MRC Global Inc (MRC) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. And welcome to the MRC Global third-quarter earnings conference call.

(Operator Instructions)

This conference is being recorded today, November 1, 2013. I would now like to turn the conference over to Monica Schafer, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, Craig, and good morning, everyone. Welcome to the MRC Global third-quarter 2013 earnings conference call and webcast. We appreciate you joining us. On the call today we have Andrew Lane, Chairman, President and CEO; and Jim Braun, Executive Vice President and CFO.

Before I turn the call over to Andrew, I have a couple of items to cover. There will be a replay of today's call available by webcast on our website, MRCGlobal.com, as well as by phone, until November 15, 2013. The dial-in information is in yesterday's release. Later today we expect to file the third-quarter 10-Q, and it will also be available on our website.

Please note that the information reported on this call speaks only as of today, November 1, 2013. And therefore, you are advised that this information may no longer be accurate as of the time of replay.

In addition, the comments made by the management of MRC during this call may contain forward-looking statements within the meaning of the United States federal securities law. These forward-looking statements reflect the current views of the management team of MRC. However, various risks, uncertainties and contingencies could cause these MRC actual results to differ materially from those expressed by management.

You are 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 those risks, uncertainties and contingencies. And now, I would like to turn the call over to our CEO, Mr. Andrew Lane.

Thanks, Monica. Good morning, and thank you for joining us today for our third-quarter 2013 earnings call, as well as for your interest in MRC Global. Before turning the call over to our CFO Jim Braun for a detailed review of the third-quarter financial results, let me first begin with some highlights from the quarter. Following Jim's third-quarter review, I will finish with a discussion on the outlook for our business.

Results for the third quarter were in line with our expectations. And we are reaffirming adjusted EBITDA and diluted earnings per share annual guidance. For revenue, we are raising the midpoint of annual guidance to reflect our current outlook. Now that we have more than three-fourths of the year behind us, annual revenue guidance is now expected to be between $5.16 billion and $5.3 billion. The low end is slightly above our previous guidance.

From where we stand today, the market seems to have stabilized. And we believe this is an inflection point for us. Revenues were $1.3 billion for the third quarter, a 9.5% decline from the same quarter last year, but a 3.6% improvement over the second quarter. The sequential improvement from last quarter is primarily due to higher sales in our North America upstream business.

Diluted earnings per share were $0.38 for the quarter, and included a couple of unusual items that negatively impacted EPS by $0.02 per share. Year-over-year earnings were down due to lower revenue, which was partially offset by the $13 million in lower quarterly interest expense from our refinancing efforts late last year.

Moving to the market. We had some noteworthy market share gains this quarter that I would like to highlight. We have talked about market share in the past and how we gauge it, but I thought I would comment on it this quarter and give you a sense of what we are seeing.

This quarter, we secured a net increase in MRO-based business worth an estimated $90 million per year over the life of the contracts. Two of the larger wins were in our upstream business with Marathon and Anadarko. These represent incremental and new MRO contracts.

On the project side, we continue to win work across all three sectors, with one of the more notable wins being the midstream line pipe project with SaskEnergy in Canada. As part of our global Shell agreement signed last year, we secured the valve work for Shell's Carmon Creek heavy oil project in Canada.

This Tuesday, we announced a new agreement with Williams Companies to be a preferred supplier of PVF for both projects and MRO. With this agreement, we expect to see a significant growth in business with Williams next year, as they have a very active capital spending plan in 2014.

On Wednesday we announced a new PVF framework agreement with Chevron Phillips Chemical Company for their major petrochemical expansion project at their Cedar Bayou and Sweeny facilities on the Gulf Coast in Texas. We are also on track to sign additional contracts, including EFAs with some of our largest customers this year and plan to have more announcements soon. We believe this further validates the value proposition that MRC delivers to our customers.

Our line pipe business has had some challenges this year, but has turned a corner with us. And the customer activity in the US is picking up.

In the US during the third quarter, we sold the largest volume of carbon line pipe from stock in the Company's history. Line pipe revenue was $278 million in the third quarter, up 20% from the second quarter of 2013, despite the decline in market prices, which declined 12% from September 2012 to September 2013. Sequentially, tons sold from stock in the US increased 35% over the second quarter, with prices down 7%.

We continued to make progress this quarter strengthening our balance sheet. We reduced debt by an additional $40 million during the quarter. And we continue to generate positive operating cash flows, bringing our outstanding debt balance to $1.04 billion at September 30, 2013. Cash provided by operations was $59.5 million during the third quarter of 2013 and $241 million for the nine months ended September 30, 2013.

Since we spoke last quarter, there have been a couple of recent announcements that affect the PVF competitive landscape. In September, National Oilwell Varco announced they are looking to spin out their distribution business to become a standalone company. After having acquired CE Franklin and Wilson Supply, they have decided that distribution should operate as a separate public company. Based on their disclosure, we estimate this entity will be approximately $4 billion to $4.5 billion, making it one of the largest PVF distributors.

Later in September, Marubeni-Itochu Steel agreed to buy Sooner Inc., a US distributor of pipe and tubing to the oil and gas industry, for $600 million. Marubeni-Itochu is a venture between Japan's third and fifth largest trading houses. With the Sooner acquisition, we estimate they will have annual revenue of approximately $1.8 billion to $2 billion in the OCTG business.

And most recently, in October, Sumitomo, a large Japanese conglomerate, announced they are acquiring Edgen Murray for $12 a share, or a 58% premium. This acquisition further expands Sumitomo's global presence in the up-, mid- and downstream sectors, with a primary focus on OCTG. Including Edgen, we estimate Sumitomo's US pipe distribution business, which sells under several brands, to be approximately $4 billion to $4.5 billion in revenue, based on public disclosures, also making it among the largest PVF distributors.

