MRC Global Inc (MRC) 2014 Q4 法說會逐字稿

Greetings and welcome to MRC Global's fourth-quarter earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference to your host today, over to Ms. Monica Broughton, Executive Director of IR for MRC Global. Thank you, ma'am, you may begin.

Thank you, Latanya, and good morning, everyone. Welcome to the MRC Global fourth-quarter and year-end 2014 earnings call and webcast. We appreciate you joining us. On the call today we have Andrew Lane, Chairman, President, and CEO; and Jim Braun, Executive Vice President and CFO.

Before I turn the call over, I have a couple of items to cover. There will be a replay of today's call available by webcast on our website, www.mrcglobal.com, as well as by phone until March 6, 2015. The dial-in information is in yesterday's release. Later today, we expect to file the fourth-quarter 2014 Form 10-K and it will also be available on our website.

Please note that the information reported on this call speaks only as of today, February 20, 2015 and therefore you are advised that 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 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 defer 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.

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 fourth-quarter and year-end 2014 earnings call and for your interest in MRC Global. I'll begin with some highlights from the year's performance and then discuss the outlook for the business before turning the call over to our CFO, Jim Braun, for a review of the financial results.

Let me begin with last year's performance. I am proud to report 2014 revenues set a new record high for the Company at $5.93 billion and was in line with the guidance we provided, landing at the midpoint. For the year, revenue growth was 13% compared to 2013 with strong organic growth of 9%. We realized $1.51 billion of revenue in the fourth quarter, which is the second best fourth quarter the Company has seen.

The quarterly revenue increased 12.5% from the fourth quarter of last year, with organic sales growth of 8%. For the year, we had organic sales growth across all the end market sectors and product groups, as compared to last year, which goes to the continued strength of our customer spending through the end of 2014.

Adjusted gross profit for the year was $1.12 billion, or 18.9% of total sales. This too was in line with our expectations. Adjusted EBITDA was $424 million and slightly below the low end of our guided range. This was due to lower Q4 gross margins, primarily in our international segment, along with some large Middle East orders that were in our forecast but slid into 2015. Profit margins in our US and Canadian business held up reasonably well in the quarter.

Net income for the year was $144 million, or $1.40 per diluted share, compared to $152 million, or $1.48 per diluted share, in 2013. Excluding certain items in each year, adjusted net income per diluted share was $1.57 in 2014 compared to $1.60 in 2013.

While oil and gas prices began their rapid decline last fall, customer spending and drilling activity in the US remained steady, as our US revenue in the fourth quarter 2014 grew 15% from last year, with the US rig count 9% higher over the same period. Contributing to this growth was the continued execution of our line pipe strategy to target new and growing upstream and midstream companies.

Overall, I am very pleased with our 2014 performance. We had a series of accomplishments, including several strategic acquisitions and market share gains. So while we are faced with a difficult upcoming year, I still want to take time to acknowledge the hard work by all of our employees and achievements of 2014.

Now let me turn to the current environment in the energy market and how that will impact our business, since that is what is at the forefront of everyone's mind. When we spoke last quarter, we did not expect the decline in oil prices to be so severe. Since then oil prices continue to fall to their current levels around $50 per barrel and customers have continued to lower their capital and operating expense budgets for 2015.

The volatility and uncertainty remain and customers' plans remain in flux as the industry adjusts to the new reality. While we don't know exactly how this cycle will play out, we have continued our discussions with our customers and suppliers. Public announcements, spending surveys, and predictions about oil prices give us an indication of how 2015 might unfold.

We believe the current general consensus that WTI oil will trade around $45 to $55 per barrel and that US natural gas will trade around $2.50 to $3.50 per Mcf. We are also of the belief that we should expect a 35% or more reduction in 2015 capital spending in North America. This implies a decline in rig count of around 800 to 900 rigs from the peak in 2014. International spending is expected to be 15% to 20% lower.

We would expect our upstream business to be impacted the most and fall in line with the lower capital budgets. We also expect some of these lower spending trends to affect our midstream business somewhat, but not nearly as much as the upstream. We expect the downstream business to be impacted more modestly since it is most operating expense-driven and the capital projects are longer term in nature.

Geographically, we expect the biggest percentage decline to be in Canada, due to the high production and transportation cost environment, followed by the US, with the least impact in international. Our backlog was $1.09 billion at the end of the year, down 13% from the record high level at September, yet still over $300 million higher than the backlog a year ago. We also expect the first half of 2015 to be stronger than the back half, as activity levels are still in decline and are expected to bottom later this year.

Like many others serving the energy end markets, we are not providing specific 2015 guidance at this time. The volatility and uncertainty I mentioned earlier makes an already challenging exercise even more difficult. I will say that based on our revenues so far in the first quarter, we believe the first quarter will be down sequentially, although we expect some carryover spending from 2014.

Directionally, we would expect the back half of the year to be more challenging. I believe this is not fully reflected in the current consensus view for 2015. I would also point out that we expect the recent strengthening of the US dollar to create additional headwinds in 2015.

