MRC Global Inc (MRC) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the MRC Global first quarter earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded today, Friday, May 2, 2014. At this time, I would like to turn the conference over to Monica Schafer, Vice President Investor Relations for MRC. Please go ahead.

Good morning, everyone. Welcome to the MRC Global first quarter 2014 earnings 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 items to cover. There will be a replay of today's call available by webcast on our website www.MRCglobal.com as well as by phone until May 16, 2014. The dial-in information is in yesterday's release.

Later today, we expect to file the first-quarter 2014 form 10-Q, and it will be available on our website. Please note that the information reported on this call speaks only as of today, May 2, 2014, and therefore you're advised that this information may no longer be accurate as of the time of replay.

In addition, the comments made by management of MRC Global 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 Global. However, various risks, uncertainties and contingencies could cause MRC Global's actual results to differ materially from those expressed by management. You're encouraged to read the Company's annual report on form 10-K, the quarterly reports on form 10-Q and current reports on form 8-K to understand the risks, uncertainties and contingencies. 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 on our first quarter 2014 earnings call and for your interest in MRC Global. I will begin with some noteworthy events and highlights from the quarter before turning the call over to our CFO Jim Braun for a review of the financial results. Following Jim's comments, I will finish with a discussion on the outlook for our business.

First, as we discussed in the last earnings call in February, we expected to have headwinds from inclement weather in the first quarter, which we did. The severe weather, particularly in the Northeast and Midwest, has been must publicized and had a negative impact on our business as road closures and hazardous conditions caused many of our customers to halt their activity and our branches to close at various times during the quarter.

We expected sales in the first quarter would be down mid single digits from the fourth quarter. That's about where we landed, down 3% at $1.3 billion in revenue. We saw a nice pick-up in activity in March, and it has continued into the second quarter.

Also as we mentioned previously, we closed the acquisition of Stream this quarter in early January. You will see their results reflected in our international segment, where sales are up 42% this quarter from the same quarter last year.

We continue to integrate this acquisition into the MRC Global organization, and the customer reaction to our expansion into the Norwegian continental shelf and the offshore production market has been positive. We expect the combined results of Stream and Flangefitt in 2014 to be on track with our previous guidance of $330 million in revenue and $30 million in EBITDA.

As I mentioned, we saw activity pick up in March, which has continued into April. Nevertheless, in 2014, we have begun implementing various cost-saving measures to improve profitability.

In April, we implemented a voluntary early retirement program as well as eliminating a number of additional management positions as part of an ongoing effort to streamline operating costs. As a result, we have reduced head count by 60 and anticipate annual savings of approximately $8 million.

However, we expect to incur a pretax charge of approximately $4 million in severance costs in the second quarter related to these initiatives. We will continue to look for opportunities to generate further efficiencies and reduce our operating cost structure in 2014.

As noted, sales results were in line with our expectations at $1.3 billion for the first quarter of 2014, virtually flat with the first quarter 2013. The first quarter of 2014 gross profit margin percentage is lower by 110 basis points as compared to the first quarter 2013, primarily due to the inflation in line pipe prices as well as the impact of LIFO.

We expected the gross margin percentage to improve sequentially from the fourth quarter, which it did. It was up 100 basis points to 17.8%.

As you may recall last quarter, we had a product line mix shift to lower-margin ERW line pipe, and that mix returned to a more normal mix in the first quarter. Adjusted diluted earnings per share were $0.28 for the first quarter 2014, which excluded a loss on the sale of our Canadian progressive cavity pump business of $0.05 per share.

There have been no changes to our acquisition strategy, and we continue to evaluate and pursue potential acquisitions with a focus on international bolt-on acquisitions. In March 2013, we entered into an exclusive alliance with North American Western Asia Holdings or NAWAH in Iraq.

Our initial focus in Iraq was to sell valves to our major customers who operate there. In 2013, we stated we expect to have $10 million in sales in the first year and that activity could ramp up to $40 million to $50 million annually within a few years. In 2013, we sold $10 million of valves in Iraq.

This year in April, the NAWAH/MRC alliance added US Steel tubular products to our consortium, with an expanded focus to include OCTG and line pipe. This consortium will allow us to serve our major customers in Iraq as they upgrade the aging energy infrastructure and add new production capacity. We are optimistic about the growth opportunities in Iraq with the addition of US Steel tubular products.

We continue to enter into broad multi-region arrangements with our top customers to expand into new geographies and expand product scope. We talked about renewing our contract with ConocoPhillips as the primary supplier [TBF] MRO supplier in the lower 48 states last quarter. This quarter, we have added Canada to that agreement.

