MRC Global Inc (MRC) 2016 Q3 法說會逐字稿

Greetings and welcome to MRC Global's third-quarter earnings webcast. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Monica Broughton, Investor Relations. Thank you; you may begin.

Thank you and good morning, everyone. Welcome to the MRC Global third-quarter 2016 earnings conference call and webcast. We appreciate you joining us.

On the call today, we have Andrew Lane, 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 18, 2016. The dial-in information is in yesterday's release.

We expect to file our third-quarter Form 10-Q later today and it will also be available on our website. Please note that the information reported on this call speaks only as of today, November 4, 2016, and therefore you are advised that information may no longer be accurate as of the time of replay.

In our remarks today, we will discuss adjusted gross profit percentage, adjusted EBITDA, and adjusted EBITDA margins. You are encouraged to read our earnings release and securities filings to learn more about our use of these non-GAAP measures and to see a reconciliation of these measures to the related GAAP items.

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 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 filings for a more in-depth review of the risk factors concerning these forward-looking statements.

And 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 for your interest in MRC Global. I will begin today with some highlights of the Company's performance, before turning the call over to our CFO, Jim Braun, for a more detailed review of the financial results, and then I will finish with our current outlook.

Our third-quarter revenue was $793 million, which is 6% higher than the second quarter. This is our first sequential revenue gain since the downturn began in 2014. The business generated $82 million of cash from operations this quarter and $230 million year to date. We have exceeded our previous expectations of generating at least $200 million in 2016.

Compared to the same quarter a year ago, revenue was down 26%, driven by reduced customer spending across all segments and sectors.

Our upstream sector declined the most, at 41%, midstream by 12%, and downstream by 25%, as compared to the same period in 2015. The decline in upstream includes the impact of selling OCTG, which otherwise would have been a 24% decline. The decline in downstream was across all segments and reflected the completion of major projects in the prior year.

Net loss attributable to common shareholders for the third quarter was $46 million or $0.48 per diluted share, including after-tax non-cash inventory, as well as severance and restructuring charges of $40 million or $0.42 per diluted share, as compared to net income attributable to common shareholders of $10 million or $0.10 per diluted share for the same period last year.

This week, the Board of Directors authorized an increase in our share repurchase program to $125 million. 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. Our strong cash flow performance allows us to take advantage of this opportunity to enhance shareholder value in what has been a difficult macro environment.

The Company repurchased $17 million of stock at an average price of $14.92 per share during the third quarter. We repurchased a total of $100 million of stock, or 7.2 million shares, through the end of the third quarter, resulting in an outstanding share count of 95.3 million shares.

I also want to highlight some recent announcements regarding agreements we have executed with Cameron, which, as many of you know, is now a Schlumberger company and is also our largest supplier. As we discussed on our first-quarter call, we have been working with Cameron to sell more of their products by shifting those products from direct sales to go through distribution. While this benefits suppliers like Cameron by allowing them to lower costs by using our sales, warehouse, and logistics infrastructure, it also benefits MRC Global. It allows us to expand our higher-margin product offering to customers.

Given that these products previously sold direct from the supplier, these product expansions represent an increase in the overall market that we now serve.

This October, we signed an exclusive arrangement to sell Cameron's measurement and instrumentation products in North America. These are also higher-margin products that Cameron previously sold direct to upstream customers primarily. We hired 17 product specialists from Cameron and we have been actively rolling these products into our customer base. Given our wide breadth of customers across the energy complex, we have the opportunity to cross-sell these products to our downstream customers.

With this addition of valves and measurement and instrumentation products, this opportunity could generate $125 million to $150 million in revenue in 2017.

Obviously, these sales will increase and go higher as the energy markets expand and our penetration of the market increases. All these products are higher margin and assist us in achieving our goal of generating at least 40% of our revenues from valves, automation, measurement, and instrumentation products. We think this is a tremendous opportunity and worthy of your attention.

We believe we have gained market share during this downturn. We have expanded our framework agreements with customers. We won new customers and expanded our product offerings. We estimate that our core energy-related pipe valves and fittings available market in North America is approximately $7 billion to $8 billion and our share of that market is approximately 30% to 35%. This is up from our previous estimates of about 20% to 25%.

While this is hard to see in our results, given the significant contraction in the market, we feel confident the work we have done to gain share in the downturn will pay off as the recovery takes place. We are encouraged by the recent improvements in oil prices and we expect the pace of an oil and gas recovery to be measured, with more meaningful improvements expected in the second half of 2017.

While visibility remains unclear until customer budgets are set, we continue to stay focused on our cost structure with an eye towards future growth. Given that view, this quarter we closed or consolidated additional branches, bringing the total number of branches we've closed or consolidated to 24 this year, including five this quarter, for a total of 68 since June 2014. While we think we are close to the end of branch closures and restructuring, we will continue to review branch performance and make adjustments as needed.

We reduced headcount by another nearly 150 employees in the third quarter, for a total of approximately 560 this year. Since the end of June 2014, we have reduced headcount by approximately 1,450 employees, or 29%, and we have reduced total operating costs by 33%.

