MRC Global Inc.
Q1 2021 Earnings Call Transcript

Published: 28 Apr 2021

[Operator:]

Greetings, and welcome to the MRC Global’s First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Monica Broughton, with Investor Relations. Thank you, Ms. Broughton. You may now begin.

[Monica Broughton:]

Thank you and good morning. Welcome to the MRC Global first quarter 2021 earnings conference call and webcast. We appreciate you joining us. On the call today, we have Rob Saltiel, President and CEO; Kelly Youngblood, Executive Vice President and CFO.

[Rob Saltiel:]

Thank you, Monica. Good morning, and welcome to everyone joining today's call. This is my first earnings call as President and CEO of MRC Global and I want to begin the call by thanking our former president CEO Andrew Lane, who retired in March after more than 12 years of able leadership. Andrew led our company through its formation, its public offering, and its establishment is the market leader in PVF distribution to the energy and industrial sectors. Andrew's commitment to our core values of operational excellence and customer satisfaction helps cement our reputation as a reliable service provider and a trusted partner. All of us at MRC Global appreciate Andrew's years of service and contributions to our success, and we wish him all the best in his well deserved retirement. During my first six weeks at MRC Global, I've spent considerable time meeting with our employees, customers, and suppliers, and gaining understanding of the key drivers of our business. I have visited multiple field locations where I witness firsthand the value added services we provide and observed the dedication of our employees to safety, quality, and customer service. I've spoken with customers who have long standing relationships with MRC Global some going back more than 20 years and heard them speak of the outstanding support they received from our sales representatives and branch locations. I've met with suppliers who value our global footprint and the validation that comes with being considered an approved manufacturer by MRC Global.

[Kelly Youngblood:]

Thanks Rob and good morning everyone. My comments today will be focused on sequential comparisons so unless stated otherwise, we are comparing the first quarter of 2021 to the fourth quarter of 2020. Total sales for the first quarter were $609 million, a 5% increase with U.S. and Canada driving the increase in all sectors except for gas utilities. The gas utility sector declined sequentially as the fourth quarter was unseasonably higher than historical averages and we typically see reduced activity in the first quarter as our customers finalize their plans for the remaining quarters of the year. As mentioned by Rob, the quarter got off to a slow start due to customer budget resets in January and the winter freeze experienced in February that had a significant impact to the Gulf coast states. However, March rebounded strongly and was the strongest revenue month we've had since the pandemic began March of last year. From a sector perspective, gas utility sales, which are primarily U.S. based were 210 million in the first quarter of 2021, 3% lower as the fourth quarter experienced unseasonably higher than average sales due to customers catching up on activity related to pandemic related delays. Many customers got off to a slow start this year due to weather that ramped up later in the quarter preparing for the construction season. However, as compared to the first quarter of 2020, gas utility sales were up $8 million or 4% and this sector now represents 34% of our total revenue for the quarter and as mentioned earlier we were targeting to grow this sector into a billion dollar plus business in the coming year. Downstream and industrial sales were $194 million in the first quarter of 2021, 11% higher driven by the U.S. segment and now represents 32% of our total revenue. Upstream production sales for the first quarter of 2021 were $127 million modestly higher by 1%. This increase was driven by strong sequential improvement in Canada in the U.S., but mostly offset by international. This sector now is 21% of our total revenue. Midstream pipeline sales, which are primarily us focused, were $78 million in the first quarter of 2021, a 26% increase. This sector is now our smallest sector making up 13% of total revenue. Now let me summarize the sales performance by geographic segment. U.S. revenue was $484 million in the first quarter of 2021, up 8% with increases in the downstream and industrial and the midstream pipeline sectors, followed by the upstream production sector as client budgets reset and activity levels improved. The U.S. downstream and industrial sector revenue increased $19 million or 16% due to increased turnaround and maintenance activity previously delayed due to the pandemic as well as repair work related to the winter freeze and February particularly in the Gulf coast region. The U.S. midstream pipeline sector revenues increased $19 million or 38% as customers pivoted to small projects and increased maintenance programs. Increased purchases of valves pump and compressor stations also contributed to the increase. U.S. upstream production sales were up $5 million or 8% as customers began completing more wells and constructing more facilities. This compares favorably to U.S. well completions which declined about 3% over the same period.

