MRC Global Inc (MRC) 2017 Q1 法說會逐字稿

Greetings, and welcome to the MRC Global 2017 First Quarter Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Ms. Monica Broughton, Investor Relations. Thank you. You may begin.

Thank you, and good morning, everyone. Welcome to the MRC Global First Quarter 2017 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 May 19, 2017. The dial-in information is in yesterday's release. We expect to file our first quarter 2017 report on Form 10-Q later today, which will also be available on our website.

Please note that the information reported on this call speaks only as of today, May 5, 2017, and therefore, you are advised that any 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 items.

In addition, the comments made by the management team 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. Today, I will review company performance highlights and then I'll turn over the call to our CFO, Jim Braun, for a more detailed review of the financial results. I'll then finish with our current outlook.

We are encouraged by the improved market conditions and remain focused on growing our business. The first quarter of 2017 revenue of $862 million was 20% higher than the fourth quarter of last year, which exceeded our expectations. All end market sectors showed sequential growth with the strongest performance in our midstream sector. First quarter 2017 was the highest quarterly revenue since the fourth quarter of 2015, and March 2017 was the highest monthly revenue since December of 2015.

Compared to the same quarter a year ago, revenue was up 10% driven by midstream and upstream. Midstream increased 33% and was higher in both subsectors, transmission and gathering as well as gas utilities. We have several projects ongoing with a large transmission customer driving a portion of the increase. Orders related to these projects, many of which are in backlog, are expected to deliver throughout the year. We have also seen increased work in the gas utility subsector and a pickup with several other transmission and gathering customers. This is related to an increase in market activity driven in part by the approval of pipeline infrastructure projects.

Our upstream business also performed well. Our Canadian upstream business increased 30% over first quarter last year, exceeding our expectations, due to increased market activity, as operators have shifted spend from heavy oil projects to more conventional oil drilling work. We also experienced growth in the U.S. upstream business, as drilling activity has increased since last summer, which is resulting in an increase in well completions.

Excluding OCTG revenue earned in the first quarter of last year, our U.S. upstream business increased 24% in the first quarter compared to the same quarter a year ago. Our downstream sector has lower quarter-over-quarter due to the rolling off of a major petrochemical project. However, we saw increased refining turnaround activity at several customers, which contributed to a 6% sequential increase in our downstream sector.

Adjusted gross profit for the first quarter of 2017 was $157 million or 18.2% of revenue as compared to $147 million and 18.7% for the same period in 2016. This is in line with our guidance and is a function of the higher mix of midstream project revenue in the first quarter. We broke even with 0 net income attributable to common shareholders for the first quarter of 2017, as compared to a net loss attributable to common shareholders of $14 million or $0.14 per diluted share for the same period last year, which included after-tax charges for the severance and restructuring of $4 million or $0.04 per diluted share. There were no comparable charges this quarter.

We continue to generate cash in the first quarter providing $22 million of cash from operations. We expect to generate modest operating cash in 2017 as we plan to shift our capital allocation to growth, investing more in working capital to support this growth, which we will see later in the year. We completed our current $125 million authorization under the share repurchase program this quarter. In the first quarter of 2017, we repurchased $18 million of stock at an average price of $20.54 per share. Since the program was authorized, the company has purchased 8.5 million shares at an average price of $14.64 per share.

As we've discussed previously, we are focused on capturing market share through customer MRO agreements. In 2012, MRC Global executed the first global contract with Shell. And since then, we have been meeting substantially all of their valve requirements. We believe the trend towards standardization will continue and more customers will want stable, dependable suppliers who can operate with consistent, excellent service around the globe. This is where MRC Global excels.

In our last earnings call, we mentioned that we're expecting to announce additional market share wins. And earlier this quarter, we announced a global agreement with ExxonMobil to supply them their downstream valves. This is a tremendous opportunity for us. We expect it to take several months to fully implement the agreement across their facilities, but when fully implemented in 2018, we expect this agreement to generate around $50 million of revenue per year over the next 5 years.

