MRC Global Inc (MRC) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the MRC Global first-quarter earnings conference call. During today's presentation all participants will be in a listen-only mode. Following the presentation, the conference will be open for your questions and instructions will be provided at that time. Today's conference is being recorded, May 3, 2013, I would now like to turn the conference over to Ken Dennard. Please go ahead.

Thanks, Alicia. Good morning, everyone. We appreciate you joining for MRC Global's conference call today to review 2013 first-quarter results. And also I'd like to welcome the Internet participants that are listening to the call 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 e-mail of the earnings release yesterday afternoon and would like to be added to our distribution list, please call the Dennard-Lascar offices at 713-529-6600 and provide us your contact information. Or you can e-mail me personally.

There will also be a replay of today's call and it will be available by webcast on the Company's website at www.mrcglobal.com. There will also be a recorded replay by phone, which will be available until May 17. And that information for dialing is in the press release yesterday.

Please note that information reported on this call speaks only as of today, May 3, 2013, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any 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 is encouraged to read the Company's annual report on Form 10-K, its quarterly reports on 10-Q, and current reports on Form 8-K to understand certain of those risks, uncertainties and contingencies. And now with that being said, I'd like to turn the call over to MRC's CEO, Mr. Andrew Lane. Andy?

Thanks, Ken. Good morning everyone and thank you for joining us today for our first-quarter 2013 investor call. I'd like to welcome you to the call and thank you for your interest in MRC Global.

Before reviewing the results of the quarter, and turning the call over to our CFO Jim Braun for the financial discussion, let me first begin by highlighting some of the noteworthy events that happened during the quarter.

In March, we signed an exclusive logistics agreement with North American Western Asia Holdings, or NAWAH, to service the Iraqi market. Under the agreement NAWAH will own and operate a new warehouse and logistics service center in Basra.

The new facility will focus on providing equipment to serve the burgeoning oil and gas market in Iraq and represents an exciting growth opportunity for MRC. Iraq has some of the world's largest energy reserves and the oil and gas infrastructure needed to bring those reserves to market will have to be built and maintained. This new service center will stock material which will enable MRC to further build out its Middle East distribution network and more quickly deliver product to Iraq's energy companies.

According to IEA World Energy Outlook 2012, between 2016 and 2020, there are only two countries in the world what that will be leading infrastructure growth and growing reserves. Those two countries are the US and Iraq. Both will not only be replacing and upgrading old energy infrastructure during that timeframe, but also targeting a production increase of 3 million barrels per day.

We're extremely well-positioned in the US to take advantage of this growth and now with this new NAWAH alliance, we are taking the first steps to position MRC in Iraq as well.

During the first quarter, we completed a secondary public offering of 26.45 million shares of common stock on behalf of our largest shareholder PVF Holdings. This transaction reduced PVF's percentage ownership of outstanding shares from a controlling interest of 55% down to 29%.

As a result, we are no longer classified as a controlled Company. And in compliance with New York Stock Exchange rules, we will evaluate the composition of our Board of Directors, so that within one year, a majority of members are independent directors. This is a part of the continuing evolution of MRC from a private equity sponsored business to a Company whose ownership is substantially all publicly held.

And finally, during the quarter, we successfully integrated the operations of Production Specialty Services into our Organization and ERP systems. This was done within 90 days of the acquisition. A testament to the efforts and various disciplines within MRC and our ability to quickly integrate North American bolt-on acquisitions.

Now turning to the first-quarter results. For the first two months of the year, we saw a continuation of the slowdown in US activity that began in the fourth quarter, particularly in the upstream and midstream sectors, which were also impacted negatively by inclement weather conditions in certain parts of the country. However, we did see activity pick up towards the end of the first quarter, though not enough to make up for the slow start. Our downstream sector improved as the anticipated turnaround activity at US refineries began to get underway.

For the first quarter, our total revenues were $1.305 billion, down 6% from a year ago. Much of the decline is attributable to the downsizing of our OCTG business, which we have actively been working to deemphasize to enhance earnings stability and profitability.

As a result of this strategy, OCTG represented only 10% of our total sales in the quarter, compared to 16% a year ago. Without the OCTG business, our core product offerings posted year-over-year revenue growth of 2%, consisting of 7% growth from acquisition, partially offset by a 5% organic decline.

By end market sector we had declines in year-over-year revenue of 11% in our upstream sector and 4% in our midstream sector, while our downstream sector was up 2%. If you exclude OCTG, upstream revenues were up 5% from a year ago.

