$DNOW: the boring distributor that could double on 2029 numbers | Firebird Management

0:28This episode is brought to you by Google Chrome. with your host, me, Andrew Walker. Today, I've got Steve Gorlick on from Firebird. This is his third time on the podcast. And we're talking about, you know, it's funny. When he told me, we're talking about DNow. DNow is a distributor mainly focused on oil and gas. And now they're upstream, they're midstream, they're downstream, they're all over the oil and gas. And when he was about to come on, I was telling him, you know, it's funny, distributors, they are, I don't know how long this podcast is gonna be because distributors are such a boring business.

0:53You know, you say you've got a distributor and there's not a ton to talk about. But while they're boring, you know, talk to a private equity firm about a distribution group. And they're anything but boring to the private equity firm because these businesses are low cap X, very sticky, very difficult to replicate, and they've got huge roll up opportunities. So, you know, you think about a fast now or you think about a Westco like these are businesses that both in private and public markets have returned fortunes because if you can just buy them and hold them like they tend to do really well. And Steve's got a really interesting view on D.

1:25Now. This was a spinoff 10 years ago and why, you know, The spinoff hasn't gone. I don't want to say poorly, but it hasn't gone great. And he thinks the environment is setting up like trial, trial multiples, trial value, trial everything. And they point this out in their proxy trial and they just did a merger. The integration's behind them and the free cash flow said to explode. And I think he lays it out well. And he lays out why he thinks over the next few years, the stock could really, really work from here. So we're going to get to Steve in one second. And I will include a link, I believe, to both his sub stack and a present to his denom presentation in the show notes.

1:55So you can go look at those in the show notes, but we'll get there in one second. First word from our sponsors. Today's podcast is sponsored by Fiscal.ai. Fiscal.ai is the modern financial data provider for global equities. Look, that's what they have me tell you. But let me tell you how I've been using Fiscal.ai. And I'll remind you, I'm a customer. I paid with my own money to connect to the Fiscal.ai API. There's two things that I've really found it useful for. Number one, this is something super unique. They've got a huge database of fund letters. and the fun letters are created, are connected by the API.

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3:21I'm a big fan of the podcast. If you want to try it out, you can use my link at fiscal.ai slash YAB to get 15 % off their AI connector. That's fiscal.ai slash YAB, and there'll be a link in the show notes. All right. Hello, and welcome to the Yet Another Value podcast. I'm your host, Andrew Walker. With me today, I'm happy to have on for the third time, Steve Gorlick from Firebird Management. How's it going, Steve? It's going pretty well. Thanks for having me back. I'm super excited for this. I think, well, I was going to say maybe not. I really like the last one we did on Molina. This might not be quite as juicy, but it's still a very interesting name that I've got a lot of notes on over the years.

3:55We'll get there in one second. But first, disclaimer, remind everyone, nothing on this podcast, investing advice, always true. Please check out the disclaimer in the show notes or at the end of the show. Steve, the company we want to talk about today was D-NOW. The ticker is D-NOW, D-N-O-W. And I'll just toss it over to you. What is D-NOW and why are they so interesting? So Zia now is an oil and gas distributor. It was spun off a few years ago from this company, National Oil Well Barcode, NLV. So it used to be kind of their in-house distributor, but then because NLV was a producer of certain equipment for the oil and gas industry.

4:32And then they spun off this company, which is quite a different business. It's an oil and gas distribution business and historically they have been primarily in what's called upstream and midstream. So you're thinking about extracting oil and then pipelines and things like that. After the company was spun out and became a separate public company, they have been growing primarily through acquisitions. So the way like the typical distribution business, quite often you see a lot of fragmentation in the industry, a lot of mom-and-pop shops with particular relationships with particular clients. And then it makes sense to take those smaller companies and for a larger player with the cheaper cost of funding, it makes sense to take that company in, consolidate maybe all of the orders into a few number of centers, which makes them more efficient.

5:30And as a result of that, you get a fairly good, efficient growth and returns on capital. And this is a playbook that we've seen happening and for high quality distributors being done in many different industries. And I think oil and gas is no different. I mean, this is private equity roll up 101, right? Distributors, lots of leverage, roll them up and IPO into the public markets that love these. So the leverage point is quite interesting because up until recently, and we're going to get to that transaction, I'm sure the company actually did not have a lot of leverage. So they were financing the transactions that they were doing were being done at a relatively low multiple, especially once you take into account the synergies that they have produced from the combined companies.

6:14And the company actually did not have a lot of leverage up until recently, and it still doesn't. But now they do have some debt that they have acquired in this latest acquisition, which is kind of a big part of what's going on right now and what makes the company attractive and the potential here. That's for brief. You know, I want to get to the acquisition. I want to get to the present day. I know you I mean, one of the reasons you came on is because you pitched these at a conference and people I think people came to you like, Steve, this is a really good pitch. Go on the podcast and talk about the pitch.