There are only 3 global pipe valve and fitting contracts with IOCs in oil and gas and we have all 3: with Shell, Chevron and now, ExxonMobil. This has been our strategic objective for many years. We were also awarded a geographic expansion and a couple of projects with Statoil, including the instrumentation and valves for the Johan Castberg project. We expect the sum of these agreements to generate sales of about $7 million a year over the next 4 years.

The recent pipeline approvals and announcements this quarter are positive for our business. With some of the larger interstate pipelines -- will typically go direct to manufacturers, we do participate in the laterals, the tie-ins, the short materials and staging services. As the largest North American pipe, valve and fitting midstream distributor, we are well positioned to benefit from the more favorable regulatory environment.

In addition, there have been a number of recent announcements regarding Canadian asset change -- changing hands. Specifically, U.S.-based IOCs reducing their investment in Canada. We expect the net of all the Canadian asset sales to be neutral to slightly positive due to our contract position with the Canadian companies acquiring these assets, as well as benefiting from the IOCs redirecting their budgets to the Permian basin.

We are active in pursuing small bolt-on acquisitions, with a 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.

In summary, the first quarter was a great start of the year. After 2 years of reduced industry spending, it appears our customers have returned to a growth mode. We remain well positioned through our actions over the past 2 years to continue to benefit from that return to growth.

I'll now turn the call over to Jim.

Thanks, Andrew, and good morning, everyone. Our total sales for the first quarter of 2017 were $862 million, which were 10% higher than the first quarter of last year, primarily due to increases in the midstream and upstream sales. Excluding OCTG sales from the first quarter of last year, revenue was up 13% year-over-year. Sequentially, revenue increased 20% due to an increase in activity across all sectors and segments.

U.S. revenue was $666 million in the quarter, up 10% from the first quarter of last year, as midstream and upstream activity picked up and was partially offset by a decline in downstream. The U.S. midstream sector increased $83 million or 32% from the first quarter of last year, due primarily to ongoing projects with transmission and gas utility customers, which will continue to deliver over this year.

Revenue from gathering customers has also contributed to the increase in U.S. midstream as drilling and production has increased. The U.S. upstream sector increased $27 million or 24% from the first quarter of last year, excluding $18 million of OCTG revenue from the prior year. The U.S. downstream sector decreased by 15% from the first quarter last year due to the completion of a large petrochemical project last year. Of the product lines, gas products increased the most at 34%, followed by valves, automation, measurement and instrumentation at 12%.

Sequentially, U.S. segment sales were up from the fourth quarter by 21%. Gains were across all sectors, but primarily due to an increase in midstream sales due to large project deliveries, followed by upstream related to increased well completion activity and downstream due to increased turnaround activity.

Canadian revenue was $77 million in the first quarter, up 20% from the first quarter of last year, driven primarily by upstream as the rig count increased significantly with customers shifting more spend towards conventional oil drilling from the heavy oil. Sequentially, the Canadian segment was up 41% from the fourth quarter, also due to an increase in upstream drilling activity.

In the International segment, first quarter revenues were $119 million, up 5% from a year ago. Sales were up due to higher midstream activity from a major pipeline project in Australia and increased sales in downstream, partially offset by a decline in the upstream sector due to lower activity levels, including projects.

Sequentially, the International segment was up 4% from the fourth quarter, primarily from a -- increases in midstream, partially offset by declines in upstream.

Now turning to our results based on end market sector. In the upstream sector, first quarter sales increased 6% from the same quarter last year to $245 million from strong performance in Canada, followed by the U.S., both driven by increased drilling and related well completions.

Excluding OCTG from 2016 sales, U.S. upstream sales were up 24% from a year ago. The rig count in the U.S. was up 35% in the first quarter of 2017 versus the same period in 2016. There are a couple of reasons for the difference, including the natural delay in well completions from rig utilization, the increase in drilled but uncompleted inventory over the quarter and our customer mix.

