabling us to offer more comprehensive offerings to the critical industries we serve. This integrated approach is becoming a meaningful competitive differentiator and is helping the company capture larger scopes and higher-value customer relationships.

Our gas utilities business had another solid quarter, driven by improving revenue trends, stronger operational performance and continued progress on the initiatives we put in place to enhance profitability and cash generation. Gas utilities demand was healthy, supported by infrastructure modernization and ongoing customer investment. Revenue grew 4% sequentially on top of an exceptionally strong prior quarter, showing solid execution of our revenue recapture initiatives, delivering the highest quarterly gas utility revenue in three years.

Growth was driven by increased seasonal construction activity and higher capital spending by several key gas utility customers. Additionally, in the quarter we saw increased momentum and interest in our intech gas meter product offering that addresses meter OEM and supply chain management challenges. Our downstream and industrial revenue improved 10% sequentially, highlighting success in our recapture initiatives and marking the highest revenue quarter of 2026. Activity levels increased as customers prepared for upcoming turnaround work, reinforcing our confidence in the progress we are making in this key sector. In addition, we also see improving momentum in LNG and other energy infrastructure opportunities, providing an additional source of growth.

Canada revenue for the third quarter was 56 million, up 19% from the second quarter. Operating conditions supported increased activity across Western Canada. We are encouraged by the continued strength we are seeing in thermal and oil sands activity and where customers are advancing multi-year development programs, creating a healthy pipeline of opportunities across valves, actuation, pipe, fittings and flanges. Separately, we are seeing opportunities develop around LNG, power infrastructure and other adjacent industrial projects, further broadening the opportunity set for our Canadian business.

International revenue was 156 million, up 5 million sequentially. Large projects forecasted for the third quarter were shifted to future quarters, muting the expected growth from this segment. While customer decision timing remains variable, the underlying demand environment is constructive, supported by continued investment across energy infrastructure and industrial markets. We are also driving efficiencies in facilities, logistics and inventory management.

Looking ahead, we believe our international business is well positioned for growth and improved profitability. While project timing and regional market conditions may create some variability quarter to quarter, we are encouraged by the multi-year opportunity pipeline and our increasing exposure to attractive growth markets and operational improvements underway. Our focus remains on disciplined execution, profitable growth and building a more diversified and resilient international business.

Turning to capital allocation, our strong cash generation is improving the balance sheet and providing greater flexibility across our capital allocation priorities. During the quarter we generated $120 million in cash flow from operations, our best third quarter since 2015. We reduced net debt by $95 million for the second quarter in a row and ended the third quarter with net debt of $265 million and a leverage ratio of 1.1 times trailing 12-month EBITDA.

And finally, we repurchased $17 million of shares in the third quarter, bringing our total share repurchases over the past three quarters to 92 million, or 24% higher than the prior 11 quarters combined. As we continue to generate cash and reduce leverage, we are enhancing our capacity to invest in the business, return capital to shareholders and pursue strategic opportunities when they meet our return criteria. With that, I’ll hand it over to Mark.

Mark Johnson (Chief Financial Officer and Senior Vice President)

Thank you, Dave, and good morning, everyone. Total revenue for the third quarter of 2026 was $1.34 billion, up 30 million or 2.3% sequentially, with growth across all geographic segments. On a sector basis, upstream represented 36% of total revenue, followed by gas utilities at 24%, midstream at 22% and downstream and industrial at 18%. Turning to the U.S., which represents 84% of third quarter revenue, revenue was $1.1 billion, up $16 million from the second quarter of 2026. Upstream represented approximately a third of total U.S. revenue in the third quarter, followed by gas utilities at 28%, midstream at 25% and downstream and industrial at 14%. In Canada, revenue for the third quarter was $56 million, up 9 million or 19% sequentially as activity recovered following the seasonal breakup period.

