MRC Global Inc (MRC) 2015 Q2 法說會逐字稿

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

(Operator Instructions)

As a reminder, the conference is being recorded.

I would now like to turn the conference over to your host, Monica Broughton, Investor Relations for MRC. Thank you, Ms. Broughton. You may begin.

Thank you, Rob. Good morning, everyone. Welcome to the MRC Global second-quarter 2015 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. There will be a replay of today's call available by webcast on our website mrcglobal.com, as well as by phone until August 16, 2015. The dial-in information is in yesterday's release.

Later today we expect to file the first-quarter 2015 Form 10-Q, which will also be available on our website. Please note, that the information reported on this call speaks as of only today, August 4, 2015, and therefore you are advised that it the 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 US federal securities laws.

These forward-looking statements reflect the current views of the Management of MRC Global; however, MRC Global's actual results could differ materially from those expressed today. You are encouraged to read the Company's SEC filing.

Now, I would like to turn the call over to our CEO, Mr. Andrew Lane.

Thank you, Monica. Good morning and thank you for joining us today and your interest in MRC Global. I will begin with a discussion of the quarter's highlights before turning it over to Jim for a detailed financial discussion and I will close with the current outlook.

Last quarter we said that we expected the second-quarter revenues to be down between 5% and 10% from the first quarter. We came in at $1.2 billion, down 7% sequentially at the midpoint of where we thought. As compared to the same quarter a year ago, revenue was down 20%, driven primarily by weakness in our upstream sector due to the much publicized lower activity levels.

However, our US upstream business performed better than rig count. We attribute this in part to market share gains. In addition, our midstream and downstream businesses continued to perform very well during the quarter, demonstrating the benefit of our balance and sector exposure.

Adjusted net income available to common stockholders for the quarter was $23 million, or $0.22 per diluted share, compared to $0.42 per diluted share a year ago. Adjusted gross margin declined by100 basis points sequentially and 140 basis points quarter over quarter.

There were a combination of factors that contributed to the decline, including a higher mix of direct sales attributable to lower margin project sales, and also pricing pressure as a result of the industry's slow down. We expect that project sales will remain a larger part of our sales mix as midstream and downstream projects continue.

The business generated $161 million of cash from operations this quarter and $277 million so far this year. With that, we are raising our expected range of cash flow from operations. We now expect to generate $400 million to $475 million of cash from operations this year.

Our priority remains to pay down debt with free cash flow. We would expect our debt balance to be in the $680 million to $750 million range by the end of the year. This quarter we also reduced debt with the proceeds from a preferred stock offering. One of the benefits of the preferred stock offering was the ability to better position the Company to take advantage of any potential opportunities that may arise, both organic and potential acquisitions.

The strength of the US dollar is still a headwind to revenue as we experienced an impact of $41 million in the second quarter and $88 million for the first half of the year. We expect the annual impact to be in excess of $120 million.

In this challenging environment, we continue to focus on what we can control. From a cost management perspective, we took additional cost saving measures in the second quarter by reducing head count by approximately 180. This is higher than the estimate of 100 that we discussed on our last call. Since our peak employment in 2014, we have reduced the head count by approximately 680. We expect our new SG&A run rate to be about $149 million to $152 million per quarter for the remainder of 2015, which includes the benefits from the most recent cost savings measures.

The most important thing within our control is our focus on serving our customers. We continue to develop our customer relationships and demonstrate value by providing excellent service, which in turn leads to market share gains. This will position us to be stronger when the market recovers.

Most recently, we announced an extension of our United States and European MRO valve contract with Savik to include all 22 of their petrochemical facilities in Saudi Arabia. We estimate this could yield $5 million to $10 million in revenue annually in the first couple of years, with the potential to increase over time to $20 million per year. This is another example of leveraging relationships with customers from one geography into another, as well as the benefits of our international expansion.

We have also had success in the gas utility space, which is reported in our midstream sector. We talked about several new wins last quarter and this quarter yielded the highest revenue for that sub sector in the Company's history.

Another recent market share gain includes an agreement to sell line pipe to one of our largest customers in the Gulf of Mexico. While we currently provide them with PVF onshore, adding the Gulf of Mexico is a new geography for us.