With the acquisition of Stream as well as our previous acquisition in Australia, we also support ConocoPhillips in Norway and Australia. ConocoPhillips is expected to be our fourth largest customer in 2014, and we expect over the next five years to have sales of over $700 million from these contracts in the lower 48 states and Canada. With that, let me turn the call over to Jim to review our financial results.

Thanks, Andrew. Good morning to everyone. Total revenues for the first quarter of 2014 were $1.306 billion, which were flat with the first quarter last year and 3% sequentially. Year over year, while there was virtually no net change, there were a couple of moving parts, including the impact of our acquisitions which in total added an incremental $70 million of revenue in the quarter, offset by the sale of the progressive cavity pump business of $23 million, and lower organic sales of $47 million.

US revenues were $948 million in the quarter, down 2% from the first quarter of last year. The decrease reflected a $46 million decline in the line pipe product line due to line pipe deflation as well as lower volumes due to inclement weather, particularly in our Eastern and Midwest regions.

Average line pipe prices declined approximately 15% year over year. The decline in US line pipe sales was partially offset by increases in all of our other product lines as well as $6 million from our acquisition of Flow Control. Sequentially the US segment sales were down from the fourth quarter by 6% due to weather and from the previously noted shift of line pipe sales from the first quarter of 2014 into December of 2013.

Canadian revenues were $166 million in the first quarter, down $38 million or 19% from the first quarter of last year. The majority of the decline, $23 million, was the result of the sale of our progressive cavity pump business early in the first quarter. The remaining decrease was due to the 8.6% decline in the Canadian dollar relative to the US dollar.

Sequentially, excluding the sale of the progressive cavity pump business, the Canadian segment is flat from the fourth quarter of 2013. And historically, the fourth and first quarters are the strongest in Canada.

Internationally, first-quarter revenues were $191 million, up $56 million or 42% from a year ago. The increase was the result of the acquisitions of Stream and Flangefitt which added $64 million in incremental revenue in the first quarter of 2014.

Organically sales were down 6%, with growth in the UK upstream sector more than offset by a decline in Australian sales. Sequentially the international segment was up 34% from the fourth quarter due to acquisitions.

Turning to our results based on end market sector. In the upstream sector, first-quarter sales increased 10% from the same quarter last year to $635 million. This increase was driven by the acquisitions of Stream, Flangefitt and Flow Control, partially offset by the divestiture of the Canadian progressive cavity pump business.

The US drilling rig count was up 1% in the first quarter from a year ago, and the US land well count was up 4% over the same period. Upstream sales in the US were up 3% organically, in line with these indicators.

Mid stream sector sales were $307 million in the first quarter of 2014, a decrease of 11% from 2013. Compared to the first quarter of last year, both the transmission and gas utility sectors were lower by 17% and 16% respectively. The lower sales were in part due to the impact of weather and lower average line pipe pricing.

In the downstream sector, first-quarter 2014 revenues decreased by 5% to $363 million as compared to the first quarter of 2013. While there was modest growth of 1.6% in the US, it was offset by weaker sales in our international and Canadian segments.

Turning to revenues by product class, our energy carbon steel tubular product sales were $337 million during the first quarter of 2014, with line pipe sales of $207 million and OCTG sales of $130 million. Overall, sales from this product class decreased 13% in the first quarter from the same quarter a year ago, including a $4 million or 3% increase in OCTG sales offset by a $55 million or 21% decrease in line pipe.

First-quarter 2014 line pipe prices were on average 15% lower than the same quarter last year. Tons we sold from stock were also lower due to the impact of inclement weather.

As you will recall, we also had several customers purchase more line pipe in the fourth quarter of 2013, approximately $60 million that we had expected to ship in the first quarter of 2014, which also contributed to lower sales in the first quarter. This impacted the sequential comparison as well as the first quarter of 2013 versus the first quarter of 2014.

As we said on the last earnings call and of note, based on the pipe logics all item index, the deflation in line pipe spot prices has somewhat abated the last three months, as prices have declined less than 1%. If this trend continues, this will be a positive for line pipe sales in the second half of 2014.

For the first quarter of 2014, 42% of our line pipe sales were within our mid stream sector, while upstream and downstream made up 37% and 21% respectively. Sales of valves, fittings, flanges and other products were $968 million in the first quarter, a 6% increase from the first quarter of 2013.

Sales of valves were up 18% during the quarter. This increase consisted of 14% from acquisitions, and the remaining 4% was from organic growth.

Sales of fittings and flanges were flat from the first quarter of last year as organic losses offset the growth from acquisitions. Other products were down 6% from the quarter a year ago, primarily from the disposition of the Canadian progressive cavity pump business.