With that said, while we cannot control commodity prices or how much our customers spend, there are some things we can control and we are squarely focused on those. We are focused on three primary actions: using our industry-leading position to continue to win new business and gain market share, reducing our working capital and applying the operating cash to debt repayment, and managing our cost structure.

In terms of gaining market share, we have a couple of recent gains that I want to highlight today. I also want to say that we are looking forward to working with these companies and we are honored they trust us to help us solve their supply chain complexities and bring value to them during the challenges they face in this environment.

As we previously announced in December, we were awarded a five-year supplier agreement by MarkWest, a midstream company focused in the Marcellus and the Utica. In addition, we have been informed that Statoil intends to award us a contract to provide instrumentation valves, compression tubing, and fittings for the Johan Sverdrup project in Norway. This is a major $29 billion Statoil project that was recently sanctioned and is expected to begin production in 2019. We also expect to have further announcements of recent wins in the near term.

Regarding the balance sheet, one of the benefits of our distribution business models is its ability to generate cash from working capital reductions in a counter-cyclical fashion, which provides downside protection. For example, in 2013, we generated $324 million in cash from operations and paid down debt by $269 million. As we generate cash throughout the year, you'll see us use it to reduce debt.

We expect to bring debt down in 2015 by between $200 million and $300 million. If activity slows more than we currently anticipate, we will reduce debt further. In addition, the terms of our credit facilities are favorable in that we have no financial maintenance covenants, no near-term maturities, and an average interest cost under 4%.

Regarding the cost structure, as we discussed on previous calls, we have been working through various cost-saving measures that started in 2014 to improve profitability, which at the end of 2014, had resulted in a reduction of 230 positions. However, as we entered 2015 with the continued negative macro oil and gas sentiment, we have embarked on additional cost-saving measures and we will continue to evaluate the cost structure to keep it in line with customer spending and activity levels.

In addition to cuts in discretionary spending, we have instituted a hiring freeze and deferred the annual wage and salary increase. We have reduced head count another 270 employees through terminations and attrition in the first quarter. In total, we have reduced head count by 500, or approximately 10% of our employees since March 2014. We expect the head count to be approximately 4,700 by the start of the second quarter.

We have managed through downturns in the energy cycle before and MRC Global is well-positioned to manage through this one and be in an even stronger position when we emerge. The question I believe isn't if the activity will return, but just when. As decline rates on shale production are high and with steep rig count deadline and delays in completing wells that have already been drilled, the picture should change for the better as global oil demand is expected to continue to grow and as US oil production falls.

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

Thanks, Andrew, and good morning, everyone. Our total sales for the fourth quarter of 2014 were $1.512 billion, which were 12.5% higher than the fourth quarter of last year, due to the higher spending levels and the impact of acquired revenue. As compared to the same quarter a year ago, revenue increased 8% organically and 4.5% from acquisitions net of divesture.

Sequentially, as expected, revenues declined 7% in total and across all geographic segments. US revenues were $1.159 billion in the quarter, up 14.5% from the fourth quarter of last year. Market activity as measured by rig count and number of wells completed increased 9% and 5% respectively over this same time period. Growth in excess of these levels is indicative of market share gains and project activity.

The upstream and midstream sectors, as well as every product line in the US business, posted revenue growth in the quarter. The midstream sector grew the most at 26%, and of the product lines, OCTG grew at 24%, due to a large number of well completions by our core OCTG customers, followed closely by valves at 21%. Sequentially, US segment sales were down from the third quarter by 4%, primarily due to midstream and downstream revenue declining about 4% to 9% respectively; normal year-end seasonal trends were primarily responsible.

Canadian revenues were $155 million in the fourth quarter, down 18% from the fourth quarter of last year. The sale of our progressive cavity pump business reduced sales by $24 million in the quarter. An 8% decline in the Canadian dollar relative to the US dollar reduced sales by another $13 million. Sequentially, the Canadian segment is down 4% from the third quarter, due to the negative effect of the decline in the Canadian dollar; otherwise, revenues were flat.

In the international segment, fourth-quarter revenues were $198 million, up $55 million, or 39%, from a year ago. The increase was primarily the result of four recent acquisitions, Stream, Flangefitt, MSD, and Hypteck, which added $85 million in incremental revenue in the fourth quarter of 2014.

Organically, sales were down 21% from lower activity, particularly in the Netherlands, the Middle East, and Australia, and from the negative impact of the stronger dollar. Sequentially, the international segment was down 21% from the third quarter, due to the negative impact of the stronger US dollar, large Middle East orders that were forecasted but not realized in the fourth quarter, and the timing of certain large orders in Europe and Australia.

Turning to our results based on end-market sector. In the upstream sector, fourth-quarter sales increased 19% from the same quarter last year to $719 million. This increase was driven by organic growth of 9% and the impact of acquisitions of 10%, net of the Canadian pump divesture. Strength in the US, based on higher activity levels was offset by declines internationally.