International revenue was $156 million in the third quarter, up $5 million or 3% sequentially, and the growth rate was muted by approximately 15 million of project delays pushed into future periods. Adjusted gross profit for the third quarter was $283 million, or 21.2%, compared to $272 million or 20.8% in the second quarter of 2026. The 40 basis point sequential improvement in adjusted gross margin reflected a more favorable geographic and sector mix along with continued traction on our margin enhancement initiatives, which helped partially offset higher logistics costs in the quarter. Selling, general and administrative, or SG&A, expense was $232 million in the third quarter, down 6 million sequentially, benefiting from continued synergy realization.

Adjusted EBITDA for the third quarter was $76 million, or 5.7% of revenue, up $16 million sequentially. Depreciation and amortization expense was $24 million in the third quarter and is expected to be approximately $25 million in the fourth quarter of 2026. Moving to operating profit by geographic segment in the third quarter, the U.S. reported a $19 million operating profit while International delivered $11 million and the Canadian segment reported $3 million of operating profit. Interest expense in the period was $7 million. The $2 million sequential decline was primarily due to a lower average debt balance during the third quarter.

Moving to income taxes, changes in geographic mix of projected earnings, including year-to-date 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 third quarter income tax benefit of $3 million on $23 million of pre-tax income, producing an effective tax rate of negative 13% for the quarter and a year-to-date tax benefit with an effective tax rate of 15%.

For modeling purposes, we currently expect the full year 2026 GAAP effective tax rate in the mid to high teens range. However, the actual rate may vary based on the level and geographic mix of fourth quarter earnings, discrete items and any additional LIFO adjustments. Net income attributable to Dnow for the third quarter was $26 million, or $0.14 per fully diluted share. On a non-GAAP basis, third quarter 2026 adjusted net income attributable to Dnow was $34 million, or $0.18 per fully diluted share.

Moving to the balance sheet, at the end of the third quarter, accounts receivable was $878 million, a decrease of 11 million from the second quarter, as days sales outstanding (DSO) improved to 60 days, an improvement of 2 days. Inventory reduced 74 million sequentially to 988 million, reflecting continued progress on our inventory optimization initiatives. Annualized inventory turns improved to 4.3 times. Accounts payable was $708 million at the end of the third quarter, or 60 days payables outstanding.

Working capital excluding cash as a percentage of annualized third quarter revenue improved to 17.6% in the third quarter. And in the third quarter of 2026, we generated $120 million of cash from operating activities, driven by inventory optimization, improved profitability and strong receivable collections. With our year-to-date cash flow from operating activities of 158 million and continued progress on working capital, we now expect full year 2026 cash flow from operations to approach $200 million.

During the quarter we invested $14 million in capital expenditures, resulting in free cash flow of 106 million. We reduced total debt by 97 million during the quarter, ending with $377 million of total debt and $265 million of net debt. As a result, our trailing twelve-month net leverage ratio declined to 1.1 times. We repurchased $17 million in shares during the third quarter and to date we have repurchased $129 million under the current share repurchase program, and a total of $209 million cumulatively across the current and previous share repurchase programs. We ended the quarter with total liquidity of $568 million, including $112 million of cash and $456 million in availability under our revolving credit facility. Our $850 million credit facility matures in November 2030, providing us with long-term financial flexibility.

In the third quarter, we continued to deliver on cost synergy realization, with our first-year expectation to approximate 32 million, significantly exceeding our original year one exit rate estimate of $17 million. Overall, the third quarter demonstrated meaningful improvement across the financial priorities we established for the combined company—improving margins, realizing synergies, reducing working capital and converting earnings into cash. Our strong cash generation allowed us to materially reduce debt while continuing to return capital to shareholders, and we remain focused on carrying that momentum into the fourth quarter. And with that, let me turn the call back to Dave.

David Cherachinski (President and Chief Executive Officer)

Thank you, Mark. Now, shifting to the future, we expect revenue to decline seasonally in the fourth quarter, driven by fewer business days, holiday timing and the normal seasonal spending patterns as some customers approach year-end budget exhaustion. Historically in the fourth quarter, legacy Dnow revenues tended to decline around 6% and legacy MRC Global revenues would drop seasonally by around 10%, driven notably by the 13% to 20% gas utility revenue declines experienced in the prior three years.

