MRC Global Inc (MRC) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to MRC Global's fourth-quarter earnings conference call.

(Operator Instructions)

This conference is being recorded today, February 21, 2014. I would now like to turn the call over to Monica Schafer, Vice President of Investor Relations.

Please go ahead.

Thank you, George.

And good morning, everyone. Welcome to the MRC Global Fourth-Quarter and Full-Year 2014 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 March 8, 2014. The dial-in information is in yesterday's release. Later today, we expect to file a 2013 Form 10-K, and it will also be available on our website.

Please note that the information reported on this call speaks only as of today, February 21, 2014. And therefore, you are advised that information may no longer be accurate as of the time of this 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 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 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 all for joining us today on our Fourth-Quarter and our Full-Year 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 financial results, let me begin with some highlights from the quarter and the year.

Following Jim's comments, I will finish with a discussion on the outlook for our business and introduce our 2014 Guidance. I'll start with a couple of noteworthy events this quarter.

First, we took the final step in becoming a full, publicly-traded Company when our private equity sponsor sold its remaining shares of MRC stock in the secondary offering this past November.

With that milestone, we made other governance changes, such as changes to the Company's Board of Directors and bylaws. Our two private equity directors resigned when the secondary was completed, and Rhys Best was appointed Lead Director.

We repriced and upsized our Term Loan B in November, which gave us more flexibility to make acquisitions and allowed us to take advantage of lower interest rates. We also generated $82 million of cash from operations during the fourth quarter, and $324 million for the year, which helped fund our acquisitions.

As you saw in our release yesterday, sales results were in line with our expectations, as we came in at $5.23 billion for the year, and $1.34 billion for the fourth quarter.

Revenues for the fourth quarter were up 3% from the same quarter last year, and up 2% from the previous quarter. Last quarter we guided that we would be up sequentially; and despite inclement weather and holiday headwinds, we met our guidance.

Gross margins were down 300 basis points this quarter from the same quarter last year due to the impact of LIFO, deflationary pressures on line pipe, and a higher mix of low-margin carbon pipe sales. In the fourth quarter of 2013, adjusted EBITDA was $87 million, which put the annual number of $386 million within our last guidance range.

Diluted earnings per share were $0.23 for the quarter, and included three items that negatively impacted earnings per share by $0.09 per share. Diluted earnings per share were $1.48 for the year, and also included unusual items that reduced EPS by $0.12.

Full-year adjusted EPS was $1.60, compared to the low end of our guidance of $1.65. EPS was outside of our guided range, largely due to lower gross profit margins in the fourth quarter. And Jim will go into more detail on the nature of these items.

We continue to execute our long-term strategy. As we have mentioned before, our strategic initiative to re-balance our product mix and de-emphasize our lowest margin and most volatile product line, Oil Country Tubular Goods, began in the third quarter of 2012. Therefore, this quarter was the first quarter where there was no significant year-over-year impact.

Our rebalancing efforts resulted in a decline of approximately $250 million in sales, but mostly PG in 2013. For 2013, OCTG sales were 9% of total sales, which is within the 8% to 10% range we guided as our run rate going forward.

Our targeted growth account program for those accounts ranked 25 to 100 was successful in 2013. In North America, we grew sales in these accounts by more than 20% in 2013 over 2012. This group of customers will remain a focus in 2014.

We also continue to grow by acquisition where we see opportunity to expand our reach. Expanding our international geographic footprint, as well as certain product lines, has been a major focus. And we are pleased to have closed the previously-announced acquisitions of both Flangefitt Stainless in the UK and Stream in Norway.

The Flangefitt acquisition gives us a stronger presence in stainless and alloy product lines, an area in which we continue to focus. The Stream acquisition gives us offshore capabilities and technologies we didn't have previously. Before Stream, about 2% of our revenue was generated from offshore business. With Stream, this will now be about 8%.

Our plan is to take this expertise and leverage it into other areas outside of the Norwegian Continental Shelf. We expect this will take some time. But our initial focus is on the UK Continental Shelf.

Our international expansion strategy is focused on positioning MRC to best serve the IOCs on a global basis. As I mentioned before, approximately 75% of our major customer spending is outside of North America. And we are positioning MRC to expand our contracts with those customers in order to capture that market share.

Current estimates show that of the more than $700 billion of global E&P capital expenditures estimated to be spent in 2014, approximately $100 billion is estimated to be spent in the four largest offshore markets of Norway, Brazil, the US Gulf of Mexico and the UK.

Of these, the Norwegian Continental Shelf is the largest. With these two acquisitions, along with our existing operations in the US Gulf of Mexico, we now have operations focused on growing in three of the four largest offshore E&P markets in the world.

We continue to evaluate and pursue potential acquisitions. We would expect that these would be more likely to occur in the second half of 2014 rather than the first half, having just closed Stream.

We continue to enter into broad, multi-region agreements with our top customers to expand into new geographies and expand product scope. Since we last spoke, we have announced new agreements with BP and Chevron. We also have a notable contract renewal with ConocoPhillips to tell you about today.

First, the announcements with BP were for MRO work retained, as well as new project work. The global projects for pipe, flanges and fittings opens up a new opportunity for us.