Midstream sector sales were $453 million in the fourth quarter of 2014, an increase of 16% from 2013. Compared to the fourth quarter of 2013, sales to our gas utilities customers were higher by 23% and sales to our transmission customers increased 12%.

Gas utility sales were up due to the timing of customer projects, and the increase in sales to transmission customers was due to increased project activity and the continued penetration of targeted accounts. In the downstream sector, fourth-quarter 2014 revenues decreased by 1.6% to $341 million as compared to the fourth quarter of 2013.

Now turning to the revenue by product class, our energy carbon steel tubular product sales were $465 million during the fourth quarter of 2014, with line pipe sales of $321 million, and OCTG sales of $144 million. Overall sales from this product class increased 14% in the fourth quarter from the same quarter a year ago, including an increase in line pipe of $30 million, or 10%, and an increase in OCTG of $26 million, or 22%.

In terms of pricing, it wasn't much of a factor in the quarter. Based on the latest Pipe-Logix all-items index, average line pipe spot prices in the fourth quarter of 2014 were up modestly from the fourth quarter of 2013. More recently, pricing continues to be slightly lower over the past several months. January's price is 1% less than December.

While we expect to have some deflation in certain types and sizes of line pipe in 2015, we don't expect it to be anywhere near the levels as we experienced in 2009, when we saw prices decline nearly 50%. In fact, we would estimate deflation to be in a range of between 5% and 15%.

Sales of valves, fittings, flanges, and other products were $1.047 billion in the fourth quarter, a 12% increase from the fourth quarter 2013. Sales of valves were up 25% during the quarter, organic growth was 9%, and the remaining 16% came from acquisition. Sales of fittings and flanges were up 14% from the fourth quarter of 2013, 9% from acquisitions, and the balance, organic. Our oil field, gas, and related products group were down 6% from the same quarter 2013, as the disposition of the Canadian progressive cavity pump business offset modest organic growth.

Turning to margins, gross profit percent decreased 40 basis points to 16.4% in the fourth quarter of 2014, from 16.8% in the fourth quarter of 2013. The decrease was primarily due to the impact from LIFO of 30 basis points. A LIFO charge of $5.9 million was recorded in the fourth quarter of 2014 as compared to a charge of $1.1 million in the fourth quarter of 2013.

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 18.1% in the fourth quarter of 2014, down slightly from 18.3% in the fourth quarter of 2013. Sequentially, the adjusted gross profit declined 90 basis points, or $33 million.

The decline is primarily due to the $106 million sequential revenue decline, lower margins in the international segment, and slightly lower margins in the US and Canada. In addition, the sequential revenue decline was weighted more to the higher-margin international business. We also incurred costs for inventory provisions related to the integration and rationalization of certain international operations.

SG&A costs for the fourth quarter of 2014 were $174 million, an increase of $7 million from $167 million a year ago. SG&A increased $20 million as a result of acquisitions. Even so, SG&A was 11.5% of sales in the fourth quarter of 2014, as compare to 12.4% of sales in the fourth quarter of 2013, a 90 basis improvement. The quarter benefited from the cost-cutting measures taken earlier in 2014 and a reduction in operating expenses relate to the divesture of our Canadian progressive cavity pump business.

As mentioned earlier, we reduced our operating expenses in 2014 through a reduction in head count. In 2015, we're taking further action to reduce costs, including hiring and salary freezes. We've eliminated approximately 270 positions, including reductions of permanent and temporary employees, attrition, and the elimination of open positions.

The sum of these two actions represent a work force reduction of approximately 10%. In the first quarter we expect to incur pre-tax charges of approximately $3 million for severance expense. We continue to look for cost savings opportunities to size our business appropriately to fit current customer activity levels.

Interest expense totaled $16.3 million in the fourth quarter of 2014 which was higher than the $14.7 million in the fourth quarter of 2013. This was due to higher average debt balances. The effective tax rate for 2014 was 36.2%, although the rate in the fourth quarter was 41.1% due to changes in the mix of profitability between the US and international operations and certain discreet tax items.

Our fourth-quarter 2014 net income was $31 million or $0.30 per share, compared to net income of $23 million, or $0.23 per diluted share in the fourth quarter of 2013. For the fourth quarter 2014, adjusted net income was $34 million, or $0.33 per diluted share and excludes charges related to the disposition of our rolled and welded business.

This is compared to an adjust net income for the fourth quarter of 2013 of $33 million, or $0.32 per diluted share, and excludes charges related to refinancing, accelerated equity-based compensation, and deferred tax asset adjustment. The rolled and welded business is a legacy business which fabricates large diameter steel vessels that contributes less than $4 million of revenue a year and has minimal profits. This business is a non-core activity and we elected to dispose of it.

Adjusted EBITDA in the fourth quarter was $102 million versus $87 million a year ago, up 16%. Adjusted EBITDA margins for the quarter were 7.6%, up from 6.5% a year ago, but down sequentially from the third quarter's 8.2%, due to lower revenues and margins as described above, partially offset by cost savings measures.

