MRC Global Inc (MRC) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to MRC Global's fourth-quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, February 22, 2013.

I'd now like to turn the call over to Ken Dennard. Please go ahead, sir.

Thanks, George. Good morning, everyone. We appreciate you joining us for MRC Global's conference call today to review 2012 fourth-quarter and full-year results. We'd also like to welcome the Internet participants as the call is being simulcast over the web.

Before I turn the call over to management, I have the normal housekeeping details to run through. For those of you who did not receive an email of the earnings release yesterday afternoon and would like to be added to the distribution list, please call our offices at Dennard Lascar, and that number is 713-529-6600 and provide us your contact information, or you can email me at the address on the contact section of the press release.

There will be a replay of today's call. It will be available by webcast on the Company's website, which is mrcglobal.com. There will also be a reported replay available via phone until March 8, and that information to excess is in the press release yesterday.

Again, as George said, please note that the information reported on this call speaks only as of today, February 22, 2013, and therefore, you are advised that time-sensitive information may no longer be accurate of any time of replay, listening or transcript reading.

In addition, the comments made by management today of MRC during this conference call may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of the management of MRC; however, various risks, uncertainties, and contingencies could cause MRC's actual results, performance, or achievements to differ materially from those expressed in the statements made by management. The listener or reader is encouraged to read the Company's annual report on Form 10-K, its quarterly reports on Form 10-Q, and current reports on Form 8-K to understand certain of those risks, uncertainties, and contingencies.

Now with that behind me, I would like to turn the call over to MRC Global's CEO, Mr. Andrew Lane.

Thanks, Ken. Good morning and thank you all for joining us today for our fourth-quarter 2012 investor call. We'd like to welcome you all, and thank you for your interest in MRC Global.

Before I review our fourth-quarter performance, let me begin by highlighting some of the noteworthy events that have taken place over the past year.

2012 was a year in which many changes were made and a lot of milestones were achieved. MRC became a publicly-traded company by raising $477 million in an initial public offering followed by a $506 million secondary offering. Today roughly 45% of the Company is owned by the public.

We redeemed all $861 million in outstanding 9.5% senior secured notes using $650 million in proceeds from a new lower-interest seven-year term loan and a draw on our global ABL credit facility, which served to significantly reduce our interest expense, extend our debt maturity, and upgrade our credit rating. Through these actions, our interest expense savings in 2013 is expected to be over $50 million.

MRC signed a five-year global enterprise framework agreement with Shell, which makes us their single source distributor for valves and a central distributor for other products to their businesses in North America, Europe, Asia, Australia, the Middle East, and Africa. This contract contributed $10 million of incremental revenue in 2012 as the contract began its ramp-up phase in the second half of the year. This is on top of a $240 million-based Shell business.

Acquisitions expanded our presence in key growth markets such as OneSteel Piping Systems, now known as MRC Australia, which made us the largest distributor of PVF products on that continent; Chaparral Supply, which broadened our base in the Mississippi Lime; and Production Specialty Services, which strengthened our presence in the oil-rich Permian Basin and Eagle Ford shale. Collectively we added about $370 million of annual revenue from these acquisitions.

And finally, we continue to shift our focus to higher margin, more stable activities reflected in our MRO business and the de-emphasis of our lower margin, more volatile OCTG project business, which, as you know, we have actively worked to reduce as a percentage of our sales and inventory over the last half of the year.

Today, MRO makes up approximately 70% of our revenue and is at the highest level in the Company's history.

I am proud of having accomplished so much towards our goal to be better positioning the Company for future growth and greater stability. I'd like to thank the nearly 4800 employees of MRC for their outstanding performance in 2012.

Now turning to our fourth-quarter results. We felt the effects of our decision to deemphasize the oil country tubular business in the fourth quarter. We moved aggressively on this strategic initiative and lowered our OCTG inventory to $85 million at year-end, about 7% of our total gross inventory. As a result, our OCTG sales were down $102 million in the quarter as compared to a year ago.

Unfortunately, this move coincided with a year and a slow down in the activities of our US customers. The seasonal year-end slowdown was expected; however, this year the slowdown started earlier and was broader than in recent years, driven in part by some of the uncertainty around the fiscal cliff question at year-end and also the robustness of capital spending earlier in 2012, which exhausted certain customers' capital budgets before the end of the year.

Having said that, I remain very optimistic about our future, including 2013 as set forth in the guidance that was included in yesterday's press release. More on the outlook later.

As a result, our total revenue for the quarter was $1.3 billion, comparable with a year ago. With the decline in our OCTG business largely offsetting sales growth and our other core product offerings of 9.4%, of which 6.5% was from acquisition and 2.9% was organic.