Turning to margins, the gross profit percentage declined 110 basis points to 17.8% in the first quarter of 2014 from 18.9% in the first quarter of last year. The decrease was due to lower average line pipe prices which contributed approximately half of the decline as well as the impact of LIFO. A LIFO benefit of $3 million was recorded in the first quarter of 2013, as compared to $1 million of expense in the first quarter of 2014.

Our adjusted gross profit percentage, which is gross profit plus depreciation and amortization and the amortization of intangibles and plus or minus the impact of LIFO inventory costing, decreased to 19.5% in the first quarter of 2014 from 20.1% in the first quarter of 2013. Lower margins and line pipe sales were offset somewhat by an increased mix of higher margin sales and other product sales.

On a sequential basis, adjusted gross profit was 120 basis points higher than the fourth quarter, as expected. SG&A costs for the first quarter of 2014 were $171 million, or 13.1% of sales, an increase of $10 million from $161 million or 12.3% of sales in the first quarter 2013. SG&A increased $18 million as a result of the acquisitions of Stream, Flangefitt and Flow Control and partially offset by a $7 million decline primarily from the divestiture of our progressive cavity pump business.

As Andrew mentioned in April, we took certain cost saving initiatives directed at reducing SG&A. With the actions taken to date, we anticipate annual savings of approximately $8 million per year and expect to incur a pretax charge of approximately $4 million in the second quarter related to severance.

We will continue to look for opportunities to generate efficiencies and reduce our operating cost structure. We expect the SG&A run rate to be approximately $176 million to $178 million per quarter for the balance of 2014.

Operating income for the first quarter of 2014 was $61 million versus the $86 million in last year's first quarter. The operating margin also declined compared to last year to 4.7% from 6.6%. This is due to the lower gross profit and higher SG&As discussed early.

Also during the quarter, we recognized the loss on a derivative instruments from the foreign currency, foreign transaction contracts. As you may recall, there was a $3.7 million gain recognized in December of 2013 related to the Stream acquisition. This quarter, we recognized an offsetting $2.1 million loss recorded in January of 2014.

Our interest expense totaled $15.1 million in the first quarter of 2014, which was modestly lower than the $15.3 million in the first quarter of 2013. This was due to lower interest rates offset by higher average debt balances.

Our Q1 2014 adjusted net income excluding the after tax charge related to the sale of our Canadian progressive cavity pump business was $29 million for the first quarter, or $0.28 per diluted share, compared to net income of $46 million or $0.45 per share in the first quarter of 2013. There were no adjustments to net income for the first quarter 2013.

Adjusted EBITDA was down 19% year over year to $84 million in the first quarter, versus $104 million a year ago. Adjusted EBITDA margins fell to 6.4% from 8% a year ago.

Our debt outstanding at March 31 was $1.314 billion compared to $987 million at the end of 2013. Our leverage ratio at March 31, 2014 was 3.3 times on a pro forma basis for the Stream and Flangefitt acquisition. We expect free cash flow to be used to pay down debt over the next 12 months.

Our operations used cash of $74 million in the first quarter of 2014, and our working capital at March 31, 2014, was $1.254 million, $170 million higher than it was December 31, reflective of the acquisition of Stream and an increase in our US inventories' anticipation of greater sales as well as the timing of receivables collections. Cash use and investing activities totaled $249 million in the first quarter, primarily related to the acquisition of Stream. And with that, I will turn the call back to Andrew for his closing comments.

Thanks, Jim. We are encouraged by our customer spending activity in March, which has continued into April, as well as the backlog. We now have the largest backlog in our Company's history.

Our backlog was $1.03 billion at the end of March this year. Excluding the $96 million of backlog associated with acquisitions, our backlog is $935 million, a 23% increase over the December 2013 balance of $758 million. Year-over-year backlog is up 36%, excluding the backlog from acquisition, and up in all three geographic segments.

The US backlog continues to improve. It has grown from $470 million in December to $625 million through the end of March. We have also seen a shift in the makeup of our US backlog that reflects longer lead times associated with an increased amount of project work.

Finally, we are reconfirming our 2014 annual guidance. We had mentioned on our last earnings call that we would see lower sales in the first quarter, which we did. We still expect the remaining three quarters of the year to see an increase that puts us within our annual guidance range.

As we discussed in the press release yesterday, we still 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. With that, we will now take your questions. Operator.

Thank you, sir. We will now begin the question-and-answer session.

(Operator Instructions)

Our first question comes from the line of Matt Duncan with Stephens, Inc. Please go ahead.

Good morning, guys.

Good morning, Matt.