Our debt outstanding as of December 31 was $1.454 billion compared to $987 million at the end of 2013. This increase was due to our acquisitions and working capital growth. Our leverage ratio at the end of 2014 was 3.4 times. We have no financial maintenance covenants in our debt structure and our nearest maturity is in 2019. As our working capital requirements go down with the lower activity, we expect to generate cash that will be used to repay debt in 2015.

In addition, the availability on our ABL facility was $302 million at the end of the year. That availability should increase as we pay down debt in 2015. Our ABL facility, like most, has a borrowing base that changes over time and is determined as a percentage of available accounts receivable and inventory.

Our operations used cash of $38 million in the fourth quarter of 2014 and a total of $106 million for the year. Our working capital at December 31, 2014 was $1.438 billion, $354 million higher than it was at December of 2013. We experienced an increase in accounts receivable as a result of acquisitions, organic revenue growth, and the timing of payments from various large customers.

However, we improved our number of day sales were outstanding by approximately three days from the third quarter, as we made progress in collections. Inventory increased in the fourth quarter as lead times on certain size and types of line pipe and valves extended going into the fourth quarter and resulted in the receipt of product through the fourth quarter and into 2015.

The third quarter was a record quarter for the Company and October was the highest revenue month of 2014, so working capital requirements continued into the fourth quarter. As it became more apparent that 2015 would be a more substantial downturn, we began aggressively reducing our inventory purchases. Since peaking in November, open purchase orders have come down around $200 million, or 32%, by the end of January, indicating that we expect to see inventory levels decline over the course of the next two quarters.

Capital expenditures were $20 million in 2014 and somewhat lower than typical. Our capital expenditures are expected to be higher in 2015, as we are planning for the implementation of a new ERP system to bring certain areas of our international segment onto one system.

As a result of our various acquisitions, today we operate on several disparate systems internationally, and the plan is to migrate the business to one system to improve service to the customer and improve our operating effectiveness and deliver long-term value to our high-growth international segment.

This implementation will take most of the year and we expect to go live some time in 2016. Including regular capital spending needs and plans, the total capital budget for 2015 is $43 million.

The average currency exchange rates in 2014 were around 7% to 8% lower than 2013 for the Canadian and Australian dollar as it compared to the US dollar, most of that hitting in the fourth quarter. In 2015, we also expect to have a revenue impact of over $100 million related to the currency, as the US dollar has continued to strengthen against some of the major currencies where we operate, including Canada, Australia, Europe, and Norway.

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

Thanks, Jim. While we face a challenging 2015, MRC Global is well-positioned to manage through it and emerge stronger. We have a low-cost debt structure with favorable terms. We are focused on protecting and growing market share, controlling costs, and reducing debt.

We have been through many energy cycles before. Since the last cyclical downturn, we rebalanced our product portfolio towards higher-margin, lower-volatility projects, and we expanded internationally, all of which helps now with downside protection. In summary, I believe we are well-positioned to take advantage of opportunities, even in this tough market.

With that, we'll now take your questions. Operator?

(Operator Instructions)

Our first question comes from James West with Evercore. Please proceed with your question.

Good morning, Andy.

Good morning, James.

Andy, when you think about your midstream and your downstream businesses, obviously we're going to see a big cut in the upstream, we know where the CapEx numbers are going to fall and you laid that out nicely, but you indicated midstream somewhat gets hit, downstream maybe not nearly as much. Could you frame that a little bit for us and how you're thinking about it? Is that going to be one-half of the decline in the upstream business, one-quarter of the decline, is there some type of range you're thinking about for those two businesses?

Yes, James. The upstream, as you said, with the rig count drop and the number of wells projected to be completed, we'll be pretty much in line with the CapEx decline in North America. On midstream, a couple things happening there. One, large diameter, major trunkline products that we spoke of on the last call, that are in the backlog in 2015 and 2016, those we see going forward without interruption.

Also that would being 16-inch and above line, so we see no impact to that investment level as that infrastructure has to be put in place. We also see a good year in gas utility, which is more tied to construction, both residential and commercial gas utility work. So those aspects of our midstream business are positive.

The only negative will be in the smaller diameter lines, less than 16 inch, primarily ERW, where you have gathering lines and flow lines with the less well hook-ups from the upstream. So a slight impact on demand there, but the only real impact that I would say in the midstream business is really the deflation we see in those carbon pipe prices related to lower demand and deflation that we expect of what Jim spoke to, the 5% to 15%, in that range is what we would see in the midstream, offset by no decline in the gas utility, but that type of decline in the transmission sector.

Okay, that's very helpful. And then as we think about your strategy this year, you mentioned the three areas where you can control things. Are you also still on the hunt for M&A at this point or, given your leverage ratios and that tough market you see, is that on hold for now?

Yes, James. I would characterize that we're on hold for 2015 on acquisitions. Our primary focus will be managing the costs, generating the capital that Jim talked about, the working capital reductions and deleveraging and paying down our debt. That's at least for the first few quarters of the year until we see what the timing on a pick-up of activity will look like, but I wouldn't expect us to do any acquisitions in these first few quarters.