We believe these changes in the market not only reinforce the distribution business model, but also support our assertion that customers desire to have one solution across all their geographies. We provide today a broad PVF solution as a trusted partner for our customers, and we now see others following suit.

I also want to take a moment to recognize two of our recently retired executive officers for their many years of dedicated service, Jim Underhill and Neil Wagstaff. Each made significant contributions to our Company.

Jim Underhill's career spanned 33 years. He has most recently led the US operations, and he was instrumental in the merger of McJunkin Corporation with Red Man Pipe & Supply in 2007.

Neil Wagstaff led the international business for the past four years and led the growth of our international valve business, and led the integration of our Australian acquisition. I wish them both well in their retirement and thank them for their great service.

With that, let me now turn the call over to Jim Braun to review our third-quarter results.

Thanks, Andrew, and good morning, everyone. This quarter, in addition to our usual quarter-over-quarter discussion, I will discuss some sequential changes to expand on the point that Andrew made earlier regarding the improved direction of the business.

I will begin with a comment about our backlog that is promising. The backlog is indicative of the general direction of our business over the short-term. And it has been trending positive as of late. Backlog was $739 million at the end of September, which was an increase of 16% from the June balance, with all three geographic segments up.

The biggest component of the increase over June is from our Canadian operations, which is somewhat seasonal. Backlog growth was 6% in the US segment and 10% in the international segment. We expect these sales to be earned over the next three to four months.

Total revenues for the third quarter were $1.3 billion, which were down 9.5% from the $1.5 billion we reported in the third quarter of last year. The year-over-year decrease was partially offset by the impact of two acquisitions, which had added an incremental $33 million of revenue in the quarter.

US revenues were $1 billion in the quarter, down 8.7% from the third quarter of last year. Most of this decline, approximately $83 million, was attributable to a 47% reduction in OCTG sales. Excluding OCTG, US revenues were down 1% in total, with a decrease of 5% organically, slightly better than the 5% decline in the US rig count.

A new measure that we believe is also a relevant industry indicator for our upstream business is the US land well count, which measures the number of wells completed. In the third quarter, the well count was down 3% from a year ago.

Looking at the US business sequentially, sales grew 4% over the second quarter this time compared to a year ago, when the rig count and the well count increased less than 1% and 2%, respectively.

Canadian revenues were $162 million in the third quarter, down $24 million or 12.7% from the third quarter of last year. While we had less project work this quarter compared to last year, approximately one-third of the decline in the Canadian segment was due to the decline in the Canadian dollar relative to the US dollar. Looking at it sequentially, the Canadian segment is up 6% over the second quarter this year. Historically, the fourth and first quarters are the strongest in Canada.

Internationally, third-quarter revenues were down $17 million or 11% from a year ago, to $137 million. The decline was the result of weaker demand, particularly in Australia, where we have seen reduced customer spending in the mining and oil and gas sectors. However, nearly half of this decline is attributable to a weakening Australian dollar as compared to the US dollar.

Sequentially, the international segment was down 2% from the second quarter this year. Also of note, the integration of our Australian operations into a single business unit has been completed, and they are now operating on a single ERP system.

Turning to our results based on end-market sectors. In the upstream sector, third-quarter sales decreased 10% from Q3 of last year, to $588 million. This decrease was driven in part by the planned reduction in OCTG revenue and lower Canadian sales, partially offset by the acquisitions of Production Specialty Services and Flow Control.

Sequentially, upstream sales increased by 8% compared to the second quarter. So while the activity hasn't picked up to the levels seen in 2012, it has improved over the last quarter.

The midstream sector was down approximately 7% year over year, to $377 million. And as discussed last quarter, some of our largest midstream customers have reduced their spending in 2013. As a result, revenue in the transmission part of our midstream sector declined 16% in the third quarter, but was partially offset by increased spending by some of our larger gas utility customers, who were working on multi-year pipeline integrity projects.

This part of our midstream business grew 10% in the quarter. Sequentially, the midstream sector was flat, with transmission down slightly, and gas utility up modestly.

In the downstream sector, third-quarter 2013 revenues decreased by approximately 12% to $348 million, as compared to the third quarter of 2012. This decrease is primarily attributable to weaker sales in our international segment. And sequentially, the downstream sector was also virtually unchanged.

And turning to our results in terms of product class. Our energy carbon steel tubular products accounted for $384 million during the third quarter of 2013, with line pipe sales of $278 million and OCTG sales of $106 million.

Overall, sales from this product class decreased 20% in the quarter from Q3 a year ago, including an $81 million or 43% decline in OCTG sales, and a $16 million or 5% decrease in line pipe. The reduction in line pipe was due primarily to the midstream part of our business, partially offset by an increase in line pipe sales in the upstream segment. Line pipe pricing continued to come under pressure during the quarter as a result of deflation, which impacted our sales in a year-over-year comparison.

For the third quarter of 2013, 47% of our line pipe sales were within our midstream sector, while upstream and downstream made up 34% and 19%, respectively. Sequentially, line pipe grew 20% from the second quarter, with growth across all sectors -- upstream, midstream and downstream.

Sales of valves, fittings, flanges and other products were $930 million in the third quarter. This represents a decrease of 4% from the third quarter of 2012. The decline in this product group was across all geographic regions.

Revenues from valves were down about 5% during the quarter. And carbon steel, fittings and flanges were down about 8%, while other products were flat compared to the quarter a year ago. Sequentially, this product class increased slightly at 1% over the second quarter.

