MRC Global Inc (MRC) 2015 Q3 法說會逐字稿

Greetings and welcome to the MRC Global's third-quarter earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce Monica Broughton, Investor Relations. Thank you; please go ahead.

Thank you, Brenda, and good morning, everyone. Welcome to the MRC Global third-quarter 2015 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.

There will be a replay of today's call available by webcast on our website mrcglobal.com as well as by phone until November 20, 2015. The dial-in information is in yesterday's release. Later today, we would expect to file the third-quarter 2015 Form 10-Q, which will be available on our website.

Please note that the information reported on this call speaks only as of today, Friday, November 6, 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 US federal securities laws.

These forward-looking statements reflect the current views of the MRC 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 filings for a more in-depth review of the risks and factors concerning these forward-looking statements.

And now I will turn the call over to our CEO, Mr. Andrew Lane.

Thank you, Monica. Good morning and thank you for joining us today and for your interest in MRC Global. We continue to focus on our long-term strategic objectives; gaining and retaining market share by renewing and winning new customer contracts; sizing the business to current economic conditions, including cost reduction measures and managing working capital; and strengthening our balance sheet by continuing to reduce debt.

I will get into the progress on each of these objectives a little more. But first I'll go through a couple of financial metrics before turning it over to Jim for more detail on the financials. And then I will close with our current outlook.

Starting with the top-line results. Consistent with what we expected, the business generated $1.07 billion in revenue in the third quarter 2015, down 11% sequentially. Compared to the same quarter a year ago, revenue was down 34%, driven primarily by weakness in our upstream sector. Our midstream and downstream businesses also declined, but by much less than upstream.

The gas utility space continues to be a bright spot in the midstream sector. It grew 9%, partially offsetting the decline in revenue from transmission customers. The decline in downstream was primarily from our international segment.

Given the decline in upstream activity this quarter, the business is weighted more evenly among the sectors, with 35% upstream, 35% midstream, and 30% downstream as compared to a year ago when the business was nearly half upstream. This shows the resilience in our midstream and downstream markets in the current environment and the benefit of our balanced portfolio of customers and end markets.

The strength of the US dollar continues to reduce international revenue. We experienced a $44 million impact in the third quarter and a $132 million reduction in the first 9 months of the year. Net income available to common stockholders for the quarter was $10 million or $0.10 per diluted share compared to $0.49 per diluted share a year ago.

As I have said before, we are keenly focused on retaining and gaining market share by continuing to renew and win customer contracts. This will place us in an even stronger position, not only to navigate this low commodity price environment, but for the inevitable recovery.

Our customer contracts are renewed and won on the basis of our outstanding customer service and operational excellence. I'd like to share three recent wins that demonstrate our success.

The first one we announced formally in September is a five-year agreement with Phillips 66. This was an extension of our current contract, which added geographic scope to include their European facilities. This provides additional value and it positions us for the ongoing and planned project work during the contract term with our third-largest customer.

In addition, we renewed an agreement with our largest Canadian customer for three more years. This agreement expanded product scope to now include valve actuation in line with our valve strategy.

Finally, a third agreement that I want to highlight is between our MRC Energy Piping unit in Norway and Samsung Heavy Industries for the Johan Sverdrup project, Statoil's largest offshore development project in the North Sea. We previously discussed the award from Statoil for instrumentation, and this week we announced the additional award for pipe fittings and flanges. We will be providing the pipe fittings and flanges on two of the four platforms, with deliveries expected to begin in the second half of 2016. Combined, we estimate the value of this project to be about $80 million to $100 million over the next 3 years.

Also of note, MRC Teamtrade is not only providing the instrumentation equipment during the project construction, but also for the maintenance and repair work throughout the life of the field.

Taking a broader look at our largest segment, the United States, it is well diversified across the energy complex, which is beneficial particularly in the current environment. Year to date in the US, the midstream sector is now our largest sector, followed by upstream and then downstream. Both midstream and downstream have been resilient in that they have experienced only low single-digit declines this year.

Midstream has been a benefit from the gas utility subsector and also larger diameter regulated transmission infrastructure projects, which has helped to offset some of the decline with our nonregulated pipeline and our gathering line customers. Downstream in general has been a benefit from lower commodity prices and has been relatively stable in the US this year.