Okay, got you. Thanks, Andy.

Our next question comes from Matt Duncan with Stephens, Incorporated. Please proceed with your question.

Good morning, guys.

Good morning, Matt.

I appreciate this may be a little bit of a difficult question to answer, but I want to try and see if we can get a little help on the margin side. Your gross margins in the fourth quarter were a little low, and Jim, you did a good job describing what was happening there. Help us think through how the gross margin would be impacted by the drop in tubular prices and then if you look at year-over-year adjusted gross margin, how much do you think it could be down?

Yes, you're right, Matt. One of the headwinds we see going into 2015 is on the margin line with the desire of our customers across the spectrums trying to control their costs. Certainly we feel good about the pipe. We have an inventory and what we can sell it for and as we take new orders and we start to see deflation, we'll be buying at lower prices, but we'll also be selling, so we'll get some small squeeze on margins. But as we go into 2015, the margin area is one where we'll be working hard to maintain and preserve that, that we've gained in the past.

Okay. And then flowing that down to an EBITDA margin, back in 2009, the adjusted EBITDA margin was -- I believe it was 5.7%. The cost structure has changed a bit since then. Obviously, the gross margins have been a little better at times because you guys have lessened the OCTG exposure, but your SG&A expense as a percent of sales are a good bit higher than they were back then. As we think about where your EBITDA margins might be this year, is that 5.5% to 6% range a decent starting point or do you see reasons it could be below or above that?

We're going to try to manage the costs to keep them with those levels.

So using the 2009 range, the 2009 number would be a good place to start then?

That's a reasonable place to start.

Okay. Then last thing on cash flow, I know in 2009 the free cash flow -- it was almost $500 million, $486 million, if I remember correctly, and you're guiding us to $200 million to $300 million of debt pay down, which would seem to equate to how much free cash flow you will have. Why would you maybe not be able to do a little bit better than that?

If you're seeing a 35% drop in upstream revenue, it seems like the potential is there to generate more cash. It may be as simple as not wanting to overpromise and underdeliver, but just help us think through how you guys are planning to manage working capital. How much inventory do you plan to take out and what's the opportunity to maybe generate more cash than that?

Yes, Matt, you're exactly right, and your great recollection of 2009 is exactly right. We paid down right at $500 million that year. I know you appreciate, it's a very volatile market. We don't have a great outlook on exactly activity levels for the second half of the year, and so this is really our only formal guidance that we wanted to give and we wanted to give that in this uncertain environment with 100% certainty that we could deliver.

So it is a conservative range. Regardless of what happens in the market, we feel very comfortable stating today that we can generate the $200 million to $300 million and decrease our net debt that much. Certainly, if activity goes a little lower and we reduce our inventories a little bit farther, you're going to see more cash flow. But at this point in the year, that's our target. And just to your inventory question, we expect to pull at least $200 million lower out of the inventory by the end of 2015.

Okay. Very helpful, guys. Thank you.

Our next question comes from David Manthey with Robert W. Baird. Please proceed with your question.

Hi, guys. Good morning.

Good morning, Dave.

First off, we were talking about the capital spending plans of customers down 35%. There you're talking mainly about volume, and, again, concentrated in the upstream, but as you're talking about pricing, that would be added to that, or add to the declines, if you will, related to how much pipe in each of the different streams you have, so just trying to get to those thoughts. Could you tell us, just remind us what percentage of up, mid, and downstream are related to pipe, line pipe, and OCTG, and all-in, specifically?

Sure. The OCTG business is all upstream. The majority of line pipe is in the midstream. It makes up about one-half of the midstream business, but you've probably got 25% to 30% of the upstream business is going to be pipe related, so you've got it in those two primarily, and also some in the downstream.

Got it. Okay. That's very helpful. Then on the cost-cutting side, just given your relatively high fixed-cost structure 10% head count sounds like a lot, but as we're looking at the cost improvement that you realized in 2014, let's say, from the first 230 head count reductions, could you talk about the carryover benefit from that you'd expect to see in 2015, and then the next round of reduction in force, that 270, would pretty much all be in 2015? Can you give us an idea of the dollar benefit you expect to see from those two things year-on-year?

Yes. What we said last year is that the annual impact was around $16 million or $17 million, and we got most of that in the third and fourth quarter, so you'll have some of that carryover impact. We haven't quantified the impact of the actions so far as they've unfolded. You certainly have a comparable number of people, but in this go-around, it's more field people to relate to, or to adjust for the activity levels. Last year, it was more related to Management structure and organization higher level, so you would expect to see something, probably a little less than last year.

Okay. Just so I'm hearing you correctly, the $16 million, $17 million, you're saying you hit that run rate in the third and fourth quarters, meaning that maybe you get one-half of that benefit again in 2015?

That's correct.

Yes. Okay. Thank you very much.

Thanks, Dave.

Our next question comes from Sam Darkatsh with Raymond James. Please proceed with your question.

Good morning, Andy, Jim, how are you?