The first question that I've got -- as you look at organic sales trends on a month-to-month basis, can you break out for us what you saw in March once the weather got out of the way and what you're seeing into April?

Yes. Let me just talk from a top level, all-in, Matt. January and February were two very difficult months, and impacted mostly in our East and Midwest regions geographically; impacted in an end market from both our transmission and gas utility business. And then from a product line standpoint, almost entirely in line pipe impact.

So we saw that -- the way that the year was starting out, impacted everyone in the industry. But March was a real strong month for us. So let me -- a couple data points. We couldn't do much about the weather in the first two months. A lot of things started to happen in March. There are a lot of positive macro events going on.

As Jim mentioned, the rig count is up 1%. If you look at annual increases, up over 100 rigs in North America. So a real positive there for us. Oil price is up 5%. Gas prices are up 49%. The well counts are up 4% on a year-on-year basis and well permits are up 7%. So a lot of positive macro trends that we're seeing in our activity and we're seeing in the customer spending, especially in our upstream business.

So when you look at March, it was a really strong month. Part of it was shifting of activity from the weather-impacted months, and we made up some ground in March. But when I look at March, total all-in, including acquisitions, it was the strongest month we had on a revenue basis since August of 2012. So very positive for us.

When I look at April, which we just closed, the preliminary continued good activity. The way I look at it, when you look at April compared to the way we started the first quarter in January, the month is up $60 million in revenue. So very positive, very strong start to the second quarter over the way that we started the first quarter. So we feel very good about our position in the market. And a lot of things that we did in 2013, the position of the Company is now going to show after we got through January and February.

Okay. So, Andy, if I translate all of that to what the sequential improvement ought to look like, then, it sounds like you're already tracking $60 million above first month of the quarter versus the first month of last quarter. Is it reasonable to assume that we ought to see sales up at least $100 million sequentially, given that you obviously had the shift in business out of the 1Q into the 4Q and obviously the quarter started well? Is that a reasonable assumption?

We are trying not to give specific guidance on the sequential basis. But certainly we have a very strong April compared to January, as I just mentioned, and as you referred to. Certainly the outlook for May is much stronger than we had in February.

And then we expect to have a good June compared to March. But March was very strong. So it's -- rather than just give a specific number, it's definitely in the direction that you're talking about.

Okay. Last thing, and I will hop back in the queue.

On the ConocoPhillips agreement, can you refresh our -- ?

Matt, I think we may have lost you. Operator, can we go to the next question?

Yes, we can. Our next question comes from the line of Ryan Merkel with William Blair. Please go ahead.

Hello, guys. How are you?

Good, Ryan. How are you doing?

Good. I thought the backlog jump was one of the bigger takeaways here. You mentioned it was broad based across geographies. You mentioned some project work. I'm wondering if you can comment more on the streams? And are you starting to see some signs that midstream could possibly be starting to stabilize?

The backlog is a very big positive for us. When I look on historical terms, it is our largest backlog we've ever had coming out of the end of the quarter. To go back to the previous high, you have to go to the third quarter of 2008. And you remember when our business was doing very well back then, with a lot of carbon pipe. The backlog at that time was heavily weighted to OCTG and line pipe.

This backlog is much different; it's much more broad based, much more weighted to valves. Also with international strength through the acquisitions we've had. The other thing that we're starting to see just now -- and I will say that the backlog continues to grow into April. So another positive indicator for us from the end of the first quarter. But what you're starting to see is the results of our efforts to expand our project business with both Shell and Chevron.

As Jim mentioned in the comments, part of this increase is more work through the EPCs, through the major projects, which has been part of our strategy for a couple of years. It takes a while to get into that feed mix and into the front end of the work. We're now starting to see those bookings. We also are starting to see the downstream chemical bookings come in -- the CP Chem project we have talked about previously in the Gulf Coast. With Shell, it's the Carmon Creek project in Canada -- heavy oil.

So a lot of good signs there. But not so much in the midstream. Midstream -- very positive on the upstream. Very positive on downstream. Midstream still is soft.

Part of it is really a tough two months from the midstream customer base. There wasn't a lot of transmission or gas and utilities spending in the first two months of this year. So it's a little bit difficult to indicate. But if you look at through April, we're still slow with Access Midstream, Williams, and DCP Midstream, and PG&E compared to our historical averages. So that's a soft area for us with four of our top midstream customers. But it is significantly offset with the positives in the upstream and downstream and with our major customers, Chevron and Shell.

Got it. Great.

The second question I had was, can you update us on what you're expecting from acquisitions this year in terms of accretion? And if you want to throw the divestiture in there, too, as an offset. Because before, I think you'd said $0.01 to $0.02. It feels like it might be higher than that.