We now have the ability to bid on projects that were previously inaccessible. We estimate that this could be worth $50 million to $75 million a year, depending on our success on these project bids.

Our most recent announcement earlier this month with Chevron covers three regions where we have expanded our work with them, and is part of our strategy to add scope with existing domestic customers in new geographies.

First, we are now able to supply them with valves on their upstream future growth project in Kazakhstan, which is a $30 billion project. This is not exclusive, although we are on a very short list of valve suppliers. This is also another great opportunity to gain access to some of their project work.

The other components of our Chevron contract announcement are for MRO business and include our full-product offerings of pipe valves and fittings for both their Australian and Thailand operations. Leveraging our long-standing domestic relationships and building out our presence in Australia provided that opportunity to gain this new market share.

While the Australian business isn't exclusive, we are competitive with our scale there. We are the primary supplier in Thailand, and we will be ramping up our current valve warehouse there to serve the customer.

This contract allows us to expand our footprint in Southeast Asia and extend our product offering there. Chevron spends 70% of their capital expenditure budget on international upstream. And with these contracts, we are capturing more of it.

We have also renewed an important contract with ConocoPhillips for PVF, as a primary supplier in the lower 48 states. This is an example of retaining a long-standing piece of business that went out for bid.

We retained the work due in large part to our outstanding service to ConocoPhillips over the past 10 years. It is a three-year contract with two one-year op renewals. And the opportunity over the expected five-year life of the contract is expected to be $500 million.

Obtaining enterprise framework agreements and adding scope to existing contracts are major tenets of our strategy. And you should expect to hear more from us on these periodically.

Before I turn the call over to Jim Braun to review our financial results in more detail, let me give a quick recap of our topline performance from 2012 to 2013.

We finished 2012 with revenue of $5.57 billion. In 2013, we experienced lower revenue, driven by reduced spending in certain customer groups:

Approximately $100 million related to some of our major US and Canadian upstream customers, about $30 million from our downstream Australian mining business, and about $120 million from three of our largest midstream customers.

We also completed our planned reduction in OCTG, reducing revenue by approximately $250 million, as well as reduced revenue of $25 million from foreign currency. These reductions were partially offset by growth from acquisitions of approximately $190 million, yielding a net reduction of $335 million, which resulted in our $5.23 billion of sales in 2013.

While we had several customers reduce their spending in 2013, we did not lose any of our major long-term contracts, but instead added to our strong contract framework. We also made acquisitions to position us for growth in 2014 and beyond.

So with that, let me now turn the call over to Jim to review our financial results.

Well, thanks, Andrew. And good morning, everyone.

Total revenues for the fourth quarter were $1.34 billion, which were 3% higher than the $1.31 billion we reported in the fourth quarter of last year. The year-over-year increase was driven by the impact of our acquisitions, which added an incremental $37 million of revenue in the quarter.

The US drilling rig count was down 3% in the fourth quarter from a year ago, while the US land-well count was up 5% over that same period. US revenues were $1 billion in the quarter, up 6% from the fourth quarter of last year.

Organic growth in the quarter was 2.3%, while acquisitions contributed an additional 3.7%. Sequentially, the US segment sales were flat from the third quarter.

Canadian revenues were $189 million in the fourth quarter, down $23 million, or 11%, from the fourth quarter of last year. While we had less project work this quarter compared to last year, approximately half of the decline in the Canada segment was due to the decline in the Canadian dollar relative to the US dollar.

Sequentially, the Canadian segment is up 17% from the third quarter, benefiting from a large line pipe order in the fourth quarter. Historically, the fourth and first quarters are the strongest in Canada.

Internationally, fourth-quarter revenues were up $3 million, or 2%, from a year ago, to $143 million. This increase was the result of increased sales in Europe, partially offset by weaker demand -- particularly in Australia, where we've seen reduced customer spending in the mining and oil and gas sectors.

Nearly a third of the decline in Australia is due to a weaker Australian dollar. Sequentially, the international segment was up 5% from the third quarter, due to stronger activity in Europe and Asia-Pacific.

Turning to our results based on end-market sector. In the upstream sector, fourth-quarter sales increased 6% from the same quarter last year, to $606 million. This increase was driven by the acquisitions of production specialty services and flow control, while the acquisition of Flangefitt in mid-December had little impact on the quarter.

Sequentially, upstream sales increased by 3% compared to the third quarter. This increase is largely driven by an increase in OCTG and line pipe sales.

The midstream sector was $392 million in the fourth quarter of 2013, an increase of 7% over 2012. Compared to the fourth quarter last year, this quarter saw a growth in both the gas utility and transmission sectors, which were up 14% and 4%, respectively.

Sequentially, the midstream sector was up 4% as well. The fourth quarter saw 18% growth from the previous quarter with our transmission customers, driven by line pipe sales. While our gas utility customer segment decreased by 14%, which was negatively impacted by weather.

In the downstream sector, fourth-quarter 2013 revenues decreased by approximately 6%, to $346 million, as compared to the fourth-quarter 2012. The decrease is primarily attributable to weaker sales in our international and Canadian segments.

The US downstream sector was up 2% from the fourth quarter a year ago. And sequentially, the downstream sector was flat.

