MRC Global Inc (MRC) 2012 Q1 法說會逐字稿

Good morning and welcome to (multiple speakers)

Good day, ladies and gentlemen. Thank you for joining and welcome to the MRC Global first-quarter earnings conference call. (Operator Instructions). This conference is being recorded today, Monday, May 7, 2012. I would now like to turn the call over to Mr. Will James. Go ahead, sir.

Good morning and welcome to MRC's first-quarter 2012 earnings conference call. I'm Will James, MRC's Vice President, Corporate Development and Investor Relations.

This call will be hosted by Andrew Lane, our Chairman, President, and Chief Executive Officer, and Jim Braun, our Executive Vice President and Chief Financial Officer.

As a reminder, today's conference call includes forward-looking statements regarding the Company's anticipated financial and operating results. The Company's actual results may differ materially from those anticipated. Information on factors that could cause actual results to differ materially from these forward-looking statements is contained in the Company's earnings release and periodic and current reports, which are and will be posted on the SEC website, as well as our investor relations site.

In addition, this presentation includes certain non-GAAP financial measures. The disclosures related to such non-GAAP measures, including reconciliations to the most directly comparable GAAP financial measures, are included in our earnings release, which is also available on our investor relations website.

I will now turn the call over to our CEO, Andrew Lane.

Thanks, Will. Good morning and thanks, everyone, for joining us for our first-quarter 2012 investor call. As this is our inaugural earnings call as a publicly-traded company, I would like to welcome all of our new shareholders to the call and we thank you for your interest in our Company.

I will start by highlighting our first-quarter accomplishments, and then Jim will go through the financial results in more detail.

First, let me begin by congratulating all of our 4,425 employees for producing outstanding first-quarter results. Revenues in the quarter increased 39% to $1.38 billion, which is a record for the first quarter and is the third-highest revenue for any quarter in the Company's history.

The revenue increase was broad based with double-digit growth rates in each of our Upstream, Midstream, and Downstream and Industrial sectors.

Adjusted EBITDA for the first quarter came in just over $115 million, or 8.3% of revenues, and represents an increase of 92% over first-quarter 2011 adjusted EBITDA of $60 million. The increase was driven by higher sales and a higher gross profit percentage.

The first quarter of 2012 presented us with a favorable business climate, and I am extremely proud of the way our employees executed and achieved these excellent results.

We began the year on a successful note as we completed the acquisition of Sydney, Australia-based OneSteel Piping Systems, which is now known as MRC Piping Systems Australia.

As a reminder, for those of you who are still familiarizing yourselves with our Company, merely three years ago MRC had no presence in Australia. In 2009, we established a beachhead through our acquisition of Transmark FCX, which was primarily a Europe-focused business, but did have a relatively small operation in Australia. In May 2011, we acquired Perth-based Stainless Pipe and Fittings, which strengthened our presence and gave us a platform to pursue project work throughout Australia and southeast Asia.

And finally, in early March of this year we acquired OneSteel Piping Systems, whose strength in carbon steel products, expertise in valves, and particular strength in MRO business makes us the clear leader in Australian PVF distribution.

Again, we are very excited about having built the leading position in this attractive market and we think our success in Australia clearly demonstrates the execution of our vision to grow through strategic acquisition.

Turning now to organic growth. In the first quarter, we opened or expanded facilities in several of the most active drilling and production areas in North America. In January of 2012, we opened our new 80,000-square-foot regional distribution center, sales branch, and valve actuation shop in Cheyenne, Wyoming, to support the ongoing oil-related activity in the Rocky Mountains and the Bakken shale.

In Canada, we are in the process of expanding our 74,000-square-foot regional distribution center in Nisku, close to Edmonton, which is well positioned to serve the growing heavy oil and oil sands market of northern Alberta.