We also recently agreed to renew the contract with one of our largest downstream and midstream customers for an additional five years. This contract renewal includes projects and MRO activity. We hope to make a formal announcement and provide more specifics on both of these in the near future, as well as a new international win.

Finally, we continue to evaluate our footprint and make adjustments as necessary. Last quarter we consolidated or closed six branches in Canada and the United States. This quarter we have closed an additional eight branches, six in the United States and two in Australia. We continually review our infrastructure to determine where it makes sense to open, close, expand or consolidate our branches. Our oven smoke replenishment model is designed to respond to changing market conditions.

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

Thanks, Andrew. Good morning, everyone.

Total revenues for the second quarter of 2015 were $1.198 billion, which were down 20% from the second quarter last year and 7% lower sequentially. Starting with revenues by segment, US revenues were $956 million in the second quarter, down $159 million, or 14%, from the second quarter of last year.

The decline was driven by a weak upstream sector, as the midstream and the downstream sectors were up slightly. The US upstream business was down 36% due to lower oil and gas activity. However, this was favorable relative to the market as the average US rig count was down 51% over the same period. We believe some of this out performance is due to market share gains.

Sequentially, the US segment sales were down from the first quarter by $16 million, or 2%. Strong sales in midstream partially offset a 17% decline in the US upstream business, which was half of the 35% sequential reduction in the US rig count. Canadian revenues were $78 million in the second quarter, down $72 million, or 48%, from the second quarter of last year, due primarily to reduced customer spending in the upstream sector as activity has declined year over year. $10 million of the decline was the impact from a weaker Canadian dollar.

Sequentially, the Canadian segment sales were down $42 million, or 35%, from the first quarter of 2015. The Canadian upstream sales were down 42%, an improvement over the Canadian rig count, which was down 68% over the prior quarter due to the seasonal breakup period.

Internationally, second-quarter sales were $164 million, down $67 million, or 29%, from a year ago. The decline resulted from weaker foreign currencies of $31 million and lower customer spending in the UK, Norway and Australia, partially offset by the acquisitions of MSD and Hypteck, which added $10 million in incremental revenue. Sequentially, the international segment was down $37 million, or 18%, from the first quarter, primarily due to lower activity in Norway, Australia, and the UK.

Turning to our results based on end-market sector, second-quarter sales in the upstream sector decreased $265 million, or 38%, from the same quarter last year to $435 million. This decrease was driven by lower oil and gas activity across all our segments. The biggest impact was in the US, where our upstream business declined $163 million, or 36%, as discussed earlier. Canada declined $65 million, or 55%, including the impact of foreign currency, which was $9 million. International declined $36 million, or 37%, including the impact of foreign currency, which wa $15 million.

Midstream sector sales were $419 million in the second quarter of 2015, nearly flat with the same quarter in 2014. The gas utility sector was a bright spot and was higher by $43 million, or 30%, from the same quarter last year. The increase in gas utilities is due to our strong market position with these customers as they continue to execute the pipeline integrity projects. This was offset by the transmission sub sector, which was down $45 million, or 17%, due to the impact on gathering systems from lower upstream activity.

In the downstream sector, second-quarter 2015 revenues decreased by $33 million, or 9%, to $345 million as compared to the second quarter 2014. International downstream was off $30 million, or 29%, of which $16 million, or just over half, was the result of weaker foreign currencies. The remaining decline was due to continued weakness in the Australian economy and Europe. The US downstream was up slightly despite the negative impact of less spring turnarounds as a result of the strikes at 13 US refineries in the front part of the year.

Now turning to revenue by product class, sales from our energy carbon steel tubular products were $321 million during the second quarter of 2015, with line pipe sales of $242 million and OCTG sales of $79 million. Overall sales from this product class decreased 24% in the second quarter from the same quarter a year ago, including a $55 million, or 41%, decrease in OCTG and a $46 million, or 16% decrease in line pipe sales.

We have experienced some deflation in this product group; however, not as much as reflected in the public indices. For the second quarter of 2015, 58% of our line pipe sales were within the midstream sector, with the remainder about equally weighted between upstream and downstream.