We expect to see an uplift for the next turnaround season in the spring as the impact from the 2015 strikes is over and operators resume their regular maintenance schedules and catch up on some deferred activity from 2015.

The US upstream business has declined 32% year to date, which is less than the 43% decline in the rig count. Given the current market conditions, we have taken measures to adjust the business to fit these conditions.

This quarter, we closed or consolidated an additional 4 branches in weak upstream areas. For the full year, we have closed or consolidated 18 branches. We will continue this practice of reviewing the performance of our branches and making adjustments as needed.

Since the middle of 2014, we have reduced headcount by approximately 775 employees or 15%. And we reduced total operating costs 23%. We plan to take an additional voluntary and involuntary cost reduction effort, affecting approximately 250 employees beginning in the fourth quarter.

I also want to highlight our working capital management efforts. So far this year, we have reduced inventory by nearly $300 million or 25%. This has been a major objective of ours this year: to resize the business in order to fit the current environment. We will continue to reduce inventory, manage inventory turns, and evaluate purchases based on market conditions.

A strength of the business is its ability to generate cash in a downturn. The business generated $204 million of operating cash flow this quarter and $481 million so far this year, which is above the high end of our previous annual guidance. We have also reduced the total debt balance to $664 million, which also exceeded our previous annual guidance. This is the lowest debt level for our Company since 2007.

We have a strong balance sheet and this puts the Company in a great position to take advantage of any potential opportunities that may arise. At our Board of Directors meeting this week, the Board authorized a $100 million share repurchase program. The authorization allows management to buy shares in the open market at their discretion, and the program is scheduled to expire on December 31, 2017.

This program allows the Company to be opportunistic to enhance shareholder returns during a challenging market environment while maintaining flexibility on the timing of such repurchases, if any. The strong year-to-date cash flow performance allows us to put this program in place and as is customary, we will report quarterly on the share repurchase activity.

Finally, we are proud to have recently added Robert Wood to our Board of Directors. He has 30 years of experience in the downstream chemical industry. He held a variety of positions within Dow Chemical Company, including sales, marketing, and management roles, and ultimately became the Business Group President of the Thermosets and Dow Automotive Group.

Mr. Wood is also a director of Praxair, the largest industrial gas distribution company in North and South America, and the Jarden Corporation, a global consumer products company with a diverse portfolio of over 120 market-leading brands. We are very pleased to have him join our Board.

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

Thanks, Andrew, and good morning, everyone. Total revenues for the third quarter of 2015 were $1.071 billion, which were down 34% from the third quarter last year and 11% lower sequentially.

Starting with revenues by segment, US revenues were $865 million in third quarter, down $340 million or 28% from the third quarter of last year. The decline was driven by weakness across all sectors, but primarily the upstream sector. The US upstream business was down $227 million or 47% due to lower oil and gas activity, while the US rig count was down 55% over the same period.

Canadian revenues were $69 million in the third quarter, down $92 million or 57% from the third quarter of last year due to reduced customer spending in the upstream sector, as activity has declined significantly year over year.

Much of the Canadian business is concentrated in the heavy oil regions of Canada, one of the areas hardest hit by the fall in oil prices. $14 million of the decline was the impact from a weaker Canadian dollar. Sequentially, the Canadian segment sales were down $8 million or 11% from the second quarter of 2015.

The second quarter is typically lower than the third quarter due to the spring breakup. This unusual occurrence reflects the significance of the pullback in Canadian activity.

Internationally, third-quarter sales were $136 million, down $115 million or 46% from a year ago. The decline resulted from the combined impact of lower project activity and the deferral of MRO expenditures, particularly in Norway, the UK, Australia, and the Netherlands, as well as weaker foreign currencies, which contributed $30 million to the decline.

Sequentially, the international segment was down $28 million or 17% from the second quarter, primarily due to lower activity in Norway, the UK, and the Netherlands, as well as a $5 million impact from weaker foreign currencies.

Turning to our results based on end-market sector, third-quarter sales in the upstream sector decreased by $374 million or 50% from the same quarter last year to $379 million. This decrease was driven by the lower activity levels across all our segments due to the significant decline in commodity prices.