By end market sector, revenue gains of 6% and 13% in our midstream and downstream business respectively were offset by a 10% decline in our upstream sector. Excluding OCTG, upstream revenue was up 8.3% in the fourth quarter from a year ago.

Adjusted EBITDA for the fourth quarter was $99.2 million or 7.6% of revenue comparable to the fourth quarter of 2011.

For the fourth quarter, we reported a net loss of $6.4 million or a loss of $0.06 per share compared to a net profit of $3.6 million or earnings of $0.04 per diluted share for the same period a year ago. The quarter's results were negatively impacted by the previously announced redemption of our 9.5% senior secured notes and a termination of a foreign pension plan.

Collectively, the after-tax charge was $62.8 million or $0.61 per diluted share. Excluding the impact of these two items, our fourth-quarter adjusted net income was $56.4 million or $0.55 per diluted share.

With that, let me now turn the call over to Jim Braun to review our financial results in more detail.

Thanks, Andrew, and good morning, everyone. Let me begin with some comments on fourth-quarter market conditions.

As Andrew mentioned, customer activity at year-end fell off more than expected. With 2012 budgets spent and objectives met, nonessential activities were deferred or slowed down. Rig counts, both in the US and Canada, were down year over year with US rigs down 10% and Canadian rigs down 22%.

Revenues for the fourth quarter were $1.307 billion, comparable to the fourth quarter of 2011. Revenues from OCTG, which is only a North American business, were $114 million in the fourth quarter, down $102 million from $216 million in the fourth quarter of 2011. Excluding the OCTG business, revenues grew 9.4% from last year. That 9.4% revenue growth was split between organic growth of 2.9% and acquisition growth of 6.5%.

North American revenues were $1.166 billion in the quarter, down 4.1% from the fourth quarter of last year. Excluding the OCTG business, revenues in North America were up 5.3%, split between organic growth of 2.9% and acquisition growth of 2.4%.

Within North America, our Western region, which includes the Bakken and the Mississippi Lime, was the best performing region in the US with 12% revenue growth, mostly in the upstream sector. The Eastern and Gulf Coast regions were the most impacted by the drop in OCTG revenues, each showing a year-over-year decline.

Canada had a particularly strong quarter, building on our leading position in the heavy oil market. The completion of our new distribution center in [Misque] in the second quarter should position us well to support the long-term growth in the heavy oil and oil sands market.

Internationally, in the fourth quarter, revenues were up 55% from a year ago to $141 million due substantially to the piping systems of Australia acquisition. Organic growth in the international business was 3.4% in the quarter compared to the fourth quarter of 2011. Our Australasia business is now our largest in the international segment with an annual revenue run rate of over $300 million a year, giving us a leadership position in this important market. The integration of the three former businesses in 2013 will help drive improvements in operating margins.

And now looking at our results based on end market sector. In the upstream sector, fourth-quarter sales decreased 10% from the same quarter a year ago to $574 million. This decrease was driven by the $102 million year-over-year OCTG revenue decline. Without this decline, the upstream sector grew 8.3%. This growth was attributable to the acquisitions of Chaparral and OneSteel Piping Systems.

Importantly, from an organic perspective, our North American revenue in the quarter was down only 1% compared to last year, in spite of the 12% drop in the North American rig count, thus reinforcing the idea that our upstream MRO business is not highly correlated with the rig count.

Fourth-quarter sales in the midstream sector increased 6.3% to $366 million with nearly all of that growth coming organically from our North American business. Revenues from our gathering and transmission customers was up 5.2% year over year, and revenue from our natural gas utility customers increased 8.6%. We continue to see the buildout of oil and gas gathering infrastructure and transmission pipelines within the shale basins, as well as increased pipeline integrity work and expenditures by natural gas utilities.

In the downstream sector, fourth-quarter 2012 revenues increased by 13.2% to $366 million. Growth attributable to our international acquisition of piping systems in Australia was 8.5%. Organic growth was 4.7%, including organic growth in our North American business of 4.6%.

In terms of sales by product class, our energy carbon steel tubular products accounted for $393 million or 30% of our sales during the fourth quarter of 2012 with line pipe sales of $279 million and OCTG sales of $114 million. Overall, sales from this product class decreased 24% in the quarter from Q4 a year ago, driven mostly by the $102 million decline in OCTG.

