MRC Global Inc (MRC) 2014 Q3 法說會逐字稿

Good morning ladies and gentlemen, and thank you for standing by. Welcome to MRC Global's Third Quarter Earnings Conference Call.

(Operator instructions)

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

Thank you Anna, and good morning everyone. Welcome to the MRC Global Third 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 November 21, 2014. The dial-in information is in yesterday's release. Later today, we expect to file the third 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, November 7, 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 the Management of MRC Global during this call may contain forward-looking statements within the meaning of the United States Federal Securities Law. These forward-looking statements reflect the current views of the Management 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 report on Form 10-K, its quarterly reports on Form 10-Q, and current reports on Form 8-K to understand those risks, uncertainties, and contingencies.

And now, I would like to turn the call over to our Chairman, President, and CEO, Mr. Andrew Lane.

Thanks Monica. Good morning and thank you for joining us today on our third quarter 2014 earnings call and for your interest in MRC Global.

I'll begin with some highlights from the quarter and recent developments before turning the call over to our CFO Jim Brown for a review of the financial results. Following Jim's comments I will finish with a discussion on the outlook of our business.

I am proud to report that third quarter revenue set a new record high for the Company at $1.6 billion. This record surpassed the previous record set in 2008. Growth has been robust across all areas of our business.

Including the impact of acquisitions, revenues for the quarter increased 23% from the third quarter of last year, with organic sales growth of 18%. At a consolidated level we had organic sales growth across all segments and end market sectors, as compared to the third quarter last year. Upstream growth was driven by increases in the US rig and completed well counts, as well as an increase in market share in the key oil shale basins in the US.

In the midstream sector, we saw higher levels of activity with our transmission customers. Line pipe and related valve and fitting purchases have increased, and we are further penetrating our target growth accounts consistent with our objective to broaden our midstream customer base. This is the early result of our effort to cross sell a broad range of products to our targeted growth account customers.

In the US, we achieved records for both line pipe sales and tons of line pipe sold from stock. The downstream sector also experienced growth, both internationally and in the US, driven by ongoing repair and maintenance work along with project related work.

Another major milestone as a result of our efforts to expand our higher-margin product lines was reached this quarter in valve. We have focused on expanding our valve lines, adding additional suppliers, adding additional technical sales capabilities, and through targeted acquisitions.

We have also expanded our Global Valve Automation Center capabilities. We now have 35 Global Valve Automation Centers.

The results of all of these efforts have delivered our largest quarterly valve sales in Company history of $531 million. As you know, we support many gas utility companies across the US in their normal operations as well as their infrastructure integrity projects. We operate with many of them under long-term agreements.

During the third quarter, we won or renewed four integrated supply agreements with gas utility customers worth over $500 million over the five-year contract terms. These agreements demonstrate the value we bring the gas utility customers in managing and supporting an integral part of their supply chain requirements.

As we discussed on the previous calls, we have been working through various cost-saving measures to improve profitability. As a result of those efforts, we now expect annualized savings of more than $17 million, an increase from the estimate we provided last quarter. We began to realize the benefits of these cost-saving measures in the third quarter, which has helped us achieve an 8.2% adjusted EBITDA margin percentage.

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

Thanks Andrew, and good morning to everyone.

Total sales for the third quarter of 2014 were $1.618 billion, which were 23% higher than the third quarter of last year, and 8% higher sequentially. As compared to the same quarter a year ago, revenue increased $232 million organically or 18%, and our acquisitions added an incremental $92 million of revenue.

The divestiture of our progressive cavity pump business in Canada had a negative $20 million impact on our revenues this quarter. US revenues were $1.205 billion in the quarter, up 19% from the third quarter last year. Market activity, as measured by the rig count and number of wells completed, increased 7.5% and 5.4% respectively over the same time period.

The growth in excess of these levels is indicative of the market share gains and strong project activity. Each end market sector in every product line in the US business posted growth in the quarter. Midstream grew the most at 26%, and of the product lines, valves grew at 25% followed closely by line pipe at 20%.

Sequentially, US segment sales were up from the second quarter by 8%, led by the midstream business which increased 13%. Canadian revenues were $161 million in the third quarter, nearly flat with the third quarter of last year. As mentioned earlier, the sale of our progressive cavity pump business reduced sales by $20 million.

A 4.5% decline in the Canadian dollar relative to the US dollar reduced sales by another $8 million. These declines were offset by organic growth of $28 million, and sequentially the Canadian segment is up 8% from the second quarter due to seasonal factors. Internationally, third quarter revenues were $252 million, up $115 million or 84% from a year ago.

The increase was primarily the result of four recent acquisitions, Stream, Flangefitt, MSD, and Hypteck, which added $92 million in incremental revenue in the third quarter of 2014. Organically, sales were up to 17%, primarily from growth in the downstream sector in Europe from projects under our global EFA with Shell. Sequentially, the international segment was up 9% from the second quarter.

