MRC Global Inc (MRC) 2016 Q4 法說會逐字稿

Greetings and welcome to the MRC Global fourth-quarter 2016 earnings conference call. (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 fourth-quarter and year-end 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 March 3, 2017. The dial-in information is in yesterday's release. We expect to file our 2016 annual report on Form 10-K 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, February 17, 2017, 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 margin. 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 item.

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. This past Wednesday, February 15, marked MRC Global's 96th anniversary. While we've been a public company for almost 5 years, we have been continuously operating and serving our customers with innovative solutions for nearly a century. This is a testament to the dedication and hard work of our current and former employees over the years.

Today I will review Company performance highlights, and then I will turn the call over to our CFO, Jim Braun, for a more detailed review of the financial results. I'll then finish with our current outlook. In February of last year we thought 2016 revenue would be down 25% to 30% from 2015 excluding OCTG revenue, and we landed at about the midpoint, ending 2016 with $3.04 billion in annual revenue. We believe this marks the end of one of the worst downturns in oil and gas history.

For the fourth quarter we reported revenue of $719 million, down 9% sequentially, in line with historical end-of-the-year performance, with November and December seeing both traditional seasonal activity declines and spending curtailments. Compared to the same quarter a year ago, revenue was down 26%, driven by reduced customer spending across all segments and sectors.

Upstream declined the most at 41%, downstream by 17%, and midstream by 15%. The decline in upstream includes the impact of selling OCTG, which otherwise would have been a 29% decline. Adjusted gross profit for the fourth quarter of 2016 was $133 million or 18.5% of revenue as compared to $172 million and 17.7% for the same period in 2015. Some of this increase can be attributed to product mix, as we sold the OCTG online in early 2016 and focused on higher-margin products.

Net loss attributable to common shareholders for the fourth-quarter 2016 was $24 million or $0.25 per diluted share, including after-tax severance and restructuring charges of $7 million or $0.07 per diluted share, as compared to net loss attributable to common shareholders of $399 million or $3.92 per diluted share for the same period last year, which included an after-tax charge for the impairment of goodwill and intangible assets and other items of $411 million or $4.04 per diluted share.

We continued to generate cash in the fourth quarter, providing an additional $23 million of cash from operations for a total of $253 million for the year. While we plan to generate modest operating cash in 2017, we expect to shift our resources to growth, investing more in working capital to support this growth.

Last quarter the Board authorized an increase to the share repurchase program to $125 million, and we continue to buy under that program. In the fourth quarter, we repurchased $7 million of stock at an average price of $15.94 per share. Since the program was authorized, the Company has purchased $107 million under the plan at an average price of $13.98 per share. The current authorization is scheduled to expire at the end of 2017.

Even though the market conditions have been weak, we believe there are opportunities to position for maximum growth by capturing market share. This has been a major focus of our strategy. Chevron awarded us their MRO and project work in Thailand, which is another scope addition from one of our major customers.

In downstream, LyondellBasell, one of the largest chemical companies in the world, awarded us an extension to our PFF MRO agreement for an additional three years, adding stainless and alloy products to the scope. LyondellBasell has two very large projects planned, one of which we have begun to see orders, and the other is in early stages. And we are well positioned to participate.

Also in downstream, we were awarded additional scope in our agreement with PBF, an independent refiner, adding their two new refinery acquisitions into our agreement. These are all great examples of how MRC Global is positioned to grow by gaining market share with new and existing customers. While this hasn't been obvious in our results during the last two years of market contraction, we expect to see it as our customers begin to increase spending again.

In addition to these large contract and project wins with major customers in 2016, we continued to focus on smaller, targeted growth accounts that include the hundreds of regional fabricators in North America. Small capital projects through fabricators have been an important part of our North American business for many years.

Our end customers have a strong preference for regional fabricators that they have worked with for many years. We have pipe, valve, and fitting sales to approximately 300 fabricators in Canada and the United States. To put this in context, in 2016 we had PVF sales to fabricators in North America of over $300 million or approximately 13% of our North America sales. We are one of the largest PVF distributors to fabricators in the United States, and our strategy continues to be neutral PVF supplier to the North American fabricator market.

We also continue to focus on new and expanded integrated supply arrangements across all three of our up, mid, and down sectors. Our growth in this area has been the greatest in the midstream, and we expect integrated supply revenue to be over $700 million in 2017.