Sales of valves, fittings, flanges and other products reached $913 million in the fourth quarter or 70% of sales. This represents an increase of 16% over the fourth quarter of 2011 results. There was particularly strong organic performance in North America where our valves, specialty and automation product lines grew 23%, and our carbon fitting flanges and alloy pipe product lines grew 19%.

Turning now to margins, our gross profit percentage in the fourth quarter of 2012 grew 5.5 percentage points to 19.8%, up from 14.3% in last year's fourth quarter. And similar to our third quarter, margins benefited from a LIFO gain due to deflationary economic data. For the fourth quarter, we booked a LIFO-related benefit of $27.2 million compared with a $27.7 million charge in the fourth quarter of 2011, and for the full-year 2012, we had a LIFO benefit of $24 million.

Our adjusted gross profit percentage, which is gross profit plus depreciation and amortization, the amortization of intangibles, plus or minus the impact of LIFO inventory costing, increased 120 basis points to 19% from 17.8% in the fourth quarter of 2011. The shift away from OCTG contributed to improved adjusted gross profit percentage, as well as other pricing and cost of product initiatives.

Fourth-quarter SG&A costs were $154.2 million or 11.8% of sales compared to $137.5 million or 10.5% of sales in the fourth quarter of 2011. The increase in expense year over year was evenly split between North America and international. The acquisition of Piping Systems added $9.5 million of SG&A expense, while the $4.5 million increase in North America was due to additional personnel to support the growth of the business and other costs directly related to the increase in business activity.

SG&A as a percent of sales increased as the $102 million reduction in OCTG revenue did not bring with it a corresponding reduction in SG&A. Although some of the personnel associated with the OCTG business have been reassigned to line pipe sales in our midstream business.

Operating income for the fourth quarter improved to $104.1 million or 8% of sales from $50 million or 3.8% of sales in last year's fourth quarter. Higher gross profit, offset somewhat by an increase in SG&A expense, contributed to the operating income increase.

Our interest expense totaled $19.9 million in the fourth quarter, which was a 42% reduction compared with $34.5 million in the fourth quarter of 2011. This was primarily due to lower borrowing costs on our indebtedness, including the retirement of our 9.5% senior secured notes during the quarter, as well as a reduction in our outstanding debt.

We closed on a new $650 million seven-year term loan during the quarter and used the proceeds together with the draw under our global ABL facility to redeem the remaining $861 million of senior secured notes for $930 million. In connection with these purchases, we incurred a pretax charge of $92.2 million or approximately $59.9 million after-tax, including the purchase premium and the write-off of deferred financing costs and original issue discount. This charge impacted our results by $0.58 per share.

In addition, during the quarter, we terminated the defined benefit plan in the Netherlands and replaced it with a new defined contribution plan. As a result, we incurred a $4.4 million pretax settlement charge. The after-tax impact was $2.9 million or about $0.03 per share.

We reported a net loss of $6.4 million for the quarter or a loss of $0.06 per share as compared to a net profit of $3.6 million or $0.04 per diluted share in the fourth quarter of 2011. And excluding the impact of the two Q4 items, our adjusted net income in the quarter was a profit of $56.4 million or $0.55 per diluted share.

Adjusted EBITDA was in line with year ago amounts with fourth-quarter 2012 adjusted EBITDA of $99.2 million. As a percent of sales, adjusted EBITDA was also in line with last year at 7.6% in the fourth quarter of 2012 compared with 7.7% a year ago.

And now turning to our full year of 2012 results. We achieved total revenues of $5.6 billion. This was up 15% over the prior year. For the year, organic growth was 10.2%, including the planned reduction in OCTG, while acquisition-related growth was 5% during the year.

North American sales topped $5 billion and were up 11% over 2011. International sales were up 72% to $567 million, mostly due to acquisitions. Upstream revenue was up 12% to $2.5 billion. Midstream revenue was up 20% to $1.5 billion, and downstream was up 16% to $1.5 billion. Organic growth in these three market sectors was 8%, 20%, and 5% for up, mid, and downstream, respectively.

Our 2012 adjusted gross profit of $1.1 billion was up 24% and improved to 19% of sales from 17.6% in 2011. Adjusted EBITDA improved $102.7 million to $463.2 million or 8.3% of revenues, up from 7.5% in 2011.

Diluted EPS was $1.22, including the special items versus $0.34 a year ago. Those special items included in 2012 included the $114 million charge associated with the retirement and repurchase of our senior secured notes and the settlement loss on the termination of the Netherlands pension plan. Our adjusted EPS for 2012, excluding special items, was $2.02 per diluted share.