In terms of branch activity, we opened a new branch in Alva, Oklahoma, to serve the Mississippian Lime area in northern Oklahoma and southern Kansas. And further east, we are actively developing a branch in Carrollton, Ohio, to serve the Utica shale, which is showing strong potential as a source of oil and natural gas liquid.

Also in the first quarter, we closed on our new $1.25 billion multi-currency, asset-based revolving credit facility, which replaced both our previous North America ABL credit facility, as well as our MRC Transmark credit facility. This new five-year global ABL facility provides for borrowings in the U.S., Canada, Australia, the United Kingdom, and parts of continental Europe. The new global ABL facility provides us increased borrowing capacity, as well as flexibility to borrow in multiple currencies, and improves our ability to fund our growing operations, particularly internationally.

Lastly, as you all know, after 90 years as a privately-held company, MRC became a publicly-traded company and began trading on the New York Stock Exchange on April 12. In the IPO, MRC sold just over 17 million shares and raised net proceeds of $334 million, which we have used to reduce net debt.

Today, approximately 21% of the Company is owned by the public. This is a major milestone in the history of MRC, and again I would like to thank all of our new and existing shareholders for your faith in our Company.

I'll now turn the call over to Jim Braun to review our first-quarter results in more detail.

Thank you, Andrew, and good morning, everyone. I'm going to speak to a number of items impacting our results of operations, and then Andrew will return with some concluding remarks.

First, let me begin with some comments on the first-quarter market conditions. The North American rig count remained strong, averaging 2,575 rigs in Q1, with oil rigs accounting for approximately 65% of the total, which is the highest oil rig percentage in several decades.

And while natural gas prices have declined due to record production levels and slowing demand due to the unusually warm winter, oil prices remained over $100 per barrel during the quarter.

Infrastructure development activity in the new and emerging wet gas and oil shales was also strong during the quarter as new discoveries drove an increasing need to get oil to market. Refinery, petrochemical, and chemical plant activity was also good, although tempered by general economic conditions.

In the first quarter of 2012, our sales reached $1.383 billion, an increase of 39% over $992 million in the first quarter of last year. This marks our eighth consecutive increase in quarter-over-quarter revenues. Of the $391 million increase in quarterly revenue, 88% comes from organic growth, with the remainder from our acquisitions of SPF and OneSteel Piping Systems.

For some color on the first-quarter sales increase, let me turn to our three primary sectors. For the Upstream sector, the oily and wet gas areas in the various U.S. shale plays continued to show strong growth, as did the Canadian heavy oil areas.

Sales to the Upstream sector increased by 39% in the first quarter of 2012 to $650 million, or roughly 47% of our quarterly sales.

The Midstream sector continues to be our highest growth sector. First-quarter sales to the Midstream sector increased 58% to $360 million and represented 26% of sales. Key drivers of the growth include the continued buildout of oil and gas gathering infrastructure and transmission pipelines, as well as increased pipeline integrity work and expenditures by natural gas utilities.

In the Downstream and Other Industrial sector, first-quarter 2012 revenues increased by 25% to $373 million and accounted for 27% of total sales. Approximately half of this growth was attributable to our Australian acquisitions, which are more heavily weighted towards Downstream and Other Industrial than the business as a whole.

In North America, the Downstream sector grew 12% year over year. After several years of subdued investment, our major customers in the refining end markets are showing signs of increased turnaround activity. We are also optimistic about additional investments in chemical and petrochemical facilities, given the low natural gas prices, which is their primary feedstock.

In terms of sales by product class, our energy carbon steel tubular products accounted for $512 million, or 37% of our sales, during the first quarter of 2012, with line pipe sales of $290 million and oil country tubular goods sales of $221 million.

Our sales of valves, fittings, and flanges reached $608 million in the first quarter, or 44% of sales. This represents an increase of 35% over the first-quarter 2011 results. Sales of general supplies and other products were also strong, increasing 26% quarter over quarter to $263 million, or 19% of sales.