6:45But I do just want to back up a little. I remember this company. This was spun off in like late 2014. And that's kind of when I was like starting as a public markets focused professional investor. Let's say I remember this company getting pitched back then. Right. Because what is everyone like? Spinoffs? A spinoff that was like captive to one customer, distribution, big role, like everybody loved this. And if I just go, you know, there's been ups and down, but the stock spins off at 35. Within a year, it's trading at 13. And as you and I are talking today, it's trading at 16, 15 to 70, right? So the stock is down from the spin and flat over like a 10-year base.

7:27So I just want to ask, like, What happened with, it hasn't, again, I know people who this spun off and they're like, 10 % position, love this, this is going to the moon. Why hasn't this worked over the past 10 years? So I think that's where kind of the macro part of the story comes in. I thought that also makes it quite interesting because 2014 happens to be probably the last peak of oil and gas investment globally. If we look at the United States and the number of rigs operating in the United, so let's step back for a second. What do they do for upstream and midstream? They sell essential parts, a lot of these are consumables, for companies that are trying to get oil out of the ground.

8:04In the United States, one of the ways that you measure the intensity of how many people are looking for oil, a lot of it is in the shale spaces that we have in the country, we had back in 2014, there was 1 ,800 rigs in operation looking for oil and gas, trying to extract oil and gas. Today that number is below 600. it. And that is the explanation for why... So essentially, this company has been operating, and we didn't own it in 2014, and arguably it was a good company, and we can discuss what happened after that and how much they have done. Essentially, how hard did they have to work to stay in place from the point of view of the earnings that they have generated in an environment in which the addressable market has shrunk dramatically.

8:53And this is not the type of company, if I would believe that this is the market that will continue to shrink from here, this would not be interesting to me. But I think there is something that's happening here. And I don't know if you feel comfortable switching to that right now. We can get on that later. But what is happening today in the oil and gas markets, we have the potential to at least stabilize, if not to grow the investment into oil and gas from here. I think the major reason for that is what is happening in the Strait of Hormuz and in Iran. If you look at the historical periods of disruption, and we have to go back to the 70s where it was kind of similar because you had when the Iranian Revolution and then you had the Arab oil embargo.

9:39In both cases, what was impacted at the time was about 7 % of oil and gas production in the world, in both of these cases. And as a result of that disruption and the impact that it had in a global economy, what the world has realized is that they cannot, we, they, whoever, cannot rely on supply coming from a particular area when we have the supply and demand so tightly balanced. What we're talking about, like today, the daily consumption of oil is something like 102 million barrels per day. And the production is like 103 and 104. And the world is looking at it and saying, oh, there's excess oil.

10:24But we also are operating at 99 % capacity utilization. And when we have a disruption like we have today, where we have 20%, so last time, when we're talking about the 70s, 7 % got disrupted. And that resulted in a massive investment in the oil and gas exploration in other places not to be too dependent on the Middle East. And as a result of that investment, which benefited a lot of companies around the world participating in the oil and gas investment, including the distributors who were there at the time. As a result of that, there was massive finds of oils, including the Gulf of Mexico, a lot of the field in Mexico and Cantarelle, the North Sea oil.

11:05So all of those things weren't really on the map as far as where the oil was coming from before 1970s. And then because the world realized that it cannot depend on one region, or at least not as much as that they used to, that exploration happened and investment happened. So today we have 20 % of the supply got disrupted, not seven, but 20. And I would argue that we saw the impact of that. You saw the airlines in Asia not really knowing where they're going to get the jet fuel on whether they can operate two or three months down the road. They seem to have worked out more or less, but there were different reasons for why despite the fact that 20 % of the supply gets disrupted, it looks like a lot of the inventors, especially from places like China, have been drawn down.

11:56But that is not sustainable and you start seeing because there's quite long lead times from the time that you decide that you need to look for oil until you actually start investing into it. So you're starting to see changes as far as we're starting to see increase in investment as well. Because the current level of investment, if we go back to 2014, on a nominal dollar, in real dollar terms, is 40 % below globally what was there in 2014. And it was just enough to kind of keep the oil at the level where the supply and match demand. If you want to have a bit more spare capacity in order to make sure that your economy doesn't go off the rails, you're going to start looking for oil in other places.