Turning to revenue by product class. Our energy carbon steel tubular products accounted for $409 million during the fourth quarter of 2013, with line pipe sales of $291 million and OCTG sales of $119 million.

Overall sales from this product class increased 4% in the fourth quarter from the same quarter a year ago, including a $4 million, or 4%, increase in OCTG sales, and an $11 million, or 4%, increase in line pipe. About 2.6% of the increase in line pipe was organic, and 1.5% was due to the acquisition of PSS.

Fourth-quarter 2013 was a record quarter for line pipe tons sold from stock in North America. We sold 35% more tons of line pipe and had higher revenues in the fourth quarter of 2013, compared to the fourth quarter of 2012. However, those increased volumes were a higher mix of lower-priced ERW pipe.

Also impacting the quarter was approximately $60 million in lower-margin line pipe sales that shipped in the fourth quarter of 2013. These orders had been expected to ship in the first quarter of 2014, but shifted to the fourth quarter.

For the fourth-quarter 2013, 52% of line pipe sales were within our midstream sector, while upstream and downstream made up 30% and 18%, respectively.

The recent preliminary decision in the OCTG trade suitcase is not expected to impact us significantly. Since our OCTG business is not focused on the spot market, but rather it is with our larger customers under cost-plus arrangements.

Sales of valves, fittings and other products were $935 million in the fourth quarter. This represents an increase of 2% from the fourth quarter of 2012.

Revenues from valves were up 3% during the quarter, primarily due to acquisitions. Fittings and flanges were down about 8% after benefiting 3% from acquisitions, compared to the quarter a year ago. Other products were up 12%, primarily due to organic growth of 7% and then 5% from acquisitions.

And now turning to margins. In the fourth quarter of 2013, the gross profit percentage declined 300 basis points, to 16.8%, from 19.8% in the fourth quarter of last year. The decrease was largely due to the impact from LIFO.

A LIFO benefit of $27 million was recorded in the fourth-quarter 2012, as compared to a $1 million expense in the fourth quarter of 2013. And that equates to an $0.18 per diluted share impact year over year.

Our adjusted gross profit percentage -- which is gross profit plus depreciation and amortization, amortization of intangibles, and plus or minus the impact of LIFO inventory costing -- decreased to 18.3% in the fourth quarter of 2013, from 19% in the fourth quarter of 2012. Lower line pipe spot prices and a larger-than-normal amount of lower-priced ERW line pipe sales created pressure on margins.

All-in, the average line pipe sales prices declined about 20%. And OCTG pricing declined 4% from the fourth quarter of 2012 to the fourth quarter of 2013.

On a sequential basis, adjusted gross profit was 80 basis points lower than the third quarter. This was primarily due to lower margins in the US and Canada segments, partially offset by a margin improvement in the international segment.

We don't believe the lower margin in the quarter is indicative of a structural change in our product mix, but rather the fourth quarter experienced a higher demand for ERW line pipe, primarily in our midstream sector.

SG&A costs for the fourth quarter of 2013 were $167 million, or 12.5% of sales, compared to $154 million, or 11.8% of sales, for the fourth-quarter 2012. The increase is primarily due to $5 million of incremental SG&A related to acquisitions, and $5.2 million for the accelerated recognition of equity-based compensation expense, triggered by the November 2013 sale of stock by our private equity sponsor.

We expect SG&A expense to be around $180 million per quarter in 2014, with the addition of Stream and Flangefitt.

Operating income for the fourth quarter of 2013 was $59 million, versus $104 million in last year's fourth quarter. The operating margin also declined compared to last year, from 8% to 4.4%. This is due primarily to the impact of a LIFO benefit in 2012, and lower profit margins on line pipe that I discussed earlier.

Another item of note in the quarter is a gain on a derivative instrument from the foreign currency forward contract related to the Stream acquisition. Approximately $3.7 million gain was recognized in December 2013, and an offsetting $2.1 million loss is to be recognized in January 2014.

Our interest expense totaled $14.7 million in the fourth quarter of 2013, which was a 26% reduction, compared with $19.9 million in the fourth quarter of 2012. This was due to the redemption of our 9.5% senior notes in November of 2012, as well as the repricing of our Term Loan B in November of 2013 and the resulting lower interest rates.

In addition, average debt levels were approximately $190 million lower in the fourth quarter of this year, compared with the fourth quarter of 2012. And at the end of December, our weighted average interest rate was 4.5%.

Our net income was $23 million for the fourth quarter or $0.23 per diluted share. Compared to a net loss of $6 million or $0.06 per share in the fourth quarter of 2012.

Fourth quarter 2013 adjusted net income is $33 million, and is adjusted for three items: a $3.3 million after-tax charge related to expenses from the repricing of the Company's senior secured Term Loan B in November of 2013. A $3.4 million after-tax charge for the accelerated recognition of equity-based compensation as a result of the November 2013 sale of common stock by our private equity sponsor, which sold its remaining interest in MRC Global. And this was recorded in SG&A.

And finally, a $3 million after-tax charge for a net adjustment to increase the valuation allowance on deferred tax assets for certain foreign jurisdictions. Note that this adjustment helps explain our effective tax rate of 45.3% for the fourth quarter of 2013, and 35.8% for the year.