We also announced the restructuring effort in Australia, which we expect will lead to return to profitability for our Australian business in 2017, with mid-single digit adjusted EBITDA margins in 2018 for that business.

This quarter, we recorded non-cash pretax inventory charges of $45 million, which Jim will cover in more detail. This had the effect of depressing gross profit and adjusted gross profit. Gross profit and adjusted gross profit percentages for the third quarter of 2016 would have been 16.8% and 18.7%, respectively, excluding these charges, with the adjusted gross profit percentage being 100 basis points higher than the same quarter a year ago.

Part of our inventory charge was related to Iraq, which, as you know, has become an increasingly difficult market environment in which to operate. The lack of funding of oil projects by the government has continued to plague Western operators and service companies. This in part led to the winding up of the business with our former alliance member in Iraq.

Even so, we remain focused on growth in the Middle East region, due to the potential we see there.

We believe our working capital efficiency is best in class at under 20% of sales at the end of the quarter. We have reduced working capital net of cash by $287 million for the first nine months of the year, including $112 million in the third quarter. As we return to growth, we will begin building our working capital, the pace of which will be dependent on the trajectory of recovery. However, we expect that working capital as a percentage of sales will continue to be best in class.

This week, we announced the launch of our enhanced online customer catalog called MRCGO for an initial set of customers, with the intention of expanding it to others. We have and will continue to make investments in technology to make it easier for customers to place orders with us and strengthen our customer relationships. Today, revenue through our online catalog is over $100 million per year.

Regarding acquisitions, we maintain an attractive list of potential targets. As the market continues to improve, we would expect to have opportunities in 2017. You can expect us to be focused on acquisitions in one or more of the following areas -- valves, technical products, downstream, and stainless or higher alloys. We have ample room on our balance sheet to pursue acquisitions to grow organically as the market returns. We are well positioned for growth.

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

Thanks, Andrew, and good morning, everyone.

Total sales for the third quarter of 2016 were $793 million, which were 26% lower than the third quarter of last year and were lower across all sectors. Sequentially, quarterly revenue increased 6%, which is the first sequential increase since 2014, reinforcing our views that the market is ready for a recovery.

US revenue was $590 million in the quarter, down 32% from the third quarter of last year. Excluding $63 million of quarterly OCTG revenue from a year ago, US revenue was down 25%. All sectors and all product lines declined in the quarter, as compared to the third quarter of 2015.

The upstream sector decreased the most at 56% in total, or 32% excluding OCTG revenue, from the third quarter of last year. Upstream market activity, as measured by the rig count, decreased 45% over this same time period. The US midstream sector declined by 17% and the downstream sector declined by 28%.

Of the product lines, line pipe decreased the most at 44%. Sales were down in midstream due to lower project activity and deflation in line pipe prices. Sales in downstream decreased primarily to lower project activity and deferral of MRO expenditures.

Sequentially, quarterly US segment revenue was up 7%. All streams showed sequential improvement, but primarily driven by upstream and midstream, which were up 15% and 8%, respectively.

Canadian revenue was $70 million in the third quarter, up 1% over the third quarter of last year, as growth in midstream offset a decline in upstream. Canadian revenue was up 28% sequentially from growth in midstream; in particular, midstream valve orders for a pipeline project were strong during the quarter.

In the international segment, third-quarter revenue was $133 million, down 2% from this same period a year ago. Sales in downstream were down modestly, due to lower project activity and the deferral of MRO expenditures, offsetting improvements in upstream.

Sequentially, international segment revenue was down 6%, due to large project revenue in the second quarter, which tend to be lumpy and not repeated in the third quarter.

Now turning to the results based on end-market sector. In the upstream sector, third-quarter sales decreased 41% from the same quarter last year, to $224 million. Excluding OCTG revenue, upstream sales declined 24% from the third quarter last year. The decline in upstream sales reflects the weakness in the oil and gas market year over year.

However, sequentially upstream increased 6%. This is encouraging and is an indication that the market could be at an inflection point.

The midstream sector was again our largest sector in the quarter, at 41% of total sales, and remains over 90% US based. Midstream sector sales were $327 million in the third quarter of 2016, a decrease of 12% from the same period in 2015. Among the midstream subsectors, sales to our gas utilities were flat with the same quarter a year ago. However, sequentially gas utility sales were higher by 9%, as it is not uncommon for the third quarter to be seasonally stronger.

Sales to our transmission and gathering customers decreased 22% from the same period a year ago, reflecting continued reductions in gathering line work, direct line pipe activity, and line pipe deflation in the quarter. The mix between our transmission and gathering customers and gas utility customers was split 45% and 55%, respectively, for the quarter.

In the downstream sector, third-quarter 2016 revenue was $242 million, a decrease of 25% as compared to the third quarter of 2015. The decline in downstream is across all geographies. It continues to be the case that the rolloff and delay of large and small projects, together with a general reduction in spending in line with lower commodity prices, have contributed to the decline in downstream.