Going into the fourth quarter, we do expect our recapture initiatives in downstream and industrial to bear fruit, partially offsetting some of the seasonal decline. And for International, we expect modest growth based on project delivery timing. Taken together, we expect Dnow’s fourth quarter revenues to be down sequentially in the high single-digit percentage range, with EBITDA targeted at 4.5%. We anticipate full year 2026 cash flow from operations could now approach 200 million at the top end of our prior guide.

And now switching to some comments about the trajectory beyond year end. While I’m careful not to get ahead of our customers, as our 2027 budgets are critical in forecasting the upcoming year, our ability to stack back-to-back quarters of significantly improved performance demonstrates we are on the right track and expect to continue our forward momentum into 2027. When last talking about 2027 possibilities, our outlook was premised on revenues growing, supported by expected improving macro factors across the upstream, midstream and gas utility sectors, paired with opportunities to expand market share, continued revenue recovery, compounded with improvements in gross margins and operating efficiencies. One useful way to think about how we are beginning to contemplate 2027 scenarios ahead of our customers publishing their budgets is looking at our third quarter EBITDA of 76 million annualized, which approximates $300 million in EBITDA.

Now, keep in mind the third quarter EBITDA occurred in what is typically the best quarter of the year, but this still could serve as a theoretical starting point for our 2027 scenario planning. Now, as we contemplated in May, if we see the upstream market expand where it has been flat to down over the last four years, combined with sector expansion in gas utilities and midstream, and we continue to recover revenues as we have been, plus we are able to realize the kind of margin appreciation our team is excellent at delivering, we could be on a path towards 350 million in EBITDA.

While it is premature to lay out our forecast for our 2027 forecast as traditionally provided in February, we can see scenarios that range from 300 to $350 million in EBITDA in 2027. This provides reference points as we evaluate the resources, infrastructure, operating capacity, inventory requirements and cost structure needed to support the opportunities ahead. I remain confident in the earnings trajectory of the business and believe we are entering the year from a strong operating position.

In closing, our team delivered another strong quarter of outstanding execution, generating third quarter EBITDA of 76 million, nearly double our first quarter results, reflecting broad-based strength across the company. Sales increased sequentially in all three geographic segments, with solid growth in the downstream, industrial and midstream businesses, with the gas utilities business achieving its highest quarterly revenue in three years. Cash flow from operating activities was incredibly strong at 120 million, fueled by substantial improvements in working capital velocity.

As a result, we further strengthened our balance sheet, reduced our net debt leverage ratio to 1.1x and enhanced our financial flexibility to capitalize on future opportunities. We also remained disciplined in our approach to capital allocation, repurchasing 17 million of Dnow shares during the quarter. Year-to-date repurchases totaled 92 million through September, exceeding the combined amount returned through share repurchases over the prior 11/4 by 24%.

This demonstrates our confidence in the business and our commitment to delivering value to shareholders. Most importantly, these results reflect the foundational dedication, expertise and customer focus of our teams across the organization. Their unwavering commitment to supporting our customers, deepening supplier partnerships and executing with excellence every day continues to be a key driver of our success. With an even stronger balance sheet, improving end-market fundamentals and positive outlook across our business, we believe we are well positioned to continue gaining share, expanding profitability and creating long-term value for our customers, employees and shareholders.

I’m excited about the opportunities ahead and confident in our ability to build on this momentum as we move forward. With that, let’s open the call for questions.

OPERATOR

At this time I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. We’ll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Chris Dankert with DA Davidson. Your line is open.

Chris Dankert (Analyst)

Hey, morning guys. Thanks for taking the questions again. Great to see the sales performance in the quarter. Nice profitability. So again, it seems like the mitigation actions are kind of proceeding apace. Maybe can you just update us on where we’re at in the ERP recovery, the transition, anything kind of additional details you can provide on that program?