Adjusted EBITDA for the first quarter was $104 million or 8% of revenue, compared to first-quarter 2012 adjusted EBITDA of $115 million, which was 8.3% of revenue. For the quarter, we reported net income of $46.2 million, or $0.45 per share compared to $37.5 million or $0.44 per share for the same period a year ago.

Although our net income was up 23% from a year ago, our earnings per share increase was only modest because our outstanding diluted share count increased by 21% over the same period as a result of our IPO in April 2012.

We continue to make progress on the implementation of our five-year global enterprise framework agreement with Shell, which has added some incremental growth to the business in our current markets. It is a process though, as broad contracts such as these take time to implement.

As we have in the past, we will continue to look for acquisition opportunities, particularly those that can build on the international presence, so that we are better able to service customers with a full product offering in meeting their MRO and their project business needs.

Before turning the call over to Jim, let me mention our cash flow during the quarter. We generated $174 million of cash from operations during the quarter, through the solid operating results and improved working capital metrics. As a result, we reduced our net debt to $1.046 billion with the leverage ratio of 2.3. This is our lowest net debt level in five years.

Strong cash flow and paying down debt continues to be a major part of our strategy. A strong balance sheet offers us flexibility in being able to execute on our acquisition strategy.

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

Well, thanks, Andrew, and good morning everyone. First, let me begin with some comments on first-quarter market conditions. As Andrew mentioned earlier, the slowdown in customer activity that we experienced during the fourth quarter, continued into the first months of the first quarter. Some of that slowdown was weather related, as parts of the Midwest and the Northeast experienced a harsher winter than a year ago.

US drilling activity was down 12% in the first quarter from the same period a year ago, while the Canadian rig count was down 5% over the same time period. Revenues for the first quarter were $1.305 billion, which was down 5.6% from last year's first quarter.

As you may remember, we noted in our last call that we expected the year-over-year decline from OCTG would be about $100 million. Revenues from OCTG which only has a North America presence were down $95 million year-over-year to $126 million in the quarter.

Excluding the OCTG business, revenues rose 1.5% from last year. That 1.5% revenue growth was the net increase from a 5.2% organic decrease and acquired growth of 6.7%.

US revenues were $966 million in the quarter, down 8.3% from the first quarter of last year. Excluding OCTG, revenues in the US were up 2.1%, reflecting an organic decrease of 3.9%, offset by acquisition growth of 6%. However, our organic business did begin to pick up in March, despite the softness we saw for most of the quarter.

Canadian revenues were $205 million in the quarter, down 1.8% from the first quarter of last year, and the 5% Canadian rig count decrease had a muted impact on our business, as we continue to see solid activity in the heavy oil and oil sand regions of Canada.

Internationally, first quarter revenues were up 11% from a year ago, to $135 million, due mostly to the contribution from our Piping Systems Australian acquisition in March of 2012.

Organically, the international business was down 11.5% compared to the first quarter of 2012, but the PSA acquisition more than made up for the $11 million organic decline. This decline reflected weaker demand in Europe and parts of Australia.

And now, turning to our results based on end market sector. In the upstream sector, first-quarter sales decreased 11% from the same quarter a year ago, to $578 million. This decrease was mostly driven by the $95 million year-over-year OCTG revenue decline. Without OCTG, the upstream sector grew 5.1%, due largely to the acquisitions of Chaparral Supply in June of 2012, and Production Specialty Services in December 2012, offset by an organic decline of 9%.

First-quarter sales in the midstream sector were down 3.9% to $346 million, largely due to a 5.5% decrease in the US, which was the result of continuing slowness that began in the fourth quarter as well as weather-related issues. This demand slowdown was concentrated among some of our larger pipeline and gathering line customers, as well as some of our gas utility accounts, and has put additional pressure on pricing in the line pipe markets, with some pricing down approximately 10% over the past six months.

However, we continue to be disciplined with our inventory levels and our approach to the market, balancing market share and gross profit margins.

In the downstream sector, first-quarter revenues increased by 2.1% to $381 million. A large portion of the increase was attributable to our acquisitions of PSA, which added $15 million to our downstream results. The anticipated US turnaround activity began to materialize in the quarter, as US revenues were up 4.5% from year ago.

In terms of sales by product class, our energy carbon steel tubular products accounted for $388 million or 30% of our sales during the first quarter of 2013, with line pipe sales of $262 million, and OCTG sales of $126 million. Overall, sales from this product class decreased 24% in the quarter, from Q1 a year ago, driven mostly by the decline in OCTG.