Turning now to the results based on the end market sector. In the upstream sector, third quarter sales increased 28% from the same quarter last year to $753 million. This increase was driven by organic growth of 16%, the impact of acquisitions of 12% net of the Canadian divestiture.

We experienced strong North American activity and market share gains in the quarter. Midstream sector sales were $474 million in the third quarter of 2014, an increase of 26% from 2013. Compared to the third quarter last year, transmission customer sales increased 43%, and sales to our gas utilities were higher by 2%.

The increase in the sales to transmission customers was due to increased project activity and gas utility sales were virtually flat due to the timing of customer projects. And in the downstream sector of third quarter of 2014 revenues increased by 12% to $391 million as compared to the third quarter of 2013.

The increase was primarily driven by increases in turnaround activity and project work. Organic growth in our International segment was 10% and 5% in the US.

And turning to our revenue by product class. Our energy carbon tubular product sales were $471 million during the third quarter of 2014, with line pipe sales of $323 million and OCTG sales of $148 million. Overall sales from this product class increased 23% in the third quarter from the same quarter a year ago, including a $44 million or 16% increase in line pipe, and a $43 million or 40% in increase in OCTG sales.

Line pipe pricing wasn't much of a factor in the quarter. Based on the latest pipe logics all items index, average line pipe spot prices in the third quarter of 2014 were up modestly with the third quarter last year. And more recently, pricing continues to be flat over the past several months.

Recently an anti-dumping ERW line pipe trade case was filed against certain foreign manufacturers. If this case is successful, much like the OCTG case which settled in August, it could provide further support for your ERW line pipe pricing. Sales of valves, fittings, flanges, and other related products were $1.147 billion in the third quarter, a 23% increase from the third quarter of 2013.

Sales of valves were up 49% during the quarter, organic growth was 31%, and the remaining 18% came from acquisitions. Sales from fittings and flanges were up 15% from the third quarter last year, 9% from acquisitions and the balance organic. Our oil field, gas, and related product groups were generally flat with the same quarter a year ago as the disposition of the Canadian progressive cavity pump business offset organic growth.

Turning to margins, gross profit decreased 90 basis points to 17.2% in the third quarter of 2014, from 18.1% in the third quarter of last year. The decrease was primarily due to the impact from LIFO of 60 basis points. A LIFO benefit of $5.7 million was recorded in the third quarter of 2013, as compared to $3.9 million in expense in the third quarter of 2014.

Higher amortization of acquisition-related intangibles also contributed to lower gross profit percentage. The adjusted gross profit percentage, which is gross profit plus depreciation and amortization, the amortization of intangibles, and plus or minus the impact of LIFO inventory costing, was 19% in the third quarter of 2014, comparable to the second quarter of 2014 and down slightly from 19.1% in the third quarter of 2013.

SG&A costs for the third quarter of 2014 were $185 million, at an increase of $24 million from $161 million. SG&A increased $21 million as a result of acquisitions, and included $2.6 million of severance and $5.7 million of charges related to the cancellation of certain executive employment agreements. Even so, SG&A was 11.4% of sales for the third quarter of 2014, as compared to 12.3% of sales in the third quarter of 2013 for a 90 basis point improvement.

The quarter benefited from cost-cutting measures taken this year and a reduction in operating expenses related to the divestiture of our Canadian progressive cavity pump business. As mentioned earlier, we reduced our operating expenses, and with the actions taken to-date we've revised our savings estimate. We now expect annual savings of more than $17 million per year.

Year-to-date we have incurred pretax severance charges of approximately $7.5 million for the year. We continue to look for cost savings opportunities, but do not expect any further significant charges at this point. We expect the SG&A run rate to be approximately $176 million to $178 million per quarter, everything else being equal.

Interest expense totaled $14.9 million in the third quarter of 2014, which was modestly lower than the $15.5 million in the third quarter of 2013. This was due to lower interest rates partially offset by higher average debt balances. Our third quarter 2014 net income was $50 million or $0.49 per diluted share, compared to net income of $39 million or $0.38 per diluted share in the third quarter of 2013.

For the third quarter of 2014 adjusted net income, which excludes the charges related to employee severance and the cancellation of executive employment agreements, was $56 million or $0.54 per diluted share. This is compared to an adjusted net income for the third quarter of 2013, which excludes charges related to executive separation expense and insurance of $41.3 million or $0.40 per diluted share.

Adjusted EBITDA in the third quarter was up 37% year-over-year to $132 million, versus $96 million a year ago. Adjusted EBITDA margins for the quarter were 8.2%, up from 7.3% a year ago and also up sequentially from second quarter's 7.1% due to the higher revenue levels and the benefit of cost savings measures.

Our debt outstanding in September 30 was $1.417 billion, compared to $987 million at the end of 2013. The increase was due to acquisitions and working capital growth. Our leverage ratio at September 30, 2014 was 3.25 times on a pro forma basis for the four recent acquisitions.