Midstream sector sales were $371 million in the first quarter of 2017, an increase of 33% from the same quarter in 2016. Among the subsectors, sales to our gas utilities increased by 20% and sales to our transmission and gathering customers increased 48%. Gas utility sales increased primarily due to pipeline construction and increased spending on integrity projects. The increase in sales to transmission and gathering customers was due to transmission projects as well as gathering line work.

The mix between our transmission and gathering customers and gas utility customers was weighted 54% for transmission and gathering, and 46% for gas utilities in the first quarter, which is opposite of where it was at the end of the prior year. In the downstream sector, first quarter 2017 revenue was $246 million, a decrease of 10% as compared to the first quarter of 2016. The decline in downstream relates to a major petrochemical project on the Gulf Coast that concluded in 2016.

The spring turnaround season was as expected, contributing to an incremental $13 million in revenue sequentially. In turning to margins, gross profit percentage decreased 80 basis points to 16.2% in the first quarter of 2017 from 17% in the first quarter of 2016. The decrease was due in part to the impact from LIFO. A LIFO expense of $1 million was recorded in the first quarter 2017 as compared to a benefit of $3 million in the first quarter of 2016.

Adjusted gross profit percentage was 18.2% in the first quarter of 2017, down from 18.7% in the first quarter of 2016. The decrease in adjusted gross profit percentage reflects an increase in a mix of project work from midstream projects in the U.S. and Australia.

Regarding product inflation. Line pipe prices have steadily increased since last October. Based on the latest Pipe Logix all items index, average line pipe spot prices in the first quarter of 2017 were 13% higher than the first quarter of 2016 and 19% higher sequentially. We expect to continue to experience pipe inflation as demand continues to increase and mill capacity in some types and sizes has been reduced.

We have begun to see an impact from higher prices with an increase in our gross margin percentage for stock sales. As open purchase orders for pipe deliver, we'll begin to sell the higher cost pipe, increasing sales dollars under our cost-plus contracts.

SG&A costs for the first quarter of 2017 were $126 million, a decrease of $11 million or 8% from $137 million a year ago, due primarily to the cost-cutting measures taken in 2016. Also included in first quarter 2016 is severance and restructuring of $5 million. There were no severance and restructuring charges in the first quarter of 2017.

Related to our previous outlook, first quarter SG&A ran higher than expected due to more volume-related cost, due to the stronger-than-expected revenue and employee benefits expense. Based on a revised outlook for higher revenue in 2017, we now estimate our 2017 SG&A run rate will be between $129 million to $131 million per quarter for the remaining 3 quarters of the year, recognizing that the second and third quarter expenses will have ERP implementation costs as we cut over to the new system.

The increased outlook for SG&A is a function of higher expected revenue levels and spending on our e-commerce initiative. Regarding the ERP implementation, this week, we began operating our new system in Europe and the Middle East, leaving only Norway to implement before year-end, at which time we will have all of our international business on a single system.

Interest expense totaled $7 million in the first quarter of 2017, which was $1 million lower than the first quarter of last year due to lower average debt balances. We recorded a small tax expense of $1 million in the first quarter of 2017. This reflects the impact of a discrete tax benefit related to a new accounting pronouncement adopted in the quarter, which produced a tax rate of 14%. We expect the effective tax rate to be about 38% for all of 2017 based on our budgeted geographic product -- 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 first quarter 2017 net income attributable to common shareholders was a breakeven compared to a loss of $14 million or $0.14 per diluted share in the first quarter of 2016. The first quarter of 2016 net loss attributable to common shareholders included after-tax charges of $4 million related to severance and restructuring.