Sales of valves, fittings, flanges, and other products reached $917 million in the first quarter, or 70% of sales. This represents an increase of 5.3% over the first-quarter 2012 results. Our valves and specialty products led the way, up 9.3% from a year ago to $363 million in sales, roughly 50% from acquisitions and 50% organically. Growth in our industrial valve business has been a core goal of our strategy.

And now, turning to margins. The gross profit percentage in the first quarter of 2013 increased 180 basis points to 18.9%, up from 17.1% in last year's first quarter. Margins benefited from the change in our product mix and other gross profit enhancement strategies. We also had a $3.1 million LIFO-related benefit, which compares with a $6.9 million increase in our cost of sales during the same period of 2012.

Our adjusted gross profit percentage, which is gross profit plus depreciation and amortization, the amortization intangibles, and plus or minus the impact of LIFO inventory costing, increased 1.3 percentage points to 20.1% from 18.8% in the first quarter of 2012.

First-quarter SG&A costs were $160.8 million, or 12.3% of sales, compared to $146.4 million or 10.6% of sales in the first quarter of 2012. Of the $14.4 million year-over-year increase, approximately $11 million was due to incremental SG&A expense, from our March and December acquisitions of Piping Systems of Australia and Production Specialty Services, respectively, with the remainder due to higher personnel cost.

The two acquisitions added approximately 370 personnel, bringing our total headcount to 4,723.

On a percent of sales basis, SG&A was impacted by the OCTG revenue drop. Without the OCTG revenue decline, SG&A would've been 11.5% of sales.

Operating income for the first quarter decreased to $85.8 million, from $90.2 million in last year's first quarter. The decrease in operating income was the result of several factors, including the net sales decline and the incremental SG&A expense, partially offset by our gross profit improvement initiatives, as evidenced by the increase in operating margin to 6.6% in the first quarter of 2013 from 6.5% in the same period last year.

Our interest expense totaled $15.3 million in the first quarter, which was a 55% reduction compared with the $33.7 million in the first quarter of 2012. This was primarily due to the redemption of our 9.5% senior secured notes in the fourth quarter of last year, as well as lower debt levels.

Average debt levels were approximately $375 million lower in Q1 of this year, as compared to the first quarter of 2012, largely attributable to our April 2012 IPO.

Our effective tax rate for the first quarter of 2013 was 35.1%, compared to 36% for the same period last year.

We reported net income of $46.2 million for the quarter, or $0.45 per diluted share, as compared to a net profit of $37.5 million or $0.44 per share in the first quarter of 2012. Again, keep in mind that the per share results are impacted by a year-over-year share count increase of 21% over that time, from 84.8 million shares outstanding to 102.4 million shares outstanding.

Adjusted EBITDA was down 10% year-over-year to $103.9 million versus $115.2 million a year ago. However, adjusted EBITDA margin held up very well at 8% in the first quarter of 2013, as compared to 8.3% a year ago.

Our outstanding debt at March 31, 2013 was $1.073 billion, decreasing from $1.257 billion at the end of 2012. At the end of the first quarter, our leverage ratio, defined as total debt less cash to the trailing 12-months of adjusted EBITDA was 2.3 times as compared to 2.6 times as of December 2012.

In part because of this improving leverage metric in April, S&P upgraded our corporate credit rating to BB- from B+. This is the second rating upgrade from S&P in the last 12 months.

Our operations generated cash of $174 million in the first quarter, which was the result of improving working capital metrics and solid operating results in the quarter. However, we expect to see a use of cash in the second quarter because of revenue growth and because we expect to make two US estimated tax payments in Q2 where none were required in the first quarter.

Our working capital at the end of the first quarter was $1.073 billion and down 11% from the end of 2012. Cash used in investing activities totaled $4.5 million in the first quarter and included capital expenditures of $4.9 million.

And now, I'll turn the call back to Andy for his closing comments.

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

Our backlog at March 31 was $688 million, including $456 million in the US, $69 million in Canada, and $163 million in our international segment. This represents a 4% increase since the end of 2012, and that is strengthened further in April. As a result of the soft first quarter and an improving second quarter, though not as robust as we originally expected, we have lowered the top end of our 2013 annual guidance.

For the full-year 2013, we expect MRC revenues to be in the range of $5.75 billion, to $5.95 billion. We expect adjusted EBITDA to be in the range of $480 million to $510 million. And earnings per share to be in the range of $2.10 to $2.30.