As you may recall 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, and lower the pricing grid on US and Canadian borrowings by 25 basis points, and extended the maturity of the facility to 2019. Our cash use in operations is $17 million in the third quarter of 2014, and used cash of $69 million for the first nine months of the year. Our working capital of September 30, 2014 was $1.374 billion, $290 million higher than it was at December 31, 2013.

We've experienced a significant increase in accounts receivable as a result of the acquisitions, the double-digit revenue growth, and the timing of payments from various large customers. And as a result, our cash from operations is forecasted to be between a cash outflow of $25 million to a cash inflow of $25 million for the year. Capital expenditures are expected to be $15 million to $20 million for the year, lower than previously thought.

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

Thanks, Jim. For the third quarter in a row, we have set a new record backlog for the Company. At the end of September our backlog reached another record high, coming in at $1.25 billion, an increase of 11% from the end of the second quarter, which is encouraging as we move into 2015.

The backlog is broad-based with $882 million in the US, $74 million in Canada, and $297 million in International. This growth in backlog is a result of our multi-year strategy to grow project work with our top customers to supplement our base MRO business with them.

The strong results this quarter, along with expectations for the remainder of the year, led us to update our 2014 annual guidance. We have raised and narrowed our sales guidance range to $5.9 billion to $5.97 billion, the new midpoint is $135 million higher than it was previously.

We are also increasing the adjusted EBITDA guidance reflecting the operating cost leverage from our cost savings measures and the additional growth in the business. Adjusted EBITDA is now expected to be between $430 million and $450 million, as compared to be between $400 million and $430 million previously.

Now turning to our outlook, we are currently in the budgeting and planning process for 2015, much like our customers are. We are listening to our customers and looking at the energy landscape over the next several years and we are optimistic.

Despite the recent decline in commodity prices, which could impact our customers' capital spending plans, if sustained. Currently we are not seeing any significant changes as a result. Most of our customers plan for several years and consider the volatility in the underlying commodity in that planning. Their projects are based on long-term view and many have already hedged their production for 2015.

We believe the recent decline in oil prices is a short-term phenomena. However, should this be sustained, we would expect there to be some changes to capital budgets which could impact us. Therefore, we will continue to talk to our customers, look for their 2015 capital spending budgets, and then we will plan accordingly and announce our annual guidance on our next earnings call.

The global PVF market is a very large and fragmented, and we continue to have many, many opportunities for growth through market share gains and leveraging our industry-leading global PVF sourcing and delivery platform.

So with that we will now take your questions. Operator?

(Operator instructions)

David Manthey, Robert W. Baird.

First off, thanks for your comments on the broader outlook here, but if $80 oil does persist and it impacts the energy CapEx as we move forward, as we think about the implications of that, is it safe to assume that based on energy exposure in each of your streams that it would hit upstream most, then midstream, and downstream the least? And then also, if you talk about geographically, based on marginal cost to production and so forth, is it right to assume that the US might actually get hurt less than Canada or International? Or is that not right?

Yes, Dave, a couple good questions there. So let me take on first the overall impact and -- of a sustained lower oil price level.

Let me just take a minute to talk about how it changed the Company over the last couple of years, and having lived through the big drop in 2009 and 2010, of course we see this adjustment in 2015 being nothing like that. But we did a lot of things following that to de-risk the Company and really put more balance and diversity in the Company.

So you think back to the last cycle, we didn't have a $900 million International business and that will provide good basis for us through to 2015. The other big thing we did, the most volatile area of the business is both line pipe in the midstream sector, and OCTG directly attributable to rig count fluctuations in the upstream sector.

So we've made steps over the last couple of years to de-risk that. If you look back in 2008, roughly 50% of our revenues came from that carbon energy piping. Today it is 19% in line pipe and 9% in OCTG.

So we have done an awful lot to minimize any fluctuations to our business in volatility and the rig count. We're not a rig count equipment supplier so we don't get impacted by drilling contractors' activity directly. So we have done a lot of things to position the Company to minimize any risk to the Company in a slowdown.

But let me talk -- to your other question. You're exactly right. Bigger impact in upstream than midstream, and then downstream, bigger impact in Canada than the US.

What we see for 2015, without getting into too much guidance, chemicals and refining is going to be a very strong year for us. Of course, refining projects and chemical projects are ongoing. They're are a big part of our backlog. So we see that still as a real positive, and of course chemical influenced more by the gas price than the oil fluctuations.

We also see a good gas utilities activity level for us. We also see, while there could be some pressure in MLPs and transmission, we actually see some very good major projects in midstream transmission already on our sights for 2015. And so the biggest impact would be, of course, upstream drilling, but we have minimized that with a lower OCTG base.

But I think you're exactly right. It would impact Canada upstream more relevantly because of the higher cost and the US shale less. We don't see a major impact to our International business because it is largely focused on production infrastructure, and then refining and chemical with our valve business there.

