MRC Global Inc (MRC) 2014 Q2 法說會逐字稿

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

(Operator Instructions)

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

Thank you, Anna. Good morning everyone. Welcome to the MRC Global second-quarter 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, 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 August 15, 2014. The dial-in information is in yesterday's release.

Later today we expect to file the second quarter 2014 Form 10-Q, and it will also be available on our website. Please note that the information reported on this call speaks only as of today, August 1, 2014 and therefore you are advised that information may be no longer 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 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 are encouraged to read the Company's annual reports on Form 10-K, its quarterly reports on Form 10-Q, and current reports on 8-K to understand those risks, uncertainties, and contingencies. And now I'd like to call over to our Chairman, President, and CEO, Mr. Andrew Lane.

Thanks, Monica. Good morning, and thank you for joining us today on our second-quarter 2014 earnings call, and for your interest in MRC Global. I'll begin with some 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 a business.

I'm pleased to report that second quarter revenues were just shy of $1.5 billion, the second-highest quarterly revenue in the Company's history. Importantly, we had organic sales growth across all segments and in market sectors, as compared to the second quarter last year. Total organic sales growth for the Company was 13%, upstream was 17%, midstream 11%, and downstream 8%. In total, including the impact of acquisitions, revenues for the quarter increased 18% from the second quarter of last year.

The pick-up in activity that we saw in March and April continued throughout the second quarter. Many of the upstream drivers that have been positive quarter over quarter, including the US rig and completed well counts. In the midstream sector we saw higher levels of activity in line pipe from our existing customers, as well as with several new customers, as we are beginning to see a pick-up in infrastructure spending.

Downstream experienced strong growth in US and Europe, driven by turnaround activity and project-related work. Broadly speaking, our customers spending budgets for the year have increased recently. That bodes well for and MRC Global in the back half of 2014.

We are pleased to have closed two international acquisitions this quarter, Hypteck is a Norwegian business that complements our stream instrumentation business. And MSD Engineering, which enhances and expands our valve offering in Singapore and Southeast Asia. The combined purchase price for the two acquisitions was just over $100 million. We continue to evaluate and pursue potential acquisitions with a focus on international bolt-on acquisitions as part of our strategy.

Last quarter we talked about the implementation of cost saving measures to improve profitability. In April we implemented a voluntary early retirement program and eliminated of a number of management positions as part of an effort ongoing to streamline operating costs. We have continued and expanded those programs, and as a result we have reduced headcount by 180, and we now anticipate annual savings approximately $12 million, 14 million.

Related to these initiatives we incurred a pretax charge of approximately $5 million in employee severance costs this quarter, and expect an additional $2 million to $3 million in the third quarter related to facility consolidations and additional severance costs. We will continue to look for savings opportunities, even while the business grows organically.

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

Thanks Andrew, and good morning everyone. Total sales for the second quarter of 2014 were $1.497 billion, which were 18% higher than the second quarter of last year and 15% higher sequentially. As compared to the same quarter a year ago, revenue increased $160 million, or 13% organically, and our acquisitions added an incremental $84 million in revenue. The first quarter divestiture of our progressive cavity pump business in Canada had a negative $15 million impact on our revenues.

US revenues were $1.116 billion in the quarter, up 14% from the second quarter of last year. The growth was broad-based. Each end market sector of the US business achieved double digit organic growth, and each product line posted organic growth as well. The line pipe product group grew the most at nearly 30% in the US. And sequentially US segment sales were up from the first quarter by 18%, led by the midstream business which increased 37%.

Let me take a minute to talk a little more about the US line pipe market in the quarter. Higher line pipe sales benefited all three end market sectors, with the upstream being driven by higher levels of well hookup activity, the midstream by purchasing ahead of additional pipeline construction, and the downstream from increasing project activity. In addition we've seen the benefit of our targeted account program, especially in our line pipe business.

Sales in 2014 to our historically top midstream line pipe customers have not yet returned to the levels seen in 2011 and 2012 as expected; however, we've aggressively sought new customers in this market. For example, some of the top 20 line pipe customers in the first half of 2014 were not in that category in 2013. These new sales are often direct sales in which we coordinate logistics and other services, and as a result the margins are lower than sales from inventory. However, these new relationships allow us to offer our broader range of products such as valves, fittings, and flanges to a new customer base.