Natural gas prices have been on a strong rally of late, and are now above the $4 level, driven in part by a cold winter in much of the country.

Although North American gas rig counts have fallen 37% year-over-year, there remains healthy demand for the infrastructure needed to move gas and NGLs from existing wells to end users.

Crude prices have been trading in the mid-$80s to high-$90s for the most of the past 12 months and this remains an economically favorable environment for continuing on infrastructure development in the upstream and midstream sectors.

For the downstream markets, we should continue to see some more of the spring turnaround activity in the early half of the second quarter. Activity in our important midstream line pipe and gas products business is expected to improve throughout the spring and summer months, although weak NGL pricing may impact the timing of some midstream projects.

For the balance of 2013, we will continue to focus on seeking out new opportunities to expand our geographic reach, establish more integrated supply and MRO relationships, where we can act as a one-stop-shop, much as we do for the Shell enterprise framework agreement.

As the Shell contract continues to ramp up, we are continuing to pursue similar agreements with other key international operating companies. We still expect to have a second broad framework agreement signed this year.

Our goal is to continue to be the name the energy industry looks for in PVF products and integrated services, essentially an extension of their internal supply organizations, freeing energy and industrial companies up to focus on what they do best, while letting us handle the procurement, inventory management, and distribution service that we do best.

With that, we will now take your questions.

(Operator Instructions) David Manthey, Robert W. Baird.

First off on the trends getting better into March. I was wondering if you could comment on April. I know there has still been a number of adverse weather events in April, but anything there?

And then as it relates to the weather, if you could talk about if you have any data or just anecdotally, growth or activity in areas that were less impacted by weather versus those that were?

Yes. Dave, this is Andy. Let me start and Jim might want to add some color. It's -- first quarter, it really was a mirror image to the fourth quarter of 2012, where we had a very strong October and a slowing November and December. And really, we saw the exact opposite. A slow January and February with a strong March in the first quarter. So, we feel good about that - the way the quarter ended.

So from a high level, that's how the first quarter played out, which ended up being flat as we guided at the last call, what we expected to come. And then when you look at April, a little slower than we thought it would be in the second quarter. And I think you are still seeing, as you mentioned, this is the winter that just won't end. We are still seeing some slight impact through April in [event].

And the way it impacts us in two ways. Well, first the OCTG pull-down was by our own strategy. And so we feel good about implementing that and the timing we did that. But what the weather has impacted us both in the first quarter and it continued into April, was really in the line pipe midstream construction cycle and also with our gas products in our gas utility business.

So, when you look at our business, our other products, general oilfield, upstream, our valves, our downstream business was good through those months and it really was minimum weather impact in plants and both in our Gulf Coast area. And the impact is isolated in the Rocky Mountains and the Northeast and in the two product lines I mentioned, line pipe and gas products for us.

But our best six months and our cycle always happens from May through October. So this is when we have minimum weather impact and the construction cycle is in full gear and we feel equally strong this year that we have the best next six months ahead of us still.

Great. That sounds good, Andy. Thank you. And second question, just in terms of downstream turnarounds. Last quarter, it sounded like some of the deferrals that you saw previously had broken free and you expected a strong year this year. You made some comments about that in the monologue. Could you just give us an update? Has your outlook at all changed on the downstream turnaround activity in 2013?

No. Our outlook is still good. It's improved over the last two years with growth wasn't that strong. We started out in the first quarter with -- in a tough market with growth in the downstream. We see the turnaround activity continuing in April and May for the second quarter. And we expect to see an active turnaround in the fall.

So it still looks good for us. Chemicals still looks -- and petrochemicals still look -- real good for us through the year. So those are bright spots in our outlook in the downstream.

Matt Duncan, Stephens Inc.

Andy, the first one I've got is just a follow-up on Dave's question, about the tone of the 2Q. I'm wondering if maybe you can give us some thoughts on each of the three energy streams? As we look at 2Q '13 versus 2Q '12, I would assume you still have a headwind in upstream from OCTG, but it sounds in downstream the turnaround market is going to allow for you to grow that business year-over-year.

I'm a little less clear on midstream. Do you expect midstream even given the weather in April to be up year-over-year, as you sit here today in the 2Q?