Turning now to margins, gross profit percentage in the first quarter of 2012 with 17.1%, compared with 14.8% in 2011's first quarter. The increase was driven by a favorable change in product mix and the leveraging of the fixed-cost component of cost of sales. Included in our cost of sales is a LIFO charge of $7 million in the first quarter of 2012, compared with a $10 million in the first quarter of 2011.

Adjusted gross profit percentage increased to 18.8% from 17.5% in the first quarter of 2011.

Moving onto SG&A expenses, we continue to leverage the generally fixed nature of selling, general, and administrative costs as our revenues increased. In the first quarter of 2012, SG&A costs were $146 million, or 10.6% of sales, compared to $117 million, or 11.8% of sales, in the first quarter of 2011. The increase in expense year over year is primarily due to additional personnel costs, other costs directly related to the increase in business activity, and also our acquisitions of SPF and OneSteel Piping Systems.

Operating income for the first quarter improved to $90.2 million, or 6.5% of sales, from $29.6 million, or 3% of sales, in last year's first quarter. Higher gross profit and increased leverage over our fixed SG&A costs both contributed to the operating income increase.

Our interest expense totaled $33.7 million in the first quarter of 2012, essentially unchanged from the $33.5 million in the first quarter of 2011.

Our effective tax rate for the first quarter of 2012 was 36%, compared to 38% for the same period in the prior year. The rates are slightly higher than the 35% statutory federal tax rate, primarily due to state and foreign taxes.

Net income was $37.5 million for the first quarter, or $0.44 per share on a fully diluted basis, as compared to a loss of $1.1 million, or a loss of $0.01 per share, in the first quarter of 2011. These per-share amounts reflect the two-for-one reverse stock split that we affected in February of this year.

Consistent with our strong revenue and profit performance, adjusted EBITDA improved significantly over the prior period. Adjusted EBITDA was $115 million in the first quarter of 2012, compared to $60 million for the same period in 2011. And on an incremental basis, the $55 million year-over-year improvement in adjusted EBITDA is 14.1% of the $391 million revenue growth.

Our outstanding debt balance was $1.61 billion as of March 31, 2012, increasing from $1.53 billion at the end of 2011. Our operations generated cash of $18 million in the first quarter of 2012, driven by strong earnings, offset by increases in working capital to fund the growth in our business.

Cash used in investing activities totaled $80 million, reflecting our $73 million acquisition of OneSteel Piping Systems, plus capital expenditures and other investment activities.

We financed these investments through operating cash flow and by drawing upon our revolving credit facilities. At the end of the first quarter, our leverage ratio, defined as net debt to trailing 12 months of adjusted EBITDA, was 3.7 times, as compared to 4.1 times at 2011 year-end. As Andrew mentioned earlier, subsequent to the end of the quarter we used the $334 million of net proceeds from our IPO to reduce our net debt.

On a pro forma basis for the IPO proceeds, the leverage at March 31, 2012, was 2.9 times, within our desired leverage range of 2 times to 3 times.

Our working capital of the end of the first quarter was $1.2 billion, compared to $1.1 billion at year-end, and our total liquidity, including cash on hand, at the end of the quarter was $496 million and $830 million on a pro forma basis for the IPO proceeds.

And now, I'll turn it back to Andrew for closing comments.

Thanks, Jim.

Let me conclude with some thoughts on the current business environment. Our backlog at March 31 was $948 million, including $775 million in North America and $173 million in our international segment.

The North American rig count remains close to multi-year highs and oil prices are approximately $100 per barrel. In addition, demand is increasing for midstream infrastructure to transport oil and natural gas liquids to market, and we should continue to benefit from that.

We will continue to monitor low natural gas prices, and result in shifting rigs from dry natural gas to wet natural gas and oil.

We believe the key drivers for our business and our primary end markets remain strong and we expect full-year 2012 revenues to be between $5.4 billion and $5.6 billion. Due to our improved Q1 performance and our favorable product mix in our inventory from our 2011 inventory rebalance and our purchasing strategy, we also expect our adjusted EBITDA percentage to be between 8% and 8.5% in 2012.