This quarter come our SG&A costs were $120 million, excluding severance and restructuring charges, which is the lowest it has been since 2011, when the Company was still privately held. While reducing costs is never easy, it was necessary, and we responded to the market conditions quickly.

In the fourth quarter, we reduced headcount by about 40 positions. However, in 2017 we expect to increase headcount modestly as the business grows. Since the middle of 2014, we have reduced headcount by approximately 1,500 or 30% of our workforce. We have continuously implemented cost-cutting measures since 2014 to improve profitability and to size the business to the current environment.

Since the middle of 2014, we have closed or consolidated 74 or 31% of our branch locations. While we continually review branch performance and open or close new facilities based on market conditions in the ordinary course of business, we expect to grow from our current branch and distribution center foundation as we enter a new phase of the cycle.

We aggressively managed working capital last year. Since the end of 2014, we have generated over $550 million of cash from the reduction of inventory. However, we plan to increase inventory in 2017 while maintaining efficiency as measured by inventory turns and working capital as a percentage of revenue -- which we expect to remain at our current best-in-class level. We are among the most efficient managers of working capital in the PVF space, and we intend to remain the leader.

In 2016, we reduced total debt to $414 million or net debt to $305 million. This is the lowest debt level for the Company since 2007. We have availability under our ABL of $425 million, which will grow as the business does. We have no financial maintenance covenants, no near-term maturities, and an average interest cost of 5%.

We have a strong balance sheet, with the capacity to grow organically as well as through acquisitions. While we have been quiet on the acquisition front over the last two years, acquisition growth remains one of the major tenets in our long-term strategy, and we maintain an active list of potential targets. We expect opportunities in the future, and we are positioned with very strong liquidity to execute when those opportunities present themselves. We are focused on the strategy to increase market share both through organic growth and the underlying market and through acquisitions.

We will continue to be diligent in managing our working capital and costs to maintain the gains we achieved in the downturn as we begin growing. You should expect to see us focus on high-margin product offerings, both in organic and acquisition growth. That includes growing our valve, automation, measurement, and instrumentation product offerings, with a particular focus on downstream chemicals, which include stainless and higher alloy products. We are on course to meet our strategic goal and to have this product group be at least 40% of our total sales in 2017.

I will now turn the call over to Jim.

Thanks, Andrew, and good morning, everyone. Total sales for the fourth-quarter 2016 were $719 million, which were 26% lower than the fourth quarter of last year due to continue to challenges in the oil and gas end markets, which has reduced customer spending across all geographies and all sectors. Sequentially, revenues declined 9% due to a seasonal decline in activity.

US revenue was $550 million in the quarter, down 29% from the fourth quarter of last year as activity across all sectors declined, primarily due to lower drilling and completion and project activity. The US upstream sector declined the most at 36%, excluding OCTG from the prior year. The US downstream sector decreased by 24%, and the US midstream sector decreased by 15%. Of the product lines, line pipe in the US decreased the most at 40%, followed by valves at 26%.

Sequentially, US segment sales were down from the third quarter by 7%, primarily due to a reduction in midstream sales, followed by a decline in downstream. On a positive note, US upstream sales experienced a sequential increase of 8%. This compares to a 23% sequential increase in the US rig count, as our US upstream sales will typically lag the rig count by a quarter or two.

Canadian revenue was $55 million in the fourth quarter, down 17% from the fourth quarter of last year in spite of a small Canadian rig count increase. A pullback of major customers' projects in heavy oil contributed to the decline. Sequentially, the Canadian segment was down 21% from the third quarter due to a decline in midstream sales as a result of large valve and the line pipe orders in the third quarter that did not repeat in the fourth quarter.

In the international segment fourth-quarter revenues were $114 million, down 7% from a year ago. Sales were down due to lower upstream activity, partially offset by an increase in downstream activity. Regionally, the decline was in Australia, Singapore, and Norway. Sequentially, the international segment was down 14% from the third quarter, primarily from declines in upstream.

Turning to our results based on end market sector, in the upstream sector fourth-quarter sales decreased 41% from the same quarter last year to $218 million from reduced customer spending in 2016 from 2015. Excluding OCTG from the 2015 sales, US upstream sales were down 36% from a year ago. End market activity as measured by the US rig count decreased 22% over the same time period.