In 2014, we expect our tax rate to be between 35% and 36%. The cumulative impact to EPS of those items is $0.09, which results in an adjusted diluted EPS of $0.32 for the quarter.

Adjusted net income for the fourth quarter of 2012 was approximately $56 million. And excludes a $59.9 million after-tax charge or $0.58 per diluted share related to the purchase and early redemption of a portion of our senior notes. As well as a $2.9 million after-tax charge related to the termination of a defined benefit pension plan in the Netherlands.

Adjusted EBITDA was down 12% year over year, to $87 million in the fourth quarter, versus $99 million a year ago. Adjusted EBITDA margins fell to 6.5% from 7.6% a year ago.

For the year, sales declined $340 million, or 6%, to $5.23 billion for 2013, as compared to $5.57 billion for 2012. The 6% decrease reflected a planned $250 million reduction in the OCTG business resulting from the strategy to re-balance our sales and inventories.

Revenues also contracted by over $250 million from lower capital spending by our customers during 2013, a longer-than-normal spring break up in Canada; a decline in project sales, particularly in the oil sand regions of Northern Alberta; and weaker demand in parts of Australia, where we experienced reduced customer spending in the mining and oil and gas sectors.

We also experienced weaker foreign currency, which had the impact of reducing revenue by approximately $25 million throughout 2013. Our 2013 sales benefited from several acquisitions, contributing $189 million in 2013.

SG&A expense increased $36 million in 2013 over 2012, primarily due to the incremental costs associated with our acquisitions. Interest expense was $52 million lower in 2013 than 2012, primarily due to the November 2012 debt refinancing. Net income in 2013 was $152 million, up 29% from last year's net income of $118 million.

Our debt outstanding at December 31, 2013, was $986.8 million, compared to $1.257 billion at the end of 2012. Considering the debt incurred as part of the January 2014 Stream acquisition, on a pro forma basis, net debt outstanding at December would have been $1.23 billion.

At December 31, 2013, our leverage ratio -- which we define as total debt less cash -- to the trailing 12 months of adjusted EBITDA, was 2.5 times as compared to 2.6 times at December 2012.

On a pro forma basis for the acquisition of Stream, leverage moves to 3 times. However, our 2014 forecast is for free cash flow to be used to pay down debt over the next 12 months.

Our operations generated cash of $82 million in the fourth quarter of 2013. And our working capital at the end of the year was $1.084 billion, $43 million lower than it was at September 30, 2013.

For the year 2013, we generated cash from operations of $324 million. Next year, we expect cash from operations will be lower, in a range between $175 million and $200 million, as we expect revenue growth will consume some cash in the form of additional working capital.

Cash used in investing activities totaled $35 million in the fourth quarter, and included capital expenditures of $7 million and the acquisition of Flangefitt. For 2013, capital expenditures were $22 million. And in 2014, we expect capital expenditures, excluding acquisitions, to be between $25 million and $30 million.

And while not in the fourth quarter, but noteworthy -- in January of 2014, we sold our Canadian progressive cavity pump distribution and servicing business to Europump, our primary manufacturer and supplier of progressive cavity pumps. We believe this divestiture will allow us to focus on our core business of supplying PVF products and services to the energy industrial markets.

We expect the impact of this divestiture to be a reduction of sales in Canada of approximately $82 million in 2014, of which approximately $25 million will be in the first quarter. However, through the elimination of costs associated with the business, including the cancellation of a profit-sharing arrangement to Europump shareholders related to pipe valves and fitting sales in the heavy oil region of Canada, we expect the disposition will have a modestly accretive impact on profitability going forward.

However, we do anticipate a first-quarter 2014 pre-tax charge of approximately $7 million associated with the termination of our profit-sharing arrangement with Europump.

Looking ahead, January and February results reflect the impact of inclement weather in our operations in part of the Midwest and the Eastern US. Combined with the large line pipe sales in the fourth quarter and the loss of sales from the disposition of our Canadian pump business, we expect revenues to be down mid single-digits in the first quarter of 2014 from the fourth quarter of 2013, even after considering the revenue from the Stream and Flangefitt acquisitions.

However, results to date in 2014 reflect a higher adjusted gross profit percentage than was experienced in the fourth quarter, consistent with our belief that there has not been a structural change in our product mix.

I'll make one final comment before turning it back to Andrew.

While the start of the 2014 will be impacted by poor weather and a strong fourth quarter of 2013, our backlog remains strong. Our backlog was $758 million at the end of December, which was 3% higher than September, and 14% higher than December of 2012.

Year over year, backlog in all three geographic segments is up. And in addition, since the end of the year, we've seen continued strength in the US backlog in particular.

It has grown from $470 million at December to just over $550 million through this week. We believe this is indicative of the opportunities in 2014.

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

Thanks, Jim.

Let me conclude with some comments about our guidance for 2014. For the full year 2014, we expect sales to be in the range of $5.5 billion to $5.8 billion, and adjusted EBITDA to be in the range of $400 million to $450 million.

We have been diligent in determining our estimates for this year, considering many different factors to arrive at these ranges. Some of the factors we considered were industry capital expenditure forecasts and surveys, our specific customers' capital expenditure forecast, feedback from our supply chain, discussions with our top 20 suppliers, our current backlog, and specific insight from our top 25 customers.