While we did see an improvement in turnaround activity this quarter, it was not enough to offset the decline in projects. We are still anticipating a strong turnaround season in the spring of 2017. We also expect to see an increase in downstream project activity in 2017 once Shell [Franklin], an ethane cracker project in Pennsylvania, and other projects begin deliver.

Turning to the revenue by product class, our energy carbon steel tubular product sales were $117 million during the third quarter of 2016, which now only consists of line pipe sales. Sales of line pipe declined 40% from the third quarter of 2015.

On a quarter-over-quarter basis, line pipe prices have declined. Based on the latest Pipe Logix all items index, average line pipe spot prices in the third quarter of 2016 were lower by 15%. Sequentially, prices stabilized the last several months, but dropped 1% in September to hit a new low. There is still insufficient demand for pipe to support higher prices.

Sales of valve, valve actuation, and instrumentation were $296 million in the third quarter of 2016, as compared to $360 million in the same quarter a year ago, for a decline of 18%. Revenue from fittings and flanges and other related products was $177 million in the third quarter of 2016, as compared to $222 million in the same quarter a year ago, representing a decline of 20%.

Sales of gas products were $124 million in the third quarter of 2016, as compared to $126 million in the same quarter a year ago, representing a decline of 2%. All remaining products, including oilfield supplies, were $79 million in the third quarter of 2016, as compared to $104 million in the same quarter a year ago, representing a decline of 24%.

Now turning to margins, both gross profit and adjusted gross profit were impacted by the $45 million of non-cash pretax inventory charges to cost of goods sold. As is consistent with our past practice, we have not adjusted gross margin for these inventory charges and the reconciliation you saw in our press release. This charge includes $24 million in the international segment, primarily related to the restructuring of our Australian business and the market conditions in Iraq that Andrew described earlier.

In addition, reserves for excess and obsolete inventory were increased in the US and Canada by $16 million and $5 million, respectively, as the result of the current market outlook for certain products. While we do believe that 2017 will be improved from 2016, demand improvement will not uniformly impact every product, and as a result, certain inventory required further reserves.

The gross profit percentage was 11.1% in the third quarter of 2016 and 17.3% in the third quarter of 2015. Excluding the $45 million of inventory charges, the third quarter of 2016 gross profit percentage would have been 16.8%. A LIFO benefit of $3 million was recorded in the third quarter of 2016, as compared to a $15 million benefit in the third quarter of 2015.

The adjusted gross profit percentage, which is gross profit plus depreciation and amortization, amortization of intangibles, plus or minus the impact of LIFO inventory costing, divided by revenue, was 13% in the third quarter of 2016, lower than 17.7% in the third quarter of 2015. Excluding the $45 million inventory charge, the third quarter 2016 adjusted gross profit percentage would have been 18.7%, consistent with adjusted gross profit percentage for the first half of 2016.

SG&A costs for the third quarter of 2016 were $124 million, a decrease of $18 million or 13% from $142 million a year ago, due primarily to our cost-reduction measures. Included in SG&A is severance of $3 million in the third quarter of 2016.

In the third quarter, we continued to reduce our operating expenses through a reduction in headcount of nearly 150 positions. We have eliminated approximately 1,450 positions since June of 2014. This represents a workforce reduction of approximately 29% and a decline in SG&A expenses of 33% over the same time.

And as part of the Australian restructuring, we expect to record approximately $8 million to $10 million of charges in the fourth quarter of 2016.

Interest expense totaled $9 million in the third quarter of 2016, which was lower than the $10 million in the third quarter of 2015, due to lower average debt.

The effective tax rate for the third quarter was 5% and we now expect the full-year effective tax rate to be 12%. The reduction in our previously estimated effective tax rate of 22% to 12% is due to higher forecast of pretax losses in our international segment, combined with an increase of the relative significance of pretax losses in certain foreign jurisdictions where the losses have no corresponding tax benefit. Approximately one-half of the inventory charges in the quarter were in jurisdictions where we were not able to recognize the tax benefit.

Our third-quarter 2016 net loss attributable to common shareholders was $46 million or $0.48 per diluted share, compared to $10 million or $0.10 per diluted share in the third quarter of 2015. The third quarter of 2016 includes non-cash inventory after-tax charges of $38 million or $0.40 per diluted share, as well as severance and restructuring after-tax charges of $2 million or $0.02 per diluted share.

Adjusted EBITDA in the third quarter was $24 million versus $51 million a year ago, down 53%. Adjusted EBITDA margins for the quarter were 3%, down from 4.8% a year ago, due to lower revenue and margin dollars as described earlier, partially offset by cost-reduction measures. The US and Canada are positive adjusted EBITDA, and with the actions taken in Australia and elsewhere, we look to move international to positive.

The adjusted EBITDA reconciliation includes an add back of $40 million of the inventory charges, rather than the $45 million we discussed previously. The difference of $5 million relates to inventory charges that are more routine in nature and amount, and as is consistent with our historical practice for similar items, we have not adjusted for these charges in arriving at adjusted EBITDA.

The business generated cash from operations of $82 million in the third quarter of 2016 and $230 million for the first nine months of the year. We exceeded the $200 million threshold we expected for the year. Our working capital, excluding cash, at the end of the third quarter this year was $604 million, $112 million lower than it was at the end of the second quarter.