12:44And then we're starting to see that as well. So like in US, we're talking about the rate counts. Right now, I think we're around something 590. We start six months ago, we were at 530. So we're already seeing about a 10 % increase in number of rigs in the United States, which is actually helping companies like Dinao. You don't see that. So they just reported Q2, which they already showed like a 10 % growth in quarter over quarter in the US for various reasons. But I think it's just the beginning of what we could be seeing from this company. Let me hop in here. And I want to mention two things before I happen.

13:16Number one, you and I had this podcast planned a month, a month and a half ago. They reported earnings last week and the stock is up like 10 to 15%. and we'll talk price targets, everything. So there is a jump, but I don't think, I've had people come on and bit the stocks up 20 % and they want to take a victory lap. I don't think you're taking a victory lap. I think, as you said, you think this is just getting started. But the reason I mentioned last week's earnings is I read it to prep for this, and you could hear the CEO comes on and he's like, business is firing on all cylinders. There's all this interest, all this sort of stuff.

13:45But let me try to gently push back on this. I definitely hear it, right? But at the same time, even before this, I mean, you had 2022 with Russia, Ukraine. Like, I don't think people thought there was like tremendous amounts of like, I think we were drill baby drill for a lot of part in the D now things. And if you were like, hey, the world is going to increase investment in spare capacity, everything. I might say yes, I might say no. But is that really going to come from the US? Like, is there so much slack in the US? Is there so much? Because a lot, I mean, I know a lot of the energy bulls before you, before Ukraine and before the straight of Firmous, they were pointing to U.S.

14:23shale and saying, hey, shale's kind of rolling over. All these wells are tapped out. We're actually going to start declining. So even if you are right on, hey, there's going to be this big investment in like energy is all about signals, right? Oil at 80 is sending a signal, drill, baby, drill. Oil at 60 or 65 is sending a signal, hey, you know, maybe run these for cash flow. Oil is at 80 right now. But even if it's drill, baby, drill, isn't that going to be happening outside the U.S.? Are you betting on this macro trend that is going to go somewhere else, I guess? No, there is. So it's a great question.

14:51I think it's going to be a combination of both because I think people are going to be looking for oil anywhere that you can find. What's also interesting is that you did mention the oil prices of 60, 80, and we saw 100. I think we're at around 90 today. What's interesting, if you look at the price of Brent out to 2030, so the futures, they actually haven't moved that much between, I think, in January, we were at 65, and now we're at something like 68. I haven't looked at these numbers in a couple of days, But when I looked at it, it was surprising to me how complacent the world seems to be from a point of view of that the oil is going to be there by 2030.

15:27But from a short term, but where does actually, why does, we might see investment in places like the shale? Because these are the projects that have smaller upfront investment and faster payback period. And it could be, but there are certain projects that may have been, may be economical at 80, but not economical at 60. And I think that's the type of things that's part of the reason for why you're seeing an increase in rigs in US right now is because these are the type of projects that are being tapped. And also from a point of view of US oil and gas rolling over, I think part of the argument there is that we've been growing.

16:06So what was interesting is that in US, you had the oil and gas production kept growing despite the number of rigs coming down over the years. So each rig was becoming more and more efficient because it was trying to get more and more oil. Essentially, it was becoming better extracting oil and gas from the same place. It seems like that may be starting to tap out to some extent. So then in order to keep the production at the same level, I think you might need to actually have more rigs. as well. So that's kind of like part of the argument there as well. But it's a, from, to me, I think we're getting so much into macro, but this is partially just a company specific story as well.

16:49So if we're going to get the macro angle here, then I think this could work very well. But even without it, I think this is a company that has shown, and if you look at their results kind of like within the last five years or so, in the environment in which the oil and gas investment has been declining, they still managed to do pretty well. And they still managed to increase their profit margins. They still managed to increase their profitability as well. No, I completely hear you on the macro versus micro. It's just you talked a lot about the macro when you were, and I'm just trying to follow where the conversation goes.

17:26Let's turn a little bit more to the micro. So I think you laid out a big piece of it, the oil and gas, but you know, they did MRC, they did an MRC global acquisition. So I'll open the door here for you to talk about MRC global, but I will just note, it's funny. I had Claude go through all my notes as I was preparing for this podcast. And it said, Hey, you don't have crazy amounts of notes on DNL, but you have a lot of notes on MRC global from a couple of years ago. And one of the notes says MRC global and DNL would be a perfect fit. And MRC global on top of the oil and gas thing, they had, as you alluded to, a lot of midstream exposure.

17:57And that midstream exposure is really interesting because they say on the call, hey, it got us a lot of water exposure and water maintenance and water projects. And it got us some data center exposure from the midstream, especially with the gas going to data center. And, you know, you say water and data center, I think people's ears perk up. So I'd love to just ask you about the MRC D-NOW merger overall. And I think that can get us to the IT integration, into the synergies, all that sort of stuff. and also some of the businesses that came with MRC Global that I think have like really are kind of really where the puck is going.