Adjusted EBITDA in the first quarter was $36 million versus $19 million a year ago, an increase of 89%. Adjusted EBITDA margins for the quarter were 4.2%, up from 2.4% a year ago, due to higher revenue and the benefit of cost reduction measures taken throughout 2016. All 3 of our segments generated positive EBITDA this quarter, including International, which benefited from the cost reduction and restructuring actions taken in 2016.

Our operations generated cash of $22 million in the first quarter of 2017. Our working capital at the end of the first quarter of '17 was $674 million, 1% lower than it was at the end of 2016. At the end of the first quarter of 2017, our working capital, excluding cash as a percentage of our trailing 12-month sales, was 18.6%. We've not yet experienced an increase in working capital, but we do expect working capital to rise beginning in the second quarter, as open purchase orders for inventory are delivered. As inventory builds, it could be lumpy depending on the timing of deliveries and sales. However, we expect our working capital as a percentage of revenue to remain best-in-class at around 20% on average.

Our debt outstanding at the end of the first quarter was $412 million compared to $414 million at the end of 2016. Our leverage ratio based on net debt of $319 million decreased to 3.4x as EBITDA grew in the first quarter. We have no financial maintenance covenants in our debt structure and our nearest maturity is July 2019. The availability on our ABL facility was $466 million at the end of the first quarter, which gives us ample financial flexibility and it too will grow as working capital grows. At the end of the quarter, we had nothing drawn on the ABL and had $93 million in cash.

Capital expenditures were $11 million in the first quarter, in line with our expectations. However, we expect to increase capital spending this year to $35 million, up a little from $32 million, due to accelerated investment in the ERP system and increased investments in e-commerce solutions.

And now, I'll turn it back to Andrew for closing comments.

Thanks, Jim. Now let me wrap up with our current outlook. Our first quarter results were strong on midstream project deliveries, upstream growth and refining turnarounds. The outlook is also generally more positive than previously thought, and as a result, we are raising our overall revenue guidance for 2017. We do want to be mindful that there remains a fair amount of uncertainty in our end markets with oil fluctuating between $47 and $53 per barrel ahead of the upcoming May OPEC meeting. The market seems cautiously optimistic that OPEC will extend production cuts, but there is some uncertainty around when this will balance the market.

EIA, however, predicts market balancing this year. Some updated spending analysis show even more spending than when we reported in February, which is a positive. The regulatory environment is more favorable to energy infrastructure projects and inflation in line pipe pricing has begun, which are all positive for our business. We've recently seen an uptick in drilled but uncompleted wells or DUCs. This is a tailwind as we expect to see a drawdown of this DUC inventory as the year progresses, as current completion bottlenecks are addressed by the oilfield service industry. We are also focused on market share through existing MRO contract renewals and expansions as well as new multiyear MRO contracts. We announced the major strategic contract with ExxonMobil this quarter and we expect to have additional contract announcements in the second quarter.

Our backlog was $833 million at the end of the first quarter 2017, up $221 million or 36% from a year ago, primarily due to increase in project spend in the U.S. Of that increase, 62% is from one midstream customer. Excluding that customer, backlog is up 15%. The backlog has continued to increase in April, indicative of growing activity levels going into the summer construction cycle, which is typically the busiest time of year for us. We have raised overall revenue guidance with some changes to the sector guidance. As compared to 2016, we expect total revenue to be 13% to 23% higher in 2017.

By sector, we now expect upstream and midstream each to be up 20% to 30% higher and downstream to be unchanged at 5% to 15% higher. For comparison, we previously expected upstream to increase 15% to 25%, and midstream by 10% to 20%. Upstream is higher as we expect some of our larger contract customers to be more active in drilling and completing wells later in the year. We raised our midstream expectations on a strong first quarter and a continued strong midstream backlog.