As a side note, we publish a magazine biannually for customers called InSight, which provides a detailed overview of market data by product line, including lead times and price trends. You may access it on our website under News.

Now turning to margins. In the third quarter of 2013, the gross profit percentage declined 100 basis points to 18.1% from 19.1% in the third quarter of last year. The decrease was due to the deflationary impact of some of our product categories compared to the third quarter of 2012, and in a smaller benefit this year from LIFO.

The LIFO method of accounting resulted in a reduction of cost of sales of $5.7 million in the third quarter of 2013. And this compares with a $15.4 million decrease in cost of sales for the third quarter of 2012. Assuming a similar level of deflation, we would expect a total benefit for 2013 of approximately $28 million, as compared to a total benefit of $24 million in 2012.

Our adjusted gross profit percentage, which is gross profit plus depreciation and amortization -- the amortization of intangibles -- and plus or minus the impact of the LIFO inventory costing, decreased slightly to 19.1% from 19.2% in the third quarter of 2012. The deflationary impact of carbon pricing created downward pressure on margins, partially offset by an increase in other product lines and the favorable mix of lower OCTG sales.

On a sequential basis, adjusted gross profit was 60 basis points lower than last quarter. And this was due to lower margins in our Canadian and international segments. US-adjusted gross profit percentage were the same in the second and third quarters.

SG&A costs for the third quarter of 2013 were $161 million or 12.2% of sales, compared to $155 million or 10.7% of sales for the third quarter 2012. The increase in SG&A dollars is primarily due to the acquisitions of Production Specialty Services and Flow Control Products, which, combined, added an incremental $5 million to SG&A in the third quarter.

Third quarter SG&A also included $2 million of expenses related to the retirement of an executive officer. This consisted of the recognition of $1.2 million of equity-based compensation and $800,000 of cash costs. We expect SG&A expense to be in a range between $158 million and $160 million in the fourth quarter of 2013.

Operating income for the third quarter was $77 million versus $122 million in last year's third quarter. The operating margin also declined compared to last year, from 8.4% to 5.9%. This is due primarily to the impact of the 9.5% lower revenues and a lower LIFO benefit in 2013, as I discussed earlier.

Our interest expense totaled $15.5 million in the third quarter of 2013, which was a 45% reduction, compared with $28.2 million in the third quarter of 2012. This was due to the redemption of our 9.5% senior notes in November 2012, and the resulting lower interest rates on our new term loan.

In addition, average debt levels were approximately $271 million lower in the third quarter of this year, compared with the third quarter of 2012. At the end of September, our weighted average effective interest rate was 4.7%. Our net income was $39 million in the third quarter or $0.38 per share, compared to net income of $56 million or $0.54 per diluted share in the third quarter of 2012.

Q3 2013 adjusted net income is $41 million, and is adjusted for a $1.3 million after-tax charge related to the bankruptcy of a workers' compensation insurance carrier, which required us to assume that obligation for an existing claim. The insurance charge is reflected in the other income expense line on our income statement.

Q3 2013 adjusted net income is also adjusted for a $1.3 million after-tax charge for the costs associated with the retirement of an executive officer, as previously mentioned. The cumulative impact to EPS of these two items is $0.02 a share, which results in adjusted diluted EPS of $0.40.

Adjusted net income for the second quarter of 2012 was approximately $62 million, and excludes a $6.5 million after-tax charge, or $0.07 per diluted share, related to the purchase and early retirement of a portion of our senior notes recorded in the third quarter of 2012. Year-to-date net income was $128.8 million, up 3.5% over last year's net income of $124.4 million.

Adjusted EBITDA was down 23% year over year to $96 million in the third quarter, versus $125 million a year ago. Adjusted EBITDA margins fell to 7.3% from 8.6% a year ago.

Our outstanding debt at September 30, 2013, was $1.44 billion compared to $1.257 billion at the end of 2012. At the end of the third quarter, our leverage ratio -- defined as total debt less cash for the trailing 12 months of adjusted EBITDA -- was 2.5 times, as compared to 2.6 times as of December 2012.

Our operations generated cash of $59 million in the third quarter of 2013. And our working capital at the end of the third quarter was $1.126 billion, unchanged from the end of the third quarter.

For the nine months of 2013, we have generated cash from operations of $241 million. And for the full-year 2013, we expect to generate cash from operations in a range between $250 million and $280 million.

Cash used in investing activities totaled $24 million in the third quarter, and included capital expenditures of $4 million and the acquisition of Flow Control Products. On a year-to-date basis, capital expenditures were $15 million. And we expect full-year 2013 capital expenditures to be between $25 million and $27 million.

And now, I will turn the call back over to Andrew for his closing comments.

Thanks, Jim. Let me conclude with some comments about our strategy and our outlook for the fourth quarter and for 2014. We continue to focus on implementing our long-term strategic plan. One of those strategic objectives is to implement broad multi-region contracts with our top US MRO customers, and to further strengthen our base of US MRO contracts.

As I mentioned earlier, we are very proud of our recently announced agreement with Williams Companies for an initial five-year term. This contract strengthens our position with Williams, who will be very active in 2014, and with major investments, including the Bluegrass Pipeline Project, which plans to transport 400,000 barrels per day of NGLs from the Marcellus and Utica to the Gulf Coast chemicals complex.

We are also very pleased with our PVF framework agreement with Chevron Phillips Chemical to support their major US Gulf Coast petrochemical expansion. We are currently working on several more contract opportunities with our major customers, and are optimistic they will be signed and announced before the end of the year.