Yes, let me just make a couple of general comments and then Jim is going to -- can give you some guidance by stream the way we're -- with our new annual guidance, how we see the year playing out. But specifically for second quarter -- May, June, all through the summer months is really the best time for us in midstream. April wasn't outstanding for us and so the market is still responding -- weather is still giving us a little havoc, but just on the construction cycle.

But, I think you know, we're going to have a $50 million headwind, as Jim mentioned on the last call, on year-over-year decrease on comparisons with OCTG on upstream. Jim, do you want to give some -- a little more guidance on by stream for the year?

Yes. For the year, and just updating what we talked about on the last call, at the midpoint of our guidance now it's a 4% to 5% organic growth overall. And then by stream, up is 3% to 4%. The midstream is 5% to 6% and downstream is 5% to 6%. So from the last update, mid has come down a little bit, but downstream is still holding up relatively strong.

Okay. That's helpful. And then, secondly for me on the M&A environment, Andy, you hinted in your prepared remarks that the focus on M&A right now seems to be international. I assume you are also still looking at bolt-ons here domestically. Can you give us an update on where you are with how the funnel looks from an M&A perspective and how much you might think you guys can do there this year?

Yes, Matt, it's -- we are still very active in that area. The one thing we spend a lot of time in the first quarter was the last two acquisitions we did. We are fully integrating both systems and Management personnel in Australia. We feel real good about that. And we actually did the full integration of PSS in under 90 days -- 75 days, so that is all 100% integrated into the Company.

So we are very good, especially in North America, at getting a quick turnaround on our acquisitions. So that was the focus in the first quarter.

Lots of candidates still out there. We were very active, had detailed discussions with approximately five companies and didn't pull the trigger on any of them based on valuation expectations in the first quarter. We focused on Southeast Asia and looked at both Canada and some more in the US. So, very active, but because of that, we won't have an announcement in the second quarter.

But we have a lot of ongoing discussions for acquisitions in the third and fourth. So part of our guidance adjustment is due to the softness in these first four months, but also remember that that's guidance without any acquisitions and we will do acquisitions this year, but it will be in the second half.

James West, Barclays.

So I just want to dig into the midstream a little bit further. Jim, I believe you said 5% to 6% growth this year is what you were thinking.

But if I look at the MLPs, which are primarily the midstream companies, they are raising $1 billion a week or so right now in the capital market. It seems like that's a conservative number. So, one, are you being conservative?

And then, two, is my view that might it be conservative, is your view that you have better visibility out there and that I'm thinking about it in terms of -- maybe I'm thinking about it in terms of cycle times being shorter?

Yes, James, the last three years, the midstream has been our fastest-growing end sector. We still feel very good about our competitive position there and we feel good about the amount of money that's going to be spent.

The weather really impacted us early on. Slow capital budgets getting start -- at least spent in the midstream early on.

Right.

So, that tainted our view to slow down our expectation on the annual growth. Well, we certainly may have a much different view after the next two quarters when we get a full summer construction cycle.

The money is going to be spent. We are not seeing the infrastructure very active in dry gas, as you'd expect with a pullback on dry gas all through the end of last year.

Sure.

But we do think that -- and we watch all the same things and we talk to our midstream customers every week. And there's a lot of projects still queued up.

Okay. Okay. Fair enough. And then, Andy, as you still think about these large global agreements like with Shell, I know you are targeting an additional one this year. Is the target of one per year to be signed and announced? Is that an MRC-driven decision -- do you have it based on your capabilities? Or is that more of just how you think the customer base is adapting to moving forward with these types of agreements?

Yes, James, it's a little bit of both. Shell tends to be an early mover in the industry and that's why they first. But it's also still a little bit of our capacity to ramp up on a major contract like that and get all the inventory in place on a global basis to support a customer like that. So there's a lot of implementation. There's a lot of work with EPCs on the project side.

So that takes a lot of personnel and time and inventory management. So, yes, to do it right and when we talk about our top two or three customers, we definitely, as we take on a broader scope with them, want to make sure we do it exactly right in ramping up to support them.

So it's a little bit of both, James. It's a -- that's the trend we will have is one a year. And it may take up -- a little ramp-up, a little more speed, when we are a couple years out, and it's more of a common practice. But it's also because the ones we are targeting are of a significant scale to us, so it takes us a lot of resources to ramp up for them.

Doug Becker, Bank of America Merrill Lynch.

I wanted to get into a little more detail on the downstream guidance. It sounds like 5% to 6% growth in 2013, down a little bit from 7% to 8%. Was this because the turnaround activity was just a little bit slower than expected in the first quarter? And does that mean that there's still some pent-up demand down the road that if we do see a decline in refining margins that we see a pick-up in turnaround activity for you guys?