As compared to the same quarter a year ago, days sales outstanding improved by five days, and excluding the impact of the inventory charges, days payable outstanding improved by seven days and inventory turnover improved to 4 times, up from 3.7, both from the same quarter a year ago. And we remain focused on optimizing working capital.

Our total debt at quarter-end was $515 million, comparable to the balance at the end of June. Cash increased by $46 million during the third quarter this year and we ended the quarter with $213 million in cash, resulting in a net debt balance of $302 million.

Given the strong cash generation this year, we have decided to pre-pay $100 million of the Term Loan B with cash on hand. Currently, we are paying 5% in interest on the term loan, and this will save us approximately $5 million in interest costs per year, or about $0.03 per share.

At the end of September 2016, the availability on our asset-based revolver was $475 million, which is not impacted by the Term Loan B repayment. We continue to have substantial financial flexibility and are well positioned.

Our leverage ratio has increased as adjusted EBITDA has declined, and we are now at 3.3 times compared to 3.0 times at the end of the second quarter. While this ratio is expected to increase over the balance of the year, we have favorable terms in our debt structure, including no financial maintenance covenants, and our nearest maturity is July 2019.

As the market grows and customers spend more, our ABL gives us the flexibility to comfortably grow our working capital. We also have room under the ABL and cash on hand, should there be an acquisition we would like to pursue.

Our balance sheet is strong, with a debt structure that is flexible and conducive to future growth.

Capital expenditures were $10 million in the third quarter and $24 million year to date.

Our backlog was $659 million at the end of the third quarter of 2016, up 9% from a year ago, excluding OCTG backlog in the third quarter of 2015 of $56 million. Since December 2015, backlog has increased $159 million or 32%, excluding OCTG backlog in December 2015 of $42 million. Since the second quarter, the backlog has been fairly flat, with a 9% increase in the US from midstream projects offset by an 11% decline internationally as deliveries have taken place.

And now, I would like to turn it back to Andrew for his closing comments.

Thanks, Jim. We are encouraged by the recent increase in commodity prices and modest improvement in activity levels this quarter. However, uncertainty remains with respect to the pace and trajectory of the recovery. We expect to have more clarity for 2017 when customers complete their budget process and expect that we will share that with you on our fourth-quarter call next February.

While we are not providing specific fourth-quarter or full-year guidance, our view regarding fourth quarter is cautious as there are three last billing days as compared to the third quarter, as well as the holiday season, when activity often slows. As a result, we expect revenue to be down sequentially in the fourth quarter, which is typical for our business model as third quarter is generally the strongest. Only once in the last six years has the fourth quarter shown sequential growth over the third quarter, and that was in 2013 when several large line pipe orders shipped in the fourth quarter.

We maintain our focus on controlling costs and optimizing working capital, with an eye toward recovery next year. Once we have clarity around how the recovery may unfold, you should expect to see us begin to build inventory levels consistent with the growth we expect.

We are in a great position. We have all options available to us and we will continue to take advantage of the opportunities to maximize shareholder value that arise, including repurchasing additional stock, paying down debt further, reinvesting in the business for organic growth, or holding steady and making acquisitions. Should we see an attractive opportunity, we have enough financial flexibility that all our options are not mutually exclusive.

We're excited about the opportunities ahead of us. We have gained market share with current and new customers, expanded our product offering, increased our gross margins, and streamlined the cost structure. So MRC Global is positioned to take advantage of the impending upturn.

Operator, with that we will now turn it over to you for questions.

(Operator Instructions). Matt Duncan, Stephens Inc.

Nice job this quarter on the things you can control.

Good morning, Matt. Thank you.

So, Andy, I just want to start with the outlook. If you could give us a little help on the pace of decline we ought to think about sequentially in the fourth quarter, like you've done the rest of the year, that would certainly help. And then just big picture, looking out to next year, what are some of the qualitative things that you are hearing from your customers at this point that give you comfort you'll grow next year?

Yes, Matt, let me start with the fourth-quarter commentary. It is very typical for us, as we said in our prepared remarks, to have a fall off in the fourth quarter, seasonal, and also with the last billing days.

Of course, we are sitting here at $44 oil. It still remains very volatile, so we are being cautious about the guidance there, given that volatility in commodity pricing.

But we feel good about our position. The third quarter played out like we would expect. October run rate continued at the third-quarter rate, but our uncertainty on how the year will play out is really in the November/December time frame. What will our customers do with this final spending, given the end-of-year budgets they might have left?

So I think that's very typical for us. We have a nice backlog going in. Certainly, the upstream market has improved and will continue to improve with weekly gains in rig count, so that is directionally positive, although it takes a while for that to work through our revenues. But we feel good about that.

We feel good about the midstream activity and the projects we have going, going into the quarter, and then downstream, while slow in project activity, of course we feel very good at the start of next year.