By segment, we now expect all our segments to grow double-digit percentages with Canada higher due to stronger performance in the first quarter. Sequentially, we expect second quarter 2017 to be up mid- to high single digits from the first quarter 2017. We maintain our expectation of adjusted gross margins in 2017 to average 18.5% in 2017, with the first 2 quarters coming in below average. Margin tailwinds will include the continued move to higher-margin valves and instrumentation and general inflation and higher contract prices in the second half of 2017. We are encouraged that the year has started off strong. We are glad to be growing again, and we are looking forward to a successful recovery year in 2017.

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

(Operator Instructions) Our first question comes from Matt Duncan from Stephens.

So Andy, I want to talk a little bit more about midstream because it sounds like that's where things are outperforming prior expectations the most. Other than the one customer where you see backlog up a lot, can you talk about what else is driving that? Is this large pipeline construction and you guys getting the sort of ancillary stuff? Or is it smaller pipelines where you're getting kind of all of those -- all of the PVF instead of just the fittings, flanges and sort of odd lot sizes?

Yes, Matt, it's a combination of both. And certainly, if you look at the regulatory environment over the last 3, 4 months, it's definitely turned to the positive. So as we mentioned on the last call, we were seeing equal activity with both gas infrastructure pipelines in the East and also oil pipelines in the Permian and South Texas. So it's that combination. Very active, as you know, TransCanada acquired Columbia Pipeline Group last year. So their plans for the U.S. with oil pipelines already added that gas infrastructure. So we're very active with them, very active with the Phillips 66 and Williams and Enterprise and Dominion. So it's broad based. It's not just TransCanada. So we feel very good about that, and just from the overall activity levels. And the first quarter is historically not our best quarter in midstream due to the weather impacts, so we have some good quarters ahead because normally, second, third quarter are our best midstream construction cycles. The other big thing happening in midstream is line pipe pricing has definitely inflated. So we've gone through the 2 years of deflation, the market has definitely turned, it bottomed in pricing in September, October. So some of the margin impact that we talked about and Jim talked about in the prepared remarks and margin impact in the first quarter was related to line pipe that was bid in the fourth quarter at relatively lower pricing. We've definitely seen the market move, demand for -- the mills had cut way back, demand for OCTG picked up, which pushed out some line pipe delivery, so pricing's definitely moved in line pipe. And we see we'll be able to get the benefit from that as you go into second quarter but even more in the second half of the year. We'll be at a much different higher price in line pipe, which will also drive some positive results for midstream.

Great. Very helpful. And then second question is just on the guidance. Your revenue guidance is up by essentially the size of the [beat] and then, some, I think from the first quarter. But your profit guidance, if I work through line item by line item, doesn't seem to quite be up as much. One, am I right about that? And two, if so, are you just layering in a little bit of conservatism there? It looks like maybe the SG&A guide is why the profit guide is not up as much. You took that up a decent amount on a quarterly run-rate basis, and is that sort of investing in the muscle -- the fixed cost muscle that you need to grow? Or is that more variable cost going up with revenue?

Matt, let me start, but Jim can add more detail. But 2 things. First, activity up 20% sequentially. There's some additional incremental SG&A, which is a great problem for us to be ramping up a little bit faster in the year than we thought. So that's part of it. We've also, as Jim mentioned in his comments, investing in our ERP platform. So except for converting Norway in a couple of months, we have all our international platform on one ERP system, which we know when we did that in North America, we got tremendous benefit from the visibility of being on one system. So we're accelerating some investment there to get that done earlier. We've also seen a large expansion in our e-commerce business. We talked about it last year as we were in the downturn. We invested in both the ERP system but also on our e-commerce capability. We rolled out a new online catalog for our core customers. Since then, we've had mobile capability. So we now have our customers that can contract with us at the branch level or online, either from a laptop or on a mobile device. So we've taken some big steps to invest, and that's some incremental spend that's also reflected in Jim's comments, but we feel very good about that. If you look at 2016 in the e-commerce area, 25% of our revenue came through as some form of e-commerce, the catalog or EDI and 35% of our major customers are transacting with us in that manner. So we certainly see, as you've seen in many other industries, that dynamic picking up, and we're making investments in that to take advantage of that, make it easy for our customers to do business with us if they want to transact with us online. So we feel good about our investments. I think they're very much in line with the growth we're seeing. We've held headcount down. We only increased headcount 18 in the first quarter, but then, it will ramp up in the second and third quarter.