[Rob Saltiel:]

Thanks Kelly. I want to add a few thoughts before opening up for Q&A. Although we are pleased with our financial results from the past quarter, we still have much work to do to deliver on our own high expectations. As the market improves, we fully expect to transition to a consistent positive net income and we will work to make this a meaningful financial metric in subsequent quarters. We intend to increase our returns on invested capital beyond compensatory rates. We aim to increase our EBITDA margin percentages into the upper single digits as our revenues increase and we achieve higher flow through rates to the bottom line and we certainly are committed to achieving a share price that reflects our improving outlook and our ability to generate more consistent financial results. As a wholesale distributor, one of our key functions is to hold the right inventory for our customers so that it is available to them when they need it. Given our more optimistic outlook, we are anticipating a modest inventory build in the coming quarters to meet our growing backlog and expectations of increasing activity from our customer base. However, we are committed to doing so in measured steps so that we are not exposed if business conditions change. And finally, we recognize that we operate in a changing world where stakeholders expect more of us as corporate citizens. We are committed to ensuring that our environmental, social, and governance initiatives are well aligned with society's rising expectations. We're reducing our impact on the environment both in the products and services that we provide and in the conduct of our business. We believe that diversity and inclusion are strengths for us as a multinational and multicultural company and we are committed to be a leader in this area. We value our employees’ professional development, their safety and their enjoyment of their workplace. We are expanding our ESG disclosures and clarifying our improvement plans. These will be outlined in our fourth annual ESG and corporate governance report which will be available to our stakeholders in May. And with that, we will now take your questions. Operator?

[Operator:]

Thank you. We'll now be conducting the question and answer session. And our first question is coming from Nathan Jones with Stifel. Please proceed with your questions.

[Unidentified Analyst:]

Good morning. This is Adam Farley on for Nathan.

[Rob Saltiel:]

Hi, Adam.

[Adam Farley:]

First of all, gross margins MRC has done a really good job over the last 12 months keeping them above 90%. Could you talk about the competitive pricing environment and if there's any compression in product margins specifically?

[Kelly Youngblood:]

Yes, Adam. So yes, this is Kelly. Let me first explain, we kind of touched on it in the prepared remarks about our gross margins. We did have a bit of a decline here in the first quarter about a 30 bips decline and it's really due to kind of a mix issue that we experienced during the quarter both geographic and from a product perspective. Our international revenues declined 14% in Q1 because of the spike that we had in Q4 and the international margins are accretive to the overall company averages and so that had a bit of an impact. And then on the U.S. side the kind of I mentioned product mix in the prepared remarks, but that was really specifically related to our midstream business and some sales that we had during the quarter that were kind of below our normal margins for some of the products that we sold. But these were really more of kind of a one off during the quarter. Our April margins, for example, are really tracking more in line with say Q4 levels of the company. So that's I just wanted to kind of explain what happened during the quarter as we'll see in a few notes come out with that decline. But to answer your question more specifically, I think on the pricing side we mentioned inflation in the prepared remarks that we're starting to see that. We have been seeing that for sure in the line pipe part of the business, but we're actually starting to see that in other products as well. And our contracts in most cases allow us to go back to customers and raise prices due to those the inflation that we're seeing in the items that we're buying. And so we're working that through the system right now. There's always a lag effect that we see when we start to reach out to get pricing increases. But that's kind of where we see things right now. I don't know, Rob, if you have anything to add.

[Rob Saltiel:]

Yes. Just to add to that as Kelly mentioned in his prepared comments, we are guiding improvement in all sectors going forward in the second quarter versus the first quarter. So we're really not seeing any competitive compression of margins. As Kelly said, its more mix related to the first quarter. We are encouraged about margin accretion here for MRC Global as we really hit a kind of a critical threshold on our revenue. We've exceeded $200 million, sorry, $600 million in revenue per quarter starting this quarter and as I mentioned we expect that to increase throughout the year. And once we get to those levels and we've covered our fixed costs incremental revenues tend to fall to the bottom line at higher margin levels. So we're actually encouraged about margin accretion going forward, as we see an improving revenue environment across our sectors as we move through 2021.

[Unidentified Analyst:]

It makes a lot of sense. And then just following up on that on the supply chain can you talk about how your team is managing the supply chain? There is a lot of talk this quarter around extended lead times and product availability issues. So maybe we can just talk about supply chain and how you're managing inventory levels and things like that. Thanks.