The biggest impact was in the US, where our upstream business declined $227 million or 47%. Canada declined $81 million or 63%, including the impact of foreign currency, which was $12 million. And international declined $66 million or 49%, including the impact of foreign currency, which was $17 million.

Midstream sector sales were $370 million in the third quarter of 2015, down $104 million or 22% from the same quarter in 2014, which was the best quarter for the midstream in the Company's history. The decline in midstream was in the transmission subsector, which was down $119 million or 38% due to the impact on gathering systems from lower upstream activity and the timing of pipeline projects. This was partially offset by the gas utility subsector, as it experienced growth of $14 million or 9% versus the same quarter last year.

In the downstream sector, third-quarter 2015 revenues decreased by $68 million or 17% to $322 million as compared to the third quarter of 2014. International downstream was lower by $45 million or 41%, of which $12 million was the result of weaker foreign currencies. The remaining decline was due to weakness in Europe, Australia, and Singapore.

US downstream revenues were down $17 million or 6.4%, primarily from industrial customers as well as refiners, who operated at near record utilization in the third quarter.

Turning to revenue by product class, sales from our energy carbon steel tubular products were $259 million during the third quarter of 2015, with line pipe sales of $194 million and OCTG sales of $64 million. Overall sales from this product group decreased 45% in the third quarter from the same quarter a year ago, including an $84 million or 57% decrease in OCTG and a $129 million or 40% decrease in line pipe sales.

We also experienced some deflation in this product group as the spot prices declined 16% for line pipe and 23% for OCTG. However, the larger driver of the revenue decline by far is volume. For the third quarter of 2015, 58% of our line pipe sales were within our midstream sector, with the remainder about equally weighted between upstream and downstream.

Sales of valves, fittings, and flanges and other products were $813 million in the quarter, a 29% decrease from the third quarter of 2015 -- excuse me, 2014. Sales of valves were down 32% during the quarter, and for the third quarter of 2015, 36% of our valve sales were within our upstream sector and 44% in downstream, with remainder in the midstream.

Sales from fittings and flanges were down 33%, and other products were down 19%, also from the third quarter last year. Our backlog was $659 million at the end of the third quarter this year, which is 47% less than it was the same time last year and 14% than the end of the second quarter.

And now turning to margins. The gross profit percentage increased 10 basis points to 17.3% in the third quarter of 2015 from 17.2% in the third quarter last year. A LIFO benefit of $15 million was recorded in the third quarter 2015 as compared to an expense of $3.9 million in the third quarter of 2014.

Sequentially, gross profit improved 10 basis points from the second quarter of 2015, which also included a LIFO benefit of $15 million. 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, decreased to 17.7% in the third quarter of 2015 from 19% in the third quarter of 2014.

This decline was a result of the higher relative non-stock sales associated with lower margin project work and the impact of customer pricing pressures related to the decline in oil prices. On a sequential basis, third quarter of 2015 adjusted gross profit margin percentage is 10 basis points higher than the second quarter of 2015.

SG&A costs for the third quarter of 2015 were $142 million or 13.3% of sales, a decrease of $43 million or 23% from $185 million in the third quarter of 2014. We incurred less than $1 million in pre-tax severance and restructuring charges during the third quarter compared to $8.3 million in the same quarter last year, which includes a charge related to the cancellation of certain executive employment agreements and the accelerated recognition of equity-based compensation with previously issued awards.

Excluding these charges, SG&A decreased approximately $35 million, the majority of which was the result of cost reduction initiatives and volume-related declines. $10 million of the decrease was due to weaker foreign currencies.

Operating income for the third quarter of 2015 was $43 million, which was $50 million lower than the same quarter a year ago. The operating margin was 4% for the third quarter 2015, which was 180 basis points lower than last year. Our interest expense totaled $10.1 million in the third quarter of 2015, which was lower than the $14.9 million in the third quarter of 2014 due to lower average debt balances.

Adjusted EBITDA was down 61% to $51 million in the third quarter of 2015 versus $132 million a year ago. Adjusted EBITDA margins decreased to 4.8% from 8.2% a year ago and year to date, adjusted EBITDA margin was 5.6%, reflecting segment adjusted EBITDA margin of 6.1% for the US, 4.4% for Canada, and 3.9% for international.