Midstream sector sales were $268 million in the fourth quarter of 2016, a decrease of 15% from 2015. Among the subsectors, sales to our gas utilities were lower by 22%, and sales to our transmission and gathering customers decreased 7%. Gas utility sales were down due primarily to the timing of customer project deliveries, as we had large line pipe orders shipped in the fourth-quarter 2015 that did not repeat in 2016.

The decrease in the sales to transmission and gathering customers was due to continued weakness in gathering line work, direct line pipe sales, and line pipe deflation. The mix between our transmission and gathering customers and gas utility customers was weighted 54% gas utilities and 46% for transmission and gathering for both the fourth quarter and the year.

In the downstream sector, fourth-quarter 2016 revenues were $233 million, a decrease of 17% as compared to the fourth-quarter 2015. The decline in downstream was in the US and across all subsectors. The rolling off of projects in refining and chemicals contributed to the weakness in downstream.

Now turning to margins, gross profit -- the percent decreased 110 basis points to 17% in the fourth quarter of 2016 from 18.1% in the fourth quarter of 2015. The decrease was primarily due to the impact from LIFO. A LIFO benefit of $7 million was recorded in the fourth-quarter 2016 as compared to a benefit of $23 million in the fourth quarter of 2015. Excluding the impact of LIFO, gross profit percent increased 30 basis points to 16%.

The adjusted gross profit percentage, which is gross profit plus depreciation and amortization, amortization of intangibles, and plus or minus the impact of LIFO inventory costing, was 18.5% in the fourth quarter 2016, up from 17.7% in the fourth quarter of 2015. The increase in the adjusted gross profit percentage reflects the sale of our lower-margin US OCTG product line as well as mix changes, including lower line pipe sales and less project work. These items offset the negative impact from deflationary prices in line pipe and customer pricing pressures.

Specifically for line pipe, the product group where we tend to experience more pronounced changes in prices, line pipe prices declined in 2016, hitting a bottom in October. Based on the latest Pipe Logix all-items index, average line pipe spot prices in the fourth quarter of 2016 were lower than the fourth quarter 2015 by 9% and were down 17% for the year. In 2017 we expect to experience pipe inflation as demand begins to pick up and mill capacity in some types and sizes has been reduced.

SG&A costs for the fourth quarter of 2016 were $128 million, a decrease of $18 million or 12% from $146 million a year ago, due primarily to cost-cutting measures. Also included in the fourth-quarter 2016 and 2015 is severance and restructuring of $8 million and $5 million, respectively.

We aggressively cut costs throughout the last two years, sizing the workforce and our branch structure to meet the market size. In 2017, we expect SG&A expense will run about $125 million per quarter on average. However, we expect the second and third quarter to run somewhat high above the average due to costs associated with the implementation of our new ERP system in Europe. This average for the year is somewhat higher than the third and fourth quarter 2016 run rates come after excluding severance expense due to incentive accruals that begin the new year assuming the achievement of target levels of performance. We expect measured cost increases throughout the year, as we would expect to add modest headcount related to an increase in activity.

Interest expense totaled $9 million in the fourth quarter of 2016, which was the same as the fourth-quarter 2015. We recorded a small tax expense of $1 million in the fourth quarter against a pretax loss. This is due primarily to our international operations, where we are generating pretax losses for which the recording of a tax benefit is not permitted.

We expect the effective tax rate to be about 38% in 2017 based on our budgeted geographic profit mix. However, at relatively low pretax operating levels which we expect in 2017, the tax rate is subject to being volatile on a quarter-to-quarter basis and for the full year.

Our fourth quarter of 2016 net loss attributable to common stockholders was $24 million or $0.25 per diluted share compared to a loss of $399 million or $3.92 per diluted share in the fourth quarter of 2015. The fourth quarter of 2016 net loss attributable to common stock shareholders includes after-tax charges of $7 million related to severance and restructuring charges, while 2015 includes after-tax charges related to the impairment of goodwill and other intangibles of $402 million, severance of $4 million, litigation of $2 million, and the loss on a disposition of the OCTG product line of $3.2 million.

Adjusted EBITDA in the fourth quarter was $17 million versus $34 million a year ago, down 50%. Adjusted EBITDA margins for the quarter were 2.4%, down from 3.5% a year ago due to lower revenues as described above, partially offset by cost reduction measures. Our operations generated $23 million in the fourth quarter of 2016 and a total of $253 million for the year. Our working capital at the end of 2016 was $684 million, 29% lower than it was at the end of 2015.