18:28So we can talk about those if that makes sense. Sure. Yeah. So in terms of the combination of the two companies, I think you're absolutely right. Like if you look at it just purely on paper, the combination of the two companies makes sense. So D now historically has been actually so it was an upstream and midstream. So it is the getting the oil out of the ground and the pipes and the dot. And then MRC was mostly in downstream and utilities. So downstream is petrochemical companies, refineries, et cetera, and utilities are utilities. So you're talking about a supplier that all of a sudden would be able to cover the whole oil and gas supply chain from getting oil out of the ground to getting the product or electricity into your home or into your business, et cetera.

19:19within that some things actually some of the parts are similar some of the customers are similar other customers are different so if you look at like if you think about what does an oil well need versus what does a refinery need it is not the same thing some parts you know some of it is pipes some of it is something very specific and so from that point of view the combination makes sense in terms of okay you can serve some things more efficiently. And also within MRC, they did have parts of the business that were serving upstream and midstream as well. So I think the way the company has been thinking about it is that what they would do is they would combine that part of the company of MRC with D-NOW.

20:05And then also have the downstream and the utility business that is kind of an added business that that expands the size of the company and arguably makes the company more, would make the company more efficient, allow you to spread the G &A costs better, et cetera. Because they were talking about, from the point of view of the combined company, they were never, as far as I remember, I don't think they were talking about cross-selling opportunities or things like that, but they were talking about synergies from a point of view of efficiencies and talking about how the combined company could generate about 75 million.

20:40So if you look at 2024, that last year that the two companies were separate, I think DINAR had, let me just pull up my numbers, but DINAR had about 150 million of EBITDA, DINAR and MRC had 175 million of EBITDA. And then they said that between the two, they would have about 75 million EBITDA of Synergy. So they're actually a meaningful number. It's about increasing the combined company down by about 20%. And that was the logic behind the merger. So it does make sense to have the companies together, at least strategically. But what happened in between is that while they were buying, while Dina was after Dina has agreed to buy MRC, they also inherited not just this relatively synergistic business, they also inherited a ERP system implementation, which is to put it apart, it wasn't going too well.

21:38I mean, as soon as you say ERP implementation, right? And I'm reading and somebody asked a question about ERP or SAP, I can't remember. I mean, every investor you see that and you're like, oh my God, just put a gun in my mouth, right? You got to run. I mean, one day I'll learn my lesson, right? But whenever you see the ERP implementation quite often, And you will see that there are like it's delayed. You're talking about and especially for why is it why is it so meaningful for a distributor? Well, distributor has low margins to start with. Right. So if you and it's a it's a it's a working capital efficiency business.

22:15So if you have something that disrupts your margins even by two or three percent or if it disrupts your working, you cannot deliver your orders. or if you cannot, your inventory starts blowing out because of this ERP implementation. It could be deadly if the business is not set up for it. But then the flip side is like, why do people do it in the first place? Because we're not the only ones who are smart enough to figure out that ERP implementation is dangerous. The businesses that engage into it, they know that there's a value to, like at some point, and this was the argument from MRC, I believe, is that before they engaged into this ERP implementation, which was actually an Oracle, they had a homegrown system that they've put together, they developed it, and it was working well enough.

23:03But at some point, the company has become too cumbersome and convoluted for them to continue using the same ERP. So they decided to bite the bullet, they found that the Oracle is the best solution for them, and they went ahead with it. And then it turned out that getting from point A to point B was a lot more difficult than what they expected. And that's exactly when they were brought. Always is. Let me go to, okay, so you mentioned when we were talking, you know, the two separately do, I think it's 150 million on one side, 175 million on the other side of EBITDA with their guiding to 70 to 75 million of EBITDA.

23:42So, you know, separately, the two businesses do 325 in EBITDA with this energy, you'd have them at about 400, right? 2000. I'm just looking at the numbers 2025. The businesses do now they close entry year, but 227 million of EBITDA is kind of the reported number. They're guiding this year to I think it's 230 million in EBITDA this year. Am I out? So and And then on the call, management is asked and they say, hey, you guys have kind of given a target of 350 for 2027 for next year. Right now, I understand all the synergies haven't kicked in. I think they said on the call like 30 of the 70 million are kicking in this year, but that would mean more kicking next year.

24:24When I see that 350 million number that they're talking about, like that's kind of what the businesses separate do in 2024. you know the synergies are kicking in i mean probably 50 of the 70 or kick to next year maybe more like i look at that and say hey 2024 wasn't exactly a banner year for oil and gas capex these why is 2027 like steve's here telling me the businesses with synergies did four would have done 400 million in 2004 we're below that in 27 and this is a business where you know again i I mentioned the Q's you called there. It sounds like demand's going great. So why aren't we seeing this like kind of flowing through the EBITDA numbers right now?