[Rob Saltiel:]

Yes. As we've talked about, on the call here we're seeing an improving environment across the sectors in which we operate and as such we're getting more optimistic about the future and our need for maintaining an increasing inventory to support our customers’ activities. So that's really a big focus for us now making sure we've got the right inventory at the right locations for our customers. We really haven't had major delays or instances of supply chain interruptions that have impacted our business that really hasn't been a significant factor for us. I think we've been managing that quite well. So we don't really see that as an issue in terms of hampering our growth or our outlook for improving revenue and margin development throughout the year.

[Unidentified Analyst:]

Thanks for taking my questions.

[Rob Saltiel:]

You're welcome.

[Operator:]

Thank you. Our next question is coming from Jon Hunter with Cowen & Company. Please proceed with your questions.

[Jon Hunter:]

Hi, good morning.

[Rob Saltiel:]

Morning John.

[Jon Hunter:]

So I wanted to ask on your revenue progression so far through April versus the high single digits that you've got. Excuse me?

[Rob Saltiel:]

Yes. So John just how we're seeing April progress? Is that is that the question?

[Jon Hunter:]

Correct.

[Rob Saltiel:]

Yes. No. Listen based on the guidance that we provided the sequential improvement that we're expecting in the second quarter everything's tracking very well according to plan. Usually the last month or I'd call it the second half of the quarter is the strongest part of the quarter for us. But no, what we saw in March we described in the script that got off to a slow start in January and February. March, we were hitting on all cylinders and there's nothing that's giving us any concern in the month of April that was a fluke or just a one off. Everything's really pointing the right direction and I think the other thing to kind of support that is our backlog has really increased significantly. I think it was a 14% improvement from where we were at 12.31. And so that backlog continues to creep up higher and gives us confidence that our near term outlook is definitely intact.

[Jon Hunter:]

Got it. And then just to take it, I guess another step further into your full year guidance for down or I'm sorry to upload single digits for the year, how does it progress after the second quarter here? Are you expecting kind of another bit of increase in the third quarter and then a seasonal drop off in 4Q or is it a kind of more level set in terms of smaller incremental growth in 3Q and 4Q?

[Kelly Youngblood:]

Yes. No. We talked about Q2 being in the upper single digit range, feel good about that for the total company. And as we talked about in the prepared remarks that is largely going to be driven by the gas utility space. That's going to be a very, very strong double digit type improvement sequentially. And then we get into the third quarter I think, again, we're looking at a upper single digit type improvement just the way things are kind of modeling out right now and then Q4, as you know John, we typically always have a seasonal gap because of weather and holidays and things like that in the fourth quarter. Historically, when you look at it, there's always a few exceptions in different years, but historically, that's a kind of a 5% to 10% decline that we see in the fourth quarter. And I would just recommend for modeling purposes, you keep it at that range if just, we always kind of pick the higher end of that range, just to be conservative, but usually, it does fall into that 5% to 10% decline.

[Jon Hunter:]

Thanks. I appreciate that Kelly and then the last one for me is curious on framing the chemical and petrochemical market. It's an area that's clearly a focus of growth for MRC. So do you care to offer a goal similar to what you've provided on the gas utility side in terms of the $1 billion target revenues you have there. Any kind of detail around what you're seeing for the chemical and petrochemical market would be helpful?

[Rob Saltiel:]

Yes I'll take that. Look, we're not ready at this point to give a hard goal on how much that'll add to revenue and margins. But your points right that we are excited about this growth opportunity for us. There's a lot of valve business there that we feel that we can capture and as you know, the valve business for us tends to be accretive to our company wide margin. So we're excited about that. There's also a lot of stainless opportunity there as well which is currently a smaller business for us. But it's also typically been accretive to company wide margins. So we're excited about the opportunity. One of the key things you've got to do and in that space is you've got to identify these projects early and really be out in front of what is needed by the customer, working with them to make sure that you can procure the right materials and provide the right value added services. And I think in the past as a company we're probably a bit more reactive than we could have been to addressing those opportunities with the formation of this experienced team. based out of La Porte we can really look ahead and see the projects well before they go to sort of the RFQ stage and really plan with the customer, the scope of the projects and how we can participate in that so that when we do get to the pricing part of it we're ready to go and we can be competitive. So again no firm target. Stay tuned on that. But we're really excited about the potential.

[Operator:]

Thank you. Our next question is from the line of Doug Becker with Northland Capital. Please proceed with your question.

[Doug Becker:]

Thanks. Rob, I appreciate you've only been there a few weeks but was hoping to get a little more high level thoughts on where you see the opportunities to move MRC forward. It sounds like inventory management; digital expansion and just green energy are some of those areas but just a little more expansion on your high level thoughts just a few weeks in?