Yes, Doug, I would say in general, I have some comments -- I would say from the downstream perspective, a little less robust in refinery for the year activity and a little stronger in chemical and petrochemicals is our general view. But no, the turnaround activity in the first quarter was good. We expect it to be up a little bit more in the second quarter. And that's my general comments.

No, Doug, you are right. It's a little bit slower. And there could be some pent-up demand as utilizations fall.

Okay, makes sense. And then, just a few housekeeping items for Jim. Very nice working capital improvement in the quarter. Just any thoughts on 2Q and just on SG&A in the second quarter given the bump we saw in the first quarter?

Yes. You'll see the SG&A levels run about where they were in the first quarter, the $161 million level. There is nothing that's in the drawer or on plans to increase that significantly. We work through the acquisitions that are in there. Like most companies, we had our merit increases January 1. So those are all taken care of.

And on working capital?

Yes, on the working capital, we had talked at the last call around $200 million for the year of cash from operations. We will consume some cash, as I mentioned in the script, due to revenue growth and some other tax needs. But we are thinking the cash flow will now be in $240 million range for the full year. So, we will be able to continue to have a strong cash flow for the balance of the year.

Jeff Hammond, KeyBanc Capital Markets.

Just on overall margin performance. You mentioned in the gross profit, some margin enhancement initiatives and mix, and some of that probably OCTG. But just wanted to understand how you think about the sustainability of those better -- the better margin performance as we move into 2Q and the rest of the year?

Yes, Jeff. Good morning. I would say we focused a lot on that. And getting the mix right has been a big part of our strategy. So you are seeing the advantage of the product mix and the higher profit on what we are emphasizing -- a continued emphasis on the valves will drive that even further, as we make a shift.

And we also during the quarter, as we said on the last call, we absorbed the SG&A expense associated with selling the OCTG. We didn't have an active cost reduction because we moved them over to line pipe. Now we haven't seen the line pipe sales pick up with the midstream activity, but we will for the balance of the year. So that will also have a nice advantage for us going forward from an operating income perspective.

But we feel good. The only thing we are really -- in the marketplace is under pressure is really ERW. Line pipe in the spot market has, of course, pricing pressure on it. The rest of our product lines are -- we feel very good about.

Yes, Jeff, I would add that even when you get past the improvement from the OCTG change, within the balance of the products, when we sell more valves and smaller levels of line pipe like we had in the first quarter, you will see improved margins just due to the mix.

The other thing we've done is we've continued to work hard on the supplier cost side across all our products, as well as we've talk for about our pricing initiatives, where we are trying to work the transactional customers to maximize margin opportunities there. And we've continued to enjoy some success.

As you move into the second quarter, I would tell you that the 20% is a top end. We may see a little bit come down, the 19.5% as a result of some of this pressure, pricing pressure, in the line pipe area.

Okay. Great. And then this might be rounding or maybe something else is in there, but it seems like you recalibrated your growth in each of the streams by a couple points. And it seems like the midpoint of the guidance is coming down by right around a point of growth. So is there something else going the other way? Or an acquisition running in? Or how should we think about that?

Yes, those growth rates that we gave, again, are -- they are organic growth rates after you back out the OCTG drop and you factor in the acquisitions. So, they're -- I've described this on a gross basis before those other two items.

Okay. Thanks, guys.

Allison Poliniak, Wells Fargo.

So obviously it sounds like weather was a bigger negative impact here in Q1. But as you look out to the rest of the year, it sounds pretty positive from a secular growth perspective. But is there any area that you are starting to get a little bit more concerned about?

No, Allison. Really-- we are not -- we are going to have a good year as shown by our guidance and it really was the double impact of the pullback in OCTG and then the weather impact that impacted line pipe and gas products. Besides that, we feel very good about the rest of our business. And those two things get taken care of.

We think we are going to have a very good year in gas utilities. We know we are. And we're going to have a very active year in midstream and pipeline into both new installations and integrity work. So it really just has to play out over the next two quarters where it is our most active season and we think it's going to be just fine.

Okay. Perfect. Thank you, guys.

Ryan Merkel, William Blair.

My first question had to do with quarterly forecasting. I was just hoping you could provide a little bit more detail. Are you expecting a less-than-normal seasonal boost in the second quarter and then a bigger boost in the third and fourth quarter, at this point?