Tax expense in the third quarter of 2015 was $19.5 million, 25% lower than the same period in 2014. However, our effective tax rate was 54.9% in the third quarter of 2015 versus 34.2% in the same quarter last year. The increase in the effective rate was the result of a higher expected tax rate for the full year of 42.6% due primarily to changes in our international segment, including lower than previously forecasted pre-tax profits, pre-tax losses in certain jurisdictions where no corresponding tax benefit, and the recognition of a valuation allowance for certain deferred tax assets during the third quarter.

The business generated cash from operations of $204 million in the third quarter of 2015 and $481 million year to date. We have reduced working capital throughout the year as activity levels have declined. As of September 30, 2015, working capital was $1.051 billion, $387 million less than it was at December 31, 2014.

Since the end of last year, we have reduced inventory by 25%, accounts receivable by 32%, and days sales outstanding by 2 days to 56 days. Our total debt outstanding at September 30, 2015, was $664 million compared to $848 million at June 2015, for a decrease of 22%.

With the cash generated from the business and the proceeds from the June 2015 preferred stock issuance, we have reduced debt by 54% so far this year. Our leverage ratio at September 2015 was 2.1 times and our excess availability, as defined in our global ABL agreement, was $616 million. Our balance sheet is in great shape and we are well positioned to manage through a challenging 2016 and for the eventual recovery.

Cash used in investing activities totaled $11 million in the third quarter, primarily from capital expenditures related to the implementation of a new ERP system in some of our regions in the international segment. This project is still on track and on budget.

And now I will turn it back to Andrew for closing comments.

Thanks, Jim. Given the uncertainty around spending for the remainder of the year, we are not providing full fourth-quarter guidance. We believe that spending will taper off through the end of the year, as operators have spent their budgets or decide not to spend any remaining budgets. We also anticipate that margins will continue to come under pressure in this current environment.

At a high level, the slowing quarterly revenue trend that we have seen so far in 2015 will continue and we would not be surprised to see fourth-quarter revenues be down sequentially by 10%. Based on the few customers that have disclosed their 2016 spending budgets, we know they are planning to spend less in 2016 compared to 2015 and therefore we expect our 2016 revenue will be lower than 2015. We expect to provide further color on 2016 when we report our fourth-quarter results in February of next year after most of our major customers have reported their capital budgets.

We continue to remain committed to our customers and providing them with the best supply chain solutions they have come to expect from us. We will continue to focus on defending and taking market share, strengthening the balance sheet, and appropriately managing our cost structure.

In delivering on these objectives and through the actions we have taken, I believe we can create value for our shareholders during this challenging time and in the eventual recovery.

With that, we will now take your questions.

(Operator Instructions) Matt Duncan, Stephens.

Good job in a tough environment this quarter.

Good morning, Matt. Thank you.

Andy, I want to start where you left off, just looking out at the fourth quarter and out into next year. It sounds like you are thinking 4Q revenues are going to be down somewhere around 10% sequentially.

In that environment, what should we expect to see happen to your gross profit margins on an adjusted basis? And then also just thinking about SG&A cost controls, can you give us some thought about what that expense line may be in the quarter?

Just a little color on the fourth quarter. October was really on the run rate of third quarter, so as expected. But as a lot of people have discussed November and December spending, it will really tail off, as a lot of customers have spent the majority of their budgets in the early part of the year. So we think that 10% number is about right, but it is very unpredictable what the spending level in December is going to be.

We have, of course, good insight on the first part of the quarter, but that is a big unknown for us. So as we said, we were going to reduce the SG&A with an additional 250 personnel reductions in the fourth quarter, so we are managing our costs down to what we expect to be a slower quarter for us. We think that the slowness will carry over into at least the initial part of the first quarter next year.

And as we have said previously, we are managing the cost side. And we also expect the margin -- gross margin -- adjusted gross margin to be about where we have been talking about. It is highly dependent on mix, but no big change from where we have been guiding externally.

Okay, that's helpful. Can you quantify what the severance charges would be? And then also last thing for me. Just looking out to 2016, I certainly understand it is early. It is hard to really nail down how much your revenues may be down next year.