[Rob Saltiel:]

Yes. Look, we as a company have been in business for over 100 years. So we've obviously been doing some things right over that time. And I think my first few weeks here have been confirmatory of the strengths that this company has. And as I mentioned a number of times in the prepared comments, the relationships we have with our customers and our suppliers is really a great place to start because these are the folks that are key to our success and will be pivotal to how we grow our business going forward. We obviously feel very good about the gas utility space. There's a lot of optimism by these customers and I've met with five or six of them already virtually or in person and to a customer they're talking about increasing growth in their business. A lot of that is based on integrity and safety improvements. But some of it, of course is due to housing start. So gas utilities are a bright spot for us. And then of course, the downstream piece we're very excited about as well which I just commented on. But in addition to that given the strengths that we have as a company, we are going to cast a wider net in terms of looking at opportunities where our strengths can be applied. We've already done some work in the green energy and in the decarbonisation space but obviously there is tremendous amount of dollars and stimulus going toward aiding the growth of those industries. A lot of the customers that we serve are going to be leading the charge into that space whether they're IOCs or major independents, but obviously there are some new customers as well that will play a role there. But we feel that given our strengths and capabilities and our track record we should get a more than a fair share of that pie going forward. Its early days on being able to quantify that and make it significant for us. As I said we've already done some of that work but going forward we believe that it can be a significant a driver of growth for this company in the days ahead.

[Doug Becker:]

Sounds good. Maybe a little more context on the trajectory of international revenues over the course of the year. Certainly seems like all the indicators from upstream company budgets as well as large oil field service company commentary that there is increasing optimism there. I understand your business can be a little bit lumpy on specific projects but just a little more color on the trajectory as we go through the course of the year and the exit rate?

[Kelly Youngblood:]

Yes Doug I'll take that one. Yes, as we had a dip here in Q1 after a really strong Q4 just and that's just kind of the way the timeline was fell out with the delivery of sales last year. This year in Q2, we do expect to see kind of a mid to maybe upper single digit improvement in the international side, but as we got into on the call year-on-year we do think it's going to be modestly down in 2021 for international versus 2020. But as we and you're hitting on a really good point that you hear some of the OFS companies talking about strong growth on the international side in the second half of the year. I think I've heard some double-digit growth being talked about but with us there is always a bit just the nature of the work that we do with a lot of it being kind of post well ahead there's always a lag effect of a couple of quarters before you start to see it kick in for us on the international side. So because of that that's why we're guiding that 2021 will be down modestly but 2022 and even 2023, the next couple of years out, we're pretty optimistic; not ready to put a number out there yet but we definitely think it's going to be a growth market for us on the international side in the coming years.

[Doug Becker:]

And then just a quick one on working capital. Is that expected to be a use of cash now just given the growth outlook that's expected the rest of the year?

[Kelly Youngblood:]

Yes, we'll definitely hear I would say kind of in the near term like say I think we touched on it in the prepared remarks Doug that in Q2 we're going to be building inventory levels a little bit and that's going to, that'll be a use of working capital or a burn of cash and but I think as we moderate here over Q3 and Q4, we'll see where the inventory, where the market's going and how much more inventory build we need to do but I think you're thinking about it the right way when you look at the full year and the cash guidance that we provided of $75 million to $100 million that's really going to be driven predominantly by just call it EBITDA or the operating profit of the company, not so much from the working capital side. We could end up having, to your point, a little bit of a working capital burn throughout the rest of the year if we continue to build up inventories but we're monitoring this very-very closely, I would say week to week definitely month to month and we'll provide more guidance on that going forward but the way we're modeling the cash generation right now is again virtually all coming from true operating profit.

[Doug Becker:]

Thank you.

[Rob Saltiel:]

Thanks Doug.

[Operator:]

Thank you. Our next question is from the line of Ken Newman with KeyBanc Capital Markets. Please proceed with your question.

[Ken Newman:]

Hi good morning, everybody. Rob welcome on board.

[Rob Saltiel:]

Thank you. Good morning.

[Ken Newman:]

Morning. So it sounds like net leverage is expected to trend closer to two times by the end of the year. I hear you on wanting to drive organic growth this year, but with the leverage profile improving, I am curious just talk about your preference or opportunities for acquisitions especially as you start to think about the growth target for the gas utilities business?