Canadian revenues were $150 million in the second quarter, down $4 million, or 2%, from the second quarter of last year. As mentioned earlier, the sale of our progressive cavity pump business reduced sales by $15 million. A 6% decline in the Canadian dollar relative to the US dollar reduced sales by another $10 million.

These declines were partially offset by organic growth of $21 million. Sequentially the Canadian segment is down about 10% from the first quarter due to spring breakup. And historically the first and fourth quarters are the strongest in Canada.

Internationally second quarter revenues were $232 million, up $93 million, or 67% from a year ago. The increase was primarily the result of four recent acquisitions; Stream, Flangefitt, MSD, and Hypteck, which added $79 million in incremental revenue to the second quarter of 2014. Organically sales were up 10%, primarily from growth in the UK in both the upstream and downstream sectors.

The upstream sector increase was due to a number of projects in the MRO offshore platform work in Scotland and in the UK North Sea, as well as a project under our global enterprise framework agreement with Shell. The downstream growth was primarily from increased turnaround activity in the UK.

Sequentially international segment was up 21% from the first quarter, due to 19% organic growth and 2% from acquisitions. The recent acquisitions of MSD Engineering and Hypteck should add approximately $65 million of annual revenues going forward.

Now turning our results based on our end market sector. In the upstream sector, second quarter sales increased 29% from the same quarter last year to $700 million. This increase was driven by organic growth of 17%, the balance coming from the net impact of acquisitions in the Canadian divestiture. And the average North American drilling count was up 7% in the second quarter from a year ago.

Midstream sector sales were $420 million in the second quarter of 2014, an increase of 12% from 2013. Compared to the second quarter of last year, transmission customer sales increased 24% and sales to our gas utilities were lower by 6%. The increase in sales to transmission customers was due to increased project activity. And the decline in gas utilities sales was in part due to lower sales this year from one of our larger customers who had very active project spending last year.

In the downstream sector, second quarter 2014 revenues increased by 8% to $377 million as compared to the second quarter 2013. Strong refinery and chemical turnaround activity was the main driver for the growth this quarter. Organic growth in the US was 9.6%, and our international segment contributed 6.5% organic growth.

Turning to the revenue by product class. Our energy carbon pipes steel tubular product sales were $422 million during the second quarter of 2014, with line pipe sales of $288 million and OCTG sales of $134 million. Overall sales from this product class increased 22% in the second quarter from same quarter a year ago, including a $57 million, or 25%, increase in line pipe and a $20 million, or 18%, increase in OCTG sales.

Second quarter 2014 average line pipe sales price were down about 12% from the same quarter last year. The amount of tons we sold from stock for line pipe in the US was higher by approximately 29%. And based on the latest Pipe-Logix All Item Index, line pipe spot prices have declined 4% second quarter 2014 over the second quarter of last year. Our lower average sales prices have been driven by a higher mix of direct project-related work.

Sales of valve fitting flanges and other products were $1.075 billion in the second quarter, a 16% increase from the second quarter 2013. Sales of valves were up 39% during the quarter. Organic growth was 21%, and the remainder 18% came from acquisition. Sales from fittings flanges were up 5% from the second quarter of last year, as growth from acquisitions offset modest organic losses. Other products were flat with a year ago as the disposition of the Canadian progressive cavity pump business offset organic growth.

Turning to margins, gross profit declined 190 basis points to 17.3% in the second quarter of 2014 from 19.2% in the second quarter last year. The decrease was primarily due to the impact of LIFO of 110 basis points. A LIFO benefit of $12.5 million was recorded in the second quarter of 2013 as compared to $800,000 of expense in the second quarter of 2014. Higher amortization of acquisition-related intangibles also contributed to lower gross margin profit percent.

The adjusted gross profit percentage, which is the gross profit plus depreciation, amortization, the amortization of intangibles, plus or minus the impact of the LIFO inventory costing, decreased to 19% in the second quarter of 2014 from 19.7% in the second quarter of 2013. The lower margins are reflective primarily from general carbon steel pipe deflation and a higher mix of low margin pipe sales compared to a year ago.

SG&A costs for the second quarter of 2014 were $185 million, or 12.4% of sales, an increase of $31 million from $154 million, or 12.1% of sales, in the second quarter of 2013. SG&A increased $18 million as a result of acquisitions, higher personnel costs from increased business activity, and $5 million of severance. This was partially offset by a $4 million declined from a divestiture of our Canadian progressive cavity pump investments.