We efficiently managed the balance sheet, as our working capital excluding cash as a percentage of sales was 19% at the end of 2016. We increased our inventory turns throughout the year to 4.2 times in the fourth quarter of 2016, up from 3.5 times in the fourth-quarter 2015.

And finally, we made significant progress in closing the gap to three days between days sales outstanding of 51 days and days payable outstanding of 48 days. Our debt outstanding at year-end was $414 million compared to $519 million at the end of 2015. While our leverage ratio based on net debt of $305 million increased to 4 times, this is expected to reverse as EBITDA grows in 2017.

We have no financial maintenance covenants in our debt structure, and our nearest maturity is July 2019. The availability on our ABL facility was $425 million at the end of the year, which gives us ample flexibility -- and it too will grow as working capital grows. At the end of the year, we had nothing drawn on the ABL and had $109 million in cash.

Capital expenditures were $33 million in 2016. This is a decrease of 15% over 2015. We continue to implement a new SAP ERP system in our international segment, which has elevated capital expenditures from historic levels.

The first phase of this implementation went live in mid-2016, and the next phase, incorporating Europe, is expected to go live in mid-2017. Including regular capital spending needs and plans, the total capital budget for 2017 is expected to be approximately $32 million. And now I'll turn it back to Andrew for closing comments.

Thanks, Jim. Now let's wrap up with our current outlook.

After two years of severe market contraction, the macro oil and gas outlook has finally improved, and customers are announcing they will spend more in 2017 from 2016, particularly in North America, where some surveys have increases of around 20% in the US as oil prices have stabilized above $50 per barrel. The market is optimistic that the OPEC production cuts announced last November are underway.

While the independent and small E&Ps are generally expected to have higher percentage increases in planned spending than the integrated companies, the bulk of the spending is still concentrated among the IOCs, to which we are more highly levered. We expect global E&P spending to be up 5%, and we expect activity in spending to be stronger in the second half of 2017 as the recovery continues.

Also, from an upstream perspective, about half the drilling rigs added since the bottom of this cycle are concentrated in the Permian. So that is where the action will be, and we are well positioned there.

In 2015 and 2016, with the low commodity price environment and significant curtailment of customer spending, the overall pipe, valves, and fitting distribution market contracted approximately 50%. As we said on our last call, we positioned the Company for growth of market share gains during this downturn. Historically, we have estimated our share of the North American PVF distribution sales at 25% to 30%. We now estimate our share at 30% to 35%, as many small PVF distributors have struggled significantly through the downturn with a lack of access to capital. And we competed very well on adding scope and products to our MRO contracts.

As we discussed, we continue to perform at a high level with both PVF MRO contract renewals and extensions as well as new multiyear MRO contracts. We expect to continue to have some significant market share gains that we will announce in the first half of 2017. So we feel very good about our current competitive position in the market as the macroeconomics improve.

Giving that as a backdrop, we currently expect 2017 revenue to be higher across all sectors and segments. As compared to 2016, we expect total revenue to be 10% to 20% higher in 2017. By sector we expect upstream to be 15% to 25% higher, midstream 10% to 20% higher, and downstream to be 5% to 15% higher.

Upstream benefits from improved commodity pricing, resulting in higher customer drilling and completion spending. Midstream benefits from increases in upstream activity adding demand for gathering systems, line pipe inflation and growth with gas utilities, and a more positive regulatory environment for oil and gas pipelines. Downstream benefits from new project spend, market share gains with several new customers, as well as a better turnaround season this spring. This spring turnaround season is expected to be larger than normal, contributing an incremental $10 million to $15 million in revenue, which is incorporated in our annual outlook.

Last quarter we discussed a new supplier relationship with Cameron, a Schlumberger company, to sell additional valve lines and our measurement and instrumentation products. We've been in the process of rolling out both product groups with good results. So far we have increased valve sales with the expended valve offerings and sales from the measurement and instrumentation business. We expect these product groups to provide between $125 million and $150 million of revenue in 2017, which has been incorporated into our outlook.

By segment, we expect the US and international to grow the most, followed by Canada. In the US, we expect double-digit growth with increased rig count and spending levels. While international E&P spending generally is expected to be flat, our visibility on customer projects contribute to an expected international increase of double digits for our business. Canada is expected to have a modest mid single-digit increase.