But knowing what you know now, what do you think the shape of the year is going to look like? Any thoughts you can give us on how much it may be down and how late into the first quarter do think it will be before you see your customers' budgets in place to where they're spending again?

Yes, Matt, let me address the 2016 first and then Jim can talk to the severance. But I think as usual, there would be this one month or a month and a half slow pickup in the new budget cycle. We certainly see -- as we have talked and we have had this view for the full year, we see 2016 being somewhat a mirror to 2015, except the slope of the recovery being shallower coming now with the lower oil price coming in 2016.

So we see the first quarter being a tough one for us and then an improving environment after that. But we're positioning the costs for the low point and then we're just going to manage it. It is really difficult for us to project on a quantitative basis until we see more of our customer base come out with their CapEx.

Yes, Matt, to your question on severance in the quarter, it was $700,000.

Jim, I am talking fourth quarter; sorry.

Okay, no. We will have some there, but that's still being determined based on the voluntary versus involuntary nature of the terminations.

Okay, I will hop back in queue. Thanks.

Sean Meakim, JPMorgan.

Andy, can you give us -- can you just help us put the share repurchase in context after the equity raise in the second quarter? So the outlook was much better back in the spring by the time the raise came out, but your balance sheet looks much better today as well in part because of that raise. Just curious if you can help put that in context a bit. And then does this represent any shift and strategy in terms of buybacks relative to M&A?

Yes, let me address all that because it is important topic for us. Just going back a little bit, we were very active in M&A in late 2013 and carried over in the first half of 2014. We did 3 what we feel were excellent acquisitions at the time. And we certainly didn't see a $45 a barrel oil environment coming in 2015.

So when you look at the end of 2014, we were sitting with $1.45 billion in debt and a declining outlook for the -- for spending of our customers in 2015. So from day one this year, we have had a high priority on reducing the debt. We started reducing SG&A costs and we started reducing inventory purchases in the fourth quarter of 2014, so that helped us position for the year.

So that's been the top priority: generating cash flow from working capital reductions. And then we felt we also needed to make a step change in our debt reduction, and that was the strategic preferred share deal at $17.88 convert price. That was very important for us in the second quarter.

We continued to generate a lot of cash from inventories we thought in the third quarter. We will continue to generate more cash from working capital in the fourth quarter and continue to pay down debt.

So it brought us to the recent Board meeting, where we felt we had accomplished a big part of our objectives on resetting the balance sheet, getting our debt down to the lowest level we have had since 2007. And as Jim said in his opening comments, we have $616 million of availability currently. So we're in a very good -- and with knowing we're going to generate some more cash in the fourth quarter.

So it put us in a very strong position for the Board to authorize the $100 million share repurchase. It is part of our capital allocation, so we still are looking to reduce some debt further going into early 2016. We are still looking at M&A. We looked at several deals in the last two months.

The difficulty, as I have said, in all this year that 2015 was a very difficult year to execute on a lot of M&A with such an unknown outlook for 2016. And as the year has progressed, we feel that was a good choice not to delve in; to really focus on paying down the debt. And when we came to the position we're in right now, we feel that the best option for us for that $100 million was our own shares being where we are trading today.

And so now we have reset the balance sheet. We have the debt we want. We can clearly see our way on a debt basis through 2016 through the trough with no concerns on our debt at the current level. So it gave us optionality to still consider M&A, do the share buyback for our shareholders, and it is the best choice for us right now. We still will be active in M&A, but as I said, it will be a 2016 event from our point of view.

Thank you for all that detail. And so implicitly it sounds like the buyback announcement is expressing confidence in how you think EBITDA will hold up in 2016. And so I was hoping you just could -- you mentioned the consistent messaging on gross margin. I was hoping you could refresh us on what those numbers are.

And I guess if we don't see a recovery from current levels in the upstream through 2016, perhaps there is a natural knock-on effect to the transmission side of midstream. How sustainable are gross margins from here? Because obviously that would have a big impact on what EBITDA looks like in 2016.

Yes, we really don't want to guide on 2016 yet. It's too early, but we are certainly adjusting both our mix and inventory, as I said. We will come out of this cycle first with a much lower cost structure on SG&A, a much leaner organization, so that will help us support margin next year.