That's a great explanation. Thanks a lot, Andy.

Thanks, Dave.

Jeff Hammond, KeyBanc Capital Markets.

Last quarter you talked about taking a more proactive stance in getting customers from this kind of targeted line pipe strategy. Can you just talk about how that is progressing and have you started to get some of that other business as that moves forward?

Yes, Jeff. That's going very well. And we had to do this bundled sales. It's what we are best at.

A couple of things are happening in line pipe. You see the overall price continues, although Jim mentioned in his comments, flattening the last couple of weeks. We see it is up 3% from the low in February, so from a macro level on line pipe, a slight inflation environment, which is good.

We felt the back half of 2014 would be stronger from a pricing standpoint. We have made nice progress with broadening the base in midstream. We feel very good about that.

We feel extremely good about our competitive position and some of the changes that are happening in some of our competitors are positioning even stronger to be the leader in midstream. So we like that dynamic going on.

And also the trade case that Jim mentioned, there is roughly a $350 to $400 a ton difference to any ERW line pipe from domestic pricing and from foreign pricing. So when you make a parallel to the OCTG, following that case, OCTG prices from the low in February are up 10% on the spot market. And so we would see a favorable impact if that filing is successful and putting the new floor on ERW line piping would, of course, if it's successful increase the foreign pricing that is undercutting the domestic pricing today, and we see that as another macro positive for ERW line pipe.

We see strong demand for DSAW, the large diameter x-grade pipe that we are the leader in providing. Big pipelines are going forward in 2015, large diameter pipelines. We see the lead times on some of those DSAW mills extending already into mid to late 2015.

So strong DSAW, strong seamless pricing, and then with the case coming, some improvement in ERW pricing. So there's a lot of positives both competitively and from a macro level on pricing that we feel good about midstream.

We also went through a period of two years with a lot of change in our top three customers in midstream, and we see the new Williams, Access Midstream, if that merger gets concluded, being a real positive for us in 2015, along with increased spending from DCP and PG&E, and also the new Columbia Gas MLPs being formed, we're the leader in that we own the contract there, and also the new Shell Midstream MLP, all big customers for us that we see as positives.

Okay, great. And then just, over the deals, you talked about the four deals, Stream being the biggest. Can you just talk about how those deals are progressing relative to your plans?

Yes, we are very pleased with the last four acquisitions. Plans spread out at a nice alloy and stainless project capability that we are really leveraging for the whole International business. Stream and Hypteck in Norway gave us that complete offering in upstream production facilities, and in MSD and combining with our Transmark Singapore, we're now clearly the largest and leading player in valves in Southeast Asia, so that one is a home run for us.

We have some short-term headwinds with Stream related to Stat Oil pulling back on some spending that we have seen post acquiring them in January. The big headlines are on exploration rigs and exploration projects that are being either pushed to the right or shelved. Those have no impact on us because we are the production MRO business, but we have seen some slowdown in MRO.

And customers like Stat Oil will make those decisions on a short-term basis, but they don't defer maintenance on offshore production platforms for long so we see that just sliding some to the right. We initially said around $300 million in revenue from the Stream acquisition, we see it being around $270 million this year. But we still feel extremely good about those four acquisitions.

Okay. Thanks guys.

Matt Duncan, Stephens Incorporated.

So Andy, I want to look a little bit more at the midstream business and maybe dig in some more on what your market share gains may have been there recently. Can you maybe parse out how much of the very strong growth you saw there was from new customers that you guys have picked up through this initiative?

Yes Matt, I mean I don't want to get too granular because we have a lot of business development activities in that area but clearly, we are broadening our midstream base. Clearly, when we added SG&A and line pipe sales, in 2012 and 2013, that is starting to pay dividends. We are being helped by a little bit higher pricing in line pipe too.

And we have done that and for good reason while some of our major MLP midstream customers were slower than we liked in this early half of this year, they are now picking up their spending. So it's a combination of both our major customers getting back to work in the second half of 2014 as we thought they would, but also we are making good penetration.

You've got a couple of competitive dynamics where other players have both been purchased, major midstream competitors that have been purchased over the last couple of years, trying to improve on margins and of course when you try to improve margins on the low-cost provider in this segment, it certainly helps us as leader in this segment.

So a lot of dynamics going on in midstream and line pipe sales. We feel very good about our position. And I think that will continue to -- we will continue to do very well there.

Okay. And then the second thing for me, and I appreciate that it may be a little bit early to know at this point what customer spending plans are going to look like next year but I'm sure you guys are talking to them.

Is there an oil price at which you think there is a tipping point? Is that even a good way to look at it?

And just, you have been in this business a long time, Andy. As you look at where oil is today, listening to what your customers are telling you today, how should we think about a rig count number and upstream CapEx plans for next year as your customers are going through this budgeting process?