Sales of valves, fittings and flanges and other products were $877 million in the second quarter, an 18% decrease from the second quarter of 2014. Sales of valves were down 19% during the quarter. For the second quarter of 2015, 38% of our valve sales were within our upstream sector and 41% in the downstream, with the remainder in the midstream. Sales from fittings and flanges were down 19% and other products were down 16%, also from the second quarter of last year.

Now turning to margins, the gross profit percentage declined 10 basis point to 17.2% in the second quarter of 2015 from 17.3% in the second quarter of last year. A LIFO benefit of $15 million was recorded in the second quarter of 2015, as compared to an expense of $800,000 in the second quarter of 2014. Sequentially, gross profit improved 20 basis points from the first quarter of 2015, which included a LIFO benefit of $200,000.

Our adjusted gross profit percentage, which is gross profit plus depreciation and amortization, the amortization of intangibles and then plus or minus the impact of LIFO inventory costing, decreased to 17.6% in the second quarter of 2015 from 19% in the second quarter of 2014. This decline was the result of higher relative direct sales related to additional lower margin project work and pricing pressure for customers.

On a sequential basis, the second-quarter of 2015 adjusted gross profit margin percentage is 100 basis points lower than the first quarter of 2015. The decrease was due to the same factors described above.

SG&A costs for the second quarter of 2015 were $159 million, or 13.3% of sales, a decrease of $26 million, or 14%, from $185 million in the second quarter of 2014. We incurred pretax severance and restructuring charges of $6.9 million in the second quarter related to cost saving initiatives, compared to $5 million in the same quarter last year.

SG&A in the second quarter of 2015 also includes $2.6 million of incremental SG&A related to our MSD and Hypteck acquisitions. Taking both the severance charge and acquisitions into account, SG&A decreased approximately $31 million, the majority of which was the result of cost reduction initiatives. $10 million of the decrease was due to the weakening for foreign currencies.

Operating income for the second quarter of 2015 was $47 million, which was $27 million lower than the same quarter a year ago. The operating margin was 3.9% for the second quarter 2015, which was 100 basis points lower than last year. Our interest expense totaled $13.7 million in the second quarter of 2015, which was lower than the $15.4 million in the second quarter of 2014, due to the lower average debt balances.

Adjusted EBITDA down 41% to $63 million in the second quarter of 2015 versus $106 million a year ago. Adjusted EBITDA margins decreased to 5.3% from 7.1% a year ago. Year to date, adjusted EBITDA margin was 6%, reflecting segment adjusted EBITDA margin of 6.4% for the US, 5.2% for Canada, and 4.4% for international.

Our effective tax rate was 44.6% in the second quarter of 2015 versus 34.6% in the same quarter last year. During the quarter, we raised the expected tax rate for the full year of 2015 to 36%, from the 31% we estimated in the first quarter of this year. The higher expected tax rate is due to lower forecasted international prophets, which are generally taxed lower than US tax rate, as well as larger-than-expected losses in jurisdiction where no tax benefit is recognized.

Our operations generated cash of $161 million in the second quarter of 2015. Our working capital at June 30, 2015 was $1.237 billion, $201 million less than it was at December 31, 2014, reflective of lower activity levels. Our total debt outstanding June 30, 2015 was $848 million, compared to a $1.373 billion at March 2015, for a decrease of 38%. The proceeds from our previously mentioned preferred stock offering, combined with cash generated during the quarter, allowed us to reduce debt by $525 million during the quarter.

Our leverage ratio at June 2015 was 2.1 times, and our excess availability, as defined in our Global ABL agreement, was $544 million, indicating we are well positioned, we believe, to weather the current down turn and position us for an eventual recovery. Cash used in investigating activities totaled $8 million in the second quarter, primarily from capital expenditures. There has been no change to our expectations around capital expenditures since last quarter.

We expect to spend $43 million this year. The increase over historical levels relates to the implementation of a new ERP system in some of our regions in the international segments.

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

Thanks, Jim.

Some are calling the bottom of this cycle now based on the apparent stabilization of US rig activity. However, in our view, we haven't seen US oil production come off meaningfully or demand grow enough to have much impact on oil prices for the foreseeable future. As a result of the recent fall in West Texas intermediate to below $50, we are of the view that it the oil and gas market bounces along the bottom here through the end of 2015. Given the current conditions, we expect the third-quarter sales to be down 7% to 12% from the second quarter.