Our outstanding debt at December 31, 2012, was $1.257 billion, down from $1.527 billion at the end of 2011. At the end of the fiscal year, our leverage ratio, defined as debt net of cash to trailing 12 months of adjusted EBITDA, was 2.6 times as compared to 4.1 times at 2011 year-end.

Total liquidity, including cash on hand at the end of the year, was $467 million.

As planned, our operations generated a significant amount of cash in the fourth quarter as we pulled back on inventory levels, including OCTG in light of the slowdown. Cash from operations was $174 million in the fourth quarter of 2012, and as you may recall, we experienced an inventory build during the first half of the year. So we had made inventory reductions and cash flow generation a priority for the second half of 2012. For the full year of 2012, we generated cash from operations of $240 million.

Our working capital at the end of the year was $1.2 billion, up 12% from the end of 2011 on a year-over-year revenue increase of 15%.

Cash used in investing activities totaled $70.6 million for the fourth quarter and included capital expenditures of $5.2 million and the acquisition of Production Specialty Services. Our full-year capital expenditures totaled $26.2 million.

And now I'd like to turn the call back over to Andrew for his closing comments.

Thanks, Jim. Let me conclude with some thoughts on the current business environment.

Capital spending surveys for 2013 show another increase in global spending. For example, Barclays recent survey notes an increase in 2012 global E&P spending of 6.6% in 2013. Continuing a growth trend experienced over the past several years was a new all time high E&P capital spending estimated at $644 billion for the largest 300 operators. However, it is worth noting that several spending surveys indicate that North America will see 2013 spending at levels lower than has been experienced over the past several years. In fact, the Barclays survey reports North America spending growth of less than 1%.

Nevertheless, energy demand around the world continues to grow, and increase in oil and natural gas production drives increases in transmission, distribution and refinement capability, all factors that should benefit our business over the long term.

The slow finish to 2012 in November and December has carried over into the first six weeks of 2013. I believe this is a temporary pause in an otherwise robust long-term secular growth in the energy industry.

In addition, similar to the fourth quarter of 2012, the impact from the OCTG shift will be significant to the top line in the first quarter of 2013, roughly an additional $100 million of revenue decline in the year-over-year Q1 comparison.

Our backlog at December 31 was $664 million, including $517 million in North America and $147 million internationally. The backlog at the end of January was up 4% compared to the end of 2012.

We've also seen a pickup in billings in the first three weeks of February compared to the same period in January.

Commodity oil prices remain at historic high levels, which should continue to support investment activity with price differentials in North America favoring some basins more than others. US natural gas prices remain subdued, but in the short term, continued coal to gas switching in the US power industry will add demand, and longer term the prospect of the global LNG market with the US as an exporter bodes well for this part of the market.

Demand for midstream infrastructure to transport oil and natural gas liquids to market remains very healthy, and we should continue to benefit from the need for gathering and transmission lines within the shale basins.

Within the gas utilities market, there is also need for pipeline integrity and the repair or replacement of aging pipeline infrastructure, which should continue to have a positive impact on our results.

Low natural gas and NGL prices are not dampening pipeline infrastructure spending in the North America market as the industry works to catch up with historical quantities of production needed to get to end markets.

In both the downstream chemical and refining markets, we are uniquely positioned to capitalize on increases in spending on maintenance and projects. We have started to see an increase in the spring turnaround activity that we were expecting in the first half of 2013. A recent industrial information resources estimates put the value for scheduled project starts and scheduled maintenance and turnarounds to grow significantly in the first half of 2013 as compared to the first half of 2012.

We are also excited about our most recent acquisition, Production Specialty Services, on December 31. The PSS acquisition adds 17 branch locations to our existing Permian Basin and Eagle Ford operations, which along with the Bakken Shale in North Dakota are the three most active shale areas in the US. The PSS acquisition is the latest in our successful bolt-on strategy where we acquire strong regional, privately-held distributors with good customer relationships at attractive multiples, and then add the breadth of MRC's product portfolio and the efficiency of our hub-and-spoke operational expertise.

In yesterday's press release, we provided annual guidance for 2013. We expect revenues will be between $5.75 billion and $6.05 billion, representing an increase of between 3.2% and 8.6% over 2012. Adjusted EBITDA is expected to be between $480 million and $520 million, and diluted earnings-per-share is expected to be between $2.10 and $2.35 per diluted share. This guidance excludes the impact of any future acquisition.

Going forward, we will continue to focus on our higher-margin product lines and target global contract opportunities that provide a more stable recurring revenue stream servicing new and existing energy infrastructure, which should improve our margins and stabilize our earnings.