David Cherachinski (President and Chief Executive Officer)

Yeah. So, so far we’ve consolidated or transitioned all the upstream and midstream locations from the newly adopted MRC ERP platform to SAP. With that, we’ve seen significantly improved customer response time, improved inventory management, increased sales, and we’re excited about that transition. It’s relieved pressure on the Oracle system that the MRC, the gas utilities and downstream businesses use. We’ve invested additionally in the Oracle system to improve system functionality, speed customer responsiveness, and we’re making progress on that front.

And now we’re in the planning phase of moving more chunks of revenues and activities onto SAP in the new year. So we’re going through a planning phase process now as we continue to make modest improvements to the Oracle platform and plan for bigger movements to the SAP platform in the new year.

Chris Dankert (Analyst)

That’s really helpful and good to hear, fellows. I guess just want to circle back. You mentioned the benefit of some improved customer mix in gross margin. Is that more an outgrowth of just where we focused energy kind of coming out of the ERP disruption? Is that part of a more strategic review? Can you flesh that out a little bit?

David Cherachinski (President and Chief Executive Officer)

Yeah. So if you look back over time, one of Dnow’s key focuses has been, especially after the COVID period, we resized our business, the market had declined and we began through a process where we focus on higher margin product lines. We focus on our strengths, where the customers see value, and we try to decommoditize what our great people are focused on. And that’s the process we’re going through now. We’re going through a process of moving activities from one system to another and we’re trying to seize upon more profitable transactions and really seed some of those revenues intentionally.

The competition revenues at lower margins with higher cost to service those revenues. We like that model. We’ll take the things that we’re good at that the customers see value in, that we can make good margins on and favor our activities to those customers and product lines. So that’s a big focus. We call it sidestepping. We want to grow all of our customer relationships. But some of the product lines we focus on aren’t as lucrative to others. So we try to focus on what we’re strong in, what we have. Great pricing from suppliers, great vendor consideration, great return privileges where we have a good inventory position, where we can maximize margins. That’s where we want our people focused and that’s how we, over time, work to grow gross margins.

Chris Dankert (Analyst)

Yeah, I mean, just to pull that thread a little bit, if you’ll allow me, I guess it sounds like a kind of continuous improvement item. This is kind of structural to the company approach. But was this kind of turned up more in the third quarter just given the level of integration? So should we expect kind of another more material benefit on a year-over-year basis for the next kind of three quarters here?

David Cherachinski (President and Chief Executive Officer)

Well, I did allude a little bit to some cost input pressures on freight, which necessitates us getting really good at growing gross margins as much as we can. But to your question, this is really an iterative, cultural, kind of structural focus of ours. We’re always looking for introducing new products that give us an edge to grow market share, that enable us to push price and grow margins. That’s a structural, iterative focus of ours. But in the recent quarters, especially as we’ve seen freight costs balloon, we’ve been intentional about ramping up our focus.

We’ve acknowledged one of the systems we operate on is a little slower. So we want to focus on the activities that drive the best margins and not have that slower system, which we’re improving, be bogged down by lower-margin, kind of commodity-focused products.

Chris Dankert (Analyst)

That’s really great color. And again, I would just say thank you very much for, again, not providing guidance in the out year, but your kind of general commentary around how to think about things. Much appreciated. So thanks so much, guys, and best of luck closing out the year here.

David Cherachinski (President and Chief Executive Officer)

Okay, thank you, Chris. Appreciate it.

OPERATOR

Your next question comes from the line of Adam Farley with Stifel. Your line is open.

Adam Farley (Analyst)

Dave. Mark, Brad, good morning.

Mark Johnson (Chief Financial Officer and Senior Vice President)

Morning Adam.