As Andrew mentioned earlier, we've implemented certain cost savings initiatives direct at reducing our operating expenses. With the actions taken to date we've revised our savings estimate, and we now anticipate annual savings of approximately $12 million to $14 million per year. Due to these initiatives we incurred a pretax charge of approximately $5 million this quarter, and expect to incur an additional $2 million to $3 million in the third quarter.

The increase in annual savings from the $8 million that we disclosed last quarter to the $12 million to $14 million this quarter was driven by additional cost-cutting measures, including the close of our Tulsa and Sydney corporate offices. We expect the SG&A run rate to be approximately $180 million to $182 million per quarter for the balance of 2014, taking into consideration the benefits of the cost savings, recent acquisitions, and growth in the business.

Interest expense totaled $15.3 million in the second quarter of 2014, which was modestly higher than the $15.2 million in the second quarter of 2013. This was due to higher average debt balances, partially offset by lower interest rates.

Our second quarter 2014 net income was $39.3 million, or $0.38 per diluted share, compared to net income of $43.9 million, or $0.43 per diluted share, in the second quarter of 2013. Adjusted net income, excluding the charge related to employee severance, was $42.9 million, or $0.42 per diluted share. There were no adjustments to net income for the second quarter of 2013.

Adjusted EBITDA on the second quarter was up 7% year over year to $106 million versus $99 million a year ago. Adjusted EBITDA margins for the quarter were 7.1%, down from 7.8% a year ago, but up sequentially from the first quarter's 6.4% on the higher revenue levels.

Our debt outstanding at June 30 was $1.398 billion compared to $987 million at the end of 2013. The increase was due to our acquisitions and working capital growth. Our leverage ratio at June 30, 2014 was 3.4 times on a pro forma basis for the four recent acquisitions. We expect free cash flow to be used to pay down debt over the next 12 months.

Our operations produced cash of $22 million in the second quarter and used cash of $52 million cash for the first half of the year. Our working capital at June 30 was $1.31 billion, $56 million higher than it was at March 31, 2014, and $226 million higher than it was at December 31, 2013, reflective of the acquisitions this year and an increase in our working capital due to the higher revenue levels.

Cash used in investing activities totaled $102 million in the second quarter, primarily related to the acquisitions of MSD and Hypteck. In mid-July we amended our ABL facility to lower its size by $200 million to better align with the eligible borrowing base, add Norway to the facility, lower the pricing grid on the US and Canadian borrowings by 25 basis points, and extend the maturity of the facility to 2019.

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

Thanks, Jim. When we began the year we anticipated that spending by our customers and the industry in general could increase in the back half of the year. After a tough first quarter, the increase in activity we saw in March and April continued throughout the second quarter. And based on our preliminary results for July, it is continuing into the third quarter.

Higher estimates of E&P spending from recent industry surveys are also indicative of a stronger second half to 2014. Our backlog reached another record high at the end of June, coming in at $1.125 billion, an increase of 9% from the end of the first quarter.

All of this has led us to update our 2014 annual guidance. We have raised and narrowed our sales guidance range to $5.7 billion to $5.9 billion. The new midpoint is $150 million higher than it was previously. We also narrowed the adjusted EBITDA guidance, lowering the top end of the range, reflecting lower gross profit margins we have experienced to date and expect through the balance of the year. Adjusted EBITDA is now expected to be between $400 million and $430 million as compared to between $400 million and $450 million previously.

Capital expenditures are expected to be lower than previously thought. Therefore, we have reduced the range to $20 million to $25 million from $25 million to $30 million. Finally, the range for cash flow from operations is lower, as growth in the business is expected to consume more cash for working capital. We now expect cash flow from operations for the year to be between $75 million and $100 million, down from $175 million to $200 million.

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

(Operator Instructions)

Matt Duncan, Stephens Incorporated.

Good morning, guys. First question I've got. Could you go into a little bit more detail on what's going on with gross margins in line pipe? What are the gross margins like in that product category right now? Is the drop in your EBITDA forecast, is all tied to the sales mix and the lower gross margins of line pipe?

No, Matt. You are right. We've seen a big change in the mix to lower margin direct pipe orders. That's where the market is today. That's where you see a lot of the activity. And those margins will typically be in the mid single type digits.

Now, it is inventory we don't have to carry in stock. We're handling it on a transactional basis for these new customers. So we don't have the investment that we typically have with our stock pipe. But it does provide us an opening and an entree into these customers for additional work down the road.