While the short-term impact of the OCTG revenue drop is obvious, the combination of an MRO-oriented service offering and the rebalancing of our portfolio toward higher margin valves, fittings and flanges should continue to reduce earnings volatility, improve overall profitability and our exposure to rig counts.

With that, we will now take your questions.

(Operator Instructions). Matt Duncan, Stephens.

Andy, the first question I have got is with regards to what you're seeing in the business right now. It sounds like the first six weeks you said of 2013 are pretty similar to what you saw in November and December. But have you seen any trend towards things beginning to improve? It sounds like Billings are up a bit. Are you seeing the business began to lift, or is it still sitting where it was in the fourth quarter?

Yes, Matt. If I can, let me just frame it a little bit from how the year ended. We had a fantastic May through October in 2012. And as we mentioned on the last call, August was the highest revenue month we've had since 2008 peak level, and we also had a strong September and October going into the fourth quarter.

So it really was a downturn only for the last six weeks of 2012. It really started in mid-November where we really saw customers significantly slow down their spending on projects and investment. And that just coincided with what our strategic initiative was, to pull down our drilling exposure on OCTG.

So that we saw in -- we expect a little seasonal slowdown in November and December. It was much more significant than we normally have seen. And so that is how the year ended. Then we went into the start of 2013, first seven to 10 days of January, very slow as far as activity levels. It started to pick up in January, but remember, it will still be down $100 million year-on-year comparison just from OCTG.

But we really saw budgets start to kick in. And remember now, in comparisons with January and February from 2013 to 2012, 2012 we really didn't have a winter, so to speak. It was the warmest winter since 2000. So we really didn't have a lot of interrupted billing days, and construction projects had minimal interruptions.

So, as you are seeing this year, we have a more traditional winter, which impacts us in two ways. It impacts our line pipe and pipeline construction. So we have been slow, Matt, in the first part of the year in line pipe, mostly due to weather and especially in the Bakken area in the northeast. And then we have also seen slowdowns in our gas products, which is the gas utility work, which also goes with the winter conditions year on year.

But backlog is up, as we mentioned, 3% to 4%. We are seeing activity pick up in February. January was better than November; February looks to be better than December, but we had a strong October, so we'll see how March comes out to end the quarter. But it appears to be picking up.

And so in general, guidance will probably be flat to the fourth quarter and down year on year slightly because we had the really low impact from the weather a year ago.

Okay. So to make sure I understand, you are going to be pretty flat 1Q versus 4Q, maybe up, maybe down a little bit, but it's going to be fairly close. But then I get the impression 2Q and beyond things look better just in the billings you are seeing. You've talked about a strong turnaround season, so it sounds like this really is a little bit of an air pocket, I guess, if you will, to start the year. But how do you feel Q2 and beyond once you get through that?

Yes, Matt, we still feel, and I feel very good about the rest of the year. We are going to have a good year. I really see these as last two months of 2012 and the first two months of 2013 as the soft window or the trough in activity for us. We are going to be in good shape when we -- the second quarter, the third quarter are normally great quarters for us. There's no reason to think it's not going to be. Our international business is doing very good with the integration of acquisitions, so year on year that is a plus for us.

So we still feel very good. We've been very successful on our MRO contract extensions and renewals and the net gain from those. We have been successful on project bids. So it's not a situation where we're losing market share or things have changed. The only things that have changed were the dynamics and capital spending that we couldn't control for a window here.

But we feel -- I feel, personally, very good about our competitive position in the market ahead of us. And it's been our strategy for a year and a half to deemphasize OCTG and decrease our lowest margin product line and decrease our exposure to drill and rig fluctuations, and we've done exactly what we said we would do. We've pulled that down to less than 10% of our revenue, less than 10% of our inventory. And now we are at 70% MRO, 30% projects, the highest we've ever had, and that is going to bring a lot more stability going forward.

David Manthey, Robert W. Baird.

First of all, on the contribution margin relative to your guidance -- and I apologize if you addressed this and I missed it -- but if I look at the guidance relative to 2012, it looks like contribution margin is something in the high single, low double digits, 9% to 12%, and you've been running low to midteens recently. Just wondering if you'd address that, especially relative to taking low-margin OCTG? I would expect that contribution margin to be a little bit higher. And I'm just wondering if you could talk about that.

Yes, David, you are right. The adjusted gross profit we've got it forecasted relatively consistent where we finished with 2012. We have added the expense of the acquisitions in Australia. We are making investments there, as well as in the US, to continue to support the growth of the business. I would tend to think that contribution margin will be a little bit higher than perhaps what you calculate it. But as a general rule, we see about 15% of incremental revenue fall down to the EBITDA line.