We are very pleased with the sales growth and the profitability improvement that we have delivered to begin the year, and we believe this has created positive momentum to carry us through 2012.

I'll now turn the call back to Will James.

Thanks, Andrew. We will now open up the call for questions.

(Operator Instructions). Sam Darkatsh, Raymond James.

This is Josh filling in for Sam. (Multiple speakers). Congratulations on the quarter.

Thank you.

A couple of questions here. First, can you talk a little bit about how April came in in each of the streams?

Yes, April was a strong month. It continued what we saw in the first quarter, but we're not prepared to give it by streams just yet.

So, a similar growth rate to the first quarter, you said?

Just continued strong activity levels.

Okay, and then, as far as this full-year guidance goes, just to make sure I understand it, what sort of assumptions are you making for any further acquisitions and rig counts and oil prices going forward?

Yes, we -- no further acquisitions are built into that number, and just the -- after OneSteel closing the last month of the first quarter, you get three quarters of that.

But we're, based on current activity levels and oil pricing, $90-plus. We're in this $2.25, $2.30 environment for gas, and we see rig count holding about steady. We're going through the traditional second-quarter spring breakup in Canada where you have a big rig-count drop in the second quarter, but it rebounds into the end -- second half of the year.

So pretty much flat drilling activity. A large amount of the shift from dry gas to oil and wet gas has already occurred in the first quarter, and as you can see from our results, though, we'd have to vary wells to that shift already.

Gregg Brody, JPMorgan.

Hey, guys, it's Gregg Brody. I think you might know that, but just in case. Just a couple -- just a question, just breaking down the oil versus the gas impact on your business. I appreciate oil is offsetting quite a bit the weakness in gas prices, but could you give us a sense of -- maybe break that out for us what kind of type of [decline] on your gas business you're seeing versus increasing your oil?

Yes, Gregg, we're seeing -- for us, it really doesn't matter whether it's oil well or gas well. What really is a big driver for us is the shale activity, so that does have a big difference, shale versus conventional.

But we really saw the drop in -- primarily in the Haynesville and the Barnett in kind of north Louisiana, north Texas. We also saw a drop in the first quarter in the Marcellus on the dry gas portion, but we quickly saw the pickup in activity in the oil plays. South Texas, the Eagle Ford's doing terrific; same with the Bakken in North Dakota for us. And also, the conventional oils in the Permian basin and the West Coast.

So we see broad-based pickup in activity. The shift occurred, and we just see it as it was not a big event for us. That shift really started in November for us. We saw the early signs of it and carried through the first quarter. You know, as we talked about, our distribution model is much more adaptable to shifts like this than the oilfield service models that have to shift a lot of capital equipment and a lot of personnel.

So when you look out in terms of your growth substance for 2012, how much of an impact do you think -- how much more of a decline on the gas side do you think you could see from where in the current levels?

Gregg, I think the best way to look at it -- if you look at it a full year, we saw a prediction of around a $100 million revenue for the year drop in dry gas drilling, but a $200 million in revenue pickup from wet gas and oil drilling, so we really see it as a positive, as we talked about, to our Company.

The shift in the U.S. to oil drilling, what Jim mentioned in his script, at the record level of 65%, is a big positive for us. We see that as a stabilizing factor for our end markets, and even into April, we saw it shift even a little further. Now drilling is at roughly 68%. So that dynamic is a positive for our Company, and we built in our thinking for the rest of the year already with the dry gas impact factored in.

That's very helpful. And just as you look at your customer base, [want] to segment them as the majors versus the independents, and if you feel like that is incorrect, let me know, but what I'd say is what -- are you seeing different behavior from those players in those segments, sort of gas and oil?