Well, let me make a general comment, Ryan, and then Jim can add a little more color. But we definitely are projecting a much stronger second half than the first half.

Okay.

From a general standpoint. The second quarter, as Jim guided to, we will have the $50 million year-on-year OCTG headwind to overcome. So -- but it still will be better than the first quarter. It will be a ramp-up as we normally do and we will really see in May and June how good it will be.

Okay. Great. And then, I was hopeful you could back out -- or at least -- yes, tell us what the project growth was in the quarter? Is that a number that you have?

Ryan, that's something we don't have right at our hands. So to give you a good number, we would want to look at that.

Okay. Would you expect that the large project is this is going to outgrow the MRO business is year? Or how does that mix look?

Yes. Now, if you look at the first quarter, the mix was a little bit above our 70%, 30% that we finished last year at, so weighted a little bit more towards MRO, because of the big projects in midstream didn't happen in the first quarter. So we actually weighted a little higher towards MRO. But we will see how it blends over the year, because we will be picking up some good project work as the construction cycle goes on into summer months.

Okay. And then, just last one for me. If I back out the OCTG, organic sales are down about 5%, but that's on a really, really big comparison. So from my view, that's a fairly positive result given the slowdown we've seen. Is that your view as well? It just seems to me that underlying demand is actually there?

No, that's right, Ryan. It was down the 5% but that's held up pretty well in light of everything else going on.

Igor Levi, Morgan Stanley.

Could you give us a bit of more detailed breakdown on pricing for various products? I know you mentioned that OCTG and line pipe have remained under pressure and that valves are doing a bit better. Has valves and fitting prices actually continued to go up through the quarter?

Yes, Igor. I would say you are exactly right on the pricing pressures on OCTG and mostly ERW line pipe. With line pipe, though, I would say seamless has been stable and in our other categories, carbon and stainless fittings and flanges stable to slightly up, and valves stable to slightly up. And lead times continue to push out on demand against industrial valves. So it's really the mix of those.

Okay. So would you say it's industrial valves is really what's really tight out there, compared to more of the energy?

Yes.

Great. That's helpful. And then, again, on the SG&A side, I know you mentioned you expect to stay at a similar dollar level. But as a percentage of sales, I figure long-term as we are modeling this, given that this quarter was much higher because of the acquisitions, should we assume maybe 10% or 11%? What do you think is fair?

It's going to be in that 10% to 11% range.

Okay. Great. That's very helpful. I will turn it back. Thanks.

Matt Duncan, Stephens Inc.

Andy, on the progress towards the next global supply agreement, I don't know how much you are willing to share with us at this point just in terms of timing of when you think you might be able to get something finished. And then also, relative to maybe the Shell deal, in terms of impact on your business, should it be similar in financial impact, based on what you know today?

Yes, Matt, I would expect we would announce one in the third quarter and I expect it would be of a nature similar to the Shell, in that ballpark. And also, we haven't really given guidance externally on the NAWAH, but we see that as a good opportunity for us.

Just since our initial focus, we are not a big Middle East Company up to this point and there is a lot of PVF marketplace there to go after. And if you look at Iraq, with the old infrastructure they need to upgrade after years and years of under-investment, and the ramping up of new production. And it's all our major customers in there. It's ExxonMobil, and Shell, and Chevron. We -- from just the announcement of being -- participating in that market, we already have $10 million in backlog and sales for Iraq.

So we feel very good about that market being ramping up with our partner. I would see in a couple of years out that easily that should be a $40 million to $50 million plus annual market for us. So that's all new market share for us where we haven't participated. And also, we are ramping up the Shell contract in Qatar.

So we are starting to get the first phase of a Middle East presence and build to some scale that will have nice, long-term impacts. And so it also adds another regional dimension when we talk to these major IOCs about how we can serve them on a global basis.

So it's important from that -- and our growth in the Middle East going out next year and the year after, along with the contracts. These are all key differentiators from our other competitors in the marketplace.

Sure. And then with the Shell agreement, specifically in Australia, I know originally that agreement did not include the PFF in Australia, but there was hope you might be able to add that. Have you indeed been able to add that and then obviously you guys are the now the largest PVF distributor down there. What you seeing going on in that Australia market? Obviously there was a big project cancellation in LNG there recently. What are you seeing in that Australia market?

Yes, we like our -- the first part of your question, we have not added the Shell PFF yet. We're still working on that. We'd need to wait until that contract runs out -- the incumbent one. But that's certainly target we are going to go after.