We expect the year-over-year changes in the upstream to be a high 30% decline, the midstream to be a high-single-digit decline and the downstream to be a mid-single-digit decline. When taken together, we expect full-year 2015 sales to be down 20% to 25% from 2014. While we expect our gas utility business will continue to grow and transmission projects will continue to progress, we think the midstream's best quarter was the second quarter. Downstream is being affected somewhat more than we anticipated as many of the refineries are just now re-certifying their crews and may delay some fall turnarounds into next spring, as well as continued weakness in Australia and Europe.

Our backlog was $768 million at the end of the second quarter this year, which is 32% less than it was the same time last year and 16% less than the first quarter. From an adjusted gross margin perspective, we expect the things we saw in the second quarter to continue into the third quarter, namely more direct project work as a percentage of total revenues, which would put some downward pressure on margins the rest of the year.

Pricing pressure across all product groups are expected to remain, as evidenced by recent customer announcements on further cost cutting measures. All in, we expect adjusted gross profit margins to be at the low- to mid-17% level for the remainder of the year.

So far, this year has played out as we expected. We delivered a solid first-half result, given all the volatility in our customer spending and the significant reduction in the US rig count.

I am proud of our Management and employees for what they have accomplished so far this year. I would also like to thank our customers for the continued trust in MRC Global. In a challenging market, we will continue to stay focused on what we can control, defending and taking market share by taking care of our customers, generating cash from operations, deleveraging the balance sheet and appropriately managing our cost structure.

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

(Operator Instructions)

Our first question is from the line of Sean Meakim with JPMorgan. Proceed with your question.

Good morning, guys.

Good morning, Sean.

Andy, if upstream activity flat lines from here for a couple more quarters into 2016, do you think your working capitol would start to stabilize at that point or do you think there is more burn through your inventory and generating more cash in 2016?

Yes. Sean, we are still in the middle of reducing our working capital to adjust to lower rig counts. You will still see lowering of inventory in the back half, and also some additional collection on the receivable side. So the additional cash flow from ops that we are forecasting in the second half will come -- the majority from inventory reductions and some from receivables.

Okay. Fair enough. I was hoping you could give us a little more color on some of the weakness we are seeing in international on the downstream side? You particularly mentioned Europe and Australia, how that could look going forward the end of this year and into next.

The biggest impact is what Jim went through with the FX is impacting us a lot internationally. There is some softness in Europe refining that is impacting our downstream. The big impact in Australia is mining. Mining remains very slow with the slow down in China. So those are the two things that -- the two headwinds we are still going to face in the back half of the year.

You characterize it as being more FX driven than fundamentals on the demand side?

Yes. The mining slow down is real fundamentals, but the bigger impact is the FX.

Okay, fair enough. Thank you.

Our next question is coming from the line of Matt Duncan with Stephens. Please go ahead with your question.

Good morning, Matt.

Andy, can you give us some idea of what the month-to-month sales trends have looked like this year all the way through July? Are we still seeing sequential down ticks? How much of that is rolling through some of the project activity versus some of the other factors, maybe a lag in your business versus rig count, things like that?

Matt, it's been pretty steady. As we said, the second quarter came in right where we thought, at the midpoint. MRO spending in general has been down with our customer pulling back on their spending. Then we have been working through a nice backlog of midstream and downstream projects. That's why projects are a little bigger percentage of our revenue mix than MRO historically. So you are seeing some impact from that.

But the second quarter, June was a very good strong finish to the quarter. We had a good second quarter. Then July results are right on target with what we are guiding here for the third quarter. You know very well, normally our third quarter is our best quarter of the year during a normal year. This, of course, is not a normal year. So, while we do see some construction projects continuing, not like last year, where we ramped up to $1.6 billion. Of course, it's not going be that kind of year this year. We do think we are at the bottom on the rig count. We are just -- I think third quarter is playing out like we expect.

Okay. My second question is just on M&A. In the wake of the preferred offering, you've obviously paid debt down a good bit. It looks like you are going to be in a position to consider acquisitions here as the market is bottoming and hopefully targets are a little more willing to start being realistic on what they may be worth. What are you thinking you guys are going to do on the M&A front? Do you want to look at anything larger? Is it really more small bolt-on type deals? Just talk to us about how you plan to use the balance sheet here.