25:05I think it's a great question. I'll make it even kind of more compelling because what the company said when they were reporting 2025, which was kind of, and all of these problems that related to MRC was appearing, they said, if we were, Gene, I was saying, if we were a standalone company, we would make 200 million in 2025. So, which means that, and we know that MRC the year before that made 175. So then the question, okay, what is happening there? And I think what's happening is that they are still, so what they, at first they had to throw quite a, I think they were saying that they were throwing about eight to nine million dollars per quarter into what seems like to literally manually fill orders while they were figuring out the MRC ERP systems.

25:49So that was the case in the first two quarters of this year. they said, okay, starting in TQ3, it should be down to about a million, and eventually it should be going out. So it suggests that they have stabilized. I do think that they're being very conservative about the projections for next year because they're still in the middle of trying to figure out what the combined company is going to look like. And they do not want to be in a situation where they overpromise not to deliver. And I think as far as, and to your question, between if you would look at where we were in the middle of 2025 and where we are from a point of view of the demand at the end of 2026 and maybe halfway through 2027, if you would ask just the question of, should these companies be making more money or less money?

26:40I think the answer should be more. Right? So I think part of it is that they're being conservative and And they're still trying to figure out, and they do not want to be in a situation where they disappoint the market again, which is what they did when they reported 2025 on the stock. When they reported all these problems with the FRC, and the stock, I think, was down something like 40%. It was the same day, but then a couple of days, but it was a pretty massive drop. It's funny because I've got the 10-year chart pulled up, and you can't even see a 40 % drop on this. So I do see, as you're looking, January 30th,$15 per share, February 27th, 12th.

27:21So clearly a big drop in there. Well, I think it was$17 before, like starting the year was close. You're probably right. Because it's on the 10-year view, just because I had to pull back. Let's go to valuation, right? So I've had the benefit of seeing your value acts fail. So I know how you think about like kind of the long-term valuation, the 29 exit. And you are definitely, I'd love it if you talk about that. But I'll just frame. You know, as you and I were talking, the stock is trading between 16, 15, 17. That gives it about a 3 billion market cap. And they've got about, let's just round it up to make the numbers really simple, about 500 million of net debt.

27:55So 3.5 billion of EV, which I said round up because I said they've kind of soft targeted 350 million plus of EBITDA for 2027. So you're right at 10x EBITDA on 2027 numbers on the numbers I laid out. Now, this is a distribution business. And one of the reasons people love private equity, love distribution businesses, A, the roll up opportunities, but B, very low cap backs, right? So on 350 million of EBITDA, you're probably talking 20 million of cap backs. So EBITDA is a great proxy for unlevered free cash flow here. So I'll caveat with that. But, you know, when I say three and a half billion EBITDA, three and a half billion EV, 350 million of next year EBITDA, I don't say like, hey, super deep value.

28:38So I'd love for you to just lay out how you think about the valuation here. Sure. So, and you mentioned ValueX, and I know we spoke before. So the way that I'm usually trying to think about the business is from a point of view of the free cash flow yield and the kind of yield and whether the free cash flow yield these businesses are generating, then the big question is, what do they do with the money? And we can definitely talk about that. But to me, the free cash flow yield is the North Star, where I'm trying to figure out whether this company is being attractively priced or not. And one other thing, not trying to get into the game of trying to figure out what this company is worth relative to its peers, I want to look at what has the market paid for historically for this company or for this type of company.

29:22What does the market pay for, usually pay for? And historically, this number was quite volatile, but it averages out that on average for D-Now, the market was willing to pay about five to six percent free cash flow. You also call it, I don't know, 17 times free cash flow, 20 times free cash flow. That was the kind of multiple that the market historically said, we're comfortable paying for this business. Yes, it's volatile, but as you said, it's capital light. It's quite a bit of, it's very sticky business. Even if you go back to what happened with MRC, they barely lost any customers. So in an environment where your distributor is not delivering to you the parts that they're supposed to, if you're not leaving, you're sticking.

30:05And they barely lost any customers. This is like you're reading through some Tegas transcripts and talking to some of the clients, you kind of realize that the customer stayed because A, they were told, okay, we'll figure it out, but they will stay in order for them to try to figure out an alternative that would have been too different. So this is a sticky business. It's arguably a high-quality business, and the market historically has paid about a 6 % free cash flow yield. So if we're looking out to, even if we go with the$350 million number, and as you mentioned, there's their little capex, the company with MRC, they inherited some debt before that there was no debt.