Yes Matt, I mean first when you look at the gas side, $4.40, kind of maybe $3.50 to $4 projections for next year, I think things don't change much in the mix when you think about oil and gas kind of mix is still going to probably stay on the drill and rig count 80%, 85% oil and 15% to 17% in gas drill. So I think that dynamic will stay pretty consistent for next year. So the big swing is on the oil side.

Of course $70, $75 in this range I think would definitely result in lower upstream spending. But a lot of our customers are looking at it as a one- or two-quarter -- at least what we're hearing today is a one- or two-quarter impact. They may slow budgets in the early quarter too, and this may be a year where they increase budgets again in the second half of 2015 just like they did here in 2014, but I don't see dramatic changes in upstream drilling activity unless it goes below $70.

Of course back in $80, $85 I think is comfortably above the shale cost to produce level, so I think that actually is a couple of percent positive area. And of course if OPEC acts at some time in the next couple of quarters, and we get to a higher level, I think 2015 has a capability to be even better in the second half. So we don't have a keen insight better than anyone else, but we certainly have a lot of our customers that have hedged production.

I don't think they are going to come out with big changes in their CapEx next year. And remember, now, our top 25, which are all the majors that have the longest view of this space, they make up half of our revenues, they tend to respond at least to the short-term fluctuations. The real small one- and two-rig operation is not really our customer base, so we tend to be heavily weighted to the majors for that reason.

Sure. Very helpful. Thank you, Andy.

Sam Darkatsh, Raymond James.

A couple of quick questions. First off, OCTG being up 40%, I think the industry was up somewhere in the 10% to 15% range.

Now, you have been deemphasizing OCTG and you also noted that might be where you want to continue to be emphasized based on its sensitivity around the rig count and uncertainly around next year. What is happening with OCTG and why did that spike so dramatically in this quarter?

Yes Sam, as you remember, what we've done in the OCTG business is focus on our key or some really core customers. And those particular customers have been extremely active.

We haven't seen that strategy change dramatically. So we participated with those large customers as their drilling programs have really picked up over last year.

Yes Sam, you know that's Shell and Chevron and Marathon, Conoco Phillips. And the other thing, if I could just add to Jim's comment, also OCTG pricing moving up 10% after the case was settled is also a positive for us. So better pricing and our major OCTG customers being more active is what drove that.

Okay. And then -- thank you. My last question.

And I recognize this might be sensitive. Around the midstream project pricing, around line pipe and transmission, clearly you are being considerably more aggressive than your peers. And I am guessing it's as a result of you thinking that there might be a bundled opportunity around valves and fittings and such.

Why do you feel that you're advantaged vis-a-vis your peers in the bundling opportunity? Because your -- at least your number one competitor is deciding against it, it seems?

Yes, I mean I don't want to talk too much directly, but since you asked the question, you know, a couple things going on. You look at the top three players in this space, it is us and then I will refer to it as the old Wilson Midstream business and also Edgen Murray.

Now Edgen Murray was bought by Sumitomo. I would say they are less aggressive than historically they were as a separate company. I would say Wilson was always the low-cost supplier in line pipe and midstream, so if they are going to meet their 8% EBITDA targets in 2015, they have to move pricing up in line pipe or deemphasize line pipe; that's their own internal issue.

And with us, we have been the leader in this sector. We are better at bundling midstream valves and we are much stronger in midstream valves than either of the two companies I just mentioned. So, and we're also very strong in fittings and flange and associated products in midstream, so it is an area of strength for us.

We have had some slowdown over the last two years with some of our major customers. We see them picking up in 2015.

So it's not an area -- and by any means, we are deemphasizing. It is an area we are very strong in, and we see our ability to bundle better than the two competitors I mentioned, clearly.

Very helpful Andy, thank you. Have a good weekend.

Ryan Merkel, William Blair.

I want to ask first about EBITDA leverage, which was very strong in the quarter, about 1.6 times. You're sort of guiding to something around 2 times for the fourth quarter.

I'm just wondering, is this level of EBITDA leverage, is it sustainable at this kind of 1.5 times to 2 times level? And of course I appreciate sales need to be, probably, in the mid-single digits or better, but just help us think through that.

Yes Ryan, they are, and the quarter benefited greatly from the cost-cutting measures that we talked about earlier. You know, in the quarter we got close to a full $4 million worth of savings and when you combine that with strong revenue growth on our infrastructure, you get some very nice incrementals.

We also saw some improvements in our International business during the quarter at its highest profit margin levels for the year and probably in some time. And again, that was a function of some of the actions we've taken in Australia, specifically. Some in Europe. But also had strong revenue growth this quarter at $252 million for our International business.

Okay, great. And then my second question is on gross margins, which was a bit of a concern coming out of the last quarter and it seems, at least on an adjusted basis, it has kind of flattened out a bit. Is that a fair way to think about it, you think? That this 19% adjusted is achievable going forward, or might there be more pressure because of the big projects?