Yes, Ryan.

I think what we have said when we addressed the divestiture, the disposition -- first, what we said there is that the sale of that PCP business in Canada would be slightly positive from an EBITDA perspective.

As it relates to the acquisitions, we have seen a little bit of improvement and favorability. Our original thoughts about what the slide accretion -- we thought maybe a penny or so. We might get another couple pennies out of that in 2014.

Thank you. Our next question is from Matt Duncan with Stephens, Inc.

You started out on ConocoPhillips and we lost you.

Yes. Sorry about that.

I was curious, I think, Andy, that has been an exclusive arrangement that you have had with ConocoPhillips. Is that exclusive everywhere? You mentioned the lower 48, Alaska, and North Sea. Is that an exclusive deal for you guys?

Well, it's been mostly a primary deal. Now, a lot of the primary position deals we end up almost exclusive position at the end of the day. But it's not specific -- it hasn't been for the last 10 years. It's been a primary position which we retained in both lower 48 and in Canada. And so that's a top customer for us.

The other big indicator, as we have said -- we don't lose our core contracts. Everybody in the industry, including our second-largest competitor, they all tried to win that contract, and we retained it. So we still have an excellent track record of retaining these multi-year MRO agreements, which is core to us.

Okay, great.

Jim, on SG&A costs -- on the last conference call, you had guided us to $180 million a quarter there. It came in almost $9 million below that. It sounds like you obviously have put in some expense cutting measures. But the bulk of that may not kick in until April. I'm curious what, specifically, was it that you guys did in the first quarter to bring those costs down?

I know you had divested the Canadian business. But I think you had done that by the time that you guided us to $180 million. So what is it that you were doing there?

Some of it was the impact of wage increases that typically go into effect at the end of March. You see the impact of that. Another significant piece was the delay or deferral of some spending from the first quarter, either into later quarters or that may not get spent at all.

And, Matt, even within that original projection, the $180 million was an average throughout the year, and it had a little bit of a ramp in it. I think, finally, I had commented that it was certainly a little bit of it, or at least volume related, to a year ago.

Thank you. Our next question comes from the line of Allison Poliniak from Wells Fargo. Please go ahead.

Good morning.

Good morning, Allison.

On the revenue outlook, I think you had talked about the upstream being up mid-single digit -- core midstream down -- or up low single digits and downstream up mid-single digits. Are we still in the context of what you're looking at -- in terms of revenue, are we still looking at that? Or has something changed based on Q1 results?

No, Allison, that outlook remains the same, and the percentages of the organic or core growth that you just described was accurate.

Okay.

Allison, I would just add that I'm probably a little more optimistic the way that 2014 is shaping up. Maybe even a little better growth in the upstream side.

I think last quarter you had talked about a potential reset in capital budgets on the midstream. Are you still thinking that could happen, and you're just a little cautious given the Q1 weather issue?

Yes. We're just cautious on midstream. A couple of our major customers haven't kicked in their spending programs yet. They're way off. A lot of that is weather, I'm positive. But they just haven't kicked in. They're certainly going to be a lot more active in the last three quarters than they were in the first quarter.

But that is the area that we probably are the most conservative on. More bullish on an upstream and downstream; especially US downstream will be strong this year.

Okay. And on the regional perspective, can you give us your thoughts on international as we move through the year? It's obviously been challenged.

Yes. We're still building the platform. And that's one point -- I feel fantastic about the acquisition of Stream, both from the business standpoint of the results, their lab; but also the management capabilities that we have added to the company. We're now in the process of combining that all into one management structure for both the UK, Norway, and our Western Europe business. And coming with that would be a streamlining of costs associated with it.

We also now have for the first time in Western Europe and both sides of the North Sea a full PVF capability, both from a customer standpoint and delivery standpoint. So that's a huge step forward for us that I feel very good about. That's still an area where we're looking at from an acquisition standpoint.

If you go to the Middle East, we feel very good about our position there. We're going to grow in the Middle East organically. We looked at some acquisitions, but we think organic growth is the best way there. So we will be set up in Dubai, Jebel Ali Free Zone. We're supporting Shell in Qatar, Shell in Oman, and also most of our major customers in Iraq.

I'm very optimistic about Iraq especially, as we mentioned, with US Steel broadening both our valves and fittings and flange focus initially; now with line pipe and OCTG for our customer base, which is Chevron and Shell and ExxonMobil in there, and BP. So we have a very large amount, over 100 million in quotes in Iraq. So our job now is to convert those into orders. But longer term, later into 2014 and into 2015, I think that's going to be a nice bright spot for us.