Good morning, Sam.

Jim, I noticed that there was no goodwill impairment charge or write-down in the quarter, despite the fact that oil prices have obviously come down meaningfully. Can you go through what your impairment test assumptions are and what it would take to revisit them mid-year until your annual test of next year?

Sure, Sam, you're right. We went through the analysis like we do every year in terms of goodwill impairment and had no indications that there was an impairment. Some of the key assumptions are there, of course, what are the plans for the next year in growth and terminal rates and discount rates, and we've applied something that's reasonable and consistent to where we think the market is. We stress test those with some sensitivities to see how that might change, if some of the assumptions are different, and, of course, the reality is that as 2015 unfolds and things tend to play out as we expected or differently, we'll have to reassess that, do that analysis again.

Are you assuming growth returns in 2016 or 2017? How draconian are your expectations?

No, they're not draconian, but they're consistent with some of the examinations around what's going to happen with oil prices and spending levels, so it's consistent with what we've done in the past.

Okay. Then two others, if I could. I know you mentioned, Andy, I believe, in your prepared remarks that you expect the first quarter to be down sequentially. Any sense of magnitude based on what you're seeing thus far into the quarter?

Yes, Sam. The first quarter is going to be a decent quarter and consensus view is pretty accurate there, but it reflects the carryover of drilling activity. We're still dropping at a pretty good clip the drilling rig counts, but our revenues tend to lag at least a quarter behind that, where we do well hook-ups and completions on wells already drilled in the fourth quarter.

So you're going to see -- we're going to be down for sure sequentially, but consensus is in the ballpark of that because of the carryover of activity. So I see the disconnect with the annual consensus really being the second half of 2015, being slower once the drilling rig count bottoms here, we think in the second quarter, or early third quarter.

My final question, if I could. Could you talk about what your variable comp bogeys are potentially for 2015, and either what the tailwind might be for 2015 over 2014, or what total variable comp was in 2014, something along those lines, so we can gauge that?

Yes, our variable comp, which includes incentives not only for Management at all levels, but all our employees in compensation, including commissions, typically runs less than 10% of overall EBITDA in a range, so that's the levels we pay out, but that includes not just incentives, but that includes sales commissions to our sales, inside sales, outside sales people.

Sam, I just -- the ballpark, it would be $10 million to $15 million lower in 2015.

And which metrics are you using? Are you switching to more of a cash flow or is this going to be EBITDA sales dollars? Obviously you're in a different strategy phase in this cycle, so where--?

You're exactly right, Sam. 2014, we were 70% EBITDA and 20% [RANs] for the Executive management, 10% and other performance indicators. For 2015, we'll be 70% EBITDA and 20% on free cash flow, so we have switched to a cash flow focus from a return RANs and then RANs will be the measure we use for our long-term incentive. So we have made some changes in 2015 in both in short-term and long-term incentive plans.

Thank you. Very helpful.

Our next question comes from Jeffrey Hammond with KeyBanc Capital Markets. Please proceed with your question.

Hi, guys. This is James. I'm filling in for Jeff.

Good morning, James.

Good morning. So I know you've ranked your regional exposures for Canada the worst, followed by the US, and then a little more resilience internationally. Could you just more frame that within the context of your 35% of reduction in upstream CapEx, as to how you're thinking about those regions?

Yes. As we said, Canada, especially for us with the heavy oil and the project work up in Canada, and those completions, that is a high cost to produce per barrel environment, and then you have the transportation differential that also makes it an expensive location. So we'd expect that -- and it's also a heavy upstream market for us -- so as we've said, we expect that to be the biggest impact. The US, we'd moderate. We expect the full impact on our upstream business, but will be moderated by our midstream and downstream, which are stronger.

And then internationally, actually, we would focus on flat to up regardless of the FX. Then, as Jim said, we see a significant, over $100 million FX impact in 2015 due to the stronger dollar, so it's down, but down because of the FX impact. We had some markets that we feel, like the Middle East and like southeast Asia, still very good about.

Got it. But did I hear correctly, did you mention international spend -- you guys expect it to be down 15% to 20%, though?

Yes, down, but we have a full year of the three acquisitions, and that's a global spend, and that's a lot more exploration weighted, but we have some of our contract wins, plus the full year of all three acquisitions, plus, as we mentioned, the carryover of some large Middle East orders that we did not book in the fourth quarter, into 2015. We feel much better about international than Canada and the US.

Got it. And I know you mentioned the Statoil win. Do you have any idea as to the time frame of when you might see some revenue contribution from that?

Yes. There will be some in late 2015, a lot more in 2016 and 2017, and that's really only the first bid of many bids we've been working on. That's the mega project, the four platform major development over multiple years. We also have our Soleberg & Andersen and our energy piping bids out.

What we've been awarded already is that Teamtrade instrumentation award, so it's a real good step. We're happy with that win because that's one of the big Norwegian projects going forward. But the way to think about that, we're bidding a lot right now, we hope to get some additional awards in 2015. The majority of that revenue will be 2016, 2017, 2018.