But we will also -- we are still changing the mix and we will be less weighted to carbon pipe as we come out of this cycle, more weighted to our higher-margin products. So from a product mix standpoint, that will also support margin.

But we had guided in -- after the second quarter the mid-17%s to low 17%s. We worked hard on -- we passed on some low-margin line pipe work in the quarter. And I think we did a very good job managing the mix and came in a little above that, at 17.7%, but we wouldn't change that kind of general guidance for the fourth quarter.

Sean, I might add that as we go into 2016 and we start buying and replenishing our inventory levels again, we will be buying at a lower cost basis than what we were carrying in inventory before. So while you would see the expected pressure from customers on top line, we're going to be able to offset that by buying smarter and cheaper as well. All an attempt to try to maintain and preserve those margins.

That's very helpful. Thank you, both.

Ryan Merkel, William Blair.

So first question is any early indication as to how much the E&P CapEx budgets will be down in 2016? Again, I know it's early, but just any feel?

No, no general feel. There is some broad estimates out there. Some are in the 10% to 15% range. We have only had a very small number of our major customers report and so it really is too early for us to think about that until we see some more -- the data points.

We are seeing some from upstream that are -- have that level or more cuts, but also downstream and MLPs in the midstream sector we have not seen a lot from those two sectors. So it is just too early, but we will definitely be providing more guidance in February.

Got it. Okay. And then second question on pricing. I know you give a little bit of color in the script, but how did pricing trend over the quarter? And then do you think prices will be under pressure in the fourth quarter and as well in 2016?

Yes, we have seen a resurgence of some of that pricing pressure in the last part of the third quarter. And that has continued into the fourth quarter as we have seen the commodity prices touchback on some of those low levels. And with some of the reductions that oil companies are making in their efforts to preserve cash and generate more cash, we expect to see that continue into 2016.

But you think you're going to be able to keep gross margins at that low 17% level, even given the pricing pressure?

Yes, again, because of product costings coming in and mix issues and buying smarter. That's our objective to keep it in that range.

Right, okay. Thank you.

William Bremer, Maxim Group.

Very nice performance in a very difficult environment. Really and truly, you guys are operating quite efficiently. First question is on downstream. Can you give us a sense of -- all known that it is holding up better because of supplies and nameplate capacities of the refineries and chemical companies, but what are you hearing primarily from your customers there?

I would say two things. Chemical, of course, is still -- is benefiting from the low natural gas environment, so we still see projects going forward there. I will give you one example with Shell.

While it is well documented, Shell canceled the heavy oil Carmon Creek Project that we were participating in in Canada, so the economics of very difficult environment for them in heavy oil. But going forward with an ethylene cracker project in the US that we'll play a big part in.

So that shift is still towards -- anything gas, the chemical business, the downstream gas processing. Of course, we talked about the highlight of our gas utility business. That's a bright spot for us. So I think that stays steady and we're involved in several projects. The majority of that $600 million backlog that Jim mentioned is in projects downstream.

And then of course, refining is doing very well. Ran at a very high utilization in the third quarter. Profitability from that sector is good for our customers, given the low oil price. So we see -- we weren't sure coming out of the second quarter where we would pick up a big turnaround in the fall based on the deferred activity from the spring of 2014 -- I mean, the spring of 2015 turnaround from the strike.

It was just a normal -- looks like just a normal turnaround season for us in the fall, so we are expecting an improved activity level in the spring of 2016. So on the refining side, US turnarounds will be a bright spot for us and we still feel good about chemicals. So those are the two -- that was the color I would give on that.

Right, right, right. Thank you. That's all I have.

Walter Liptak, Seaport Global.

A first thing I want to say is good job on protecting the balance sheet and cash flow and taking costs out. So I want to preface by saying that.

And then just ask about the branch reductions and the cuts that you made. At this point, have you cut to the bone? And with the branch closings, what is the strategy when business inevitably picks up again? Will you be able to -- is this going to be lost market share? Are you going to be able to serve customers out of different locations?

Yes, well, that's a good question. We have closed 18. Now and we -- each year, we have an ongoing review of our branch structure, so this is not new. But the slowdown in upstream has accelerated that process. That's a very high number for us on a normal basis, so we have a North America branch count of around 160.