Our strategic initiative to rebalance our product mix and de-emphasize our lowest margin and most volatile product line, oil country tubular goods, began in the third quarter of last year. Therefore, this quarter marks the end of the impact from this strategic rebalancing initiative.

As we expected, our rebalancing efforts resulted in a decline of approximately $250 million in sales from OCTG in the year 2013, but an improved overall gross margin percentage and a more stable outlook.

Our adjusted gross profit percentage was 19.6% for the nine months ended September 30, 2013, up from 19.0% for the same period in 2012. With the changes in the competitive landscape I discussed earlier, our reduced exposure to the OCTG spot market is timely. We are also beginning to see the impact of redirecting our OCTG sales resources to line pipe, as evidenced by the increase in tonnage sold in the third quarter.

We are just beginning to see the results from the additional sales focus on the MLP midstream customer base. Our targeted account program for those accounts ranked 25 to 100 is showing signs of progress. We have allocated internal resources and hired an additional 124 sales representatives to staff this initiative. And we are seeing growth from those customer accounts.

In the US, we are tracking 16% growth over 2012 revenue levels on an annualized basis. The operational realignment of our US subregions to support enhancements of both sales and operational capabilities has been a positive, and we will see additional operational improvements in 2014.

We also continue to stay focused on our growth-by-acquisition strategy. In the US, we closed on the acquisition of Flow Control Products on July 1, rounding out our valve and valve automation offerings and capabilities in the Permian Basin. This business has been fully integrated, and is making positive contributions.

Given that the Permian Basin is the most active shale play in the US, and projected to continue to be, this acquisition, along with that of Production Specialty Services in December 2012 and our regional distribution center expansion in Odessa that will be completed in early 2014, positions us very well to capitalize on the Permian Basin activity in the years to come.

Expanding our international footprint is a top priority for 2014. We continue to evaluate and pursue potential acquisitions in regions where our global customers are active.

Moving to our outlook. As I mentioned earlier, we have raised the lower end of our annual revenue guidance for the full-year 2013. We expect revenue to be in the range of $5.16 billion to $5.3 billion, adjusted EBITDA to be in the range of $385 million to $415 million, and fully diluted earnings per share to be $1.65 to $1.85. Adjusted EBITDA and diluted earnings per share guidance remain unchanged, due to the deflationary pressure on line pipe margins.

We expect each of the upstream, midstream and downstream sectors to perform above third-quarter levels. In upstream, we expect drilling activity and related production facility infrastructure spend to be up in the fourth quarter.

In midstream, we expect more activity as the number of wells waiting on pipeline backlog has increased. In downstream, we expect the Fawley Refinery turnaround season to be flat with the third quarter, while we see growth in petrochemicals. The big ramp-up in investments in petrochemical plants is expected late in 2014 and in 2015.

As compared to the third quarter, we have two less billing days in the fourth quarter, and we will have the normal seasonal holiday impact. But we feel good about the fourth quarter and building momentum into 2014.

For 2014, it is still early in the budgeting cycle, so we don't want to get too far ahead of that process. But early industry capital expenditure forecasts indicate higher spending for North America E&P, and a further increase in US land completion capital expenditures in 2014 over 2013. We also expect international E&P capital expenditures to be up in 2014.

When I look back at the first three quarters of 2013, we faced many end-market challenges. We continued to execute against our long-term growth strategy.

We are focused on our customers and making them successful in meeting their global supply chain challenges. To that end, in the first nine months of 2013, we retained approximately $500 million of annual revenue through renewals of MRO contracts. We also added approximately $250 million of annual revenue in new and incremental MRO contracts.

Based on this performance and success, while 2013 has been a year of lower spending by our core customer group than we expected, we believe 2014 will be a year where we return delivering above-market growth in both revenue and profitability.

With that, we will now take your questions. Operator?

Thank you very much.

(Operator Instructions)

Matt Duncan, Stephens Inc.

So Andy, I appreciate all the color on the outlook. I just want to make sure I am understanding it correctly. It sounds like you are seeing improving business trends. And maybe you can comment on what the month-to-month progression was like through the quarter and into October. But it sounds like you do expect revenues to be up sequentially in your fourth quarter, which is atypical seasonality. Is that basically just the demand is beginning to improve across the board? Is that what's driving that?

Yes, Matt. Let me comment. If you look at our results in 2011, 2012 -- normal years -- we have a seasonal decline in the fourth quarter from the third quarter. And those two years we averaged around $1.306 billion in revenue and $99 million to $100 million in EBITDA. This is not typical year for us. We did not see the spike as normally happens in the second and third quarter in activity. And it's really a late-year increase in activity.

So I will tell you, in the third quarter, of course, we started really slow in July, it picked up in August, and September was a good finish to the quarter. Being November 1, we have [a spot] results for October. And I can tell you the reason we are moving the guidance up in the midpoint of our guidance, which is our expected outcome for the year. The reason Jim and I are moving that up is we had a very strong October. October flash report looks like it will be the highest top line revenue month of the year, and second only to October of 2012.

So it's definitely a strong start to the fourth quarter. We have a lot of momentum in contract wins. The way we track market share gains is with those incremental MRO gains when we renew contracts. And so we feel very good about that. Now, most of that we realized going into 2014. But we are positive this year that the fourth quarter is going to be sequentially up from the third quarter. And that's why we are guiding in that direction.

Okay. And then as my follow-up question, looking out to next year, it sounds like, again, you're seeing improving trends. I'm wondering if you can give us some early thoughts on what kind of revenue growth that might be capable of translating to, relative maybe to your goals, which I know are 8% to 9% organic, and another maybe 2 to 3 points from acquisitions. Is that a doable level of growth for you in 2014, based on what you are seeing today? And can we expect to see the next big global supply deal by the end of the year that might also help add to next year?