Adam Farley (Analyst)

Maybe putting a finer point on the trajectory into 2027, or 2027 framework, however you want to position it. I appreciate the commentary on analyzing third quarter EBITDA, but look, I mean you guys have a lot of momentum here. You’re hydrating the business, improving margins as businesses today. It looks like the end markets are also trending in the right direction. So maybe just a finer point on that potential EBITDA range for 2027 and maybe confidence on where you’ll land within that range?

David Cherachinski (President and Chief Executive Officer)

Yeah, fair question. So we’ve talked about 2027 for a few quarters now. We set in motion to draw a bridge to a much better future than when we started the year. So we said we’re going to focus on improving the functionality of the system, which reduced the revenues we experience in the business. We’re going to focus on higher margin activities. We’re going to be intentional about matching our expense level to the revenue levels. And we’re doing all those things.

We’re focused on getting to a level of earnings that enables significant improvements going into the new year. Now, in those prior couple of quarters where I talked about 27, I tried to present it as a glimpse into the new year and what we’re targeting our efforts towards going into 2027. But in this period now, we’re in a period where our customers haven’t yet given their budgets. So we don’t have a good definition for what’s going to happen in upstream or gas utilities or midstream, all three of which we think will be macro growth sectors for us. We don’t have that intel.

Our sense has been during the year, those will be three sectors that will grow. And for upstream in particular, which has been flat to down for the last four years or so, we see that as some real fuel going into the new year, if our customers say we’re going to increase their budgets like we expect they might. But they haven’t produced their budgets. So what I’m saying is I wanted to give an update on 2027. I want to put it in a framework recognizing our customers haven’t spoken. We don’t want to get ahead of our customers, but we are resourcing the business right now. So right now, even though we’ve made substantial reductions in inventory, we are adding inventory at some of our locations. And we want to be smart about where we’re growing. We want to add inventory, salespeople, operations, talent, et cetera.

We want to resource the business. And that’s kind of how we’re thinking of framing up next year. So we expect that we can quadruple our third quarter performance. And we’re organizing along those lines. As we learn more from our customers, we’ll continue to refine how we position ourselves for growth and improve profitability next year. But we don’t have knowledge about what the market’s going to do next year. So that’s kind of how we’re framing it up.

Adam Farley (Analyst)

Okay, thanks for the color, Dave. That’s helpful. Maybe looking at MRC and the optimization journey. Could you just provide an update on where we stand today on the temporary costs in the business and then also on the cost synergy side? It’s good to see the realization step up a bit here in the third quarter. You know, I think I probably ask this every quarter, but do you think that total cost synergy target could potentially move up over time as well?

Mark Johnson (Chief Financial Officer and Senior Vice President)

Well, we did say that our cost synergies, exiting 2026, would grow modestly. Our original estimates would be we’d see first-year cost synergies of around 17 million. We believe that number will be closer to 32 million as we exit 2026. In terms of the costs associated with improving the functionality of the system with MRC and the additional costs we put out in the organization to kind of cope with the system enhancements we’re making, we said that number was around 8.5 million in the second quarter.

We expected it to come down a little bit by a million in the third quarter. We saw that. And if you look at our SG&A line, SG&A was down about 6 million sequentially. A portion of that, of course, is we’re getting more efficient. We have less overtime, less additional people because we’re making systems faster. We don’t need the extra help in the field, and we’re positioning for lower cost from the consultants who are helping us improve the functionality of the system.

So we’re on track from an overall total company synergies perspective, in fact, ahead of schedule, and in terms of the discrete cost for Oracle and its associated costs surrounding that system, we made improvements as we expected.

Adam Farley (Analyst)

Okay, thank you for taking my questions.

David Cherachinski (President and Chief Executive Officer)

Thank you.

OPERATOR

Your next question comes from the line of Alex Riegel with Texas Capital. Your line is open.

Alex Riegel (Analyst)

Thank you. Nice quarter, gentlemen. David, when do you think we’re going to sort of close the book on speaking to recapturing lost revenue in ERP transitions and kind of excess costs in the system?