Regarding tempo, we expect the pace of growth to be measured in the first half of 2017 and be weighted more toward the back half of the year, but expect that every quarter will have an increase over the prior year. Of course, this is highly dependent on customer plans that can change quickly, where projects can slip a quarter or more. Sequentially, we expect first-quarter 2017 to be up high single digits to low double digits from the fourth quarter of 2016.

While it is only one month, we are encouraged, as January results are up 12% sequentially from December and up 6% over last January. We also expect adjusted gross margins in 2017 to average 18.5%, with the first two quarters coming in below average. Margin tailwinds will include the continued move to higher-margin valves and instrumentation and general inflation, offset by the negative product mix dynamics of more line pipe and project work.

Our backlog was $749 million at the end of 2016. Excluding OCTG from 2015, our backlog is up $249 million or 50% from a year ago, primarily due to increases in project spend. Of that increase, 62% is from one midstream customer. Excluding that customer, backlog is up 22%, with the majority from international. The backlog has continued to increase, reaching $786 million as of the end of January 2017, indicative of growing activity levels.

We are looking forward to returning to a year of growth. MRC Global has successfully navigated through arguably the worst oil and gas downturn in recent memory. We have come out stronger with a more streamlined organizational structure and footprint, levered to all the right areas where growth is expected. We have managed our balance sheet efficiently, and we are poised to maintain those efficiencies while growing in the upturn.

The results from our valuable market share gains and expanded product offerings are expected to become more apparent as we continue through the improving cycle. MRC Global has maintained its position as the market leader through the downturn, and we intend to continue that tradition through the upturn, with continued market share gains through new contracts in 2017.

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

(Operator Instructions) Sean Meakim, JPMorgan.

Andy, I was just hoping to maybe drill in a little bit more on the guidance. You guys gave us a lot of detail. Obviously, I appreciate that.

Just thinking about those ranges you gave across the streams -- and I suppose for the geography as well -- where do you see the most flex, I guess kind of both to the upside, and then points of concern as you think about how we could progress through the year?

Yes, Sean. Let's talk upstream first, because I think that's the biggest variable and maybe where we need the most clarification on where we participate in that market. So if you look at the US upstream end market, it contributes to our production.

When we -- you know, we play when wells are completed. So an increase in drilling rig count adds very little to our revenue upfront. And we have no sales to the rigs themselves. We have no sales to drilling contractors. We have very little, if any, sales to service companies.

So a lot of drilling activity doesn't translate into upstream revenue for us. And as we talked about it, wells have to be completed, tied into a tank battery production facility for us to recognize the revenue. So drilling wells, that increase -- drilled uncompleted count do not add any revenue to us.

So our upstream revenue lags one to two quarters, and this has been a traditional historical recognition for us. So you are going to see that lag. And increasing rig count -- as we are seeing, we are now up to 760 rigs. Very positive. Looks like a trend towards 800 or 850 by the end of the year. So our revenues will pick up in the upstream as we lag that by a quarter to two when the wells are completed.

So that's a big part of our business. So we expect it to be much stronger in the second half. And we were encouraged; we were up 8% in the US upstream business in the fourth quarter sequentially. Even though a lot of the drilling activity didn't translate into completion activity, some did, and we took advantage of that.

Our upstream business was down 3%, but it all came from international slowdowns. So I would say we expect a strong upstream business, especially midyear and the back half of the year. I would say we are pretty confident that it's going to be a stable downstream market, as we projected -- as we said in the prepared remarks, 10% to 15%. We're going to have a nice spring turnaround season, above normal average. But I think that will be pretty consistent with what we guided to.

The upside will come from midstream. The regulatory environment is changing dramatically in the last month. So we've seen six new major pipelines approved just in February.

So I think two things there. The demand will be much stronger; projects are going forward now. And also we've seen the bottoming of line pipe pricing in October and November last year. We've seen over 10% inflation just in the first part of 2017. So we are going to have both inflationary environment as mills try to ramp back up for this improved line pipe demand. So we'll have both demand and inflationary pricing to help us.

So I think midstream -- we are guiding there. And I think there would be upside both there and upside in upstream second half of the year.

Thank you for that. It all sounds very constructive. The other question I had -- you know, I think the guidance of positive cash from ops as you are going to be reinvesting in working capital this year -- that caught my eye. I thought that was pretty interesting.

And you give some guidance around where you think working capital sales will be. It would be great if you could kind of just give us a little bit more of the flex around that guidance and how you see that cash flow staying positive this year.