Well, you exactly pointed out, kind of, one of the headwinds. Now, our margins are influenced by a lot of different things, a lot of products have different margin levels, there's a lot of mix issues, there's some geographical issues, but on balance we think 19% plus or minus is a good rate of margins going forward.

Yes Ryan, I will just add a comment to Jim's, that we have a lot of focus on that level and as Jim said, we feel very good that that's a sustainable level.

Great. Thanks.

Walter Liptak, Global Hunter.

Let me ask about, one, to ask about just some of the trends, like I don't know if you could give us some monthly data points on the trends. You know in upstream, did you see deceleration and how things are going in November?

And the downstream looked pretty good, I wonder if you could talk, just kind of sequentially and monthly, how downstream trended during the quarter? Because it looks like it's finally starting to see some pickup.

Yes, well let me start from a high level and then Jim will give you the stream information. When I look at this year, of course we had a real to slow start in January and February. The market turned for us in March and April, much better. Since May, we have done over $500 million in revenue per month for five months in a row through the end of the third quarter.

And just for recent trend, when you look at the October preliminary revenue, it should be the best month we've had of all of 2014. So certainly, there is a lot of momentum behind our results that is carrying in the fourth quarter. The recount actually picked up in October on a recent basis. So a lot of good activity going on still in the current year, and a lot of people are still spending the 2014 budget.

So from a high level I still feel very good and of course, the great third quarter has carried into the fourth quarter into October. So I will let Jim talk more granularly on the streams.

Walt, for a year to date basis, we are up 14%, and 9% of that is organic, and when you look at it in our streams it's running about mid -- or excuse me, low double digits in the up and the midstream, and then the downstream's around mid-single digits. And that momentum has picked up fairly evenly through those three streams here in the third quarter. October appears to be a very good month for us as well.

End of the year, you typically have some fall off. You see that in our guidance. Part of that is a fewer number of billing days as well as the holidays, but the momentum and the strength that we have seen has been across all three streams, including the downstream.

Okay, is the is the downstream accelerating, you think? I know you said it was even throughout. But just a little bit more color on the number that you put up this quarter.

Yes, the downstream, Walt, in the third quarter is usually a very good quarter for us. There is a lot of maintenance activity that goes on, especially in the US refinery sector, kind of the fall maintenance season. So that would be a little lower in the US refinery in the fourth quarter, but US chemical will be higher in the fourth quarter for us so it offsets that.

Well, the other thing that I would highlight is the fact, you know, we talked about the backlog and a lot of the growth in the backlog is in the downstream, as Andy mentioned, and the chemical business. It's always difficult to say whether that will be in this quarter or the next quarter, but the fact that those projects have been booked and those projects are moving forward, we think is very positive for our downstream business.

Walt, those are, to Jim's point, Shell -- we are very active with Shell and Chevron, CP Chem, and Philips 66. Those are our four major projects that Jim's referencing in our customer base. They're all downstream projects, and really aren't tied to any short-term oil price change.

Okay, great, sounds good. And then just a question on acquisitions. With the lower energy prices, does that have any impact on closing deals or evaluations?

Yes, we are very -- as we talked about earlier, we are very pleased with the four deals we got done in the first half of 2014. We have been integrating those businesses and our focus now is to get higher earnings out of our International business from the platform that we built over the last three years. So we -- I wouldn't expect any acquisition for the rest of 2014.

And the valuations are very high right now given the expectations in [front] because activity has been really good in 2014, so we're not going to stretch on multiples out of our historic range. So I don't see us being very active in acquisitions in the next couple of quarters and going into early 2015. Certainly, if there is sustained oil price levels, that is positive as far as lowering peoples' valuation expectations. I would see us more active in the second half of 2015 based on that.

Okay. Sounds good. Thank you.

William Bremer, Maxim Group.

Many of my questions have been answered already. Can you go a little more granular in terms of your dialogue of the three or four -- whether it's a renewal or new customers, I'm assuming that's more of a global procurement discussions and how that is ongoing?

Yes Bill, things on that front, that's our strength. Our MRO contract renewals, adding scope, and then adding scope to recent wins that we have had on a global basis, adding the projects through the MRO contract.

One of the metrics I followed the closest is on our MRO renewals, and we haven't talked about this yet on this call so when I look at our MRO contracts that came up for renewal in 2014 through the third quarter, we renewed $760 million in revenue. So that's one that I follow very closely. The other aspect I follow very closely is the incremental MRO revenues on top of the renewals of the base business.

So this is where we are adding scope, geographically, to our product lines, and it is market share gains, because we are adding scope without bidding to our current contracts. We have added $173 million in new MRO capacity in our contracts with the renewals we have already won. And in addition to that, we have added over $700 million in new project wins, and a big part of that is reflected in our backlog number that Jim has been talking about.