What we are doing during this downturn is looking at our smaller branches in the upstream and consolidating them into the larger branch closest location. So it is not an exit of many markets; it is more of a consolidation.

Our hub-and-spoke model works very well, so we are pulling the inventories down from the branch, especially in the upstream sectors, with more focus on storing that inventory in the RDC hubs. And then that gives us ability still to service the customers, just from a smaller branch footprint than we have had historically.

But we are not exiting a lot of markets; we are shrinking the size. And of course, as activity ramps backup, we will be supporting our customers from those new consolidated larger branches, and we are very pleased with the hub structure we have put in place. Just even in this downturn in 2015, we added Monessen RDC outside Pittsburgh to support the Marcellus, the Utica, and also the project work I mentioned. Many -- there's several projects being talked about on the gas side.

So we are -- I would call it fine-tuning the structure. We are situating it for the downstream and midstream project work that we have, support that. And the consolidation has been all in small -- I would characterize them a small upstream branches.

Okay, that sounds good. Wanted to ask about the benefits from the branch closings. Is there still benefits that we're going to see, like in the fourth quarter in 2016 from those costs coming out? Or is it already reflected in the third-quarter numbers?

No, most of it has been reflected in the third-quarter numbers through the reduced operating expenses and certainly the headcount. The benefits we will see moving into 2016 will be from the continued efforts that Andy mentioned about another 250 people starting in the fourth quarter.

Okay, got it. And then I would like to ask about the EBITDA year to date and where you were this quarter. Are you managing the business to 5.5% EBITDA margins? Or is this a base level that we can think about, even if -- when 2016 sees lower revenues?

I wouldn't say we manage the business to an EBITDA level. Our goal and objective is to get and make as much EBITDA and profitability as we can. Certainly as you go into a period where the revenues are coming down, we're having to take those cost actions to get the expenses out to try to maximize that, but we will have a better look at that in February when we talk about 2016 in more granularity.

Okay. All right, thanks, guys.

Brent Rakers, Thompson Research.

Maybe as follow-up to the last question, could you maybe put some hard numbers around the extent of how much cost cutting has benefited in Q3? And then maybe also give any kind of target as to what the additional 250 people in Q4, what the benefit might be on a full-quarter run rate there?

Sure. Again, I would -- to your latter question, if you use fully loaded average salaries and costs of something in the $60,000 range, that will give you a good sense for what the potential and the future benefits might be.

But again, in the third quarter, just on a sequential basis looking at some of the improvement in operating expenses, there was $3 million just from the personnel side as we reduced average headcount. So on a year-over-year basis and on an annual basis, it is significant. It is by far the biggest contributor to the improvement in the operating expenses.

Great. And then maybe just a question on the midstream business. Wanted to -- obviously, you have a tougher quarter here, particularly on the transmission side, in the third quarter. Could you just maybe speak a little bit there to backlog, but also levels of bidding activity you have seen here recently? And what your level of confidence is going into 2016 in that category?

I would say that what's held up nicely for us, as we talked about on the last call, is the larger diameter gas infrastructure, even NGL infrastructure projects. What has tailed off the most is the smaller diameter oil-related infrastructure projects.

So the mix has definitely changed and -- but we still have a lot of activity there. And as we said, the midstream in the US segment now is our largest end market. So we are positioned very well, we have a strong midstream group, and we deal with the market on our bidding. So still very active.

Great. And then maybe one final question, if I could sneak it in. On the adjusted gross margin, I assume some of the pipe categories continue to be some of the greatest gross margin pressures. But maybe if you could speak a little bit to whether it is on product class, by stream, by geography where you have seen the most stable levels of adjusted gross margin and maybe where the greatest pressures have been there?

Yes, I think the most stable have been our valves, our fittings and flanges. And it is typically in our ongoing MRO contracts with our customers, primarily in the downstream businesses, where we see the most stability. The most under pressure are large projects, whether it be ERW line pipe projects. And certainly it is very competitive today in the upstream part of the business.

Okay, thanks a lot.

We have no further questions at this time. I would like to turn the floor back over to Monica Broughton.

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

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.