Jim, how confident are you guys that you'll be able to pick up additional revenues from those customers in those higher gross margin categories? Are you seeing that with some of the new customers that you've already added, or is that still yet to come? And when it does, should we expect to see gross margins go back up?

Certainly we expect that to happen, and we have confidence in that as we talk to the customers and we put together programs for them. So we will start to see that, perhaps some later this year and maybe into the first quarter of next year.

Okay, thanks. And then last thing and I'll hop back in the queue. On the outlook for each of the three energy sectors, could you give us an update on what your growth expectations are for upstream, midstream, and downstream sales this year?

Sure. If you remember, when we started the year we thought that the upstream was be in the mid single digits. We've now revise that to the high single digits, perhaps even touching on -- hitting something starts with a 10. The midstream we've moved up as well.

We said it was low single digits. It's now approaching mid single digits. And Then the downstream, we've moved up modestly from a mid single digit. But the biggest growth, or the biggest change in our outlook, has been in the upstream business.

Okay, thanks. I'll hop back in queue.

David Manthey, Robert W Baird.

Hi, guys. Good morning.

Good morning, Dave.

Similar on the gross margin. I'm just wondering, first of all, mid single digit gross margin, is that EBITDA profitable because you don't have to handle it and your costs are obviously the lower? And I'm just wondering if you could talk to us approximately about what the magnitude of revenues you think that was this quarter?

You're right, Dave. It's work that has margin that drops pretty much straight through the bottom line. We don't have handling costs associated with it. We don't have to bring it in, move it around. It does fall through towards that bottom line. In terms of a range, I would say it's in the $50 million range this quarter.

To demonstrate the impact of that on adjusted gross profits, if you back that out and adjust for it at those mid single digit gross profit margins, the overall gross profit of the Company move up 30 to 40 basis points. It does have some sensitivity on that when you bring in a large volume of that mid single digit margin business. But as we said, it's good business to have. It's a market that is out there today, and it provides us the opportunity to establish these new relationships that are important.

Second. In terms of the timing on that, given the fact that you are reducing the high end of the EBITDA range, it doesn't sound like you expect it to translate in the back half of this year. I suppose these are long-term relationships. But from your historical performance, can you talk about how long that typically takes to turn into a valve customer or another type of customer?

No, it can certainly happen within a three- to six-month time period. That's why I mentioned we would expect to see some of that in the fourth quarter. This is new business with people we haven't done a lot of work with in the past.

Okay. Just if I can get one more in here quickly. The fact that $50 million doesn't seem like a very big number, and even if you adjust it, it seems like adding that low margin business wouldn't impact the overall as much and allow you to reduce the EBITDA number overall, it seems like. Was there a mix shift, excluding this sort of new drop shift to this? Was there a mix shift? Were margins lower than you expected outside of that activity?

We continue to see some of that also with existing customers as well. There is certainly a portion of it that goes with the existing base business as well.

I see. Okay. Thanks very much.

Allison Poliniak, Wells Fargo.

Hi. Good morning, guys. Sorry if I missed this, but backlog jumped nicely in the quarter. I think you said 9%. Could you break that down between core and acquisition for us?

Yes, Allison. If you go back and look at it. The 9% from -- sequentially from the first quarter, that's all going to be organic. There is very little acquisition in there other than the two small ones. That's primarily all organic growth in the backlog. It's primarily in the US, although we did see it in the other streams as well.

That's great. And then internationally, can you just give us your thoughts on maybe a regional perspective as we look out into 2014 and into 2015, if you could?

Allison, let me take that one. Europe is coming back nicely for us. The brightest spot we have internationally is in the UK from an organic standpoint. From an acquisition standpoint, of course, Norway is going to be very strong for us the rest of this year and into next year.

Southeast Asia is doing well for us. We consolidated the number one and number two valve distributors in that marketplace during the quarter. So we are pleased there. And then Australia remains our problem area with both mining and refining being slow.

That's really the only spot that we're really working on more of a cost basis than a growth. The other areas, we are all working on profitable growth. And Australia we're still unfortunately in a mode of right-sizing the operation for the current demand.

Great. Thanks so much.

Jeff Hammond, KeyBanc Capital Markets.

Hey, good morning guys.

Morning, Jeff.

I know this has kind of been addressed before, and I understand the lower margin mix. What I'm struggling with is how you are taking the revenue guidance up $150 million and lowing the EBITDA. Are we seeing some other cost headwinds, or are we taking some money-losing business? I just want to understand. Or is it just more pricing pressure? Just help me understand those two dynamics.