So those are what are key to me, is are we holding on to our MRO contracts? Definitely. Are we adding more scope into the contracts? Yes.

And are we winning in our goals of projects -- target projects for those major customers? And yes we are being successful there, too.

Nicely done, nicely done. And then can we get a little more granular in the downstream here? You voiced chemical sort of offsetting a little bit of refinery.

As you are looking through now, how much of this is new build versus, say, MRO? There are so many slated projects in the Gulf coming. Just give us a little more sense on what you're seeing there.

Yes, the growth will mostly be in the new build for us. We have a nice steady business. Of course we are the clear leader in downstream MRO and refining in the US.

So we have a nice basis there. I wouldn't say it's going to be booming. More like this year, low single digits area.

But I still think it will be okay for us in 2015. The refinery expansion that handle more of this light crude production from the US, that in new build will be very good for us.

And the chemical -- we have several good years of chemical expansion and facility work in both Louisiana and Texas for us, so that is really the bright spot for us in downstream. The core -- challenged in Europe downstream, and then challenged in Asia -- in Australia downstream by the positives in the US.

Great, gentlemen. Thank you.

Mark Douglass, Longbow Research.

Following up on the MRO conversation. What is your relative exposure of MRO versus your projects, new installs, capacity expansion, by market and geography?

Yes Mark, at a high level, the split between what we call capital expenditure-driven spending our projects, as you describe it, versus operating expenses will typically be about 60% capital, 40% operating expense. And by stream it varies.

And if you started with downstream, will typically be 80% operating expense as traditional MRO business that we have. The other 20% the projects.

Midstream is reverse. In the midstream sector, what we're seeing today is primarily project-driven; it is 75%, 80%.

And then upstream you have a combination. So you probably have, at least in today's market as you are still building out a lot of infrastructure, connecting wells on this new drilling, you're going to have a slight preference towards the capital side of the equation.

Geographically, it varies widely just depending on the project or the area. But it generally will follow the same mixes.

Okay, that's very helpful. And Jim, on the adjusted gross margin, you think it's going to be pretty level going forward and sustainable. What needs to happen, in your view, in order to inch higher into the mid-19%s or even approach 20%, which I think you seen in the past at times.

Yes we have, I mean one of the things when we've experienced those types of margins, we had much higher pricing inflation component, particularly in our carbon pipe products. That is one of the things that we would have to see as we grow our International business in the mix, that's higher-margin business so that would tend to bring up the overall Company average.

But then finally, the thing that we do every day and we continue to do to improve margins, is work with supplier base, work on the cost side, work with our customers to try to add more value and get paid for it. So it's a lot of those little things.

Is pricing the biggest mover? Or is there a lot of it just in what you can do to really be aggressive?

You're not going to see just huge price increases in the products we have subject to some big inflation in carbon because of the nature of the products and the services we do. So it is winning at the everyday level on a transaction by transaction, customer by customer basis.

Mark, the biggest impact is mix changes, so more valves, more stainless, more fittings for us is a positive, and as Jim said more international, those have the biggest impact up from a positive mix standpoint on pricing. That's just a follow-up.

Okay. Thank you.

[Ven Speshnan], Bank of America.

As I think about the gross margins up, which are around 19% today, and then think about the highs that we got in 2012 on an EBIT margin, so gross margins were very similar back in 2012. Now we are focused on SG&A deduction.

So my question is, can we get back to those seven those 7%, 7.5% operating margin levels in 2015, assuming activity holds up? Or do we need something else?

Yes, if you are talking about operating margin to 7%, 7.5%, we'll still need some more revenue, but we will continue to get the benefits of the cost savings, work on the margins. But to get to those levels and to get a little bit more leverage on the fixed cost we will need some more revenue.

Okay, okay. And Andy, you mentioned international revenues will be more resilient. Typically, I was thinking about international revenue growth sequential on an organic basis somewhere around double digits. Does Norway present a risk to that double-digit assumption for 2015 for international revenues?

No, I think we're going to be fine in Norway for 2015. They actually pushed, we think, roughly $20 million to $30 million of revenue we would have seen this year and maintenance projects into next year, so we are not an expiration company, we're not a rig equipment company exposure, so it is really MRO-based, both production facilities from now Norway and the UK and the Norway business is really helping us in our UK sector, where we weren't a strong offshore upstream company prior to that acquisition. So the little bit of softness we saw this year in Stat Oil spending on maintenance, we had more than pick up in the UK sector and we see that continuing into next year.

Now we are doing well, and I just, to that point, we have done a lot in this last year and a half. We now have both the Bradford and Stavanger regional centers supporting the UK and Norway. We just opened up a new Rotterdam regional center in Western Europe, so that will help growth and pipe flange and fitting for our Netherlands, our Germany, our Italy, our France and Belgium businesses.

So we're actually adding capacity and capability there that we didn't have this year. So that will offset any short-term declines in offshore.