Matt, we are very pleased with the steps we have taken. The working capital reductions come with the slowdown in business. We've developed a strong management team to manage through those situations. The preferred stock offering was a step change in deleveraging. We like the position we are at, $815 million of debt is our lowest level since 2007. So, we are in a really strong position given the end markets are weak right now.

To invest organically, we're doing some additional investments in facilities to position us for when things turn around. That is the highest priority for us. I wouldn't expect any acquisitions on the M&A front in the third quarter or early fourth quarter. I think the emphasis will be on a couple of small bolt-ons, primarily expanding our capabilities with a valve focus and in international, but I wouldn't expect any major acquisitions in the short term. We are going to continue to work to pay down debt and we are going to be in a great position at the end of 2015 going into 2016 to be more aggressive if we see the market turning back on acquisitions in the first half of 2016.

Okay. Thanks, Andy.

Our next question is from the line of David Manthey from Robert W. Baird. Please go ahead with your questions.

Good morning, guys.

Good morning, Dave.

First question is on your outlook as it relates to the end of this year and then into 2016. I think your original budgeting for 2015 was based on $50 or $60-plus oil and 1,000 rigs. You also had mentioned that you thought that 2016 might be a mirror image of 2015, that is, weak at the beginning and then accelerating in the back end. Andy, you mentioned bouncing along the bottom. Are you thinking a lower-for-longer scenario or does that mirror image scenario still on the table?

Well, Dave, I mean, the volatility in our end markets is difficult, as you know, to predict right now. That certainly was our view in the first half of the year, that we would see a pick up in the back half of 2016 and it would mirror 2015's results, but right now I think there is some more uncertainty. We didn't think we would be down here at $45, $46 oil in August. So with our sequential guidance we see the third quarter being around $1.05 billion to $1.1 billion in revenue, then the fourth quarter on that, similar run rate. It's really too early to predict much on the second half of 2016.

Okay. That makes sense. Second, in terms of the drilled but uncompleted wells out there, is it possible that you could see better upstream trends even before the rig count moves up materially as those wells are completed, maybe not this year but into 2016?

Yes, Dave, a big part of our upstream business is the well hook up and we do very well in that environment, and so in the short term would be an impact, of course, by the lower rig count. Our well hookups usually lag drops in the rig count by a quarter. There is a timing issue there. Then we are seeing a lot of wells be added to the drilled uncompleted category. And certainly as things turn back around, when we see some improvement in pricing, those would be the first to be brought on production, which will give us a nice pick up in well hookups. So, yes, I think we will see an upstream pick up there with maybe a marginal increase in rig count just as our customers bring those wells back on production quicker.

Got it. Thanks a lot, Andy.

Thanks, Dave.

Your next question is from the line of Ryan Merkel with William Blair. Please go ahead with your questions.

Thanks. Good morning, everyone.

Good morning.

Can you talk a little more about line pipe pricing? I think you mentioned that your deflation is a little bit less than the public indices, so maybe just talk about that a bit. And then how much do you think line pipe prices will be down this year? I think last quarter the estimate was maybe 10%.

Yes, Ryan, there has been some more deflation given the slowdown in our end markets. We started out the year thinking OCTG would be down around 20% and line pipe around 10%. In the spot market, which we don't play a lot in the OCTG spot market, we have programs and we buy into stock and serve those programs with our core customers, so we don't see as much as the stock pricing decline where it's a bid and a buy on a daily basis. But we have seen the spot prices on OCTG come down roughly 23% from the peak and we have seen line pipe prices now come down about 15%.

So they are both around $1,400 a ton, which is a little more than we thought. So certainly part of our guidance down on the second half of the year is the impact of some more pricing pressure and more deflationary impact from line pipe in the back half. We have a good backlog of the larger diameter midstream projects. We're seeing the most pressure on the small diameter flow line type applications, especially in upstream, where you see the most pricing pressure.

Okay. That's helpful. And then, pretty good results, I think, overall in midstream and downstream. Have you seen project delays in those two markets?