Yes, Gregg, we are, for sure, and that's been the shift with the Exxon Mobil and Chevron and Shell's investment back into North America and back into gas. You'll see -- which are major customers of ours.

You'll see their activity and their spend go through a cycle like this, of current low natural gas pricing, and that's why we focus on that customer group. We like their -- both the growth internationally they offer us, but also the stability in their spending programs through a cycle like we have right now.

Ryan Merkel, William Blair.

So the first question I've got is just, given the large project backlog you mentioned, should we expect that portion of your business to start growing faster than your MRO sales at some point this year?

The backlog -- Ryan, the backlog number we quoted, which was up around 15% from the fourth quarter, that's a mixture of MRO and project-based business.

And so, we see it consistent. It's not -- it's a good indicator forward for us, and I think that's really -- it's not really heavily project-based.

Okay, so -- yes, because my understanding was the project portion was just now starting to recover and that was kind of a big opportunity going forward. So that's still the case, I assume?

Yes, our mix is still two-thirds MRO and one-third projects. The projects we were talking about mostly recovering is the turnaround activity in the Downstream, which we did see a good pickup in the first quarter from that. We see a strong turnaround activity later in the year that we predicted, so that's definitely a positive.

Longer term, you see some major gas development-type projects coming to North America, but they're a couple years out. But they're a good sign from a long-term perspective on our projects.

Okay, and then the second question. Can you just talk a bit more about your natural gas utility customers? What market forces are driving sales in that business? And then, remind us, how big is that as a percent of your total revenue?

Yes, it's roughly 9%. It's a good segment of our business.

It's being driven by the deregulation in that industry. Many of the operators have now gone to an outsourced model for the supply-chain efficiencies that we can bring them, and so that's continued. And as there's been continued consolidation in that industry, you see the players that are the acquirers have that outsourced model, so we continue to grow and expand in that business.

So it's both new installations, and also replacements of both lines and smart meters on the residential side, so we feel very good about our position in that market. It's a nice end segment for us.

Thanks for the color. I'll get back in line.

(Operator Instructions). Matt Duncan, Stephens Inc.

Good morning, guys. Congrats on a great quarter.

Thanks.

The first question I've got is on the Midstream business. That's pretty hefty growth there at 58%. Can you talk a bit more about where that's coming from, projects, in terms of new well tie-ins and valves associated with new pipelines, as opposed to MRO spend within that piece of your business? And have you seen much of a benefit yet from the pipeline safety act?

Yes, it's a combination of several of those factors you mentioned.

We're still seeing both -- on the dry gas infrastructure, we're seeing operators, even the independent operators, still investing in putting the infrastructure in place. Even if they're curtailing some of the dry gas drilling, of course they want that infrastructure in place when the price recovers, so that's been a positive.

Oil and NGL pipeline activity has been very strong for us. If you look at our carbon NG tubular by tons shipped, which we follow closely, our year-on-year increase is 33% in the total tons of pipe we shipped. So we see a lot of positives.

We're in the early days of the pipeline safety act. We have seen a pickup of activity with a major customer in California related to that, and we see that as a continuing trend that will have a positive impact on as we go through the year.

It's really a continuation of the strong position we had in the second half of last year as -- where midstream was our fastest-growing end market last year, and it continues to be this year.

Okay, and then, Andy, looking at the M&A environment right now, what kind of opportunities are you guys seeing? Is the focus primarily international at this point?

Yes, it remains -- there's always lots of opportunities out there. We look at everything in our space.

But our focus has been on building out the full platform internationally, like we did in Australia. We're very pleased with that. We're in the number one market-share position in the U.S., we're number one in Canada, and we're now number one in Australia. So we like those three markets a lot.

We continue to look at Europe, the UK sector, to possibly build out the full PVF capability, and we continue to look at small bolt-ons primarily in the U.S. that look favorable for us. So nothing different than we've been talking about. Funding working capital first, M&A bolt-on activities of the scale we've been doing lately as a second priority, and then pay down debt further as a third priority.