Sean, we expect to maintain our roughly 20% working capital as a percentage of revenue. So as the revenues ramp up in your models, and using our guidance, you can expect the working capital needs to run about 20%. And then with the improved EBITDA slightly better than that, we'll have some modest cash from operations generated in 2017.

So on, like, the low end of the range, say, 10% revenue build would be something like $60 million in working capital. Does that sound like it's reasonable?

That's correct.

Okay. Fair enough, thank you guys. I appreciate it.

David Manthey, Baird.

First question -- the 10% to 20% growth you expect in your midstream business -- will that require a broadening out from just the Permian on the transmission side? And then, second, you already -- you'd mentioned a little bit about your gas utility outlook. Could you just give us a little more color on how you see that playing out in 2017?

Yes, Dave. So on the transmission side, I would say it's two components. It's infrastructure around the oil -- and Permian, as you mentioned, is the lead driver for volume there. But we also have a lot of work going into 2017 and a lot of work, as we mentioned, in our backlog all related to gas infrastructure in the Marcellus in the east side. So I'd say it's pretty balanced there.

We also have infrastructure in Apache Alpine High and the new startup there in -- so that brings us some midstream work, too. So I think transmission -- it will -- demand is definitely going to be higher. We know we have a strong backlog, much higher than we had going into 2016; inflationary pricing that we mentioned. Line pipe will help us also there.

And then gas utility continues to be a real bright spot for us. It slowed in the last two months of the year. I think this was a case -- and that was part of our midstream drop in the fourth quarter sequentially -- both chemical refining and gas utilities all slowed in the last two months of the year. I think it was a case of budgets being spent in an accelerated manner early in the year. You remember, we had a mild winter last year at the start of the year. So gas utilities did a lot of projects earlier in the year than budgeted.

So really, I think it was a budget fund slowdown, not any loss of business or loss of projects. So I see that picking back up with new budgets. And we are very confident and very optimistic about the gas utility business we have. We do real well there.

Okay. And of that $10 million to $20 million, about how much do you see as price?

Jim?

I was going to say in terms of price, we think the biggest piece will be volume. We think there will be maybe 2 to 3 points on price coming out of that. And again, I think that will be later in the year, as the inflation starts to work through the pipe system.

Yes. Okay, got it. And then finally, your view on the turnarounds for 2017 -- I assume that's both energy and other process industries. But Andrew, I think you said above average there.

And I'm wondering, how is your visibility? Why do you think that -- you know, we've heard some mixed reviews as it relates to turnarounds in 2017.

Yes, Dave. We have a very good view of that. And we are in most, if not all, the refineries in the United States -- more than 90% of them, for sure. So we have a good view on orders already in hand. The refining business is roughly a $300 million business for us.

We do around $40 million -- $40 million to $50 million in turnarounds on a normal year. And so take that normal load of $10 million to $15 million a quarter, and we see an additional $10 million to $15 million in the spring this year. A lot of that is what we talked about on the previous call of carryover from last year.

We saw utilization of refineries ramp back up in the fourth quarter, just taking advantage of the warmer start of the winter early. And so it was running 92% in the fourth quarter. So we do see the turnarounds happening with our customer base. We are confident in the guidance we are giving, that that will be for our customers and our refinery customers a good pickup for us.

All right, sounds encouraging. Thank you.

Vaibhav Vaishnav, Cowen and Company.

This is John on for Vebs. First question -- how are you thinking about the US and Canada upstream revenue growth in 2017 within the 15% to 25% global revenue guidance increase that you gave?

In the US upstream, we are certainly looking at double digits. I think Canada is going to be a little bit more reserved for us. We had kind of the mid-single digits there. As Andy mentioned, there may be some upside in the US, depending on how budgets get worked out over the course of the year. But we certainly think the US, and particularly the US upstream, will be strong.

And is it fair to say that the US accounts for 55% of upstream revenues, and Canada is about 20%?

That sounds about right. The 55% certainly sounds right. I think you are close on Canada.

Okay. And then another one as it relates to the US. So if US D&C spending ends up being up, say, 50% in 2017, should we think about your US upstream revenue growing by the same amount? Or is there any lag or perhaps outperformance there?

Well, there will certainly be a little bit of lag, as we mentioned earlier. And I think the other thing you have to look at carefully is who the customers are and where that spending is coming from. Early on in this recovery, we've seen a lot of the rig count adds, and a lot of completion work that's to come is going to be small operators, private equity sponsored. That is less of our customer base than the large integrateds.