So if I switch to the outlook for next year, just starting on a macro level, the industry has never had three years of sequential CapEx spending declines, so certainly that is from a very high-level picture. No, we don't think that is going to occur in 2017. There has been several surveys of our major customers done and show that spending increases are predicted for next year. That's another point. And we have had a handful of customers come out with 2017 CapEx that also show increases over 2016.

Of course, specifically for our customers when you think about the upstream, certainly our upstream customer base have picked up rigs and plan to pick up additional rigs starting the year, so the completion of the DUCs add volume to us as we do a lot of well hookups, and we are active in the production facilities. So we think that is definitely up positive for the upstream year on year.

Midstream, we got a nice backlog of projects. A lot of them are related to gas infrastructure more than the oil side. So we see that, plus our gas utility business, being good, so that gives us confidence.

And then downstream, we're going to have a nice, really nice turnaround season in the spring to start the year. And we also have some project work kicking back in where it has been a lull for the last 12 to 18 months. The Shell Franklin that we spoke of, Jim mentioned it in the prepared remarks, that is ramping up really nicely as a major downstream project for us.

So we are, let's just say, cautiously optimistic. I am confident 2017 will be up from 2016. It really is a matter of how these budgets get approved from our major customers and spending level increase, how big will that be over 2016, and that will drive through our revenues.

From a perspective on timing, we feel really confident that the back half of 2017 will be a big pickup from the back half of 2016, with maybe a little cautiousness in the first quarter as we ramp up the new budgets.

Okay, very helpful. So I will move on to the next question, then, just on the cost side. Jim, you have been giving us a view on what quarterly SG&A cost run rate ought to be. If I back out the severance this quarter, you came in at $121 million, and your expectation had been $126 million to $128 million, so obviously doing a good job there.

How should we think about that into the fourth quarter? I would assume with down revenue there's a chance that cost line may be down a little bit, but just want to make sure we are thinking about that right.

Yes, that is certainly the case, Matt. You could see that. I think, more importantly, we are not taking any action that would add significantly to the cost structure. Certainly in the fourth quarter and as we go into the beginning of the year, we will be very cautious in adding those costs back. So, I think you can expect more of the same from us in that area.

And Matt, I will just add to Jim's comments that we -- while we are largely done with our reductions, we will have some reductions both in Australia and Norway on the cost side going into fourth quarter that will complete that process for us.

Okay. I appreciate it, guys. I will hop back in queue.

Sean Meakim, JPMorgan.

Congrats on securing that new Cameron contract. We have talked in the past about this opportunity for you to shoulder more of the customer burden for suppliers that want to reduce SG&A and outsource more of that function for some of these specialty products. Are there other opportunities out there that you're looking at? How can we think about what else can be coming down the pike?

Yes, Sean, we're excited about the expanding relationship with Cameron. As we said in our remarks, both the expansion on the enterprise distribution agreement on the valve side, and then with the measurement, we expect year on year it will add $125 million to $150 million revenue in 2017 over 2016 from what has already been put in place. So we like that a lot.

It allows our manufacturers/suppliers to reduce their costs. We get to bundle our sales with other products. We get to expose it to a broader customer base and even some additional end markets, and for the supplier/manufacturer for Cameron, we bring more bulk orders and volume, which is very good.

So they get to lower their costs. They get larger placed orders where we are placing orders for stock, so there is a lot of efficiency on their side and also on our side. It expands our breadth of products. So we like that a lot. It has been part of our strategy on valves and measurement and instrumentation to expand.

And of course, we have a couple other major suppliers in different areas of our business that we see similar, and we think it's a trend that we would like to continue. It is definitely a positive for us.

Okay, that's very good to hear. And then, maybe if you could drill into the midstream a little more, thinking about next year. Can I get a sense for how the project cadence looks? And I guess what I'm trying to get at is a sense of when do you expect to get better visibility on the rate of change for the year? Do you think you will have a good sense of it around the time you report 4Q or could we -- do we have to wait until we get quite close to the summer construction season before we have a better sense of that?

We will definitely have a better sense as we get into the spring, late spring, and we see what is teed up for the summer construction, but I think we will have a good view by the February call, our end of year call.

And I think a couple of positives. I think we're at or near bottom on line pipe pricing after two years of decline. I view that as a positive for us. It has been stable on overall line pipe pricing the last four to five months. We have seen some increases in spot buying pricing from the mills since the bottom in the first two quarters of this year. So while we don't predict a big increase in inflation and pricing, because the demand has to come first, we do think that will stabilize and be a positive.

We are still active with several customers on the gas infrastructure side. I think that dynamic continues, and then we don't do the big trunk lines, so some of the headlines on the major trunk line projects that have been held up due to regulation and permitting, we normally don't do those lines. We are much more directly tied into infrastructure and infield pipeline type projects.

So I do think it's positive. Of course, additional oil rig drilling, additional oil production leads to incremental oil pipelines, and Apache is a great example, had a great new find into Alpine High. A lot of oil infrastructure and gas infrastructure needs to be put in place with that significant discovery.

So, there are some good things happening in our core customer base that we feel good about. TransCanada work with their acquisition of Columbia Pipeline Group, they are very active.