30:45Right now they're paying, I think, about$30 million a year in interest on that debt on MRC. they said that they will try to pay down. They are generating cash flow and they will try to pay that down. So that will probably go down to about 20 million. But figure with 350 million of EBITDA by end of 2027, this company should be making about$300 million of free cash flow. Yep, yep, absolutely. So that means on 2027, today you're getting about a 10 % free cash flow yield. Well, 350. So I'll just do it in my head real quick. So 350 minus 20 CapEx is 330 30 minus 20 on your numbers of interest is 310.

31:22You know, we can talk about if you should do that. But then they're going to pay taxes, right? So aren't we taking 310 down to like 250 after tax? Am I thinking about that correctly? You are, but then you can add back the stock-based compensation. So like, because that's a non-cash item, right? So from a cash flow point of view, you're adding that back in. So it's a, the way that I'm, based on the numbers that I have, I think was coming out to be about$300 million. Okay, okay, that's cool. And I do know they also have talked about, I mean, this would be one time, not sustainable, but they have talked about, hey, we've got another$50 million of inventory reductions to go and all that sort of stuff.

31:58Okay, so - But that will go towards paying down debt, so that reduces the interest. Cool, so$300 million of cash flow is kind of what you're saying for$2 ,000. Yes, and that is on the EBITDA number that I would argue this should be relatively easy to achieve forever. Yep. So, but again, 300 million of free cash flow. So that's kind of an equity number. So this is a 3 billion market cap company. You know, I look at it and I say, okay, Steve Scott, historically, this trades 5 % to 6 % free cash flow yield to equity. That's, you know, 17 to 20 times free cash flow. You're buying this at 10 times 2027 cash flow.

32:38On one hand, that sounds attractive, right? That's, people can do that math real fast. That's like a double if you get to the 20x free cash flow. On the other hand, you know, you look at this today, hey, distribution business, not a huge amount of growth and stuff. Like, why isn't the right number? 10 is pretty low for a steady high free cash flow business, but why isn't the right number 12? Why isn't it 14? Why isn't it 15? Like, are we, it's relying a lot on multiple expansion, I guess is what I would say. It's a great question. I think that that's one of the key kind of the questions of what's going happen here.

33:11And I think what helps with this company is that the way that they have been allocating capital in the past has been relatively efficient. So where has the capital been going to? It has been going towards acquisitions, which up until MRC, if you looked at the acquisitions that they have done, they usually have been, especially after you include the synergies, they seem to be buying companies at about four to five times EBITDA. So if you are a company that is able to buy and through your own efforts, because it's not available for everyone. If you're able to buy growth at four to five times EBITDA and you yourself is trading at eight or nine, then through that, you're actually adding value.

33:56And the price that you're paying on the free cash flow yield that you're getting on those acquisitions is adding value. You know, so that is something I always struggle with, right? This is the curse of the acquisitive compound, right? If you're trading, take it to the super extreme. If you're trading for 100 times EBITDA, people are baking in like these guys are going to be able to really roll up the industry accretively, right? Well, it does remind me of the 70s, right? Like, oh, we traded a high multiple. We issue stock to go buy stuff at a cheaper multiple. So we grow. So we get a higher multiple.

34:28And I do hear you. These are creative acquisitions, but how much do you build in the value creation of that into the multiple? It's just like a little chicken or the egg or you kind of run into an infinite loop paradox. You're right, but I think that partially explains why this company historically has been trading at 6 % free cash flow yield and not 10. Because we're going from a steady state zero growth business to a business that is growing because partially maybe because of the acquisition that could be grown at 3 % to 5 % per year. And once you have that, that deserves a higher yield. The other interesting thing here, and I'm just pulling it up as we speak, but they do have uh they they have a very balanced capital allocation program right as you said i don't think they want to run with much debt uh but they do have some debt right now they are paying back a little bit of debt but they're also buying back stock while they're doing it so you kind of get the nice of you get all the worlds right where they bought back 75 million of stock in the first half of the year and again this is a three three billion market cap company they were actually lower when they bought it they timed their repurchase very well but buying 75 million in the first half of the year, 150 million a year, like that's 5 % of the company.

35:45So you get the buyback, you get a little bit of the debt reduction and the debt reduction, you know, if you're valuing on the free cash flows equity story, decreases the interest expense, which lets you buy back more shares. So you kind of get the best of all worlds. And by the way, they can keep doing some bolt on acquisitions with the balance sheet and the cash flow they generate. So they've kind of got all of them at that point. And yeah, that's exactly it. Right. So, and if you look at the history of the buybacks that they have done, they weren't doing buybacks when they were trading at$30 a share.