If Southeast Asia continues to be strong, it's the other area that we continue to look at from an acquisition standpoint. And so that part of the international business is good. The weakness for us internationally is in Australia. Both the mining and the LNG sides have impacted our business. So we are -- that is an area with a lot of focus on cost reduction until the end markets come back for us. We have a really good position there, but the end market hasn't cooperated.

That's -- the strength is in the North Sea; Middle East, and Southeast Asia will have high growth for us. And Australia -- we're going to manage costs until the growth comes.

Great. Thanks so much.

Thank you. Our next question comes from the line of Sean Meakim with Barclays Capital. Please go ahead.

Good morning.

Good morning, Sean.

Wanted to talk a little bit about the margin progression throughout the year. Looking at where you guys ended up for 1Q, and then comparing that to where the guidance, the range looks, it seems to me that we're setting up for a quarterly run rate at some point this year approaching the peak of 2012 level.

We had the Stream acquisition which should help; the cost cutting initiatives that we have talked about. Can you give us more color on what gives you the confidence that we're going to see this nice progression in margin progression throughout the year? And what that implies going forward?

Sean, I will start with a couple of comments. Jim will add more.

One thing is we have seen stabilized pricing in both line pipe and OCTG. We have seen a slight pickup in OCTG. Our view has stayed the same: that we were near bottom on carbon piping prices in the first quarter. We expect to be flat to slightly up in the second quarter. And we expect to see improved pricing in the back half of the year. That will help in the carbon pipe area, both line pipe and OCTG. Not large increases, but small increases. But still positive move for us.

The other possibility is the weighting much more heavily towards valves. As Jim mentioned, we built up the inventory ahead of the growth that we see coming for the rest of the year. A strong weighting in valves and stainless and flange and fittings. So the mix will be positive for us going into the back half. And also a small improvement on carbon pipe will help.

Yes, Sean, I would add that we continue our targeted growth account programs -- those customers and the 75 to 100 that typically carry a little bit higher margin. And then finally, it's an ongoing process for us to look to ways to improve the margin -- a profile of the business through working through with our suppliers, targeting specific pricing opportunities with various customers.

Yes. I think that makes a lot of sense.

Switching over to uses of cash, it sounds like debt reduction is the primary focus for this year. Does that mean that M&A is effectively on hold for the time being? Can you give us a sense of what working capital needs could be for the use of cash this year as well?

Let me do M&A first, and then Jim will do the working capital.

Our M&A efforts are definitely not on hold. We always have about two to three primary acquisitions we're looking at. And as we said in the notes, we continue to look at international bolt-ons of a smaller scale. Stream was a large acquisition for us that brought a lot to the Company. But I would expect a couple -- two to three -- over the course of the next 12 months in the smaller bolt-on states, focused on North Sea and Southeast Asia.

And we don't see what we have in the pipeline being challenged by the balance sheet. The leverage is 3-3. It will come down within our range of 2 to 3 by the end of the year as we generate some cash. That includes whatever working capital that we need to build to support the higher revenue levels. We don't see that as an obstacle.

That's great. That makes a lot of sense. Thanks a lot.

Thank you. The next question comes from the line of David Manthey with Robert W. Baird. Please go ahead.

Good morning.

Good morning, Dave.

First of all, your inventories are up quite a bit. And I guess some of that would be the -- and turns are down. I guess that would be related to the volume levels in the quarter. Could you talk also about any strategic purchases or anything else that impacted that number as you're thinking about inventory going into this year?

Yes. David, I think about it. Part of it -- the inventory growth is the Stream inventory came in, in the first quarter. We certainly have been building inventory because of the ramp-up in activity for the back half of 2014. We built up both valves and stainless inventories.

We also started in the fourth quarter building in a slight increase in OCTG because the price was low. But a better bet in line pipe inventory because the price was low. So it was the right time. It was also the right time with low nickel pricing to put some stainless inventory in place.

So part of that is the near term growth that we see. Part of it is it was the right time to buy from a cost standpoint. That, along with Stream, was really the build.

Okay. Thank you. That's encouraging.

On the line pipe pricing in 2013, could you tell us just what was the revenue and EBITDA impact from lower line pipe prices in 2013? And I guess you're assuming that's either going to go to zero or be slightly positive this year?

Yes. So in overall average sales prices, that was on average throughout 2013 was probably in the 15% to 12% range in terms of sales prices. The margin impact was probably 75 to 100 basis points on the overall Company average.

Okay. That's great. Thank you very much.

The next question comes from the line of Walter Liptak with Global Hunter. Please go ahead.

Good morning, Walt.