In the US, most of our midstream large diameter work is gas or NGL related, so we haven't seen that. That has been good for us, a real positive along with our gas utility business. The chemical projects we've had going that we've talked about a couple of quarters, they are doing really well. I think the midstream infrastructure spend you are seeing it. Despite the upstream slowdown of activity, you are seeing the investment being -- taking place on the infrastructure. Where we have seen projects delay is in the international and we have seen -- definitely seen projects delay in the heavy oil sands region in Canada, which we, I think, previously said that we thought that would be the highest impact on us.

Right. Okay. Thanks a lot. I will get back in line.

Thank you.

Your next question is coming from the line of Jeff Hammond, KeyBanc. Please go ahead with your question.

Hi, guys, this is James filling in for Jeff.

Morning, James.

So could we just talk about the LIFO benefit and how we should think about that for the remainder of the year based on what we saw this past quarter?

Sure, James. As you know, we had $15 million both in the quarter and the year-to-date benefit and we would expect, based on our methodology that we would see another $15 million of benefit in the back half of the year, so a total benefit of about $30 million for the entire year.

Got it. Then you guys obviously pointed out that you hit a record level in terms of the utility volume that you are seeing in midstream. Could you just talk about what the function is driving your market share gains and the visibility that you have there in terms of maybe looking into early 2016? How strong is that visibility? Just any color there would be helpful.

Yes, James. That has been a focus of our business development efforts for a number of years. We have a very strong position in gas utilities, so that is NiSource, Atmos, Atlanta Gas, Pacific Gas and Electric, so a lot more gas products. It's gas infrastructure, it's gas replacement lines, gas meters, both residential and commercial. Not directly tied to the impact we are seeing in oil and the end markets there.

We like that balance. That, along with chemicals, is really driven by gas pricing and demand. And we have a very good backlog, a very good insight to that. As we said, the second quarter was a record for the Company in the gas utility sector. It still should be a very bright spot even at $2.80 gas, some improvement in that as we go into the fall pricing, we should be in good shape in gas utilities going into next year.

Got it. Thanks. One thing that I think I missed at the end, you talked about adjusted gross margins and how they should trend the remainder of the year. What was that comment?

Yes. It was low- to mid-17% for the balance of the year.

Got it. Thank you very much. I'll get back in queue.

Thank you.

Our next question is from the line of Joshua Wilson with Raymond James. Please go ahead with your question.

Good morning. Thanks for taking my questions.

Good morning, Josh.

What sort of color or commentary are you hearing from your customers on their spreading plans for 2016?

Yes, Joshua, it's a little early for that. Of course, I think everyone is aware that Chevron and Shell and Conoco Phillips, Exxon Mobile are making some midyear adjustments to this year's CapEx budgets due to the commodity pricing environment. But I haven't seen a lot of the color around 2016. It normally comes in November, December timeframe. That, of course, is a big driver for our outlook on the business when they publish their CapEx plans.

Could you spell out specifically where you expect to have inventories by the end of this year?

I would, in general terms, expect to be down $150 million by the end of the year from the end of the second quarter.

To clarify, your guidance for the second half, are you assuming further pricing pressure in the pipe products or are you assuming it's flat from here?

I think we are near the bottom in deflation on pricing, but you haven't seen it in the previous quarters. You will get the full impact in the third and fourth quarter from this new lower deflationary pricing on carbon pipe. It's pretty much, we know where the price is. Our volumes have been still strong in some sizes, but you will see the deflationary pricing pressure in the back half. That is included in our guidance.

Thanks. Good luck with the third quarter.

Thank you.

(Operator Instructions)

Our next question is from the line of Doug Becker with Bank of America. Please go ahead with your questions.

Thanks. Andy, how much visibility do you have into the downstream segment into the third quarter? Seems like it's a very volatile area right now. Margins are high right now. Some are expecting a pullback, which creates questions into turnaround season. Just wanted a little more color on what type of visibility you have there and how that might end up being different if margins move.

Yes, Doug, that is probably one of the bigger variables we have. Essentially, the large majority of the spring turnarounds, because of the strike environment got pushed into the fall. We know some work -- we should have a good turnaround season in the fall. We don't know if it is going to be the spring on top of the fall or some of the normal fall turnarounds get pushed into 2016. We have some good visibility from a couple of our major customers and there are some large turnarounds that are going to happen in the third quarter and into the beginning of the fourth quarter.