Yes, Jeff. When we look back at it, we started in December with the outlook for the year. At that time we saw $5.65 billion and $425 million as both our plan internally and most likely outcome from external guidance standpoint. We had a tough first two months. We knew pricing would improve, both OCTG and line pipe pricing bottom in February.

We are seeing a ramp-up, as we expected, but a slow ramp-up. We saw a nice spike after the ruling on the trade case in OCTG, improvement in July of 3%. But it's a gradual improvement in line pipe.

So you are really seeing -- it's happening, it's playing out as we thought, but the improvement in carbon pipe pricing is slower than expected. So we look here, seven months later we are seeing more volume in line pipe than we anticipated at the start of the year, but at a lower price. And as Jim said, it still is below the price we had at this time in 2013, and well below the price we had in 2012 still. I would say that's still the big swing factor when you look at our $10 million.

We raised revenue by $150 million, but now we see the earnings with $415 million being the most likely. The way I look at it, Jeff, we did $2.8 billion and $190 million EBITDA in the first half. Most likely outcome in the second half is $3 billion with $225 million EBITDA in the back half. Across the board it is improving, but not to the level we thought initially.

We are very pleased with the growth. We are very pleased with the ramp-up in activity. It's continuing on into July. And as we said on the last call, I think this will be a more historical year for us. In 2013 our largest -- highest quarter revenue was the last quarter. Normally the second and third quarters are our best quarters. I fully expect this year the third quarter to be our best quarter, and exceeding the second quarter results.

We feel good about the turn in business. A lot of our customers have increased their budgets, as shown in several surveys, both for the second half but it also, really the second half run rate is what we see going into 2015, and we are pleased about that. Carbon pipe pricing is improving. It's just improving slowly. We certainly will start at a improved position on carbon pipe pricing going into the end of this year and into 2015 than we started in 2014 with.

Okay. Then just a couple of quick ones on acquisition. How would you say your acquisitions are tracking relative to your expectations? I know there has been some chatter about Statoil and NCS seeing a lower level of activity.

On these most recent acquired businesses, they look pricey on price-to-sales. Maybe if you could just talk about EBITDA multiples you would have paid for those.

Sure. Let me talk on the Norway, or the Statoil. The Stream acquisition, we continue to be very pleased with it as we look here at the midpoint. Their revenues for the year versus what we were expecting are within 5%. So we don't really see a big falloff or a big impact from the Statoil situation that you described.

Certainly on a longer term, they are going to continue to be a large spender. The two small acquisitions were, as we said, relatively small but had a little bit higher margin. Again those multiples were within the range we've talked about, in the 6 to 7 times on an international deal.

Thanks, guys.

Sam Darkatsh, Raymond James.

Good morning, Andy, Jim. How are you?

Good, Sam. Good morning.

Two quick questions, and they're frankly follow-ups to prior questions. You are saying, I think, that line pipe pricing in the quarter was down 12% versus the industry down 4%. And I think you mentioned that was because of your higher project mix, I think, then industry-wide. Back half of the year, specifically or at least directionally, what are you pegging for line pipe pricing to go into your EBITDA margin expectations?

Yes, we've got that Sam. It's going to be modestly improved, but not a lot. We provide a little bit of caution in their as we look towards the back half of the year. As we look at our backlog, we still see a lot of this project-related work in there. So we are going to continue to benefit from those additional revenues, but it will come at those lower margins.

Sam, I would just add a comment to that. One of things we've talked about on previous calls is our major midstream customers. One of them was the Williams Access midstream, two of our largest midstream customers. We're pleased during the quarter that Williams announced acquiring Access to bring those two together, Which as a combined company will be the largest midstream customer for us. It takes away that uncertainty between two of our major midstream customers.

We see some positive impact on additional spending from that in 2014, but a lot more in 2015 and 2016 going forward as that becomes the major midstream. That's one that you not seen in our mix this year.

Also DCP and PG&E on the West Coast, major spenders in midstream in previous cycle for us. They haven't ramped up, either one of them, to the level we had. So you are really seeing our four top midstream customers that are mostly handled out of stock sales active, but not to the levels we had in 2012, or even the first part of 2013. And so you are seeing us, our blend being smaller MLP operators.

