DNOW’s $300 Million Floor
A cleaner quarter, a smaller debt load, and a 2027 EBITDA framework that quietly starts below the old stretch case
DNOW · Earnings Call · 2026-11-05
A quarter that finally looks ordinary
DNOW’s third quarter is the first in a while that reads like a normal industrial distributor rather than a merger-integration project. Revenue came in at $1.34 billion, up 2.3% sequentially, with adjusted gross margin of 21.2% and adjusted EBITDA of $76 million, or 5.7% of sales. More importantly, the company converted earnings into cash: $120 million from operations in the quarter and $158 million year to date, prompting management to lift the full-year cash target. “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.” — David Cherechinsky, President and Chief Executive Officer · 2026-11-05 The balance-sheet repair is real. Net debt fell by $95 million to $265 million, and the trailing net leverage ratio dropped to 1.1 times. That matters because the MRC Global combination had turned DNOW into a leveraged story almost overnight. Effective net cash was negative $360 million at the June quarter. The June quarter also showed the scale of the combined company, with total revenue of $1.3 billion, up 108% year over year. The fourth-quarter guide—revenue down in the high-single-digit percentage range with EBITDA at 4.5%—is seasonal, not a demand warning, but it is a reminder that the third quarter is typically the best quarter of the year.High grading is now the operating system
The freshest company-specific language is not about recapturing lost revenue at any cost. It is about deliberately giving some of it away. Management’s top new themes include high grading and recapture initiatives, and the CEO framed the margin work as structural rather than a one-quarter fix. “This is really an iterative, cultural, kind of structural focus of ours. We are always looking for introducing new products that give us an edge to grow market share, that enable us to push price and grow margins.” — David Cherechinsky, President and Chief Executive Officer · 2026-11-05 That is a meaningful shift from the way the story was told earlier in the year, when the priority was volume first and margin second. “But we're focused on volume and then gross margins and then efficiencies to drive significantly improved cash flows and earnings.” — David Cherechinsky, President and Chief Executive Officer · 2026-08-06 The cost side makes the high-grading push more than rhetoric. DNOW is absorbing higher inbound freight, outbound trucking and fuel costs, and those pressures show up in the company’s logistic costs discussion. This is not a DNOW-only issue—the global tape has been full of high fuel costs and freight complaints across distributors and industrials—but DNOW’s response is company-specific: walk away from lower-margin product lines, use vendor consideration and inventory position to protect price, and let the slower Oracle system carry less commodity-oriented volume. The risk is that high grading becomes a convenient label for slower growth. The evidence so far says margin, not volume, is winning: adjusted gross margin rose 40 basis points sequentially even as logistics costs rose.Working capital: the quiet reversal
The most interesting tension in the call is working capital. In August, management was still promising more inventory reduction. “We're going to bring that down by another $25 million, $50 million during the rest of the year.” — David Cherechinsky, President and Chief Executive Officer · 2026-08-06 In the third quarter, DNOW did exactly that—inventory fell $74 million to $988 million and annualized turns improved to 4.3 times. Cash from operations hit $120 million, and Mark Johnson said the company now expects full-year cash from operations to approach $200 million. “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.” — Mark Johnson, Senior Vice President · 2026-11-05 But the fourth quarter and 2027 are a different posture. Management is now pre-positioning inventory for expected growth, which means the cash-flow tailwind that supported the third quarter may not repeat. “I mentioned earlier that we are right now in an inventory pre-positioning phase where we are planning how much more inventory do we need to seize growth in the first and second quarters next year.” — David Cherechinsky, President and Chief Executive Officer · 2026-11-05 That is the right call if end markets inflect, but it is a reversal from the “excess inventory as a commercial lever” language of prior quarters. The company’s cash flow from operations strength and leverage ratio improvement bought flexibility; now investors need to see whether that flexibility is spent on growth rather than simply absorbed by a larger working-capital base.The 2027 framework: lower floor, same ceiling
The headline number is a range, not a guide: $300 million to $350 million of EBITDA in 2027. The framing matters more than the range. In August, management sounded more confident in the high end. “We gained confidence over the last 90 days in our ability for that glimpse into 2027... So we see that $350 million as plausible.” — David Cherechinsky, President and Chief Executive Officer · 2026-08-06 On this call, the high end is still there, but the base case has been formalized lower, anchored to annualizing third-quarter EBITDA.That is a soft reset: same ceiling, new floor. It also acknowledges that customers have not yet issued 2027 budgets and that upstream, midstream and gas utilities all need to cooperate. The ERP story is no longer the central risk, but it is not fully closed either. In February, management was still saying it was not sure when the Oracle issues would resolve. “We are not really sure when the resolution happens, but here is what we are doing to mitigate it in the short term.” — David Cherechinsky, President and Chief Executive Officer · 2026-02-20 By the third quarter, upstream and midstream locations had been moved to SAP, Oracle functionality had improved, and management was planning more migrations in 2027. The CEO said he would “probably talk through the February call” and then treat the business as normalized. That is credible progress, and it explains why turnaround season visibility is improving into 2027 even as the keyword itself faded from the top of the company’s list this quarter. What has gone quiet is also revealing. data centers was a top-ranked DNOW theme in prior quarters; it is still mentioned, but no longer a headline. The merger keyword has naturally faded now that the deal is closed. The market has not fully endorsed the normalization story: DNOW shares are up about 7% over the last 90 days but remain roughly 18.5% below the August peak. The next test is whether the fourth quarter’s cash conversion holds and whether 2027 budgets validate the inventory build. If they do, the $300 million floor is conservative. If they do not, high grading will look less like a strategy and more like a hedge.While it is premature to lay out our forecast for our 2027 forecast, as we traditionally provided in February, we can see scenarios that range from $300 million to $350 million in EBITDA in 2027.