That is a positive that has -- if you look at the last two quarters of refining utilization, it's been a couple percent higher than normal as they basically ran the plants and refineries at peak capacity without the turnaround activity. So, I would think that, that is going to have some slowing down in the third and fourth quarter, especially as the turnaround activity gets done. We have good visibility on some pre-orders on some of the turnarounds, so it's hard to predict whether it is going to be very strong, but we have a good insight into that. The chemical plants is mostly projects for us and, of course, we have visibility of those projects through the third and fourth quarter.

That's definitely encouraging. Switching gears, the European implementation that always scares me but you're lowering your SG&A guidance so it sounds like that is going well. Maybe an update on how that is progressing? How much longer there might be a drag on cost in the short term and the benefits longer term?

Jim?

Yes, I was going to say, Doug, we've just gotten started with that. We are about 8 to 10 weeks into it. As you know, we are going to do the implementation and then cut over in Asia-Pacific region next -- in 2016, most likely in May on the schedule. So it's going well now. We've started to capitalize some costs in the second quarter and we will capitalize more of those costs in the third and fourth quarter.

Doug, I would add to Jim's comments, we see tremendous advantage being on one platform in the North America market. But all the acquisitions we have done internationally, the goal was to get our international business on a single platform and also to take what we believe is some of the best functionality that we utilize in North America and put it into play in international to improve margins there. Roughly 80% of our revenues in Asia/Middle East region was already on SAP, so it's a conversion that is ongoing, as Jim said. We expect to see good results from that. And then we expect to see that as part of our improved -- along with a lower cost structure, part of our improvement in margins in international over the next couple of years.

Thank you.

Thank you. Our next question is from the line of William Bremer with Maxim. Please go ahead with your questions.

Good morning, Andy. Morning, Jim.

Morning, Bill.

Just wanted to get a sense from your suppliers. Have they asked you to potentially take more on during this time? Not more on in terms of inventory but to perform more on their behalf?

No, Bill, I would say it's been pretty normal interaction with the suppliers. On the positive side, one of the big changes we have seen this cycle is the actions by the steel mills and a very large percentage of steel mill capacity, especially in the US, is idled at this point, which, as we think about 2016 is a real positive because as we work through inventory reductions in distribution in the United States especially, you don't have a lot of additional capacity coming out on speck. We will be in a position with our inventory reductions to be placing orders towards the end of this year and with today's environment, at a good cost level. We see it -- we see part of our deleveraging and part of our destocking has positioned us to buy as we see going into 2016. That's -- the steel mill, I think, it shows a lot of discipline on their part to not oversupply the market. Then, valves, fittings, flange, stainless, has been just normal operations.

Okay. Good to hear. Then possibly could you give us a little more granularity on the international markets, maybe the stream acquisition and how you are coping with all that there and some of the, maybe the levers you are able to pull in this environment?

The two areas where we have streamlined our costs, and you will see more streamlining international as we work following the acquisition spree we were on to work to get more operating leverage. We are reducing in Australia. We've reduced headcount in western Europe and Norway. That is working per our plan. In Norway, we are still very keen on the Stream acquisition, even the Gulf of Mexico win that we talked about earlier in our prepared remarks is a part of our strategy to focus on platforms, offshore platforms in the PVF. So, we are seeing a much bigger presence in that market that we haven't participated in, in the Gulf most recently and also in the UK and Norway. We announced already one nice win on Johan Sverdrup project and we expect in the third quarter to have another major international win.

So we are very keen on our position. We built out our platform. We are finishing a consolidation in Singapore with our latest acquisition there, MSD Engineering, and we've opened up our South Korea warehouse operations. The few critical delivery points that we wanted to have in place we now have in place. You will see us focus a lot on streamlining operating costs and Jim mentioned the EBITDA. We're at -- year to date, at 4.4% out of international EBITDA and we see that improving as we continue to optimize the operating costs.

Excellent, thank you. I look forward to reading about the win.

Thank you. At this time I will turn the floor back to Monica Broughton for concluding comments.

Hi, all. Thank you for your interest in MRC Global. This concludes our call. Have a great day.

Thank you for your participation. You may now disconnect your lines at this time.