David Cherachinski (President and Chief Executive Officer)

Well, you know, I characterized this in February as a transition year. And, you know, we went into explicit detail of where we lost revenues when we implemented the new system, or when MRC, before we closed the merger, implemented the new system. And I simply want to give an update through the rest of this year, probably through February, as to where we stand. And if you look at the four key sectors where we’re focused, if you look at midstream, anything that was lost in midstream, I’m confident we fully retrieved anything lost in the midstream space.

Our midstream business grew yet again in the third quarter by about $20 million. We pierced the billion-dollar annualized revenue run rate last quarter and we grew again by 20 million. Dnow and the various businesses within Dnow that pursue growth in the midstream business is in a very good position. In gas utilities, you know, I believe, you know, we’re either at or on the verge of retrieving all lost revenues there. But since the beginning of the year the two key areas we were focused on were upstream, downstream, and downstream had its best revenue quarter in the third quarter. So we’re making progress on that front. And in the upstream space, where we’re doing most of our sidestepping, making sure we pursue contracts, projects, and orders that drive the kind of flow-throughs and EBITDA levels we expect before being selective in that front.

So I’ll probably talk through the February call and then it’s going to be a normalized business focused on business as usual going forward.

Alex Riegel (Analyst)

That’s excellent. And then as it relates to cash flow, obviously very notable year to date. Taking into consideration your directional views on EBITDA for 2027, can you maybe offer us some directional views on cash flow in 2027 and/or year-end 2027 debt position or leverage rate goals?

Mark Johnson (Chief Financial Officer and Senior Vice President)

Yeah, so if we see the kind of growth we had talked about in the last couple of quarters going into 2027, you know, revenue growth in the 6 to 7% range, if we saw that kind of growth, we’d probably see lower cash flows going into 2027. I mentioned earlier that we’re, you know, we’re kind, we’re right now in an inventory pre-positioning phase where we’re planning how much more inventory do we need to seize growth in the first and second quarters next year.

So you know we would, if we see the kind of growth we’ve been contemplating, we would add receivables and inventory and see less free cash flow going into the new year. In terms of our net debt position which dropped to a 1.1 times trailing four quarter EBITDA by the end of next year it’s going to be dependent on the, you know, what kind of levels of share repurchase you know, are we going to be at. Are there any M&A opportunities that meet our return criteria and what kind of cash flow we generate in the business. But you know, we’re in a good position now to be below a 1x net debt as it relates to 4/4 of EBITDA.

So by next year of course, except for additional M&A, we’d be in a very good position to get close to net cash. But again, it’s going to be dependent on the rate of growth we see at the top line, share buyback cadence and any M&A that might become available. You’re welcome. Thanks for your questions.

OPERATOR

Your next question comes from the line of Jeff Robertson with Water Tower Research. Your line is open.

Jeff Robertson (Analyst)

Thank you. Good morning, Dave. A lot of upstream operators talk about increasing the service intensity of their drilling and completion activity. I’m wondering if that has an impact on the margin profile of the upstream revenue stack for Dnow.

David Cherachinski (President and Chief Executive Officer)

Well, if we see upstream operators significantly increase their budgets, I think that has the potential to pull gross margins favorably for Dnow. Now I talked earlier on the call about freight costs and our ability to push those freight costs onto customers. And I think you’re probably hearing from a lot of companies out there where at least for the short term that’s been a struggle. We experienced that in the third quarter. But you know, to the extent activity increases and a company like Dnow, major stocking distributor in the upstream space, you know, that should bode well for revenue growth and gross margin growth going into 2027.

Jeff Robertson (Analyst)

With your comment on annualizing third quarter 26, EBITDA as a baseline starting point for 2027, then is that basically predicated on activity staying pretty constant with where it has been in the second half of 2026?

David Cherachinski (President and Chief Executive Officer)

Probably. Probably. So

Jeff Robertson (Analyst)

Then, if I can. Lastly, you’ve talked earlier this year about downstream and some of the issues with the MRC system. As you approach the 2027 turnarounds, are you seeing improvements there on the downstream opportunity that you have?