Got it. Thanks. I'll get back in the queue.

Our next question comes from Ryan Merkel with William Blair. Please proceed with your question.

Just wanted to follow up on Canada. If I understood you right, should we expect Canada to be down greater than the 35% and then would currency then be on top of that?

Well, you're right. It's going to be down more than the 35%. Then you're going to have the impact of currency. So it'll be down more than the 35%.

Okay. Then you said you expect the second half to be worse than the first half, so does this mean that the second-half revenues are going to be below the first-half revenues?

That's correct.

And then does that also mean second-half EBIT margins are going to be below first-half EBIT margins?

That's correct.

Okay. That's what I thought. Last question, what is the variable SG&A rate for every $1 of sales decline? I was thinking it was in the $0.10 range, but help me there?

That's a little high, Ryan.

Okay.

It's probably in the [$0.50] range.

And then fixed-cost saves would be on top of that? You gave a bit of color there, but you don't want to give out a dollar range at this point?

No, not at this time.

Not at this time. Okay. Great. Thanks, guys.

Our next question comes from William Bremer with Maxim Group. Please proceed with your question.

Good morning, gentlemen. Can we touch upon a little bit more on downstream? I'm a little surprised that was actually down considering the amount of supply flushing around here in North America? Ad then secondly, maybe, you just mentioned, Andy, a little bit about your bidding. Can you give us an idea of what you're seeing? Can you break down between oil versus gas in the three segments?

Yes, Bill, let me address downstream first. It's going to hold up the best of all our end markets, stronger in chemical, a little weaker in refinery. We have a good backlog, as we said, almost $1.1 billion in backlog, a lot of that is downstream projects, so those haven't changed. But downstream refinings are not immune to these overall cutbacks in capital spending.

We have seen some discussions about some of our customers deferring turnaround activity from 2015 into 2016 because of the current environment, so we're being conservative about not counting on a big historical fall turnaround session that might slide into 2016. That's why we're guiding conservatively there.

And then just a quick follow-up. Does this polar vortex we're getting right now, does it impact at least the short-term for your MRO services in any way?

We've had a pretty mild winter in our east -- we have a big Appalachian and eastern US business, so I would say January was pretty mild as far -- less impact than last year from a weather disruption. Of course, the very cold temperatures are good for natural gas pricing and so that stabilizes things some for us.

And then, of course, we had even a bigger impact last winter in the Permian basin and through even Oklahoma that we haven't seen this year. So while the cold -- this recent late cold is good for supporting some gas commodity pricing, the disruption from overall winter will be less than we saw last year, so that's helpful for the first quarter.

And then just the bidding between the mix of the oil versus gas in your three segments?

Really we don't do a lot of spot bidding. We do much more contract and MRO pursuit, so our mix still is about the same. It's roughly 80% oil and 20% gas, and we're still very much focusing -- they're all framework agreements, so while we get impacted by the overall amount they spend, they spend less on these framework agreements.

Our focus is really on capturing more agreements during this downturn, adding scope, continuing to add scope to our major customer contracts, even at lower spending levels this year, that will serve us well in the coming years. So our focus is -- we're going to be aggressive, we're going to focus on market share because it's a very competitive market in 2015, but we have been on that strategy and we don't plan to change it.

Our next question comes from Kevin Maczka with BB&T. Please proceed with your question.

Thanks. Good morning.

Good morning, Kevin.

I just want to come back to the 35% CapEx reduction. We've been all over that on this call, but just to make sure I'm clear, why wouldn't your upstream business actually be down more than that, if that's more of a volume component, and then you would expect some additional price and maybe destocking component of that, as well? Is that because maybe the MRO portion holds up a bit better?

Yes, Kevin, you're exactly right. MRO portion holds up better, the OpEx spending associated with production facilities holds up better. We don't have direct exposure to drilling rigs and drilling rig equipment. That's not our customer base or equipment base, so we're not going to be impacted as directly from that. That's part of the reason why it's not more.

The other part is production facilities and well hook-up expansions that are related to the drilling activity over the last two quarters of 2014 carry into the first two quarters of 2015, so those aspects serve us better. The second half of 2015, we would see the highest percentage of decline if the activity levels and drilling rig accounts go to where people are forecasting it.

Okay. That's great. And then on the -- if we do see a 35% decline in upstream, how should we think about decremental margins there? You mentioned, if I heard you correctly, trying to hold a 5.5% or 6% EBITDA margin for the total Company, but did I get that correct and how should we think about the decremental?

You heard that correctly, Kevin. Again, we would typically see decremental margins flowing through to the EBITDA around 15% to 16%. That change and that would become higher to the extent the product margins also deteriorate. So the 15% to 16% assumes product margins stay the same, but as I mentioned earlier, we anticipate there will be some headwinds on the margin line going into 2015.