As Jim said, some more project work to mix in. But I think when our largest four come back to spending either later this year or into next year, that will be on top of the ability where we've expanded our customer base in midstream during their slow-down in spending.

That's very good color. The line pipe assumption from a pricing standpoint in the back half, if I could rephrase or at least understand, you're assuming it's going to be sequentially better than the first half, but not up on a year-on-year basis in the second half? Is that how to read that?

Yes, and the way I would look at it, it's been up -- if you look at line pipe, it's up 3% from the trough in February. I wouldn't be surprised to see another 3% in the next five months. I think it will finish slightly higher than we started the year, but definitely on a trajectory to improving in 2015. And I see OCTG, depending on the final determination and the impact on imports, certainly it's a positive. It raises the floor on the low cost price OCTG. So I think it will finish up the year higher than we started.

Okay. Then my final question. Taking the sales up, expectations higher $100 million, $200 million, which is obviously very encouraging, taking the cash flow expectations down by a similar amount. I am thinking the inventory requirements of the incremental sales probably is not that dramatic because a lot of it is going direct, which I think suggests that your DSOs are taking the cash.

First off, is that the right way to look at it, that it is a DSO issue, not an inventory commitment issue? Secondly, if that is the case, why would that be? Are the DSOs naturally in that mix higher, or are your customers -- is there an issue with -- not collections necessarily, but length of period of time to collect? How do we look at that?

No, Sam. You summarized it nicely. It's not in inventory issue. We have additional working capital just in the normal course of revenue being up, but also in our expectations, which we've changed from last time. We've added a couple -- actually three days to the DSOs. We've seen it spike up here at midyear at June.

No particular problems, but just more on across-the-board trend of a little slower paying from our customers. Some of them have specific reasons. Just to be a little cautious, we've added a little bit -- a couple of -- those days there at the end.

Sam, I will add, end of the second quarter our inventory average cost is up $142 million from the end of December. We do see a build, and we have been buying in advance of the building activity. That's part of it, and Jim addressed the rest.

Does your DSO over time continue to rise based on the mix that you foresee over the next couple of years?

I don't think it continues to rise. It will ebb and flow depending on a number of situations. It just happens to be at a high point right now.

Got you. Thank you very much. Very helpful.

Mark Douglass, Longbow Research.

Hi, Good morning, gentlemen.

Good morning, Mark.

You mentioned your top four midstream customers just aren't spending at the same pace as they have the last couple of years, but you expect it to improve. Is that just your assumption, given the lack of spending? Or are they giving you a lot of strong signs, indications that they will be spending more later in 2015 -- 2014 then into 2015, particularly with, I assume the acquisition -- the merger of Williams and Access probably disrupts their capital spending to some degree.

Yes. We are very close to all four of these customers. Yes, of course it is a distraction with the Williams Access combination. In 2013 we entered into a new five-year agreement with Williams. So that's positions us very well for the combined company. Of course, they've spent money on the acquisition this year.

As we've talked about on the previous call, the Bluegrass project, which was is a big one for us, got pushed into 2015 from this year. So we certainly see Williams, the combined Williams Access being very active in 2015 and 2016 from what we discussed with them. So I think that case, it is a positive -- very much a positive for us, as the certainty of having the two as a JV versus now one company.

DCP is active, but not to the level we saw it in either 2012 or 2013, but still a good customer. I think they will ramp up more slowly than the others. And then PG&E, we're in the middle of a very large bid with them as they look at the spending going forward. They've been very active in 2013, and much slower in 2014.

We have a very strong position with them. But we think once the tender and all of that is worked out this year, that they will be back to spending next year. So I think there's positives in that group for sure.

The good thing is we broadened our customer base in midstream while we've -- as part of our strategy that we talked about the last two quarters. And while that comes at some lower margin, it also builds a broader midstream customer base for us going forward.

Thank you. There are encouraging trends in Canada. How is the spending in oil sands? Is it mostly replacement? Because we have heard others talking about project push-outs and delays in capital spend, at least in the oil sands. But with your organic growth there, it seems like you are doing pretty well. Can you talk about some of the dynamics there in Canada?

Yes, the oil sands big projects have pushed to the right some. Where we're very busy is in the SAGD, the in situ production of the heavy oil part. And also our general oil field business up there is doing very well.

On a year-on-year basis when you correct for our exiting the euro pump distribution part of that business. Without that $85 million annual revenue, we're doing very well in Canada. But it's more of the general oil and gas, and also the SAGD completion. We do have some project work in the oil sands themselves, but that's pretty much steady from last year to this year. So it's the other areas that are ramping up for us.