Okay. Thank you. And then on global supply agreements, what are those discussions like right now? I would imagine that you are fairly active. Is there a chance that something hits in 2013 for you?

Yes, David, let me address that, and let me start a little bit with a little more color on Shell, even though it is a major transition from all the local regional suppliers that Shell had up to a new global supply.

So, as you know, existing incumbents supplying Shell have to wind down their inventories, and we have to get the new standardized spec for Shell in place in our inventory. So the transition was slow in the end of 2012, and we see it ramping up in 2013. And as we said, 2014 and 2015 will be at the full capacity of the contract win that we expect.

So that is the timing on Shell. We have active discussions going with two other of our super-major customers, and I would expect us to have another contract win this year.

Sam Darkatsh, Raymond James.

Two questions. First off, I guess the non-OCTG upstream organic growth in the quarter was -- I think it was down 1% or so. What do you peg that business -- since that is historically what people knee-jerk and think it's timed to rig counts, what do you think that's going to look like near-term and then for 2013? Specifically the non-OCTG organic sales growth rate in upstream?

Yes, let me make a couple of comments first about what happened in the fourth quarter. For us, that slight decline outside of OCTG is really infrastructure and production facilities for us. That's the mainstay of our business, and that's an area where we saw our customers pull back in November and December. So that was a slight decline there. But Jim will give you guidance going forward in the stream. But I will say that we feel very good about our upstream position, and Jim, do you want to give general guidance?

Yes, if you look at the midpoint of our guidance on the revenue line, that translates to around 6% to 7%. And by stream, we've forecast that to be between 5% and 6% on the upstream, 8% to 9% midstream, and 7% to 8% downstream. And that is organic growth. It backs out the impact of the acquisitions in the OCTG business.

And then your gross margin expectations, if you back out the OCTG, would they be -- I know that's going to be a benefit for you in 2013, but there's also some other headwinds with respect to perhaps Shell and maybe overall pricing ex-OCTG. If you were to back out the OCTG part of your gross margins in 2013, would gross margins be down year on year, or how should we look at that if we back out OCTG?

Yes, Sam, let me make a couple of comments, and then Jim can give you a little more detail. But I would say in general, our margins will be up ex-OCTG. We are seeing -- we have lots of initiatives going on, pricing improvement, and of course, our strategic buying into the marketplace. So that continues.

And when you look at it -- if you look at 2010, we were at 12% to 13% margin, 2011 we were 14% to 15%; in 2012, 17% to 19%, and I'd expect us to continue to improve margins. The headwinds on pricing are really only in OCTG, which is down 11% in the spot market, but we played a very little part now in that. And then line pipe, ERW line pipe could be the other area that is impacting us with the spot pricing being down approximately 10% in 2012. And most of ours is on contract, but we do have a low pressure on line pipe pricing. But I would say on valves, fittings, flanges, stainless, some of our longer leadtime valves, the leadtimes now in some cases are 40 to 50 weeks. We are still seeing pricing improvement in those product lines. So it's a little bit of a mixture.

Jeff Hammond, KeyBanc.

Just to clarify, the growth rates that you just gave by group, that's how you're thinking about organic growth within the guidance?

Yes, Jeff, let me just frame it a little bit and then Jim can expand on it.

But if you think about our guidance that we gave at the IPO and the follow-on through 2012, we talked about our business model being 10% to 12% revenue growth, 8% to 9% coming from organic, and 2% to 3% from acquisition. And you look at 2012, we had 15% growth, 10% from organic and 5% from acquisition. So we exceeded all of those targets for 2012. And the guidance we are giving you in 2013 includes our PSS acquisition that closed on the last day of 2012, but the remainder is based on organic growth.

So if you look at the midpoint of guidance, Jim was talking about 6% to 7%. I just want to make sure everyone is clear that does not include any future acquisition, and we are very active in investigating further acquisition. We just don't have any that are a sure thing at this point to put into the guidance.

Yes. And Jeff, I might add to that that the $200 million reduction that we see in 2013 coming out of the OCTG business, that gets offset -- almost all of it by the impact of the acquisitions that have been made. So there is close to $200 million of acquisition revenue that will offset that.

Okay. And then on the OCTG, so it is $100 million in Q1 and what another $100 million in Q2 and then we are done?

No, I think you will see more like 50-50 in Q2 and Q3.

And just as a --

Jeff, I would just clarify, think about our business -- 2011 it was around $800 million and a little over $700 million in 2012, and it's going to be a $500 million in 2013 going forward.

Okay, great. And is that number in line with what you had been thinking, or are you drawing that down to a lower target?