Brad Wise (Vice President of Marketing & Investor Relations)

Yeah. Jeff, good morning. This Brad, I’ll chime in on that one. Yeah, we’re if you recall some of Dave’s prior remarks talking about the revenue recovery opportunity, we always felt downstream be the longest just because there’s a lot of customers, kind of a long tail. But we are actively pursuing turnaround activity both in the refining sector as well as chemical sector. You know, our visibility into the turnaround season into 27 continues to improve and that’s, that’s supported by several large refinery customers and chemical turnarounds that we are preparing for.

Already starting to receive some pre-buys and so we’re seeing kind of a backlog start to improve there and really just kind of the core customer booking activity overall is improving, you know, within that sector. And in addition we continue to see some strength in data centers this year as well as LNG into the fourth quarter. So, you know, overall the downstream and industrial sector in the U.S. is positive, kind of trending positive for us at the moment.

Jeff Robertson (Analyst)

Thank you.

Brad Wise (Vice President of Marketing & Investor Relations)

Thank you, Jeff.

OPERATOR

Your final question comes from the line of Josh Jain with Daniel Energy Partners. Your line is open.

Josh Jain (Analyst)

Good morning. Thanks for taking my questions. First one is just on U.S. Upstream. I wanted to ask it a little bit differently. So we’re in a bit of a different environment as you sit here today. Exiting last year we were sort of low to mid-60s from an oil perspective. Today we’re in the 80s, low 90s. I’m just curious, how are your customer conversations different moving into next year today than they were maybe a year ago on the U.S. upstream side?

And in answering that, maybe you could just break out a little bit how the smaller privates have driven activity up over the course this year thinking about things versus the public’s.

David Cherachinski (President and Chief Executive Officer)

Yeah. In terms of what our customers are telling us or really their behavior suggests that when oil prices go to $90 or $100, $104 or drop to $83, they tended to stick to their budgets and be pretty disciplined around what they commit to in the early parts of the year. We’ve seen real stability in customer budget discipline over the last several years, really the whole post-Covid era. In terms of the privates or the smaller companies, where we’re seeing more rigs added, more completions work being done, you know, we see that as a revenue opportunity for us and we’re going after those.

You know, we’ve tended to focus both U.S. and MRC Global respectively. We tended to focus on the bigger customers, the super majors. But you know, we’re both, we’re as an organization very focused on growing our position with the companies that are, that are growing and that are less susceptible to, you know, sticking to a budget like we’ve seen with the big companies. So that becomes a target opportunity for us and we’re trying to grow our business with those customers.

But we’ve seen budget discipline with our customers and we’ve benefited from that over the years. Our ability to have limited stock-outs, write-offs on inventory, big swings in or, you know, more volatile behaviors and purchase levels by our customers, which we saw on a pre-Covid basis. That’s not been the case. So we’ve seen a lot of discipline. Our customers tend not to panic when they see oil prices drop into the hiatus like they’re at right now.

They’re steady as she goes and we like that cadence and we benefited from that

Josh Jain (Analyst)

Thanks for that. And then as a follow up, I think it was in the prepared remarks you mentioned the tightness in the trucking and freight market sort of driving prices up. Can you give a bit more insight into what you’re seeing and also what you’re doing to mitigate them and how long it will ultimately take them for them to take place and see improvement in results? And is that one of the sort of tailwinds that you’re thinking about into next year?

Mark Johnson (Chief Financial Officer and Senior Vice President)

Yeah, this is Mark. Yeah. So related to the logistics headwinds that we’re facing, really the cost drivers there are twofold. One is you’re seeing increased input costs for the transportation providers. So diesel up in the high range and that volatility is getting passed on to us as a distributor. And so to the extent we’re able to pass that on to our customers, we do. Sometimes there’s some delay until you can reach some neutrality there to get that recovered.