So for us, we really look to see how those major operators are spending their budgets. They've all got some increases budgeted and planned. But certainly none of them that we've seen have been in the 50%-plus range.

Okay. And then another one from me. You guys mentioned kind of a little bit of softness towards the back half of the fourth quarter and the gathering transmission business. It seems like it was down about 25% sequentially in the fourth quarter. Am I right in that estimate?

And then can you help us think about how much the transmission business declined in the fourth quarter -- or any color you can provide around that?

So the midstream down sequentially overall was down 18%. A lot of that was in the US as well as Canada. We had some big midstream work in line pipe and valves in Canada that came off.

And then, as is typical with our gas utility business and some of our transmission business, we see a slowdown in the fourth quarter. And we certainly saw that again with some of our large customers, as their activities were slowed down both because of holidays and generally by weather.

Okay, great. Thank you, guys. I'll turn it back.

(Operator Instructions) Matt Duncan, Stephens.

This is Will Steinwart calling for Matt. Was there anything you saw in the fourth quarter that contributed to the sequential decline -- outside of what you had mentioned in your remarks and a little bit here in the Q&A -- with customers operating under constrained budgets and seasonality that might have slowed into year-end more than you had expected? Or was that 9% decline about what you had pictured?

On the last call we said it would have traditional decline. I mentioned on that call, October, was at the run rate of the third quarter, which it was, but we saw softness coming in November/December.

So you had the normal seasonal impacts. You had slowdown in transmission and gas utility that Jim just talked about of 18%. That was expected for us. And then there was a slowdown in both chemical and refining of average about 10%. So I think that was a case where there wasn't a lot of motivation for budgets. Budgets had been spent some earlier. Some were retailing, expecting higher budgets and better commodity pricing environment in 2017.

And then we talked earlier about the lag between -- you are going to see a quarter or two out before we see the impact of a big drilling rig count pickup. So those aspects all came together. It's normal for us.

I think we've said on the last call, five of the six last years we've had a slowdown in the fourth quarter. And I think expectations of that -- or the headlines around the drilling rig in the US pickup didn't translate -- doesn't translate to us till first and second quarter of 2017. So nothing surprising, and we tried to guide to that.

Okay. And moving on to the guidance, can you talk more about the adjusted gross margin target at 18.5%, which looks to be essentially flat? Kind of deconstruct the moving pieces between what you are expecting to realize from the line pipe increases you mentioned and mix with the project work coming on. If you could just talk about how that might trend -- or how you see it trending throughout the year and deconstruct that a little bit, that would be great.

Sure, Will. As we mentioned, 2016, as we look back, was a year where a lot of projects got delayed. They completed; there were no new projects rolling on.

We saw a big drop-off in line pipe, which is typically lower margin relative to our [others], and that's both in gas transmission and the gathering. As we look to 2017, we certainly see those picking up, and we see them picking up nicely. As such, we are going to see the mix impact of that come back a little bit. We will see it in line pipe. We've got a very aggressive line pipe budget for our guys.

We also have visibility on some project work that's coming in in 2017. So we understand, and we know what's there.

We do have the prospect of inflationary impacts throughout the year. Perhaps we've been a little bit conservative in some of -- building those into our budgets and our plans.

And I think the final thing I would say is we've come through two years of the toughest downturn and market correction in the oil and gas industry. And as such we have had to be very responsive and proactive in dealing with our customers, our clients in terms of our contract extensions, contract rules in terms of pricing expectations.

So we certainly have had to make adjustments along the way for that. But those are the big pieces that kind of direct or guide our outlook on terms of margins.

Very helpful. Thank you, Jim. And lastly from me is you mentioned M&A in the prepared remarks, Andy. Can you talk more about your primary targets geographically and from a product standpoint?

Yes, Will. I would say the M&A market is getting to a point where it's a lot more attractive for us than it has been for the last two years. Companies are starting to recover on their earnings, but not fully yet. I think from a valuation standpoint, the gap is closing.

We are very keen on valves and everything associated with that -- whether it's automation, instrumentation, measurement, expansion and control valves, expansion and services related to valves. You are going to see that be a heavy focus because, as we mentioned, we expect 40% of our revenues in 2017 to come from that product family.

So that will be the priority for sure in 2017. And we'll have the same intent that we had in our up cycle, when we were very active in acquisitions. It needs to expand our geographic footprint or expand our product offering that add a new dimension to our Company. That's what we target, and that's what we will be targeting on this round of bolt-ons.