36:15They were doing buybacks when they were trading at$10,$11,$12. And they weaned into it early. So they did kind of at the time, this was interesting and ballsy to some extent, is that at the time when they were going through this massive problem of trying to figure out the ERP implementation for MRC, they still had enough confidence to say, okay, we're going to take 50 million and their working capital was growing. They said, okay, we have enough confidence in this business to buy back$50 million worth of shares in Q1 because they wanted to take advantage of the share price being at Relant 11 or 12 or whatever it was at the time.

36:52So they've been opportunistic and historically have shown to be pretty smart about when they're buying back shares. you know the other thing here is david as an eastern european you might be able to say his last name by the main church and oski is that it yeah yeah that's close enough he he owns like he owns a million shares i think over a million shares and you know with the stock at 16 that's 16 million dollars 60 million bucks of stock ownership i think he gets paid nicely but you you know, you do have a decent bit for a spinoff or a company that's kind of, I don't know, it's not capital intensive, but that's grown through acquisitions spinoff.

37:30Like you do have a decent bit of insider ownership just through that piece. It's not huge, but it's not. Yeah. It's not. What else should we be talking about here? No, I think we covered most of it. I think there is one question that people would have because, so once again, not to get too much into the weeds, because we're trying to, Obviously, in the last couple of calls, a lot of the questions were about, okay, what is the company going to be doing as far as the ERP? And why did they buy the company which was installing a different... Because DNow itself is on SAP ERP, and MRC was installing Oracle.

38:12So they came into it knowing that it's going to be two different systems. I don't think they realized how bad it was going to be, but they came into it knowing it was two different systems. And what they're saying now is quite interesting is that they're going to move some of the centers and they already moved 17 out of the 20 that they were expecting to move to SAP. Well, they're going to keep the others on Oracle. And there's a question like, why is that? And I had some conversations with people like at the consulting companies that normally do these type of implementations trying to figure out, okay, is this normal to run companies side by side, two different ERP systems side by side?

38:47And what I was told was that it really depends on what kind of business this is in. In some case, it could be the case that the Oracle ERP is the best for a particular type of business. And this is just another reminder that the business that they got into with MRC, which is more downstream on utilities, it is a slightly different business than upstream. And that's why they're deciding to keep the Oracle ERP for that one for now and try to make it work. And this is the business that the MRC management has made a decision to improve their own business before it was being bought by Dinao by implementing this.

39:29So there's a lot of moving parts here. But I think given the macro background switching from a headwind to a tailwind, and the people who are involved here with David Cherishinsky being there, he's been at Dinao for I think, over 25 years and has a pretty good history of prior acquisitions that they've made in the past. You're getting into a situation in which there's a few ways to win from here. And yes, the stock has done a little better since they reported Q1 and they showed Q2 stabilizing. But you could be in a situation in which things might start going the right way for the company as opposed to kind of swimming against the tide, which they've been doing since they listed.

40:15it's i mean as i was looking for the beneficial ownership it is funny because just to what you're saying they've got a little thing that says hey since we spun off like u.s rigs were uh 1907 rigs when we spun off in the u.s and that's 571 at the time that they were kind of writing their proxy and you look at that you're like hey as you're saying this company has been running into headwinds and i don't think anyone's calling for 1900 rigs in the u.s again but if if you just stabilize and start ticking back up, like the financials could really shine through here. And it's still a highly fragmented industry here, right?

40:50So yes, we had a combination of the two largest players, but I don't remember the market share numbers, but I know that it's below 20%. Do you want to talk real quickly about your 2029 price target, just so people can see why you're so excited about this and maybe get as excited themselves? Well, so it's really, we already talked about it to some extent, but when I was looking at 2029, it's just a matter of what can of companies can be earning on a free cash flow basis. And then if you put a 6 % free cash flow yield multiple on that, that you can get to about 30 easily by 2028, 2029, you can get to about 30,$32 per share.

41:27Do you think this company should be public? It's a good question. I think if the being public lowers its cost of capital, then yes. but if it does not, then maybe this is a given how volatile the business they're in, maybe it should be private. I just ask because, again, a through line of this conversation has been private equity loves these businesses. Yeah. They slap a lot of leverage on them and then they do the roll up that you're talking about, right? And this is a business where the management team does not want a lot of leverage. They're paying their leverage down. I think they're paying their leverage down.

42:12Correct me if I'm wrong. I think they're going to be well under 2x. They're already well under 2x, but they're going to be well under 2x. If this was a private equity portfolio company, 4 to 6 probably is where they'd be levering this thing up. That would create a lot of tax shield on the interest rate. They'd really juice the equity. And I say that because A, I think there would be private equity interest. And B, when you look at the shareholder roster, and I won't call out any specific people, But you've got a lot of shareholders who I remember were involved in MRC and they were saying MRC belongs with either D-NOW or a private equity firm.