And Matt, I would just add to that, and Andy covered those points. Just general cost inflation that we really haven't seen in the industry for the last couple of years as the market continues to improve and get hot, I think we'll start to see that general cost inflation. So clearly, there's some expectation that, that will start to pick up as well.

Our next question comes from Vebs Vaishnav from Cowen.

Just want to speak about the second quarter guidance. If I think about 3 different geographies, Canada typically down 20%, 25%; International modestly up. Is that a fair way to think about Canada and International at least?

Yes, that's certainly the case with Canada because of the seasonal breakup. We've typically seen it anywhere -- 15%, 20%. In a really strong year, it could be a little bit higher as a percent. The International, I think you're right there. And then I think when you look at the U.S., one of the big drivers there, Vebs, is we talked about the very strong quarter with our large midstream customer. We're actually thinking some other deliveries will be down sequentially but offset by continued growth in the upstream.

Got it. Okay. That's helpful. And if I think about SG&A, you guys mentioned about moving higher in second quarter, third quarter because of ERP implementation. If I go back to last year, I think it was like $8 million, $9 million higher in that quarter. Is that fair?

Yes, it runs about -- it'll be $7 million to $8 million, incrementally. It's about a $4 million, $5 million from first quarter to second quarter.

Okay. And last question for me, just thinking about the guidance for the year. It sounds like first half versus second half is flat. Just want to make sure if I'm reading that correctly? And if so, why would that be the case?

Yes, Vebs, let me take that and Jim might have some comments to add. I would say it's still relatively early in the year. We had a good first quarter. The third quarter historically has always been our best quarter, which we expect it to be again this year. But there is a lot of volatility in the market, as you know well, with oil price fluctuating a lot, but we feel very solid about the year. We feel even better about the gas infrastructure activity levels. But we'll update the guidance after the second quarter and we got a better view of the third quarter, but I wouldn't read into that any -- that we're not as optimistic as we were about the second half of the year.

Yes, Vebs, I'd also add. As you know, if you look back historically, whether it's a strong market or not so strong market, we typically see a falloff in the fourth quarter from the third quarter. So depending on where we are in the spending cycle as we get to the end of the year, that could be more pronounced than usual.

Yes, Vebs, I would just add one more comment that I -- we will be ramping up ExxonMobil, PBF, LyondellBasell, all the contract wins we've talked about and also the Statoil one. So we've got some nice contracts that are ramping up that you'll see in the second half too. So we'd like to see those happen before we talk -- bake too much of that into our guidance.

Okay. Would it be at least fair to think that gross profit margin actually troughed in first quarter?

That's likely, yes, based on the margin guidance that we gave.

Yes, Vebs, so we guided to 18.5% for the year. We know we have some line pipe and some integrated supply type, lower margin mix, heavier mix of that in the first quarter, a little bit in the second quarter. But certainly that implies that the back half, as we move both -- especially as we move line pipe pricing up with our customers and overall, general pricing will be higher in the second half that you can see that we'll have much higher margins back in the back half.

(Operator Instructions) And our next question comes from Walter Liptak from Seaport Global.

I wanted to ask about -- yes, you mentioned price volatility on oil and certainly today, it has been volatile. I wonder if you could talk to us about just the sensitivity of revenue. Are you seeing anything changing in the upstream? And then just thinking about the different streams, what has to happen to oil for your outlook to not come through to fruition for this year? I mean, if we went back down to $40 or $35, at what point should we be concerned?