Okay. Just finally for me, just -- I know the crystal ball for 2015 isn't good, it's even worse for 2016, but what would a recovery scenario in 2016 look like at this point? Because it sounds like there's some carryover that's still helping the first half, the second half is worse, and so then if we move into 2016 at that run rate, I'm just wondering if -- are there some areas like we take a big dive in upstream this year, but maybe there's some lag [and knitted] down, perhaps take another leg down next year, if in fact we're still sitting here around $40 or $50 oil?

Yes. It's hard to predict without knowing where the oil price is going to be in 2016 and there's lots of views, a broad spectrum there. But our view today sitting here would be that 2016 might be the mirror image of 2015 where the first half of 2015 is higher because of drilling activities ramping down, the back half will be slow. You might start -- if things don't change on a macro level with a slow half of 2016 and then activity picking up towards a better 2017, so sitting here today, it's a long ways off, but we would look at it from that perspective.

Okay. That's helpful. Thank you.

Our next question comes from Walt Liptak with Global Hunter. Please proceed with your question.

Hi. Good morning. Thanks for the color so far on the call. My question is on just the way that you manage the step-down in costs. You mentioned the first quarter is going to be decent, so I'm trying to understand the timing on when some of the costs will be coming out from this new round? And then just along those lines, as you get further into the downturn in 2015, is there a consolidation that you can do, are there more costs you can take out before you start cutting into bone?

We expect the reduction we talked about of the 270 to be completed in the first quarter, so we expect to be at that cost run rate going into the second quarter. We certainly will continue to watch things. We would monitor it. We have a view of this year and the 10% reduction fits that view in personnel reductions. If it gets slower, than currently anticipate, we will continue to make another round of reductions at mid-year.

Okay. Are there other things that you can do to make distribution centers more productive by taking some fixed costs out?

That is what we do. We have our hub-and-spoke model all over the world now with our expansions internationally. That's how we control costs is try to drive more efficiency through the hub operation and minimize the expense at each of the branch levels, so those are the main areas where we reduce when overall activity declines and that's how we adjust the workforce.

Okay. Along similar lines but thinking about the inventory, what do you think the timing looks like for inventory coming out? Is it something that's starting to come out in the first quarter, but does it accelerate in the back half?

I would say -- because we were -- if you look back, we had a fantastic third quarter, October going into the fourth quarter was our busiest month of the year, and we had good activity all through November with just a tail-off in late December because of the oil pricing. So I'd expect a slight pull-down in inventory in the first quarter.

It won't be significant because of that, but as Jim mentioned, we've already pulled down open purchase orders by $200 million, so you see the full impact of the inventory reduction in the second and third. Our objective of pulling it down at least $200 million fits our mid-year look of the business. If business is slower, we would pull it down more in the second half.

Okay, got it. If I can just ask a quick last one. You talked about the receivables a little bit and you mentioned that it was from large customers. Are you extending terms to large customers or is it -- are you seeing any small customers or is there any risk to receivables?

No. We're actively managing that. As you know, there's a lot of operators of all sizes and shapes in the US land business, some in better shape than other, but we are actively monitoring credit limits and balances and reducing and lowering those. That's been going on since the first of the year.

Okay. Thank you.

Our next question comes from Rob Norfleet with Alembic Global. Please proceed with your question.

This is actually Nick Chen for Rob this morning. Thanks for taking our call. In terms of the Stream acquisition, I was hoping you guys could just give a little recap of how that's going with some commentary around the North Sea drilling environment offshore?

Yes. That's a very good acquisition for us. It adds a big dimension to our offshore production operation. We're mostly production-oriented, not drilling rig and not expiration-focused, so our MRO work and our pipe valve and fittings and instrumentation and gauging really is the production environment. So there's a long MRO cycle both on the UK and Norwegian side.

We'd use the stream acquisition to build up our pipe business in that region of the world and also expand their capabilities into the UK and we're in the first year of multiple years of doing that. So I see it as a good extension of our business, and then we're keenly focused on winning the large project with Statoil in Norway. That's very important to us.

Excellent. Also, given the magnitude of price cuts taking place, do you see smaller distributors not having the balance sheet and scale to stay competitive right now?

Yes. In downturns like this, it puts a lot of pressure on the real small distributors, which there are many, to fund inventories and also survive through this type of pricing environment. But we don't really compete heads-up on a day-to-day basis with those real small distributors that are there, but we much more compete with the major players in the industry.

That's great. Thanks so much, guys.

Our last question comes from Mark Douglass with Longbow Research. Please proceed with your question.

Hi, good morning. This is Chris Dankert filling in for Mark. Thanks for the call. You've pretty much answered everything we had. Just one quick question, if I may, just given the strong free cash expectations, you [rewrote] the commitment to paying down debt and that's obviously a benefit to interest, but is there any reason or any covenant that would preclude you from doing a buyback, just given more valuations [add] for or could you give some color around that decision?

Yes, there is some ability within our facilities within certain limits, but for 2015, with the leverage that we have, we want to bring that back down, so that will certainly be the priority.

Great, thank you.

At this time, I would like to turn the call back over to Management for closing comments.

Thank you. This concludes our call today and we appreciate you joining us and your interest in MRC Global.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a great day.