But certainly the second half of 2017 -- I wouldn't expect anything in the first half of 2017. Second half of 2017 and definitely in 2018 we'll be more active.

I'll leave it there. Thanks a lot, guys, and good luck this year.

Walter Liptak, Seaport Global.

I wanted to ask about the working capital. You mentioned DSOs at 51 days. And I wonder if we can get some color on that. I think it's fair to say you guys have been focused around better capitalized customers, and I wonder if at some point you can loosen credit to some of the smaller customers to try and capture more share?

That's a good point. That's something that's a dynamic situation. We're looking at that all the time. A lot of the customers for the last two years that had trouble and we put on tight credit hold have either survived or come back in another corporate form with other owners. And as their balance sheets warrant loosening up some credit, we'll certainly do that to provide us the opportunity to sell to them.

Okay. Okay, thanks for that. I also want to ask about -- you mentioned the market share is now up to 30% to 35%. I'm wondering if you could clarify for me, was that all-in for all streams within energy? And if you gain market share in one stream in particular, I wonder if you can call that out for us?

Walt, it's all-in, all streams. Our recent wins have been in downstream. A couple that we mentioned in the prepared remarks. But I would say that's been the highest growth area for us.

In the upstream, very competitive. There's really -- when you look at activity levels, we are gaining share because of the scope in our contracts. Of course, in the integrated supply area of upstream, there's only two companies that really compete in that space, either on a buy/sell agreement or a return-based agreement, us and our major competitor.

There's been some exchange of customers. Previously we won CRC on the West Coast, California Resources. During the last two quarters we added Tidelands and [Toms in Ventura] to that scope. So we feel very good about that. In the recent -- last two quarters we've had losses at Hess and Marathon Oil in an integrated supply model.

So when you look at net-net, the growth from CRC and the losses in the other two, we really just swapped revenues. No change in market share at all there for us.

So there is that dynamic. It's a very competitive. People are still trying to gain share. But outside of that integrated supply upstream market, I feel very good. And as we said, we expect in the first half of 2017 to have some major announcements on new wins that will be much larger scale than those I just talked about.

Okay, all right. Sounds great. Does the downstream market share improve the pricing environment at all? Or is it still very competitive?

No, downstream is still -- we are in a very good position there, but it's competitive in the stainless area, for sure. It's competitive in valves. But we like our share, and we like our customer mix.

And then, as I mentioned, I expect some of our wins that we are going to announce will be further wins in that downstream area, which -- you know, today we are 33% downstream and 38% midstream. So you will see gains with us on these new projects and pipelines that are put forward, continued gains in the utilities. And then downstream is a real focus for us to even get a little higher market share there.

Okay, great. All right, thank you.

Vaibhav Vaishnav, Cowen. Mr. Vaishnav, your line is live.

Just a clarification here on the margin guidance. Thanks for all the color you've provided so far.

But if I look at gross margin sequentially from 4Q to 1Q, they typically increase about 100 basis points. Is there any reason to think that they should not be up the same amount in 1Q?

John, I think you might see -- based on some of the projects we see and some of the big orders we have coming in the first half of the year, you may see that not hold true this year.

Okay. And then one on Canada as well. Could you provide some color around the Canadian forecasted growth of only 5% despite Canadian activity off to a very strong start? And are you assuming Canadian revenues decline further in the first quarter? And are there any other large upstream or midstream projects completing that kind of change the organic revenue?

Yes, John -- no, we forecast a pretty normal year for Canada. Of course, everyone looks at the big increase. It had a very slow fourth quarter from historical terms. You know, Canada -- most of the activity is in the fourth quarter and the first quarter. So we started from a very slow point. So there's a big headline percentage increase in the first quarter, and we'll benefit from that. We'll have a good first quarter and Canada.

But then we still expect the normal spring break-up. You don't have a big emphasis on gas pricing driving a lot of activity there. And then we are weighted towards heavy oil, and heavy oil is not going to be a big bright spot when you look at other resources that are at a much lower cost to produce. So we have exposure in SAGD.

But when you say all that, I still believe mid-single digits growth, and maybe we are being conservative there. Maybe the fourth quarter of 2017 is stronger than we are forecasting. But I don't see a lot of downside there.

Okay, great. Thanks, guys. I'll turn it back.

Thank you. We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments.

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

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