We drew it down a little bit lower in December and November than our target, but our target was less than 10%, and we are down closer to 8% to 9%, a little bit more aggressive. I'm not a very big optimist about the future pricing environment in OCTG. You have relatively flat rig demand. You have a lot of imports still coming to the market, and you have domestic supply coming on stream. The V&M Ohio plant is ramping up with maybe 10% to 15% of capacity of a 500,000 ton new mill. You've got Tenaris announcing a new mill in Matagorda County here in the Houston area.

So you've got a lot of domestic supply coming on in a relatively flat rig environment, and imports coming in. So we felt that we had already made a strategic change -- decision to shrink that part of our business, and we pulled it down a little more than we had planned regionally. And I think it's going to prove to be good for us.

Doug Becker, Bank of America.

A very strong quarter in terms of cash flow generation. Any cash flow targets for 2013 given the very strong end of the year?

We are going to do about $200 million in cash next year, according to our plans. We are going to have to build a little bit of inventory back toward the end of the year, but we will still do close to $200 million of cash from operations.

And is that baking in any significant working capital improvements?

No. The working capital -- nothing significant on the working capital side. We're going to have to build up a little inventory, more for Shell, and replenish some of the inventory in international markets.

Okay. Andy, are you seeing any changes to the competitive landscape given the acquisitions that NOV as made over the last year?

Yes, it was a big change in the competitive dynamic. You know, we now have a strong number two. If you look at their fourth-quarter results, that was their first full quarter, and they are on a run rate to be around a $5 billion business. Their operating income margins were around 6% compared to our 8%. So they are going to be a good number two. They are going through a lot of change still combining two large companies, and they are also going through an IT conversion of one of the companies, the Wilson acquisition. So a lot of change going on there with our largest competitor.

But they will be a good competitor. But, as we said last year when that was announced, we see it generally as not a bad sign that we have two very large competitors that have the scale to compete in this. It is a very broad market still, and they're trying to improve their profitability after that acquisition.

So really, not a lot has changed there. They are going through a lot of change internally, so we see -- we like that competitive dynamic. Up in Canada where they acquired CE Franklin, and then you have Russel Metals of Comco acquired Apex up there. So we really in Canada now have three big players -- Russel Metals, Comco, Apex has one. NOV Wilson is one and then, of course, ourselves. So that market became a little more competitive in Canada with three large players, but from a global market perspective, it's still a major two players in the industry. And we're not seeing a big change in competitive pricing or anything along those lines or market share grabs by anyone. It's still status quo for us.

Allison Poliniak, Wells Fargo.

Can you touch on Australia a little bit and what you're seeing there? From what I understand, there is some accelerated macro weakness. Are you guys feeling that or see anything in that area?

No, we have a little exposure to mining there. That's really a headline from the mining side of business, and you also see a little impact on the refining side as they go to less domestic refining and more imported finished products there. But it's a big market. It's a large spend for Chevron, Shell, Exxon Mobil and ConocoPhillips -- all of our major customers. So we still see a very good market for oil and gas there, especially the gas side, the LNG project side.

So no, we're very pleased there, and we do have a little exposure through the OneSteel acquisition there both with BHP and Rio Tinto on the mining side, but no, we feel very good about Australia.

We are going through the process of integrating all three. We have a single management team in place now. We are integrating the IT systems, the platform. So we are still very good. And as Jim said, it's on a run rate of roughly $300 million a year for us now, which was our target.

Great. And you talked about acquisitions a little bit, but can you give us a little more color what's in your pipeline? Are we talking more bolt-ons, or is it more geographical growth?

Allison, it's still a combination. It's very consistent with what we said last year on calls. It's North America bolt-ons. We have several that we are looking at there.

And then we also like the geographic expansion, like we did in Australia. Our end game is in the key markets we want to be internationally to have the full PVF offering. And if you look at the UK, Norway, North Sea, Western Europe and Southeast Asia, big markets. We've had very strong valve presence, and we want to eventually build out through PFF acquisitions the full PVF capability.

So in the near term, really like Southeast Asia and also the North Sea for us, for expansions. Western Europe, we probably will wait another year out for that end market to recover a little more, and then lots of opportunity for us in the short-term in the very excretive North America bolt-ons. And PSS was a classic -- family-run business, great relationships with the customers, a nice branch footprint in the Permian, and we essentially doubled our footprint there and brought in a lot of talent.

So that is -- and one of the things we do with those kind of bolt-on acquisitions. For example, they had a good supply base, but they didn't have access to large line pipe and mill relationships, so they were buying through masters. And with the acquisition, we can get direct product line expansions with our mill relationships.