Included in our thinking is the slow first quarter, our contract framework agreement wins in 2013, and our acquisitions that have been completed, along with general market dynamics.

Overall, the midpoint of our revenue guidance assumes 4% organic growth, and 6% growth from the acquisition of Stream and Flangefitt starting from a 2013 revenue level adjusted for the sale of our Canada pump business.

In addition, the midpoint of our revenue guidance assumes a 1% revenue decrease due to a weaker Canadian dollar in 2014, versus what we experienced in 2013.

We are also expecting our contracts with Shell and Chevron to add a total of $70 million in 2014 over 2013. We have not assumed any further acquisitions in our estimate. We have decided not to provide earnings-per-share guidance this year, as the LIFO volatility makes forecasting EPS too uncertain.

From an upstream perspective, all the major industry reports indicate higher spending for North America E&P, and a further increase in US land completion capital expenditures in 2014 over 2013, although they vary on how much.

On the high end, Barclays shows North America spending is up 7%, with 8.5% in the US and 3% in Canada. On the low end, Morgan Stanley shows North America and the US up around 3%.

Internationally, Barclays shows Europe E&P spend growing to close to 8%. And Bank of America Merrill Lynch shows international spending increasing around 8% as well. At the midpoint of our guidance, we expect double-digit growth from upstream, including acquisition-related growth.

Looking at midstream, we expect very modest growth from this sector based on our current customer base and their expected spending levels. We see the potential volatility in this area, depending on project progression.

While we see good opportunities with our core midstream customers, we have several large midstream customers who are expected to spend less in 2014. At the midpoint of our guidance, we see low single-digit growth from midstream.

We expect mid-single-digit growth in the downstream sector, driven largely by a very active turnaround year in the US, with spending increases in chemical and petrochemical sectors. From a product line perspective, we expect double-digit growth from our valves and valve automation business lines.

From a macro point of view, we see oil and gas commodity prices in early 2014 having a positive impact on our customers' cash flows, and this being a real positive. And we expect 2014 to be a year of increasing spending levels by our major customers in the second half of 2014, and we've already seen examples of this.

With that, we will now take your questions.

Thank you, sir.

(Operator Instructions)

Matt Duncan with Stephens.

Can we dig a little bit more into what's going on with line pipe pricing? Have you seen that start to stabilize? And are your margins in that product line getting better here, Jim, in the first quarter?

Yes, Matt, we think the margins will get better in the first quarter. We think that will be driven by a reverse of the mix change we saw here in the fourth quarter.

There continues to be some downward pressure on pricing in that sector, spot prices continuing to move down a point or 2. But that's part of the headwind that we'll have to overcome. But the large decrease in margins that you saw there in the fourth quarter, we should see those return to more normal levels in the first quarter.

Matt, let me just add a comment to Jim's. When I look back at the year, we had softer demand early in the year -- 2013 -- on line pipe. But the mix was pretty historically normal for us. Later in the year, we saw a pick-up. We had deflation through the whole year that Jim described in the comments earlier.

And what we saw in the last year was typical. Some years -- and I can name a couple others that -- where we had end-of-year budgets being spent. And then this year, it was largely in midstream -- which makes sense for us.

You know, the first half of our year was -- midstream was soft. Third quarter was a record-level of shipments from stock. And the fourth quarter exceeded that even.

So as long as we've been in the midstream business and the line pipe servicing that, to have the most tons shipped in the fourth quarter in the history of the Company was another good milestone. A lot of volume there.

It was heavily weighted to ERW, which is our lowest margin of the mix -- Seamless and D-Saw being higher margin products for us. And so there was really just the mix impact of large midstream sales in the fourth quarter.

Okay. And then the second thing for me, and then I'll hop back in the queue. Just looking at the organic growth implied in your guidance a little bit here, it looks like it's probably on the order of flattish to maybe up 6% or 7%.

CapEx budgets, I know from a lot of your upstream customers especially, are up a lot more than that. I appreciate the color you gave us on end-market by end-market. I'm curious with -- how do you factor in what's been going on with natural gas prices to that guide?

Because obviously it strengthened. I would think that, that's going to cause some of your drilling customers in even the midstream side that's focused on gas to possibly get more active.

So are you factoring that into the guidance? And then, what are you seeing from that customer base?

Yes, Matt, let me start. And Jim may add some color to my comments.

But first off, we're -- we had a lot of volatility in our forecast in 2013. And we're not going to have that again in 2014. We're going to start being conservative in our forecasting to the 2014 year, so that's principle number one.

When I think about the year -- and we talked about this might be a year where we have more growth through acquisitions than organic, which is reverse of what we've had for the last couple years. And in our comments, we said 4% organic growth and 6% acquisition. You have to adjust.

So the way I look at it, and Jim could give more color from the end-markets. But you start with the $5.23 billion, and you take off the $80 million of revenue we'll lose -- have lost -- from the divestiture in Canada.

And then we have specifically three midstream customers' well-publicized decreases in CapEx spending for 2014 -- three of our larger ones. So we're factoring in $150 million drop from that, from a run rate perspective.