Yes. Jim and I will give much firmer guidance for 2014 on the next call. But just generally, we are confident to say that we will grow above the industry growth as a whole next year. This has been a year of high-grading a lot of acquisition targets internationally. And you will see -- I would expect to see some good progress on closing acquisitions in the next two quarters for us.

And so when I look at the way we are finishing, international will have the best -- the fourth quarter will be the best quarter of the year. In Canada, fourth quarter will be the best quarter of the year. It normally is the top quarter for our Canada business.

The US is strengthening. And I am most encouraged with the strengthening in line pipe business. The low for us was the April-May-June timeframe in line pipe demand. And it has picked up a lot. We sold a lot of line pipe in the years 2008 through 2012. And in third quarter, this last quarter, we sold the most tons of carbon line pipe out of stock that we ever have. So that's a real good map.

The pricing is not where we want it to be, but that will improve. I see signs that that is starting to stabilize. So that is a real positive. So the midstream is coming back. Upstream drilling activity is flat. Petrochemicals looks good. And our expansion through acquisitions is going to come on-stream.

And to your final question, yes. I expect us to have a couple more announcements prior to the end of the year, things we have been working on. We are very pleased with the Williams and CP Chem wins. But we also have some other ones that we've been working a long time on. And we don't control the timing on those, but I think we are close.

Okay, great, thanks.

Allison Poliniak, Wells Fargo.

On the Shell agreement, I think if I remember correctly last quarter, there was -- I guess it was not ramping up as quickly as you'd thought. But it sounds like with some projects, it's back on track. Can you just give us a little color on that contract?

Yes, and this year, as we said last quarter, it's been disappointing. We expected it to ramp up faster. And we gave some guidance on that, and it hasn't materialized this year. And Shell has gone through kind of a high-grading and repositioning of their US and Canada investments. They have exited the Eagle Ford, and they are making some strategic decisions in the Marcellus related to their acquisition there.

So they are de-emphasizing some areas, increasing their emphasis in others, like the Permian in Canada. The Carmon Creek facility, the go-ahead on the heavy oil in situ project there, is a real positive for us with them. They are very active in LNG and gas to liquids and ethane crackers. So I think they are just -- this has been a year for them to reposition domestically and in Canada.

And we are involved in a very large number of projects on the front-end engineering and the planning stages. And that's part of this project. While we have a lot of ongoing MRO business with them, it was really the significant growth from their project work. And it took us a while -- longer than we thought -- but it took us a while to get into the mix of the new projects coming on-stream. But we feel very good about Shell. We meet with them often. And while we did not see the impact in 2013, we do see the impact in 2014 and 2015 coming with their investment in projects.

Great. And then on the acquisition side, obviously some very positive on that. Can you just talk about multiples a little bit? Just given some of the pressures, have you seen that pull back a little bit, getting in to some of this acceleration?

Yes. I mean, Allison, we have been active. We are very focused on international expansions at this point because we really have the footprint, short-term, that we want, primarily in the US, with acquisitions we've already done. There's been some high multiples paid with the Sooner and Edgen transactions. So in some cases, people are looking at those multiples.

And so we are going to continue to be a very disciplined buyer. All of our deals have been accretive to this point, and we are going to continue that focus. And so it's a balance between not overpaying, but getting the position we want in some of these key international basins, if you will, where our major customers are active. And we have made a lot of progress. We have a lot of work in that area. And so I would expect in this -- the next two, three quarters -- that you see some good announcements from us in that area.

Perfect, thank you.

Ryan Merkel, William Blair.

Just wanted to start off with the guidance. Can you just walk us through why you have such a wide range of EPS outcomes in the fourth quarter, given that we only have two months left in the year?

Sure, Ryan. I mean, as you look at our revenue guidance, you saw we brought it in a little bit. We have left the EPS, in particular, alone. And it is wide. There's just a lot more variables that go in there -- going down from an EBITDA to an EPS -- including taxes, FX and most importantly, the impact of LIFO. So it is really designed to build in a little flexibility and cushion around some of those big variables.

Well, Ryan, I will just add to Jim's comments. Our expectation and our review of the guidance from last quarter and this quarter is to guide you to the midpoint. That's where we feel our most likely outcome for the year is. And that hasn't changed from an EBITDA or an earnings-per-share basis. And as we have said, strengthening top line, even with deflationary pricing pressures on line pipe, we see additional revenue that we guided to. But we still very much feel like the midpoint is where -- how you should think about our fourth-quarter and full-year result.

Okay. And then, in October you said it was very strong, and I know we talked about revenues could be up sequentially into the fourth quarter. But the high end of the guidance kind of implies things could be up 8% year over year. And I'm just wondering why you think that is a possibility? Is October up low single-digits? Is it better? Just can you give us a little bit more sense of why you think you could be hitting that top end of that sales guidance?

Well, Ryan, there's a lot of momentum going. It's different than last year. We had a good October last year, but then it tailed off on us in November, December. This year, with the backlog we have -- as Jim mentioned in his comments, backlog at the end of third quarter was up $100 million over the backlog of the second quarter. And as you know, following us, our backlog is short-term backlog. So that's going to be realized in three to four months. So that positive backlog number starting the quarter, they're very positive results.