Yes, Walt, thanks. It was a good quarter. And I would say, we have a lot of visibility for us on the second quarter and what's in our backlog and equipment already on order. So we feel good about that. We feel -- still feel very good about the third quarter as our best quarter for the year. We haven't seen any change in -- and also with the increase in U.S. rig count primarily and an increase in the drilled uncompleted wells in first quarter, we see a nice backlog there. And as we've talked about our completion revenues and the tank batteries and production facilities lag by a quarter or 2. So we see some nice increases in completions both bringing drilled uncompleted on production plus the level of the rig count that we set out here in May, feel good about the completion, our U.S. upstream revenues for second and third quarter. So I see very little impact with what's transpired in the last week or so of fluctuation in oil price. Now if it stays at this level, longer term, it probably will impact us in the fourth quarter. But it's kind of too early to speculate on that. But I see very little, if any, impact on us in that coming up 2 quarters.

Okay. Is there any impact on pricing? I mean, setting aside the contracts for product that maybe have more flexibility with price, if you -- are you able to pass along manufactured or supply cost increases? And is there some sensitivity with the price of oil?

Yes, Walt, longer term, definitely. Customers work up their cash flow from price of oil and it certainly is more favorable as their cash flows improving with higher pricing. But certain fundamentals are still going to be in play. There's a shortage of line pipe, especially small diameters, seamless line pipe. So -- and lead times on valves have extended as a lot of activity in midstream valves, for an example. So those are fundamental. There's limitations in the manufacturing supply lead times pushing out, so pricing will move up. I feel confident line pipe and valves and other pricing will move up, regardless of the price. But if it persists longer term, yes, it would slow down increased pricing.

Okay. So valve prices have not started coming up yet? And other value-add products, pumps, things like that?

Well, we don't do pumps. But in valves, some have in specific sizes and shortages of valves because all the valve manufacturers also ramped down their capacity and their plant capabilities during the last 2 years. So they're ramping back up, which pushes lead times up out farther. And so we've definitely seen and will see in these next couple of quarters valve pricing and others move up, but line pipe will have the biggest impact in positive manner for us.

Our next question is from Joe Gibney from Capital One.

Just a quick one on downstream for me. Jim, I think you referenced $13 million in revs quarter-over-quarter pertaining to the turnarounds. Just curious what the expectation is into 2Q? Should we only expect sort of a nominal stub there? I think you talked about $10 million or $15 million in revenue previously in incremental growth from the turnaround side. What are the expectations into 2Q? I know normally, you get a little bit of a spillover in the initial part of this quarter.

Right, I think we'll see a little bit more, but the big part of it came in the first quarter. So you'll see something smaller than the $13 million or so incremental that we had in the first quarter, but there's a bit more to come.

Our next question is from David Manthey from Robert W. Baird.

First off, on the convertible perpetual preferred stock, could you remind me, is there any kind of a put right there? Or is the convert decision up to the investor only?

Yes, the investor, of course, can convert it at any time. We have the opportunity after 4.5 years to force conversion if the price is -- if the share price is 150% above his strike price, which is $17.88.

Okay. But that wouldn't be until 2020?

Correct.

Okay. And then I'm trying to understand this footnote here where you talk about OCTG in the line pipe product line. You say that predisposition OCTG sales of $18 million are included in those sales from March of 2016. Jim, can you help me understand that? I think the actual sales are much higher than that, so I'm trying to understand what the $18 million is?

Sure. No. So we sold the OCTG product line in February of 2016. So we had about 1.5 months of revenue of OCTG, which was $18 million. And for presentation purposes and for convenience, we -- rather than have an OCTG line with $18 million that lived for multiple quarters and multiple years, I should say, we just included in the line pipe and footnoted it. So there were $18 million of OCTG sales in the January and February time frame of 2016.

All right. So of course, that means when you get to the second quarter of '16, 0?

That's correct.

This does conclude the question-and-answer session. I'd like to turn the floor back over to management for any closing comments.

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

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.