So while it is not huge, midstream as a whole is 38% of our revenue now. The pipeline side, I think, will be better than 2016 and the gas utility will continue to be a real bright spot for us.

Got it, great. Thank you, Andy.

David Manthey, Robert W. Baird.

Andy, speaking about the Cameron deal, I think you mentioned that the margins are better than average because of the nature of the products. Are they also equal to the margins on your other valve, instrumentation, and actuation products?

Yes, Dave, they are. And Cameron is going to continue to do the real high-technology special designs, and especially offshore or upstream. This is more of our mainstream product lines, both up-, mid-, and downstream valve applications, and we see a lot of growth and volume in the midstream valve lines that we have accessed more fully with them.

And is this an exclusive agreement? And if so, how long does it last?

Yes, the valve agreement is not exclusive. It is a global agreement. It is a multiyear agreement, and we feel like we're performing very well in the competition, if you will, for that type of sales growth that they, Cameron, was expecting. So we have seen a nice upturn in activity and sales in the North America market.

You will see more from us in 2017 as we expand the sales of the Cameron lines into international, so I think you'll see some growth that is not in the numbers this year because of it being a global contract, and we're positioned very well to serve global customers with the access to Cameron, like a Chevron and Shell, like BP and ConocoPhillips.

The measurement one is exclusive for North America, and we like that one because that's really an expansion of what we offer. We have measurement and instrumentation in Norway through the Stream acquisition. We have had a baseline of instrumentation business mostly around plants, refining chemicals, and this really takes a much bigger footprint for us in upstream measurement and instrumentation.

Okay, and just shifting gears here to the downstream sector specifically, when you talk about turnarounds and hope for project upticks, could you give us an idea of what the mix of your business is between projects and turnarounds at this time?

Yes, so, Dave, in the downstream business, a large part of it is going to be projects in recent years with some of the big construction facilities. So that as a percentage has probably been around 30% or 40%, with the balance being turnaround activity and day-to-day MRO needs.

Great. Thank you very much.

Vebs Vaishnav, Cowen and Company.

If I think about the US upstream revenues, which grew pretty nicely at 15% quarter over quarter, what drove that? Was it anything to do with any one-time items? Is there less of a lag for you guys versus the drilling activities, or was it driven by market share or something else? Could you help?

Yes, let me give you some clarity there. Because we are not a rig equipment company, so it is not directly tied to the rigs' activity, drilling rig activity, specifically. We do -- our place in the upstream is in production facilities, well completion, tie-ins, so a decrease in the number of DUCs that were out there is a positive for us, as we play in that part of the market.

But the bigger thing is really the market-share gains we've had. We are ramping up on Chevron, Gulf of Mexico, which is upstream for us. California Resources, which we announced previously, the California business ramped up nicely early in the year, and then during the quarter, we added Ventura and Tidelands and THUMS, three more operations to the previous contract.

So I think we are seeing good pickup. We certainly -- our core customer base, our multiyear MRO base of upstream customers were more active with a general activity pickup in upstream.

Okay. And switching to the Schlumberger agreement you spoke about, that $125 million to $150 million revenue is like a big number of (inaudible). Can you help us think about what is the current run rate? And if, let's say -- you also spoke about the fourth-quarter guidance being cautious over there. Is it fair to say whatever that run rate number is today, we should think about your revenues doing whatever the US spending does, and on top of that whatever is the run rate today?

Let me start and Jim will maybe add some commentary. This is part of our valve, automation, and measurement and instrumentation business, which this year should be around $1.2 billion as we talk about the 38%, 39%, and growing to 40% of our total revenues next year. So it's a big number, but not in the context of the business we are building.

The valves is a product line we know very well. This is an expansion to some other lines that were being sold direct, so there is lot of market pull already there. So I would say you can think about that, as growth from the valve contract, being around $50 million of that $125 million to $150 million.

And then, the measurement business in North America is an ongoing business that Cameron had. It is not a new business. There is lots of customers. There is a lot of brand [accesses]. These are the Barton lines, the NUFLO lines, the CLIF MOCK lines, so very respected brands in the industry.

So you can think about $50 million, $75 million of that is just a new business for us that is an ongoing business, and we feel comfortable with that projection because it is a base business in 2016, and even those numbers are well below the peak of 2014 for them. So, we feel good about that estimated as very achievable for us in 2017.

Okay. And one last question, if I may sneak in, just when I think about the gross margins for your business upstream, midstream, and downstream, can you help us think about how they rank versus, let's say, the Company level at margins?

I would put them in the order of rank. Typically, our downstream margins will be the highest, followed by upstream and the midstream. And the midstream carries the bulk of our carbon line pipe, which at times can have much lower margins, the average, because of direct or buyout products that we do.

Thank you. That's all for me.

Ryan Cieslak, KeyBanc Capital Markets.

Just really quick, going back to Cameron deal that you talked about, I just would be curious to know maybe how to think about the cadence of when those sales start to roll through. Is it something that is already hitting in the fourth quarter, or is it something that gradually ramps and you start to see that run rate more in the back half of next year? Just any color around that would be helpful.