Canada and international were strong in October. The US was very good, and it's the best month since a year ago October. So we have a good backlog to work off of. It's a short-term backlog. The only variability will be -- we get a lot of large orders at the end of the year, and it's usually a balancing act to ship soon enough for us to recognize it in December, or does it carry over into January? So in a perfect world, if everything we have in front of us came to be, it potentially could be the top side of our target -- our range for you. You know, a lot of that depends on December and the last two weeks of December billing, so we have the range that we specified.

David Manthey, Robert W. Baird.

First off, in terms of the total business, great to hear that you have turned the corner here to some extent. My question is similar to what people have been asking here in terms of that guidance. It seems on the high end. Even at the midpoint, it is greater than the normal sequential trend that you have seen in past years.

So I will ask it a different way. What can go wrong? You've talked about a lot of things just now in terms of the backlog and the momentum. But we have seen things turn relatively quickly in the past. Could you tell us what you look at that might be a variable to the downside in the fourth quarter?

Yes, David. A couple things, and Jim may have some comments, too. The downside is an unexpected slowdown in December spending by our customers, a dramatic shift. What you see -- what we did not see at the end of last year was the big pull-down coming because of a slowdown in spending for 2013 that lasted through the first three quarters. What we see in the market this year is a pick-up in activity based on what I believe is going to be increased spending in 2014.

So the dynamic's differently. They are not winding down budgets this year to a slower spending level in the year to come. They are increasing some spending to finish out this year, and building into next year. So there's always the downside that December becomes a real slow month for us. But we don't see it with the backlog we already have in-house, and with the October results -- preliminary results we already have.

All right. Thanks, Andy. And maybe one for Jim. Could you give us a range of what your expected revenue contribution from PSS and Flow Control in the fourth quarter will be relative to the $33 million in the third quarter?

No, it should be comparable levels in the fourth quarter. Those acquisitions -- one closed actually on the last day of last year, and one in July. So it would be in the $35 million to $36 million range.

Sean Meakim, Barclays.

I was hoping you could give us a little bit of an update on your outlook, as we head into 2014, on the opportunity for additional pipeline integrity activity. So we have got two customers that are really focused on that area -- but there seems like a wide opportunity in terms of needs to address old pipeline networks across North America. Could you give us an update there?

Yes. Nothing real definitive as far as a number. But we see a general trend expanding. And the two that we have referenced previously, the NiSource or Columbia Gas in the east, and PG&E, those are multi-year projects. So we see those -- their spending continuing into 2014.

But just in a broader sense, a lot more have started programs. You've seen a lot more emphasis on inspection and testing services, and that's all a prelude to some problems and replacement. And there is still, unfortunately, some incidents in old pipelines that occur. And it just heightens the awareness of the investment level.

So I think more the major players, along with the gas utilities, will pick up. And some of the midstream players will also pick up in 2014. So we will give more detailed color on that in February when we give our annual guidance, both on the gas utility and the pipeline side.

Okay, great, thanks. And then switching to the Permian. You guys made those acquisitions that are proving to be quite timely. And we are hearing through this quarter amongst E&Ps, as we are getting preliminary ideas about 2014, that activity is looking to ramp pretty significantly. Could you give us -- on the horizontal side. Can you give us some more color on that? The switch in the Permian from vertical to horizontal, what that means for your business, and how meaningful that can be in 2014 and into 2015?

Yes. That is our most optimistic view. We are north of $300 million revenue out there. It's roughly 5%, 6% of our total revenues, I think approaching 6% of our revenue. So it's a very important basin for us. It's why we were active in the acquisition, and we are expanding our major regional distribution center. It's going to -- you know, you have Shell and Chevron both making big investments, along with a broad operator base that was already there. You've got the Texas Express Pipeline that just was completed. It opens up that panhandle of gas and NGLs getting from the Permian Basin into the Gulf Coast. Same thing that the Bluegrass Pipeline with Williams is doing to the Utica and Marcellus, getting it down to the Gulf Coast. Those spur -- on both sides of those pipelines, will spur upstream activity. So if there is one area we are most optimistic about, it's the Permian Basin.

And we are also -- Eagle Ford will also be very strong for us in 2014. But I think all indications are, there will be a nice ramp-up in spending in the horizontal area. And that will equate to us, with the production facility expansions, line pipe sales and a lot of tie-ins to the pipeline that have been done there. So that will be a real positive for us. We are confident of that next year.

Jeff Hammond, KeyBanc Capital Markets.

Just, I guess some moving pieces within midstream, which overall still seems to be a little bit choppy, but line pipe improving. But as you look into next year, and we look at CapEx budgets, it seems like midstream and some of these midstream LLPs, there is still a significant decline. And I'm just wondering what you're seeing into the out-year in that transmission space and CapEx budgets, and how they are shaping?

Yes, Jeff, some of it is unique to us, because our major midstream customers' activity levels were down this year, with the ones we have talked about, Williams, Access Midstream and DCP, three of our best midstream customers. I think you're going to see some dynamics with those picking back up in 2014, as evidenced by Williams' investment levels. I think Access was reset with the Chesapeake upstream drilling activity that is coordinated on their side. So I think those two and DCP has really been a good spend this year, and should be again next year.

So I think those will be improved over 2013. We are, as we mentioned in the script, spending a lot of time on the broader MLP basis. So while their overall spending might not be significantly up, our attention and focus to that small, if you will, smaller group of MLP operators that we have determined we have to have a bigger share of the market with them, we are going to see growth from that. We already have seen growth from those efforts. That is why we have added a lot of sales resources, even in the tough top line environment of this year.

And we are going to see return, and we already have seen a return from redeploying the OCTG pipe sales resources to line pipe. So I think the market will improve with our major customers, which will be good for us. And I also think you will see continued penetration into a broader MLP customer group than we had in 2013.