So you start at $5 billion. You add the $325 million for our acquisitions. And then the next $325 million comes from a combination both of growth in the market, and also our previously discussed MRO contract wins. So a combination of the contracts we've already won in 2013 with additional scope, plus a very conservative view of organic growth, is what gets us to the midpoint which we're guiding you to.

But I will say, I think this is going to be one of the years where we come out at mid-year with higher capital spending. We've seen this before. When commodity pricing is high for our customers in the first half of the year, they normally have a reset higher.

We're not including that in our guidance. We'll of course update our guidance later in the year when we see that.

But one prime example is Access Midstream, who already increased their capital budget from the original estimate by $100 million in the last week. So I think that's one of several of our customers where we might be forecasting conservative right now for midstream. And we will see a pick-up in the second half with -- these are tremendous cash flows for our customers in the first half that they didn't expect.

William Bremer with Maxim.

Jim, can I just go through quickly -- I'm sorry if I missed this -- the revenue-by-sector forecast. So if I heard you correctly, upstream: double-digit growth. Midstream: we're looking at low single-digits now, due to what you just called out. And then downstream: more mid-singles. Is that correct?

Yes, that's correct, Bill. And that upstream growth that you had of double-digits, it?s mid single-digits are organic. And then the benefit of the acquisitions add another 5% to 7% growth.

Okay. Now, what we're seeing in terms of all this activity in the Gulf. Can you give us a longer-term view, due to the fact -- all right, we know the first half here is going to be a little difficult.

But longer-term, in terms of what we're seeing in the build on the chemical and the downstream area there, how are you guys positioned for that? And what are you seeing there?

Yes, Bill, let me just add a couple comments there. You know, in the Gulf of Mexico, we're primary a land business. So heavily focused on refining chemical and petrochemical land infrastructure. That's the bulk of our business. It looks like one of the highlights for our year.

We had the big CP chem win last year that we announced in the third quarter. So that contract will be gearing up in 2014. That part of our business looks very good.

We have a small exposure to the offshore market, and it's mostly on MRO production facilities from a PVF perspective. So we don't have a lot of exposure to the deep-water drilling environment. So the biggest impact for us is in the plant spend on the land.

Right. When you said mid single-digits in that downstream area, I got a little puzzled on that. Given what you just mentioned here, I thought that would be higher.

Well, it's stronger in the US. We didn't give that detail, but stronger in the US than the general guidance. Still muted in Europe. We have a big downstream refining business in Europe. And then still muted with our downstream business in Australia, where they are going through the structural change in both refining and mining.

So I would say it is better, if you had a US-only perspective. But on an average basis, weighted down by the Europe and Australia components.

Right, okay. Thanks, Andrew.

Sean Meakim with Barclays.

I wanted to dig a little deeper on the SG&A guidance that you gave. So just thinking about what top-line impact is expected to be for Stream, relative to the SG&A impact, it seems like the SG&A is a higher relative contributor.

Is the accretion on the gross margin side? Is that going to help balance out this higher SG&A spend that we're expecting to see in 2014?

You're exactly right, Shawn. Stream in particular will bring with it higher gross margins relative to our base business.

But it also comes with a higher load of SG&A operating expenses. A little more service-oriented. A lot of technical people associated with that business.

Okay. And staying on the international side, can you give us a little more color on Stream's position in that market? And then broadly, as this acquisition ramps up, what does this do in terms of getting you to the scale you need internationally to get margins back to something comparable to North America?

Yes, Shawn, let me start, and Jim can add a little color on the margin side. But from a competitive position, this is going to go down as one of our best acquisitions of all time. They really have a great position -- clearly number one position in the Norwegian Continental Shelf, from an offshore upstream perspective.

We've combined it with our -- even here in the first month after acquiring them, we've put that group together with our UK valve group and with the Flangefitt PFF business of stainless and alloy. We have Steiner Aasland, who is the former CEO of Stream, now running all of our North Sea and Western Europe business. And we have the German chemical business from an instrumentation standpoint to go along with our Dutch- and French- and Belgium-based businesses in valve.

So we really are pleased with the position we have there. We added a lot of talent, high-margin business, then we brought a lot of valves and high-end instrumentation that we had desired to expand into.

So from just a competitive standpoint, we think we've hit a home run there. That was a targeted market for us for a number of years, and we had to be patient on the Stream acquisition.

From an overall international standpoint, this makes a big step forward. We guided after those two acquisitions we will be over $900 million in international in 2014, and we're on a path to be over $1 billion in 2015. And those are still our good targets. Jim, do you have anything?

No, I was just going to say, Sean, to your question about leverage and margins, this is the first step. This isn't the end-game in terms of our international business in getting the same leverage or similar leverage to what we have in the US. But it's the first big step.

Just one last follow-on to that. Talking about the -- you gave some numbers around the Shell and Chevron contracts.

How are we doing on that Shell contract getting up to that ramp? Are we still slow going here? When do we see that full run rate taking effect?

Yes, Shawn. What we experienced in 2013 -- we had guided previously after signing that contact in 2012 that we would ramp up $40 million to $50 million in revenue in 2013 for a couple reasons.

First, getting into the mix of projects, a lot of work that was already in the feed stage or in construction stage was passed us. So we had to get into the new project mix. That took longer than we thought.