Okay, thank you.

William Bremer, Maxim Group.

Good morning, Andy. Good morning, Jim. Could you give us an employee count as of the end of June?

Yes, it's just under 5,000. I think it's like 4,980.

4,980, yes.

Okay. The restructuring initiative, et cetera, that you voiced. Is this the first step or will this be a continuing ongoing process throughout, say, the end of the year?

Bill, I think the largest part of it was done during the second quarter. It's a continuing process. We've been very active in acquisitions. So in international, we are looking at streamlining the structure now that we have what's more of a critical mass for us of business. We're looking.

We consolidated into two region structures internationally. We're removing some of the costs at a country level basis and synergizing it at a region level. So there is some more streamlining that will occur in the third quarter. There we had a Sidney corporate office from an acquisition that we closed, and Jim mentioned.

Domestically it's been more of a streamlining of the management structure, and also we closed a corporate office in Tulsa and moved that functioning to an existing office in Charleston. So I would say it is much more along the lines of streamlining, but certainly we wanted to improve the profitability.

That is a heavy focus for us in the second half of 2014m going into 2015 is to get our probability up. Part of that is managing SG&A costs to a lower level. So there will be a continuing effort on that through the end of the year.

Okay, great. My second question is, on the US/Canada/international, can you provide the operating margins as a percentage year over year, please?

Bill, I know we've got those in the Q. I don't know if I have them handy for -- right here. We can certainly take that offline. I know that we had improvement in both Canada and in the international on a sequential basis.

Okay, great. Thank you.

Brent Rakers, Wunderlich Securities.

Good morning. I think you talked a bit about, obviously your satisfaction with Stream since it was acquired in terms of revenue contribution. You gave some initial -- when you made the deal, some additional EBITDA targets and accretion targets. Could you maybe give us an update there?

Yes, as I mentioned, we had -- we think the revenues are going to be within around 5%. Our EBITDA and our accretion numbers are going to be a little bit less than that, based on that revenue fall-off, but still should do very well by the end of the year.

Okay. And then I guess my follow-up question. Just trying to walk through the numbers, just trying to strip out the acquisitions and focus on the core. It looks like possibly the core SG&A on a dollar basis may have outgrown the core gross profit dollars. I guess, first, any comment on that? And I guess my follow-up would be on the SG&A. Could you talk about some of the more key growth spending initiatives, whether it is headcount or branch openings or other?

Yes, the SG&A was impacted by the acquisitions. Of course, it also had the $5 million severance that we pulling out in the second quarter. We are going to start to see some of the savings from the actions in the third, more fully in the fourth quarter. In terms of initiatives, to focus on the savings it is really been around the headcount, the actions that we took.

In terms of branch locations and costs there on the G&A line, real no big impact. We do have plans from a capital perspective to open up, expand the RDC in Midland Odessa, open one in Rotterdam. But other than that, nothing significant.

Thanks.

Nick Pendergast, BB&T Capital Markets.

Hi, good morning. If I could just do a follow-up question on your cost savings plans here. It looks like you've upsized them to the $12 million to $14 million annualized savings. At what point do you expect to reach that on an annual run rate basis?

We ill have that fully implemented in the fourth quarter. We still have a little bit of transition here in the third, but on a run rate, it would be in the fourth quarter.

So it will hit $12 million to $14 million exiting the end of the year?

Correct.

Got it. Thank you.

Ryan Cassil, Global Hunter Securities. Mr. Cassil, your line is open. Please go ahead.

(Operator Instructions)

Due to no response, we will move on to our next question. Vaibs Vaishnav, Bank of America.

Good morning, gentlemen. Just wanted to see what the exited margins, if we could talk about exit rate EBITDA margins in June or July. Our first-quarter EBITDA margins were 6.4%, second quarter rose to 7.1%. Probably they are still increasing. Just wanted to get an exit rate, if you could please?

Sure. Vaibs, the exit rate, you talked about the month of June. Let me just speak in terms of the quarter. In terms of the levels of revenue around $1.5 billion, we out to be at the 7.1%, 7.2% and increasing as the revenues go up there. Certainly that is an exit rate I would look at on a quarterly basis.