No, we -- from the valve side -- let me talk about the two of them. From the valve side, we ramped up even in the second quarter shortly after signing that agreement with, let's just say, several million dollars worth of early sales, additional sales.

So third quarter was a nice run rate with the valve growth. So I think that continues and it is not the back half of 2017. You will have a lot of momentum on that in the first half also in North America. I think it will ramp up in the international midyear, going into next year.

Now the measurement, we signed that agreement in October 3, so you haven't seen any of that yet. Really in the numbers in the third quarter, you'll see that equally ramped up. If you take our number we provided on a quarterly basis, you will see start of that in fourth quarter, and that won't be -- you will see that carry right into the first quarter of next year.

So, there won't be a ramp-up period, except along with the overall upstream activity as it picks up. We could see some upside from our number there in the back half of 2017.

Okay, thanks for that. And then, my follow-up question would be just on gross margins, maybe how to think about the direction of gross margins into the fourth quarter.

And then, also, Andy, thinking about 2017, obviously pricing will have a big impact on the margins, but maybe what are some of the puts and takes going into next year on gross margins as it relates to mix or any sourcing initiatives?

Ryan, let me cover the first part of your question. There is nothing that we see in the product mix or the nature of the business over the near term that is going to change the margin significantly. So, we would expect those to continue on a same course and a same cadence.

Yes, just on thinking about next year, we really over the past two years went through three cycles of cost discussions and negotiations. We spent the bulk of the last year, year and a half, on product substitutions and discussions with our customers, so a lot of our numbers already reflect all those renegotiations, if you will, extensions of contracts, and new pricing is all in place, so I don't see a big change there.

We still will see, as we pivot even more towards our valve lines and we get from kind of the current 38% of our total revenue up above 40%, which we hope to achieve next year, you will see some positive margin shift. The new businesses are also weighted towards the positive higher margins for us. So we feel good about that and we think the worst of that is behind us.

And as I mentioned, and Jim mentioned, line pipe, which tends to be our lowest margin, we think it is at or near the bottom, so an improvement, even a small improvement, in line pipe inflationary pricing going into 2017 also is a positive for our margins.

Thanks, guys. Best of luck.

Ryan Merkel, William Blair.

Thanks for fitting me in. So, two questions for me. First, if sales grow next year, how should we think about investment spend and temporary expenses coming back on? I guess, philosophically, are you going to reinvest in the business right away or are you going to wait a year, maybe let some good leverage pour through, and then start reinvesting in 2018?

In terms of the cost structure and the infrastructure, we're certainly going to wait and see that the business comes to play out like we thought. We will certainly be very cautious in adding back costs that we don't need to. And so when you say into 2018, it would certainly be in towards the latter half of 2017, if the market does really, really well, but we are going to certainly be very, very cautious about adding costs back to the system.

Yes, Ryan, and let me just add a comment to Jim's. A bulk of our cost reductions over the last year, year and a half, have been trying to streamline -- after a period of a lot of acquisitions, streamline the whole management structure throughout.

So I think there's a lot of permanent costs that have taken out, especially in our efforts to improve the profitability of international and streamline the North America management structure. So those won't come back, so they will be permanent changes.

And you really see, as Jim said, later half of 2017, 2018, our ramp-up will be much more related to North America transactional increases. We're at really on our DCs today one shift, and, of course, in 2014 we were running three shifts. So, those incremental costs will come, but they will come with improved performance and higher growth.

That's very helpful. Okay, thank you. And then the second question, and this one might be hard to answer, looking at next cycle, what do you think is a reasonable estimate for midcycle EBITDA and just how do you get there, philosophically?

That is a good question, and again, as we have looked at the business, we think that midcycle EBITDA is into the $300 million type range. How we get there is the things we've already started to do, and that is expand and extend contracts, gain market share, manage the cost structure, and be in the best position we can to take advantage of when the market turns and customer spending picks up.

And Ryan, just on the capital side, we have done a lot on working capital, a lot on optimizing our hub and spoke, our branch and our DC network, so we feel good about our ability to ramp that up.

Of course, we are running working capital as a percent of revenue around 18%, 19% right now. So we have plenty of capacity for the $1 billion to $2 billion of revenue growth in our current balance-sheet position, and we are positioned for that. While we consolidated a lot of branches into some larger branches, we did not exit any of our end markets, so we feel as the spending increase comes that we will get back, and I would say to Jim's point of $300 million to $350 million midcycle EBITDA is certainly where we'd expect to be back to, like we were before.

Very good. Thank you so much.

(Operator Instructions). Walter Liptak, Seaport Global.

I wanted to ask about -- just a follow-on with the management streamlining, because the SG&A expenses did come down nicely this quarter. Are we now at that level, in the mid-120s? And when you think about next quarter, are there any incremental costs that I think that come through, maybe the Cameron overhead that you talked about or any incentive comp accruals that might not have been accounted for yet this year?

No, so you are right. While we added 17 people from the Cameron measurements and instrumentation transaction, so we will see a little bit of pickup in salary costs, but on balance, I don't think you're going to see a whole lot of movement in that. As we get through the end of the year, we will have to look at year-end severance, but we think we are in relatively good shape there.