I wanted to ask about -- just a follow-on to the last question about the inventories. In line pipe, you took advantage of some of the lower prices. Is the inventory starting to turn a little bit faster? Or do we have to wait until the back half of the year for that to happen?

I think the inventory, especially in line pipe, will turn just fine back to normal levels in the second quarter. That really was stalled, line pipe and midstream project, and also some gas products for our gas utilities. Maybe two-thirds of the first quarter was very slow in that area, so the turns would be off, as you would expect, along with the lower shipments.

So that's -- I see nothing happening in our turns out of the ordinary. And I do see them improving. And what you're seeing was just the weather impact of January, February, especially in line pipe and gas products.

Okay. Good. That sounds great.

And then just on the LIFO charges. What does the comp look like for the second quarter?

Yes. We're looking at an overall LIFO charge of about $5 million for the year. So we would expect to see about another $1.2 million or $1.3 million in the second quarter.

Okay. Got it. Thank you.

Thank you. Our next question comes from the line of William Bremer with Maxim Group. Please go ahead.

Good morning.

Good morning, Bill.

Can you give us a sense -- you spoke a little bit about pricing. Can you go more specifically into the valves, flanges, and stainless, what you're seeing there?

Yes, Bill, that would -- when you look at our Company, most of the time we spend is describing the volatility around OCTG and line pipe carbon piping. And that does provide the most volatility. From a valves, stainless, fittings, and flange standpoint -- very little volatility in that. We're seeing flat to slightly up pricing.

And I would point everyone to one thing that we do that is leading position in the industry is, we publish by product line, by product type, all those ongoing view of both lead times and pricing outlook. And so it's called Insight. We published it on our website.

And most of our customers, supply chain groups, use it as a main input to their thinking. So we give very detailed outlooks both in lead times and pricing there, so you can see a lot more detailed information than my general comments. Generally positive pricing both in stainless and in valves and fittings and flange.

And my second question -- I'm glad you alluded to and voiced a little bit on downstream: what we're seeing in the Gulf market and the projects coming the back half of this year and, more importantly, onward. Can you give us some color what you're seeing specifically downstream in the Gulf area over the next couple of years?

Yes. That is one of the areas that we're most optimistic. Lots of spend is coming; it's in the early stages of some projects and long lead time. So our out of stock [TBF] tends to be a late-in-the-process sale because it's coming out of stock. We only get really into the long lead time items on valves for some of those projects if they're specialized valves.

Our revenue stream tends to be later in the project. A lot of people look at the headlines early on, but a lot of engineering and front end work gets done. We are already seeing some nice orders both from the Texas and Louisiana Gulf Coast operations. So chemical and refining of both Texas and Louisiana is going to be very strong the second half; even better for us in 2015 and 2016.

Okay. And then one for Jim, real quick, on the interest expense: Is that a good run rate to use to route, that $15.2 million level that we saw in the first quarter?

Yes. I think that's a good number to use going forward for the balance of the year.

Great. Thank you.

Thank you.

Our next question is from the line of Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Good morning, guys.

Good morning, Jeff.

Back to the growth rate, which I think you said you feel better about upstream. I wanted to come back to midstream and down. It sounds like you're still seeing weakness in midstream. You had your down 11% in 1Q and you're saying up low single digits. Same with downstream, you're starting 5% in the hole. I think you're still saying mid-single digits.

Give me a sense of the confidence levels that you see the growth rate you signed up for maybe earlier in the year.

Yes. High degree of confidence that we will meet or beat the upstream growth number. Midstream is the toughest one for us. We really like to see the second quarter as we get into our -- which is historically out best midstream months, the second and third quarter. That's where a lot of the project work gets completed.

We would like to see the second quarter ramp up to feel more confident in midstream. But right now, I would say we're cautious in that area. Downstream, we feel very good about that refining outlook, especially in the US. Really, the downside comes from some project variability in heavy oil and mining in Canada and also mining in Australia. So those weighed on the results that we roll up into our total downstream. As far as refining and chemical, we still feel good about the mix overall getting to our annual guidance.

And what the visibility on the midstream side of filling these three big customer headwind holes?

Yes. Visibility is relatively short term. In a matter of couple months, we start to see the ramp-up in products. Some of them were customers that pre-bought pipe in December. They're working off of that. Now is the time in the next couple of months we should see a nice ramp-up of line pipe orders if they're going to kick in spending.

One disappointment that we did have was the Williams delay of the Bluegrass project. We were going to be a major supplier on that project. Now that pushed into 2015. Those projects swing sometimes that way. By the end of the second quarter, we will know how this summer season of installs for midstream will look for us.