And we like that market. We are forecasted in -- as we've said before, that's going to be a nice solid $300 million a year business for us down there. What we have seen is some softness in the refineries as they've done some consolidation in refining there.

We don't have a big exposure to mining but a little bit of softness in mining, and Jim mentioned that in his script. And then a little softness in stainless, related to LNG.

But from a standpoint of being the clear number one in an established position there, we feel very good about the Australian market and our position there.

Sam Darkatsh, Raymond James.

Most of my questions have been asked and answered although I did -- was dropped off the call there for a minute so I hope I'm not asking something that someone already covered.

The second half organic growth that you are expecting, we saw some more -- some -- on the SG&A line, some organic deleveraging this quarter. Once the growth switches back, what pull-through rates are you expecting, Jim, in the back half of this year, once you begin to grow again organically?

Yes, Sam, as we get in the back half, and we resume the organic growth rate, we will see a 50% to 70% flow-through on the EBITDA to the gross profit line.

So the deleverage then, organically, you were up $3 million or $4 million, X the acquisitions year-on-year in SG&A in the first quarter despite organic sales growth being down. You cited a little bit of the labor inflation. But was there anything else there that caused the deleverage?

No. It was just the additional payroll cost. We did add a few people compared to last year into the Organization in some of our supply chain business development roles. But that should hold firm going forward.

Sam, I would just add in the second half you are going to see the leverage gain from moving the resources focused on OCTG over to line pipe. And we didn't get an advantage of that in the first quarter and you will see it in the second half, and that will be a nice build for us.

Walt Liptak, Global Hunter Securities.

Most of my questions have been asked too. So I -- just one would be, just a little bit more clarification on the Iraq opportunity. What I heard you say, is this is a $40 million to $50 million opportunity? Is that right?

Yes and that's conservative a couple years out. We really only announced that a couple of months ago. We've been working on some things directly with our end customers and we have a backlog now of $10 million of orders there. But, it's a huge market. It has a lot of old infrastructure that needs to be replaced from a PVF standpoint and ambitious goals for adding new production.

And so, we will work closely with our major customers that are now taking contracts in there and we will work closely with our partner as they build out the freight forwarding, the warehouse capability in Basra, which is -- will serve us very well from a local supply standpoint. So I -- conservatively, I see it ramping up from today's initial $10 million, easily through $40 million or $50 million a year. And we probably are underestimating the amount of PVF spend that is in that market by itself.

Okay. Good. And then, you alluded to this, but I wonder if you could talk a little bit about what the profitability would be on this contract, maybe compared to the Shell agreement or other US-based contracts?

Yes. It will be a higher profit contract, because of the difficulties of getting product and doing business there. It's -- you'll find that with other oilfield services and equipment suppliers. It's tough, a tough place and so, it requires the cost of service higher, so it requires a higher margin.

Okay. Great. And then a last one. I didn't hear a tax rate update, I wonder if you could talk about second quarter and full year?

Yes, well, we are still projecting a tax rate in the 35% to 36% range.

Okay, great. Okay, thank you.

Derek Jose, Longbow Research.

I was wondering if you had any internal targets for your credit rating by the end of the year?

Derek, we don't really target it that way. We haven't set a goal that says we want to be at a certain level. We know it's appropriate to use a certain amount of leverage, but as you know, we've moved up a couple of notches recently.

So, we are going to continue to generate cash, pay down debt, and to use that as the liquidity to fund our acquisition program. But we haven't targeted a specific rating to try to achieve.

Okay. And if you look at your balance sheet and when you talk about the credit rating, with the credit rating company, besides leverage, is there anything that they want to specifically see in terms of upgrading the credit rating, like a little less cyclicality in the business, higher margin. I'm just curious what is going into maybe you guys getting to investment grade possibly by the end of the year?

Sure. Well, certainly the cyclicality is something that's addressed. The way they like to see that addressed is by diversifying, getting bigger, getting a bigger international presence, spreading out the business to more geographies. That's certainly one of the biggest.

Okay. Thanks, guys.

Thank you. I'm showing no further questions in the queue. At this time, I'd like to turn the conference back to management for final remarks.

Okay. Thank you all for joining us today on the call and your interest in MRC Global. We look forward to talking to you again after the conclusion of the second quarter.

Ladies and gentlemen, this concludes our conference for today. If you'd like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030 and enter the access code of 4609102 followed by the # sign. Thank you for your participation. You may now disconnect.