Thank you. So if I think about the second half of 2014 and think about the midpoint of the guidance, we are assuming 7.5% EBITDA margins for the second half versus about 6.8% in the first half. Given the fourth quarter seasonally, just wondered if you could walk through the assumptions that you have, either in terms of seasonality, or obviously we have more cost savings in the second half. But just some broader thoughts around the assumptions. Thank you.

As you look at the back half of the year, and as we mentioned the third quarter is typically the strongest. So we think it will be particularly strong. Andy mentioned today it would be up. The first -- the fourth quarter, excuse me, is always the one that's a bit of an uncertainty as we get to the end of the year.

We're certainly thinking it is most likely to be down on a sequential basis, but still very strong. We mentioned the margin situation. We think that will continue to exhibit these low margin direct line pipe orders. There is some built-in increases in general line pipe pricing, but that's a relatively modest. And then finally we'll start to see the benefits of the cost savings cuts, some in Q3, but full run rate in the fourth quarter.

That's very helpful. That's all me -- that's all from me. Thank you.

Matt Duncan, Stephens Incorporated.

Hey guys, just going back to gross margins to make sure we know how to look at this in our models. It was 19% on adjusted gross margin basis this quarter. Should be expect it to move up a little bit in the back half on higher sales? Or is the mix going to be enough of a headwind still that it's going to just stick around that 19% level?

Matt, I think it is going to be around that 19% level, plus or minus, again depending primarily on the volume of mix of these orders that we've talked about.

Okay. And then Jim, helping us as we look out to next year. Obviously I think by then you would expect to see the cross-sell with some of these new customer start to kick in, and that should give you some tailwind's in gross margins. But also can you talk about the make-up of backlog?

Is the growth in backlog, is that being driven more by picking up these line pipe orders, or is it more, or maybe equal parts that and the expected build-out on the downstream side where I know you've been adding stuff to backlog? And that tends to be higher gross margin kind of business on that side of the business, if I remember correctly.

You are right on a number of points there, Matt. The only thing I'd caution you is in the backlog, some of the project work in the downstream sector. That does tend to be a little bit lower margin business because of its project nature. It's not standard MRO replacements. It's better than the mid single digit line pipe, but it's certainly not our higher margin MRO business. That correction, you've hit on the head.

Matt, I would just add, one of the things we haven't really talked about this call but I still watch closely is the additional MRO scope on renewal contracts, either new MRO contracts or additional scope on existing renewals. And we are doing very well in the first half of this year, significantly higher even than last year which was a good run rate for us.

So I see that as a positive growth in the projects, as Jim mentioned, at a little bit lower margins. Some growth in smaller or midstream MLP customer, lower margin. But offsetting that would be higher growth in expanded MRO contracts that we've already realized in the first half of 2014. That sets well for growth in 2015 for us.

Okay, so to be clear, when this all sorts itself out, assuming the cross-sell to the new customers does happen, we should expect to see the gross margin expand a little bit next year on higher volume?

Yes.

Okay, thanks. Just wanted to make sure. Appreciate it, guys.

Ryan Cassil, Global Hunter Securities.

Hey, guys. Thanks for taking my question.

Good morning, Ryan.

I just wanted to touch on the customer mix. You talked about some of those larger existing customers not showing up as much this year. Are you assuming much of a pick-up at this point in your guidance with those guys? Or would that be incremental to the margin mix and the overall guidance at this point?

Ryan, we've been conservative in thinking on ramp-up with those in 2014. We certainly are very bullish on their increase in spending for 2015. I would say that if they pick up faster, that would get you more to the high end of our range, the $5.9 billion level.

Okay. And then someone just addressed this, but the new customers you guys are ramping, if we look back at it historically on when you can take new customers and start cross-selling new products and growing that account, how long does that take on average? Do you expect any real difference here?

You start to see, as I mentioned earlier, six months, sometimes shorter timeframe. The real value of these is over time those accounts continue to grow and grow and expand. So it's a nice long-term investment we are making. But you'll generally see -- start to see increased revenues within that six-month period.

Okay, great. It sounds like you guys are making the right long-term moves. I appreciate it. Thanks for the time.

Thank you.

Ms. Schaefer, there are no further questions at this time. Please continue.

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

Ladies and gentlemen, this concludes the MRC Global second-quarter earnings call. If you would like to listen to a replay for today's conference, please dial 1-719-457-0820 and enter passcode 180-8539. Again, the dial-in number is 1-719-457-0820 and enter passcode 180-8539. The conference center would like to thank you for your participation. You may now disconnect.