We have very little reservation about the gas utility side picking back up once the weather. So our gas products and our gas utility business will be strong through second and third quarter. It's really the pipeline transmission side that we don't have a great view on yet.

Okay. And then just final question. It looked like the acquisition revenue was light in the first quarter relative at least to my expectations.

What do you see in there? There's been a lot of talk about slowing in offshore. How did that come in versus your expectations? And what is the risk that, that $330 million is not the right number?

Yes. The revenue coming out of the two acquisitions came in a little below our expectations. We had factored in that it was not going to be spread equally through the year, just based on the timing and the nature of some of the projects -- out of Norway, for example. Looking at their backlog and looking at what those projects are and where they are in the queue, we feel comfortable that it's a $325 million of revenue for both of those deals.

Thank you. Our next question comes from the line of Vebs Vaishnav with Bank of America Merrill Lynch.

How are you doing?

Good.

I wanted to hone in on the weather impact in the US revenues that we saw. Anything that you can provide in terms of either revenues lost or in terms of number of days lost in the US?

Yes. We have looked at that, and we estimate that the revenue impact is about $25 million, plus or minus, in the US as a result of the weather. We know how many days we have branches closed, which was noticeable. Even when things were open, we certainly saw slower activity, less people in, less deliveries being made in and around those closed days just because of the weather.

Okay. Thank you. Switching to Canada, what is the outlook on Canadian activity? Because it seems that there are two camps. One camp thinking about flat to modestly down activity. And the other camp thinking it's going to be pretty good. I just wanted to get your thoughts around what you expect out of Canada this year.

Yes. We're in the camp of flat to slightly up,1% to 2% maybe growth there. It's going to be fueled by the heavy oil and the oil activity.

And we're certainly -- it's not a high-growth area for us. But we don't think it's going to be down. The only thing down for us there is the year-on-year difference because of the progressive cavity pump divestiture.

Thank you. The next question is a follow-up from the line of Matt Duncan from Stephens, Inc. Please go ahead.

Andy, maybe if you can give us an update on where you are in the process towards getting more global supply arrangements? And also update us on how that Shell agreement is going at this point.

Yes. Let me start with the Shell agreement. Shell, over these last two years, since we signed the agreement, has gone through a lot of changes themselves. They have really done a lot of work on their capital spending and their strategy and deemphasizing some areas and emphasizing others.

We feel very good. As we said, we missed it in 2013, the ramp-up activity was basically flat. We said we thought we would see $40 million to $50 million ramp-up this year going towards the multi-year ramp-up that we predict from that account. We are seeing some excellent growth in the projects that we have gotten in front of.

So part of that backlog in our number is, I would say, approximately $75 million in backlog. Some of that won't ship this year, but some will ship next year. It's just from Shell projects. So that is doing very good.

I would also say, part of that backlog from Chevron, to talk about another one that we have been focusing on, roughly $75 million of project backlog. So $150 million from those two alone is based on us getting into more project work and more of the front-end bigger projects with them. So that's working very well. I mean, the ConocoPhillips award was the last major customer we had up for renewal. If you look back over the last two years, we have renewed and expanded Shell, Chevron, BP, and now ConocoPhillips. So we feel very good.

It will be an ongoing effort, Matt, to add more scope to those contracts. There certainly is a lot of room for other areas to still add. ConocoPhillips is a prime one, where we become the primary again for the next five years for US and for Canada.

We'd certainly like to formalize adding the Norway, Australia, and other areas of the world with them. Those are just ongoing efforts that we will continue to do.

But the one -- I would say that the four that we had really targeted from day one have been successful for us and continue to ramp up. So that's the key part of our strategy.

Thank you. Our next question is a follow-up from the line of Walter Liptak with Global Hunter. Please go ahead.

Thanks.

I wanted to ask about adjusted gross margin and gross margin for the second quarter. And the adjusted gross margin looked pretty good at 19.5%. What are you thinking about for -- for just the short-term gross margin?

Yes, Walter. As you think about gross margins, as we see midstream and line pipe start to pick up again, that creates downward pressure on the margins from a mix perceptive. The counter to that is the valves and the stainless, the fittings, and the flanges, and a pickup in our international business. That will be the trade-off between the two. And we expect the margins will still be strong in the second quarter.

Thank you. At this time, there are no additional questions in the queue. I would like to turn the conference back over to Management for closing remarks.

Thanks, everyone. This concludes our call today. Thank you for joining us and your interest in MRC Global. Have a good day.

If you would like to listen to a replay of today's conference, please dial 303-590-3030 using the access code of 467-3664 followed by the pound key. This does conclude the MRC Global first-quarter earnings conference call. Thank you for your participation. You may now disconnect.