And also, Shell was going through a lot of strategic reviews of their portfolio and in their investment. So what it was, was basically a one-year delay.

We are going to see that same $40 million to $50 million ramp-up that we thought was going to come in 2013. We're forecasting that to come in 2014 from Shell. And then, with the new scope added to the Chevron contract, another $20 million to $30 million. So that gives us our $70 million-plus of ramp-up just from those two contracts.

Jeff Hammond with KeyBanc Capital Markets.

(technical difficulty) to this bridge you gave, Andy, on the revenue build-up. And the $325 million -- I think you said $325 million of organic growth. That's your -- that incorporates your market expectations as well as your contract wins?

Yes, Jeff. You know, we gave some color on that last quarter, on the MRO contract wins that we had already secured through the third quarter. And we said we had renewed $500 million of overall business, with an incremental $200 million of MRO scope.

We had additional MRO scope wins in the fourth quarter. And then we just signed up with ConocoPhillips, which was retained for us -- the US portion -- in January. So you add those together and that $325 million or so, it's the combination of contracts we've already scoped, we've already won, and a conservative look of ramp-up of incremental spend.

But it seems like -- I think you used the $250 million number. And then you have additional wins, and then you have this $70 million. You're already at that $325 million. I mean, does that imply that the market is flat?

No, the $70 million in the contract wins in the MRO scope -- because that's additional MRO scope with those two customers -- is not added on top. But it's in that -- it's a flat to slightly growing market, is the starting point for us. That's correct.

Okay. And then just back on line pipe, because I want to be clear. What do you expect continues from the fourth quarter? Weak pricing through 2014? What's implicit in your guidance?

Because it seems like on one hand, you're saying line pipe pricing stays weak. On the other hand, you're saying there's not a structural challenge, and your gross margin should normalize.

Yes, Jeff. ERW -- as you know, carbon line pipe pricings were under pressure all year long last year. And we really think it's slowed and close to bottoming in the fourth quarter. It slowed somewhat even in the third quarter.

But the level of the cost there and the spot market pricing was much lower in the fourth quarter than the first quarter of 2013. We see it staying at that level.

We're conservatively forecasting -- I'm mostly talking about ERW, because that was the biggest swing. Mostly forecasting that to be flat to slightly up inflationary towards the second half of 2014.

And really Seamless and D-Saw, the other two components of our product mix, weren't under the same kind of pricing pressure, although much slighter deflation. And we see those also being flat from the current levels and rebounding. But the big difference in the fourth quarter was a much higher percentage of ERW than we normally have in the mix.

David Manthey with Robert W. Baird.

Just to explore, I want to make sure I'm clear here on your assumptions for organic growth. So you're saying upstream: mid single-digits. Midstream: low double-digits. And downstream: mid-single. Which gets you to 4% organic growth overall. Is that correct?

That's correct, Dave. And that's off a base of last year, adjusted for the $82 million of the pump servicing revenue in Canada we backed out.

Right. Okay. So if you're saying that your organic growth is looking like down mid-singles -- let's say 5% in the first quarter. That would imply up 7% over the course of the next three.

And then, I'm just wondering, are you -- given the situation that you saw here, an acute situation in the first quarter, do you assume that you're going to be close to that 7% for each of the next three quarters? Or do you think it ramps up over time? Or is that even the right way to think about it?

We'll see some ramp in Q2. That will pick up some. And then it will pick up again in the third and fourth quarter. It's not 7% evenly across all quarters.

Yes, Dave --

Okay.

I would just add a comment. I think this year will look more traditional to what we've had. 2013 wasn't a typical year. I think you're going to see a strong second and third quarter.

I mean, because of the timing of this call -- we've seen a big weather impact in the last two weeks of January and the first two weeks of February. And everybody else will have seen the same impact in the first quarter.

Some of that we will make up in March. It's hard to estimate how much at this point. But we know March will be a good month. And then some of that will slide into the second quarter because of the weather impact. So I think when you look at our historical model over a couple years, you'll see a more typical strong second and third quarter this year, as Jim just described.

Okay. And then just finally on the -- where you were talking about the gross margin issues, I believe you mentioned price intensity. I'm not sure if you were just referring to the pricing on line pipe as you just outlined, or if that's a competitive situation.

Can you help clarify that? Are you seeing -- beyond just the fact that the commodity is down, are you seeing more intense competitive pressures?

Yes, Dave. No, it's not competitive pressures from a historical standpoint. It's much more -- some of our largest customers, as we've said, in line pipe contracts, were slower in the first half of the year. We had to get more aggressive in the smaller customer base, and a little bit more in the spot market in line pipe to replace some of those revenues from our contract customers because of their slowdown.

So it's more reflective of tapping into a market. It's tapping into a smaller customer base. But it's not what I would say is a structural change on the competitive pricing of our contract, our major contract position. That really hasn't changed.

Allison Poliniak with Wells Fargo.

On the upstream outlook that you gave, could you give us a little bit more color on what you're expecting between the oil versus gas markets there?

Yes, we're assuming a relatively stable rig count in the US. Basically flat -- slight increase in number of well completions. Right now, we're sticking with 80% oil and 20% gas focus.