Finally, last thing for me. Jim, on the guidance, how much organic growth is built into that 5.5 -- or $4 billion to $5.6 billion revenue guidance. What's the organic growth assumption in there?

Yes, the organic growth year over year is about 9% to 10%. There's probably $175 million to $200 million of revenue growth from the acquisitions built into that guidance.

Gregg Brody, JPMorgan.

Hey, guys. Just following up, with steel utilization levels approaching -- going up above 80%, are you seeing greater pricing power with your products?

Gregg, you know, a lot of our products are a cost base type methodology, so not a lot of pricing leverage. We are seeing in some of our smaller customers a bit of pricing opportunity, but for the most part it's holding pretty firm.

Yes, it's largely volume driven, driving our activity.

Okay, and then, as you think about your working capital over the next year, should we assume proportional growth relative to your sales growth?

Yes. A good rule of thumb, and if you look back on it on a trailing 12-month basis, we'll generally see working-capital grow about 25% for $1.00 of revenue increase.

That's very helpful. And then, your maintenance CapEx number. I noticed it's small. Are you providing that for the year?

Yes, we -- it was about $3 million in the quarter. We have a capital budget of about $21 million for the full year, excluding acquisitions, of course.

And that's mostly maintenance?

Correct.

I think that -- one last question for you, just some more on the downstream side. Could you talk about what you're seeing in terms of project work versus maintenance work in the U.S. and then outside the U.S.?

Yes. In the U.S., we saw good pickup in kind of mid-sized project work, some turnaround activity in the first quarter, which we were expecting, so a higher level of spend than we were seeing with just the maintenance spend.

As Jim said earlier, U.S. downstream was up 12% for us, but we see even a stronger activity level as we go through the year, especially the third quarter, which is usually a good quarter for us in the downstream. So that is not growing as fast as the midstream or the upstream, but still a good double-digit growth end market for us. So we like the way that's shaping up for the second half of the year.

Yes, Europe has stabilized. We're seeing some growth there, and then Australia and southeast Asia, we're seeing good growth there.

That's very helpful. Thank you, guys, and congrats on getting the IPO done.

Thank you.

Matt Duncan, Stephens Inc.

Jim, were there any IPO-related costs in that SG&A expense this quarter? Just trying to figure out what that should be on a run rate going forward?

No, Matt, those have all been deferred and will get capitalized in the second quarter, so there were no IPO costs in the G&A number.

Okay. And then, looking at gross margin, your adjusted gross margin of 18.8%, it's pretty strong growth year over year. Is that a level you think you can maintain going forward, assuming that prices stay pretty steady?

Yes, we expect to operate in that 18% to 19% range going forward. It'll fluctuate quarter on quarter, depending on product mix and customer mix, rebate activity, but that should be a range we can operate in.

Okay, and then, last thing, just want a clarification on the guidance on organic growth. So the OneSteel is about a, what, $175 million business? And I think SPF was about $90 million when you bought it. You've still got, what, another quarter of SPF as acquired revenue, so it seems like that would be a little bigger than $175 million to $200 million. Am I wrong on one of those numbers?

The SPF for the year, you've got basically half the year of 2011 that was in there, so you'll have half a year in 2012. (Multiple speakers)

(Multiple speakers) there, and I guess about $150 million or so from OneSteel for the 10 months you own it.

That is correct.

Okay, perfect. Thanks, Jim.

And ladies and gentlemen, I will turn it back to management now for any closing remarks. Please go ahead.

Thank you for participating in today's conference call. Our next call is scheduled for August when we will discuss second-quarter results.

Thank you and goodbye.

Ladies and gentlemen, that does conclude your call for today. If you would like to listen to a replay of the conference, please dial 303-590-3030 with the access code 453-3752. Again, that is 303-590-3030, access code 453-3752. Thank you for your participation. You may now disconnect.