The 17 are related to the growth in the incremental business, but as I mentioned previously, we will have probably in the range of 30 to 40 additional reductions in international, so there will be -- while we had $124 million, $3 million severance, we will have a little severance in the fourth quarter that Jim just mentioned related to those international reductions.

But, no, this is our run rate. We were, what, $180 million, $185 million in 2014. So, $60 million per quarter down, and we don't see a big change from that in the next couple quarters.

All right, that's great. And then, new topic, just going back thinking about Iraq and the Middle East, what is your percentage of revenue now that's in the Middle East? And have you seen any changes in their spending levels with the price of oil coming back in recently? And maybe specifically, how big is Iraq as a percentage of sales?

Let me start and Jim can talk about the Middle East overall. But the changes there, we had a partner. The market looked very attractive a couple years back. They were going to grow 3 million barrels per day in production postwar, and the reason we were there, our major customers were there, Exxon and BP.

But the market changed. As everyone knows, the war with ISIS started back up in the north, and the country has just diverted a lot more of the cash to fund that. Our major customers, due to the environment, have pulled out or slowed their activities.

So what was an attractive market with our end customers changed on us. Our partner shut down their business there. And so, we had some limited exposure, and we have taken care of that with the inventory write-offs. But there is going to be a day when that is a better market and a more attractive market. We would say very conservatively on that market today for sales, it is a very small market for us. But with the SABIC contract earlier, we are very keen, of course, on the Saudi Arabia market. We have got Shell Qatar. We are looking at Abu Dhabi expansion and Oman and Kuwait. There are some good markets there.

We have been growing our Middle East presence organically, so I would classify it still is the early stages, with an unfortunate write-off in Iraq related to the changes in the end market there. But the Middle East market should be a good market for us going forward.

Walt, just to give you some specifics, today the Middle East, which is primarily Iraq, is about a $10 million or $15 million business for us, but certainly, as Andy mentioned, we think the potential there is much greater than that.

Okay, great. Okay, and if I could ask just one last one, I think we're at the end of the call anyway, just the fourth-quarter working capital. It sounds like you're going to keep bringing in cash. Any guidance on where you think working capital could flow through in the fourth quarter?

No, again, I think we will continue to be a positive generator of cash from the working capital side of things. Now, the pace will certainly slow as the revenue starts to level out here and even with a little sequential decline, as we discussed, not to the same extent of cash that you saw in the year-to-date or on a third-quarter basis, but still positive.

Okay, all right, great. Thank you.

Matt Duncan, Stephens Inc.

Just on cash flow through the recovery, Jim, how should we think about the working capital reinvestment requirement? Maybe per $1 billion of revenue growth, how much working capital do you have to add back to the balance sheet?

Matt, I think what you'll see us do is adding 20%, 22%. We have successfully demonstrated that we can pull it down from the 25% level that we have typically talked about, but some of the actions we have taken, and while we are just under 20% now, in a growth mode we may be building. So I would say 20%, 22% is a good range.

Okay. And then, the $300 million to $350 million, let's say $350 million in midcycle EBITDA, what kind of revenue number would that come with? I guess maybe even to back into, what kind of EBITDA margin does that assume?

Yes, that is $4 billion, $4.5 billion, that type of revenue.

Okay. And then, last thing, on downstream the discussion that you have on turnaround season for the spring remains to be very positive. What is giving you that confidence? Is it orders that you're getting already on long lead time product? Is it customer chatter? Just a little bit of help understanding what is giving you that confidence would be great.

Yes, it is a combination, Matt. It is definitely long lead time orders that we already have in house here for start of November for the spring season. So, we have that visibility, but it is more than just discussion. It is a lot of planned project work, some small orders are on -- been placed, but a lot more are being planned for as [nuts] this time.

So, no, that part we feel very confident. Of course, we think from all -- we discussed it a little bit at length the last call, but a lot of the dynamics have happened over the last two years that we believe this is going to be a really good spring turnaround season. They just have to get the work done.

So it is not a general industry comment; it is much more about our customer base with our contracts we feel are going to be very active in the spring.

All right, that helped, Andy. Thank you.

Vebs Vaishnav, Cowen and Company.

Thanks for letting me back on. Just one quick question for me. And I understand it is a little too early to say this, but if we say international spending is maybe flat to, let's say, down by 6%, how should we think about MRC's international revenue for 2017 in that context?

Our international business will be up next year. And it comes from some awards in Norway, some Middle East awards, including I am talking about the Caspian. We consider the Caspian and the Middle East together. We have got some really nice awards coming in 2017 and ramp-up on revenues from activity there.

As you know, the whole TCO, Caspian area, Chevron activity reinvestment of $26 billion in that future growth project, so of all the upstream activity in the world, that is really a key growth spot. We have a nice presence there and nice contract position there. So we are confident we will be higher in international revenue next year, even given the macro spending you have mentioned.

Ladies and gentlemen, we have reached the end of the question-and-answer session. We thank you for your participation. This does conclude MRC Global's third-quarter earnings webcast. You may disconnect your lines and have a great day.