And then we have opened up, recently, a new center in South Korea. We have opened up a new, Jebel Ali we just moved in last week, a new Jebel Ali, RDC in Iraq business is growing. We felt very good about that.

Our Kazakhstan business is growing. And then Singapore and Southeast Asia, along with the new Korea center and new Thailand contracts we have there. We feel very good about that.

So Australia's stabilized. We still expect it to be an improved earnings year for Australia next year. A little headwind in Norway from offshore, but offset by a lot of other actions we have taken to expand internationally.

Okay, okay. And I guess, thinking it from another way, if we do see, let's say, a $70, $75 WTI world. Is there -- what kind of decrementals should we think about in that scenario? I'm guessing it's $70, $75 WTI, there could be 4% to 5% recount reduction. We're not talking about 2008, 2009, but any help with thinking about how we should think about incrementals or decrementals in such a scenario would be helpful.

Yes, it's hard because I don't -- our view is that it is not going to be a sustained -- that pricing level at that level for a long period of time. But I think your projection on impact to, primarily the US and Canada upstream only, I would think you are pretty spot on in that estimate.

Okay. That's all from me. And again congratulations on a good quarter.

Robert Norfleet, Alembic Global.

Hi guys this is actually Nick Chen for Rob this morning. Congratulations on a good quarter. I was hoping, you touched on it a little bit earlier, but can you just give us a little bit more detail in an update on backlog mix as it relates to valves versus line pipe?

Yes, the increase that we have seen in the backlog has been predominantly in the US and those two product categories that you mentioned, line pipe or valve, have two of the biggest increases. So those are exactly the product lines where we are seeing the higher demand.

Great. And can you also just give us a quick update on any frame agreement efforts and just flow through of prior wins?

Yes, I mean Nick, the numbers I gave on the MRO renewals, those are all our frame agreements, so strong renewal right at $760 million and incremental of $173 million. So from the framework agreement we feel very good, and some of that incremental and some of those renewals are the gas utility customers we made reference to in our opening comments.

We continue to grow with the Shell Global contract. We continue to add and ramp up on the Chevron contract.

We are very busy now in Kazakhstan and Thailand and Australia for Chevron; that didn't exist a year ago. So that has all been positive and continues to be a strength for us.

Thanks guys, that is really helpful. Have a great day.

Brent Rakers, Thompson Research Group.

I wanted to follow-up on some of the gross margin questions from earlier. It seems like within the tubular category, whether it be kind of competitive pressures, pricing, or mix, there's been a lot of unevenness in the gross margin in that category. Could you maybe comment on how that showed up in the third quarter?

Yes, the margins in our carbon pipe, whether it is OCTG or line pipe, held up very well compared to where we were in the second quarter. So not a whole lot of change there.

I would say that we have seen some slight uptick in the OCTG, just from the pricing firmness that is out there. So that is been helpful. But in both of those product categories the margins have held up very well.

Great. And then just a follow-up on maybe a different subject. You talked earlier about how the top 25 customers are roughly half of revenues and I assume that is across all streams. But wondered if you had that kind of color specific to the top 25 just within the upstream portion of your business.

Let's see, I don't know that we have that in front of us but you are still going to see those top 25 customers still make up 45%, 50% of that revenue in the upstream business because that is where so many of them are operating. So I think that is still a pretty good number for the upstream business.

Okay, great. Thanks a lot.

Nick Prendergast, BB&T Capital Markets.

I just had a quick question on the line pipe anti-dumping complaint. Obviously that was filed just a few weeks ago. Do you have any idea when you would expect at least a preliminary decision on that?

Yes, I mean these usually take around six to eight months for the preliminary decision, which is, should be first, second quarter, late first quarter, maybe second quarter. The final decision usually is a year or more out. But it changes behavior after the initial decision, because once the initial decision is out there, if anybody keeps importing at the low rates, it goes back to -- they have to pay the higher rate proactively back.

So, it is -- the initial ruling is the most important date. And then of course the final ruling sometimes even increases. So it could impact our business for sure. On a positive note if successful in the second half of 2015, but for all of 2016, assuming it goes through it would have a positive base for us of the full year of 2016.

Right, so you just answered my second question which was when they actually change their behavior and that is on the preliminary decision. So I guess you had mentioned that the pricing differential on the line pipe, I think you had said that the importers are about $350 to $400 a ton cheaper.

What is, kind of, the average domestic ton price? What is the percentage delta on that if they were to kind of move up to the domestic producers?

Yes, just ERW I'm talking about now, it is roughly current pricing in the spot market is about $1,350 a ton for domestic and $950 for import, foreign.

Got it, okay, well, that's about it. I appreciate that.

This concludes our call. I would like to hand it back to Monica Schafer for final comments.

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

And ladies and gentlemen, this concludes the MRC Global Third Quarter Earnings Conference Call.

(Operator Instructions)

We would like to thank you for your participation. You may now disconnect.