But I think we're probably conservative on the outlook of activity for drilling in gas, due to the very favorable cash flow from gas pricing right now. And we're going to come out of this winter with a very low historical storage level that has to be filled.

I think a strong shortage of propane has been throughout the Midwest. So there's a lot of fundamental macro views that should lead to higher gas drilling in the second half of 2014.

At this point in the year, we haven't factored that in. But we feel pretty sure that's going to show up in the second half. It's just -- the winter has had a major impact on both gas availability and storage.

Great. And then regionally, it just sounds like US is still probably going to be your strongest market this year, with some -- seems like there's still some pressure over in Australia.

Yes, Australia is still going to be pressured, although I don't think as much a downturn from the mining. More flat, would be my way of characterize Australia. From where we came from, 2012 to 2013 was definitely a decrease.

But no, US is going to be strong. We're talking about the gas mostly. But oil pricing around $100 still drives a lot of activity.

So we have a big operation in the Midwest, and a big operation in the East US. And both areas were impacted significantly in January and February. But that's just the short-term weather impact.

So the US will be the strongest for us. Although we have now created a very competitive and strong position in the North Sea, from a Norway-UK perspective. So that will be also a highlight for us.

Thank you.

Thanks, Allison.

Sam Darkatsh with Raymond James.

Couple questions. Many of my questions have been asked and answered. If I missed this, I apologize.

The first quarter EBITDA expectations -- I know you said that the sales would be down sequentially, but gross margins higher. And I think there's an impact from the divestiture, too. So where should we be pegging EBITDA, based on all the moving parts in the first quarter?

Yes, Sam, we didn't give that in the prepared comments. I think if you look at our implicit adjusted gross profit assumptions and the revenue levels we got into, that you can compute that fairly easily.

Okay. If I struggle with that, I'll get you offline on that.

Sam, the one thing we did mention, the two one-time charges, the currency in Norwegian kroners that will hit us in January. And also the one-time charge on the divestiture of the -- ending the PVF profit sharing. So those two will be one-off that will hit us in the first quarter.

Okay. And if I could sneak two quick ones then. You mentioned in your prepared remarks, Andy, that your second half, you would be more inclined to make an acquisition than the first half. Which I understand from an ingesting standpoint of the deals that you've already made.

But you also may get your primary competitor, NOV, more active in the M&A sphere in the back half of 2014 after the spin. So might there be an appetite or an indication to do something near-term? Or you don't think that's, that big a deal?

Yes, Sam. Well, first, I'll just talk about us and then I'll talk about the competitiveness a little bit there, landscape change. We just closed Flangefitt in December and Stream in January. So a little bit is making sure we get our hands around that, and integrate it early on in the first couple of months.

That's part of this period we're going through right now. Those -- especially the Stream one, that was a big acquisition. And we also wanted to leverage the talent of the new management team we brought onboard, and giving them a larger scope. So we wanted to concentrate on that in the early days.

But we're still very active in M&A. We always have a couple deals working. We still have a couple deals working right now, of a smaller scale than Stream. But most likely, mid-year would be the target for closing on those.

And then, your point is right. With the spin-out of NOV, or distribution now from NOV, you see they would be aggressive, I think. I think their strategy will be to grow.

They tend to -- I can't name one of our acquisitions in the last three years where we went head to head with NOV on a bidding scenario. They tend to go after acquisitions in a different part of the market than we have. They are much more rig-focused, and we are not on the rig contractors, or rig equipment-focused at all.

So I think they will be aggressive in the marketplace. And depends on what level of debt they come out of the spin-out with, and how aggressive they are going to be in the market. But certainly we have that in mind. And they are going to be a strong competitor.

And if there's something out there we've been looking at that we really want to get closed, we certainly would intend to close it. Or have it locked up in negotiations before the mid-year, in the second half of the year. So your point's valid.

If I could sneak one more in. The ERW trends that you were seeing, was that industry-wide? Or was that specific to you folks because of certain customers?

I think it was more specific to us in the midstream, where a lot of our customers were slow in that May through August point that we're normally really busy with them. And some of them had catch-ups and spending of their budgets before they lose them. It was one of those December end of year's. So I think it's more specific to us.

Mark Douglass with Longbow Research.

So back to the pricing, in general. Was there a broader price pressure across the board? Or was it only ERW? And with that, with steel prices rising, what kind of impact are you expecting in 2014?

Yes, Mark. I can start, and Jim add some, too. But it was really isolated just to ERW line pipe. There's still slight pressures on carbon pipe in OCTG also.

But outside of those two -- ERW line pipe and OCTG -- the rest of our pricing was not under the pressure. And actually margins were very good under (inaudible). Jim, do you have color?

And then, with expectations for steel costs in 2014 versus 2013, looks like they are on the rise. What kind of impacts --

Yes, and Mark, that was our comment earlier that we meant to imply. We see -- although we've been through a period of a year of deflation in the carbon pipe pricing, we see it stabilizing and maybe a slight rise in the marketplace. And so that's usually a much better environment for us in a pricing environment.

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

Hi. This concludes our call today. Thank you, everyone, for joining. And thank you for your interest in MRC Global. Have a great day.

Ladies and gentlemen, this concludes our conference. Thank you for your participation. You may now disconnect.