And so we’re definitely seeing input costs on fuel and energy going up. And then you’re also seeing the capacity constraints where drivers are really getting siphoned off the roads, you know, literally less drivers around and other kind of mega infrastructure projects underway that are diverting some of the drivers. So these freight carriers that we utilize are kind of getting pinched and that volatility is a headwind and I think you’ll hear that across the markets.

So we’ve been successful at mitigating that with other actions, but depending on the spike and the duration of it, there’s certainly some timing until you get back to neutrality there.

Josh Jain (Analyst)

Understood. And then since I think we’re close to the end of the queue, maybe just one more, if you wouldn’t mind, internationally, the same drivers as we talked about, different commodity price environment, there’s a lot of volatility internationally, but also it seems like a lot of opportunity. How are you thinking about different regions of growth for 2027 and beyond? And just how do you see the markets? And then I’ll turn it back. Thanks.

David Cherachinski (President and Chief Executive Officer)

Well, one dynamic that’s different in international business, I think nearly half the revenues are downstream. So we see some positivity in that. And that’s probably going to be primarily the North Sea. And then Norway’s probably our biggest area, an area where we look for long term projects and we see, we’re optimistic about that going into the future. But we see international being a strong growth segment for us, it’s more downstream dependent.

It’s an area of the world where we sell a lot of valves and MRC Global has been very strong in that space. So we see opportunities there and we see the current macro backdrop being supportive, especially on the downstream front.

Josh Jain (Analyst)

Thanks. I’ll turn it back.

David Cherachinski (President and Chief Executive Officer)

Thanks for your question.

OPERATOR

Your next question comes to the line of Chuck Minervino with Susquehanna. Your line is open.

David Cherachinski (President and Chief Executive Officer)

Morning, Chuck. Chuck, do we have you?

Chuck Minervino (Analyst)

And here I am. Can you hear me okay?

David Cherachinski (President and Chief Executive Officer)

Yeah, we can hear you, Chuck. Thank you. Thanks. Sorry. Just

Chuck Minervino (Analyst)

Just to follow up again on the international, I think you mentioned in the prepared remarks there was about 15 million of project delays flipped from 3Q. I don’t know if it’s all coming in 4Q or if it’s kind of spread over 2027. But we’re just wondering if you could touch on that a little and then I just have another follow up as well.

David Cherachinski (President and Chief Executive Officer)

Okay. No, we won’t see all those projects happen in the fourth quarter. We do expect growth internationally a little higher than normal because some of those 3Q projects will happen in the fourth quarter. We talked about one wind power project that we expected to ship in 3Q. That won’t happen now until sometime in 2027. So some of it, up to half, might happen in the fourth quarter and the rest in a 1Q kind of timeframe. And then you had another question.

Chuck Minervino (Analyst)

Yeah, the capex in the third quarter was 14 million. That’s up decently from kind of the earlier two quarters. I think it was ERP related and things like that. Was just wondering if that’s kind of a new norm or if that was an abnormal increase and it’s going to kind of revert back down to earlier levels. Touch on that a little bit.

Mark Johnson (Chief Financial Officer and Senior Vice President)

Yeah. So this is Mark. Yeah, I think, you know, the third quarter level likely will continue into the fourth quarter. So some of it is the IT investments, but it’s also some rental asset investments that, you know, as we prepare for growth and other items that came into the third quarter within our process solutions group. So as we look into 2027, you know, be able to give a little better guide there, but expect 24Q to look similar to 3Q.

Chuck Minervino (Analyst)

Got it. Thank you. Thank you, John.

OPERATOR

Thank you for your questions. 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.

Brad Wise (Vice President of Marketing & Investor Relations)

Well, thank you everyone for joining us today and your interest in Dnow. We look forward to discussing our fourth quarter and full year 2026 results on our next earnings conference call in February of 2027. Hope everyone has a wonderful day. And I’ll turn the call back to the operator. Thank you.

OPERATOR

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

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