Okay. And then, can you just give us an update on what you're seeing in line pipe pricing, and any sense that things are stabilizing or turning better?

Yes, I think they are. I mean, OCTG, if you start there, has kind of bottomed, and up 1% right now. So I think we might be at the trough in that pricing. But that's a much smaller impact on us today. In line pipe you still see roughly 3% or so deflation in the current spot market during the quarter -- last quarter. But it is stabilizing. I think we are at a point there where activity in the midstream will catch up.

And so I think we see, not a large ramp-up and improvement in pricing, but a step up from where we are, which will be good. Seamless has been good. The most pressure has been on ERW and midstream.

Walt Liptak, Global Hunter.

Thanks for the color on the market share wins. And I wonder if we could talk about 2014, and if you take those MRO wins and project wins, how much is incremental in 2014? Is it the $200 million, or is there something more than that?

Yes, Walt, one way to think about our business, and the way Jim and I think about it, if you just take $5.2 billion and you take our MRO percentage, and then you think about our contracts, a lot of them are five years. Some of them are three years, plus one year out. Basically $600 million to $700 million of our MRO base, when you do the math, comes up for renewal during any given year. So in the first three years -- the first three quarters of this year, we renewed and retained our base business of $500 million that came up for renewal. We added incremental, both products and geographies, to those renewals of $250 million. And that's what we say and that's our position on market share gains.

We are adding that scope to our existing MRO contracts. That market share is coming from somebody, and mostly from smaller regional players, versus heads-up bids with our biggest competitors. And so that's pure market share gain. That's incremental business to next year. Everything being equal, if all spending was the same as this year, that would be an incremental growth. And then you have the variability on projects up and down. But we've also been very successful this year on project bids.

And so that's where we feel confident about growth above the market going into 2014, is because we have that backlog. We will have another quarter of renewals here in the fourth quarter that will further build on that.

Okay, great. And I wonder if I could ask about the upstream and just the mix of business between smaller independents and the majors, if you can give a percentage of sales?

Yes. I mean, we haven't been that specific in our breakout on upstream. But we are heavily weighted in upstream through the majors, still holding -- roughly half our revenues come from the top 25 customers. So that's what impacted us this year with the pullback with Shell, Chesapeake and Hess, three customers that we mentioned on previous calls. We are weighted to those large players, and so when they pulled back, it impacted us this year in the upstream.

But part of our expansion in the Permian, part of the expansion in the Eagle Ford and Bakken, is a broader -- more of the larger independent customer base. And then on a smaller independent group, they are mostly transactional basis, where we have very few of those that are on multi-year contracts. So they are more transactional daily basis through our branches. But the heavy weighting is still to the major players in the segment.

Sam Darkatsh, Raymond James.

Two questions. First off, you mentioned, Andy, in your prepared remarks, all of the various strategic decisions a lot of your competitors are making. Do you find there to be increased incentive for you guys over the next three to six months to really try and consummate an M&A activity of some consequence, since you probably don't have a whole lot of bidding activity for those types of deals for those three -- at least for those three major players you noted, to date?

Yes, Sam. A couple things there. On the change of ownership, that always puts a variable into the business. People, I think, underestimate the amount of work entailed in spinning out from a division, from a corporation to a standalone public company. We spent two years, a lot of activity and a lot of costs on achieving that from our transition from private to public.

So without a question, they have a lot on their plate. They are a very good competitor -- with NOV Wilson, I am speaking to. They have a system integration, they have a merger to complete, and all that activity is related to going public standalone. So they have a lot to deal with, but they are a good competitor.

But certainly, we are looking at the marketplace from a perspective of adding additional resources, being aggressive on contracts, and being very aggressive on acquisitions over the next couple quarters. Because we have all that other activity behind us, we are very focused on the market right now. And we don't have any of those distractions. So I see that as a positive. And we have spent a lot of time this year getting to the right acquisition candidates. And I think you're going to see good results from all that work.

Next question, if I could. Your October trends are obviously very encouraging. Trying to get a sense of how much that might be market-share driven, versus the overall market as a whole. What are you seeing, generally speaking, Andy, with respect to vendor lead times? Are they starting to lengthen out a little bit? Because there's a little bit of chatter, at least in the upstream OCTG space, that vendor lead times are actually shrinking a little bit. So what are you seeing, as that relates to that?

Yes, you've got to think about our business in two sectors. Yes, I think in OCTG and line pipe, lead times are shrinking. Demand -- especially in OCTG, demand has been soft. So a lot of capacity out there, especially the additional capacity coming out in the US. So those lead times are shorter. But the longer lead time -- the alloy pipe materials, valves, some specialized -- the stainless fittings and pipe -- those are lengthening some. So it's really a mixed bag between the two.

William Bremer, Maxim Group.

Andy, you just -- you pretty much went to where I was going to go. I was going to ask you, pretty much, any particular items in the quarter were surprisingly strong? And I guess you've alluded to that just now, in terms of the alloys and the fittings. But can you give us a little more color there, possibly?

Yes. Even during all of the -- when you look back at this year, and if you just use $5.2 billion from the $5.55 billion last year, our OCTG is down $250 million, and our line pipe -- our best estimate for the year -- will be down $100 million. So the $350 million drop is really all there in those two product lines. Everything else in the valves and in the general oil field products -- stainless, gas products and utilities -- is up, all that.

The rest of our product lines have been very stable, and have been up on a yearly basis. So it's really a year of resetting on carbon pipe. And that's been the big swing factor for the whole year for us. And I am very pleased to have the OCTG reset behind us. We will be at a level -- the comparison has very tough all year. But the fourth quarter comparison will be to a reset level last year. And what I am most encouraged about, all the resources that we redeployed, and the refocus on some of the smaller players in the space, we are getting results from that.