42:45And they in the past quarter or two, I see a lot of firms that have been adding to D-NOW. And I have to imagine part of their thought is this would be either better as a private equity controlled company or run like a private equity company in the public market. I am guessing to some extent that for private equity to get involved in Sotardis, they would want to see a growth in address boomer. You do not, because the flip side of what happens when you have a highly levered company in the shrinking market, when you have a melting ice cube. And it got a lot of people into trouble, both in public and in private markets.

43:20So I don't think people want to touch that. I do agree with you, but I think I might push back just because, again, they're talking about the data center growth. and that's real. And the midstream play in particular has a lot of it. And they're talking about the utility growth and the water growth. And again, those are real and those really play into the data center side. So I could see a private equity firm kind of saying, hey, the rig side is our base. And if we get any upside there, that's the chair on top. But let's lever this up and let's, we're going to get growth from the midstream and the data center and all that sort of stuff.

43:50Let's lever this thing up and kind of take that growth and we'll get a chair on top. We'll get a call option on oil and gas exploration, if that makes sense. Yeah. Look, there's this other distribution company that I like, Wesco, which is an electric parts distributor, that all of a sudden has become a play on data centers. So A, their sales have got... They went from a business that was growing, I'll call it 2 % to 3 % per year, to 8 % to 10 % per year, and multiple expanded, right? So you could see... Once again, I'm not in any way underwriting this scenario, but this company, Dino, especially with the addition of MRC, could be in all the right places if we go on to see the type of investment that is being talked about in utilities and refineries and data centers, et cetera.

44:45If that's all is going to come to fruition over the next five years and upstream oil and gas, they should benefit. And then we talked about the numbers, kind of what are the two numbers companies look like on a standalone basis, even before the synergies and even before all of this change into that. Just on your point on Wesco, it is crazy because I was flipping through some other distributors, you know, and again, every investor, you say, this is just my personal experience. When you're 25, somebody says distributors and like, that's the dumbest, most boring business. And then when you're 30, like, what's the try to fastener look like again?

45:19And then by the time you're 35, you're like, oh, like you kind of get why you're – I love distributors. I love distributors. You mentioned Wesco, Fastnell. You know, Fastnell over the – their organic growth has accelerated, I think, from like basically rounds to zero to high single digits, low double digits because there's this huge AI boom. And like all these distributors are just – they are enormous beneficiary, not in a memory stock way, but probably in like a more sustainable way. Just step back. Why are distributors interesting? You have Bezos who are saying your margin is my opportunity.

45:56Nobody wants to get involved in a business that delivers to you 3%, 5%, 6 % EBITDA margin. In order for you to do that, you have to do really well. All you get is 3%, 5%, 6 % EBITDA margin. Your natural level of competition of people, I don't think you're going to have a lot of people saying that, oh, I want to build a new D now. hey look and the the low margin it is opportunity because you know you think of some of these guys like it's like hey if you if we uninstall the box and someone comes and installs the box well the customer payback period is like three years so that's eating like it's just a terrible business except for the guy who's already installed in there who's been with you for 20 years and by the way do you want to risk you lose the guy who's been selling this is more fast now the guy who's been selling you screws for seven years i'm sure he's not your best friend a la plastic surgeon with the guy who's selling him botox but you know the guy your screws are always there if your screws aren't there you lose a day on the job so you lose tens of thousands of revenue for a two dollar screw like no yeah and it's kind of risky with the oil with upstream oil and gas you take it to the next level like what happens when your well doesn't when you know you can't pump for a day you lose a lot of it millions in revenue and by the way for a screw that costs nothing and the Scott's making a 5%, not margin, 5%, even on margin on it.

47:15You know, it's like, it's not a lot. Steve, this has been great. Appreciate you coming on. Time number three. Two more, and we're going to have to get you that. No, you already have that. I have the hand. We'll get you a follow for two more, but this has been awesome. Do you want to include a link to the write-up or anything somewhere that I should link to? Or we can talk about that all the time. We can talk about it offline, but yes. If he decides to, there will be linking the show notes. If not, you can just go, you know, they've got the presentation, they've got the earnings call and everything.

47:43So Steve Grelick, Barbara, this has been great. And we will chat soon. Sounds good. Thanks again. A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Fall has never looked or tasted this good. Sweet Greens Fall Harvest Menu is back with seasonal favorites dressed to impress and made to be devoured. Warm roasted sweet potatoes, crisp apples, maple glazed Brussels, and crave worthy flavors in the autumn harvest bowl, maple glazed salmon plate, and roasted bacon Brussels side.

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