So now we will be able to expand to their branch network in much bigger supply of both inventory and access the more competitive line pipe.

So we get a growth in product lines. We get a growth in margin, and those are homeruns for us. And we are doing it with 2% ABL money.

So we are going to continue to do those. You'll see several of those in 2013 in North America and then a couple of geographic expansions internationally. But nothing major outside the size we have been doing.

Great. Thank you.

David Mandell, William Blair.

It seems that the EBITDA margin in the quarter came in below what would be implied by your guys prior guidance. So I was wondering if you could go over where some of the surprises were.

Yes, David, a couple of things impacted that, and you're right. In the quarter, with the reduction in OCTG, we had some margins come down, but we didn't take any of the people out.

And then the acquisitions have a bigger impact in the year-over-year quarter. The acquisition in Australia was significant to the quarter and the quarter change. And, as I mentioned, they brought in $9.5 million of G&A expense for that business, which operated as somewhat stand-alone in 2012.

So, as we said, going forward we're going to be moving to take those three businesses to one, and that will help drive some margin improvement there.

And David, let me just add, it wasn't our strategy to take a lot of costs out. When we shrunk our position in OCTG, it was too redeployed that personnel, sales, and internal people over to line pipe because we saw much bigger growth opportunities in top line and profitability by switching those resources over to our line pipe midstream business. So we've done that. Unfortunately with the slowdown inactivity in December and January, we weren't able to fully capitalize on growth in line pipe from that resource. So it appears to have a higher SG&A in this trough. Then going forward, though, we think it's a right move to do.

How long does it take for someone to ramp as they switch over to the line pipe?

Well, our product lines and our support people, we are covering both lines, and really it was tough -- the focus on growth in OCTG with all your efforts in line pipe. So there's really not a ramp-up in timing. We had a lot of expertise that were in both product lines. We are just putting all our effort now into the line pipe in the midstream business.

Igor Levi, Morgan Stanley.

Could you please talk a little bit about the variance in the sales growth guidance of 3% to 9%? Like what are the biggest factors that would impact the sales either to the upside or the downside of that range?

Well, I would just talk to what Jim said. We are forecasting the upstream business to be up 5% to 6%. We are counting on a flat to slightly down rig count in early 2013 with improving rig count in the back half for drilling, and that translates to us in production equipment.

So if the rig count should not improve in the last half of 2013, there would be a little risk to that, but we don't think that's going to be the case. We're not forecasting a large increase in drilling activity.

The midstream guidance was up 8% to 9%. We feel very strong about that. If you look at 2012, our growth was 20%, so we are taking into account a low start to the first quarter, and we feel good about that.

And then downstream was 7% to 8%. That would be based on the turnaround activity we are predicting. We are already seeing really good growth in year on year in downstream US refinery activity, and this is what we expected. And so we feel good about that 7% to 8%.

Okay. So --

So the only other thing I was going to say is today we've got very low natural gas prices. There's not a lot of gas drilling. I think an upside for this is, if gas prices come back, we see a lot more activity there in the drilling, completion of those gas wells and the transportation of it.

Got it. So it looks like the biggest variances is driven by rig count and largely on upstream as you are pretty confident on the midstream and downstream side.

Yes.

And as a follow-up, would it be too aggressive to model another year of 5% growth coming from acquisitions? I know you guys have not finalized the pipeline. You are still looking at things, but what's your gut feeling about that?

Well, we are not guiding to those in the 2013 plan. The general guidance we have that was meant to be multi-year that we exceeded in 2012 was 8% to 9% and 2% to 3% through acquisitions. We are guiding to 6% to 7% organic with the guidance we put out there, and we're not really guiding at this point to acquisition. We'd like to be a little closer on a couple.

We've only -- the PSS is in the guidance. We just closed on that 45 days ago, so we're still working on that one.

Igor, I would say, look at the size of our acquisitions that we made in the past -- the bolt-ons, the geographic expansions -- and depending on when you bring them in midyear, they could be a 2% to 3% contributor. For a full year, you could get a 4% or 5%. So it just depends on the timing, of course.

Thank you. And I'm showing no further questions. I'll turn the call back to management for closing remarks.

Okay. Thank you, everyone, for joining us today on the call and for your interest in MRC Global. We look forward to talking to you again at the conclusion of the first quarter.

Ladies and gentlemen, this concludes our conference for today. We thank you for your participation. And if you'd like to listen to a replay of today's call, you can dial 303-590-3030 or 1-800-406-7325 with the access code of 4587192.

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