We have sold a lot of pipe in our time. And to sell the most tons out of stock in a quarter that we ever have in history was a really encouraging milestone for me, because it shows those redeployed resources are getting the results we thought we could. It's a couple quarters later than we thought, but it's coming on.

So the pricing is not great right now, but that will turn. And we will have the volume, and we will have the new contracts with the greater penetration in that sector, so we are real encouraged by that.

And in valves, valve automation continues to be our lead. And you will see that in our acquisitions and our investment in inventory. Stainless, alloys, valves and valve automation will be our investment product lines.

Very nice color, thank you. On the international front, you gave us some color there. What is the long-term opportunity in Mexico for you?

Yes, it's a good question. We've taken a look at that over a number of years, and it's attractive. If you look at Pemex and the national oil company model for supply chain, they do a lot direct, just like a lot of other national oil companies. So that, as a direct customer, is -- they just don't use the distribution model. But there is a good chemical, there's a good refining, and there's a good industrial sector there of PVF.

So we like that market, we like that base market. It would be a fabulous market for us if the constitution gets changed and it opens up to our customer base on the shales and the land. So if that happens, I think it becomes even a more important market for us. But we are watching that very closely, and it's one of our key markets that we track closely on changes.

Brent Rakers, Wunderlich Securities.

I first wanted to follow up on some of the Q4 outlook. I think you have given a backlog number year over year, which I think has still improved nicely, but it's still modestly below where you were at last year. And I believe you articulated that the October month, although it's improved as well, was also down modestly year over year. If you could talk about what it is going forward from this point, and maybe what happened in November, December last year? Is a comp issue as you go forward for this fourth quarter?

Brent, last year we saw a real quick fall-off in the November, December sales, even though we had a stronger backlog -- like you said, a comparable backlog to a year ago. So the backlog today is a $739 million. We have seen it move up a little bit since the end of the quarter, which is encouraging, which we didn't have last year. So again, as Andrew had mentioned earlier, it's a different dynamic this year than it was a year ago.

That's great. Thanks, Jim. My other question is, getting back on the pricing, with line pipe in particular. Could you talk about when the initial pressure was, when the point of anniversary on some of the line pipe pricing pressure comes? And then also, when we think the gross margin related to the line pipe will start to stabilize, as well?

Yes, it's been a slow decrease over the past year on the spot pricing, which impacts a lot of contract pricing. It went from around $1,800 a ton to the current $1,600 a ton, basically. But what we have seen the last two or three months is a leveling out of that, around $1,600, $1,620 a ton. So I do think we are at a point where it starts to move up, at least stabilizes. And then I think you won't see a dramatic change-up. It will be a slight change-up, driven by demand. And so I think it does improve in 2014 for us. Seamless and DSAW are two other [grades] -- they have been more stable pricing. I think you'll see ERW, where its primary application is in our pipeline group, you will see that improved some in 2014. Not dramatically, but some.

Igor Levi, Morgan Stanley.

It looks the opportunities for next year are pretty vast from the new customer agreements and the additional petrochem awards. But what do you see as the biggest risk to achieving this type of high single-digit organic growth rate that you guys are striving for? Is it more in the simplest commodity prices, or more competition following some of those recent acquisitions in the space? Or maybe customer-specific risks, as we have seen this year?

Yes, Igor, I think it is always largely driven by the commodity pricing that sets the budgets. But in this year, the budgets came out as flat to up 2%. I think early estimates for next year are in growth in the 4% to 5% range. And so that's a positive for us. The incremental contract wins are positive incrementally for us. The acquisitions will be the big swing factor. If we are able to complete some of the acquisitions we are looking at, we will exceed that market growth, more heavily weighted towards acquisitions in 2014. But generally, we see it as a positive trend in spending. And international will still be strong. It was strong this year. We just don't have enough of a footprint in international to take advantage of it at this point. And that's why the international acquisitions are an important part of our plan for next year. That's a strong market, it's an oil-driven market, it has more offshore. And so we see that as an area where we can grow into. And that's all pure growth for us, when we expand internationally.

Great. That's very helpful. And then, as a follow-up, when you look into the mix of what you expect to come out next year, what is the projects versus MRO, and how does that compare to the current year? Is it roughly the same?

Yes, it will be roughly the same. We have done a lot on the -- we are at 72% MRO, 28% project. We will see some gains in projects. The Carmon Creek is a big project in Canada. We've done some other nice heavy oil wins up in Canada. If you think about the big CP Chem project -- now, this will go over 2014, 2015, 2016. But those are mega projects. That one is a $6 billion project. If you look at our ratio, normally we say 3% to 5% of a project of that scale is PVF. So you're looking at $180 million to $300 million of spend on PVF over a couple of years. And so we will benefit from that contract. So you will see some growth in projects. But I still think the majority of the growth will be in MRO and broader contracts with our major customers. So Jim and I expect that ratio to stay about the same.

And at this time, I would now like to turn the conference back over to management for any closing comments.

Thank you for joining our call today, and you all have a great day. Thanks a lot.

Thank you.

Ladies and gentlemen, that will conclude the conference call for today. If you would like to listen to a replay of this conference, you may do so by dialing either 303-590-3030, or 1-800-406-7325. You will need to enter the access code of 4639997. Those telephone numbers once again are 303-590-3030, or 1-800-406-7325. With the access code of 4639997. Again we do thank you for your participation on today's call. You may now disconnect your lines.