[Kelly Youngblood:]

Yes. We appreciate the fact that our balance sheet is improving and it's been a long process. A lot of heavy lifting was done in 2020 and we are certainly encouraged about the improvement in our leverage ratios that we certainly anticipate as we move through this year with an improving market. Look we are certainly going to be open to looking at acquisitions that make sense for this company, but we wanted to prioritize making sure that our balance sheet was in good shape. I mean this company was formed through acquisitions and mergers in the 2014 and 2015 time frame. So we really need to make sure that the kind of opportunities that we look at that could be inorganic line up well with our strengths and capabilities and obviously that they're fair priced. So we are keeping our eyes open on that and inorganic growth will certainly be one of the tools we will look at to grow this company going forward.

[Ken Newman:]

Got it. And then for my follow-up I think the sequential revenue increase you mentioned in 2Q that implies like a low double-digit year-over-year revenue increase. With the volumes expected to ramp this coming quarter can you just help us frame how we should think about the operating leverage potential just given all the costs that are being taken out over the last year particularly whether it's on a year-over-year or sequential EBITDA basis?

[Rob Saltiel:]

Yes. Ken I'll take that one. Just as you as you kind of alluded we took a lot of cost out of the business last year and we've talked about in previous calls that we think two-thirds of that or more will be structural in nature which we believe will certainly help with our incremental margins as the business continues to improve. Historically if you look at previous cycles as the business improves from kind of a downturn we've had incremental margins around the mid teens level but because again of the structural nature of the cost reductions that we took out and just a reminder we closed 27 branch locations last year, reduced head count by almost 600 people. So very deep cuts and as the business improves we don't see bringing back those branches. They've been consolidated into other branches or RDCs and so it really, we really feel like we're well-positioned that as the business improves the incremental margins are going to be I would say I think on the last call we said definitely in the upper teens. I will be surprised if they're not better than that just the way we're kind of modeling the business right now and keeping the SG&A cost relatively flat and don't get me wrong you will start to see over time as the business improves we'll add more head count back and things like that but as a percentage of revenue maybe we were hovering around the mid teens or kind of slightly below that in really good years. I think kind of a low double-digit percentage of revenue is something that we're targeting as we kind of get the business back to a more normalized level. So hopefully that answers your question.

[Kelly Youngblood:]

Yes. If I could just add to that we anticipate approaching mid to high single digit EBITDA margins because of this leverage that we're going to get from sort of hitting a threshold revenue level and as Kelly says having taken structural costs out of our system. So we're very excited about the opportunity to really get back to historically high EBITDA margins. Obviously we got some work to do to get there between now and then but that is certainly something this management team is targeting.

[Ken Newman:]

And just to clarify is that high single-digit EBITDA target is that something you think is achievable by your end or is that do you really need to get back to like 2019 or type of revenue levels to get to that to that target?

[Rob Saltiel:]

Yes. I think have to define kind of high. If we're talking about getting past the 5% mark, 5%, 6%, I think that's something we could certainly do this year getting past that midpoint but to get up into the kind of the upper single digits that's more of a 22, 23 type time frame.

[Ken Newman:]

Got it. And then just one more for me if I could just squeeze it in. It was encouraging to hear about the growth in the digital channel. Obviously it's been a big driver and focus for you guys. Can you give us any thoughts and help us quantify where you think the ultimate mix for digital could be over the longer term and how do you see this being a driver of value add over the up cycle as we kind of start to look towards the inflection?

[Kelly Youngblood:]

Well, you make a great point. I mean we've made a lot of progress already in growing digital and I think as we all see in our personal lives as well digital continues to become a bigger part of that. So it's a little hard for us to handicap a cap on that. I will say that a lot of our digital growth is through our major accounts and they continue to have a great uptake of that and then our smaller accounts we find it's a much more efficient channel to create a cost to serve for that group. So I think there is upside in terms of the opportunity it creates for additional revenue with our bigger and more stable accounts and then with smaller accounts it's really more of a cost to serve us. Difficult again to quantify how far this will go but it is a real focus of this management team to ensure that digital adoption increases with really all of our customers and both on the, as I say it will help both top line and bottom line as we move through that migration.

[Ken Newman:]

Great. Thanks for the color.

[Rob Saltiel:]

You're welcome.

[Operator:]

Thank you. At this time I'd like to turn the floor back over to Monica Broughton for closing comments.

[Monica Broughton:]

Thank you everyone for joining us today and for your interest in MRC Global. We look forward to having you join us for our second quarter conference call in July. Have a great day.

[Operator:]

Thank you. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.