MRC Global Inc. (NYSE:MRC) Q1 2024 Earnings Call Transcript May 11, 2024

MRC Global Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to MRC Global's First Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Monica Broughton, Vice President, Investor Relations and Treasury. Please go ahead.

Monica Broughton: Thank you, and good morning. Welcome to the MRC Global First Quarter 2024 Conference Call and Webcast. We appreciate you joining us. On the call today, we have Rob Saltiel, President and CEO; and Kelly Youngblood, 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 23, 2024. The dial-in information is in yesterday's release. We expect to file our quarterly report on Form 10-Q later today and will also be available on our website. Please note that the information reported on this call speaks only as of today, May 9, 2024, and therefore, you are advised that the information may no longer be accurate as of the time of replay.

In our call today, we will discuss various non-GAAP measures. 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, all of which can be found on our website. Unless we specifically state otherwise, references in this call to EBITDA refer to adjusted EBITDA. 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, 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'd like to turn the call over to our CEO, Mr. Rob Saltiel.

Rob Saltiel : Thank you, Monica. Good morning, and welcome to everyone joining today's call. I will begin with a high-level review of our first quarter results and discuss a couple of notable achievements and initiatives before concluding with our 2024 outlook. I will then turn over the call to Kelly to provide a detailed review of the quarter and 2024 guidance before I deliver a brief recap. Starting with our first quarter highlights. We generated $38 million in operating cash flow in the first quarter, a great start to the year because Q1 is typically our lowest quarter for cash generation. We are on track to meet or exceed our guidance of generating $200 million of operating cash flow for the full year. We continue to be very bullish on the cash generation potential of our company going forward.

First quarter revenue was $806 million growing 5% over the fourth quarter, exceeding our expectations and coming out of the gate strong in the new year. We believe that our business has turned the corner with the fourth quarter of last year representing the bottom and we expect our revenues to expand further in the remaining quarters. This quarter, we experienced revenue increases in all sectors, led by our DIET sector, which was up 7% on refining, chemical and mining customer projects and maintenance spend. The Gas Utility sector improved 5% sequentially driven by improved project work and increased customer spending due to normalizing buying patterns reversing the downward trend experienced in the last 3 quarters of 2023. And our PTI sector grew by 3%, driven by increased pipeline valve sales and stronger production infrastructure activity in the U.S. Adjusted gross margins were a very healthy 21.6%.

This is now our eighth quarter in a row with margins exceeding 21%. As we have highlighted previously, this represents a transformational change from the high teens level of adjusted gross margins experienced throughout most of our company's history. Adjusted EBITDA margins were 7.1% for the first quarter an 80 basis point improvement over the fourth quarter. This is the result of both higher adjusted gross margins along with strong cost discipline. Our balance sheet has never been stronger with ample liquidity and the lowest leverage ratio in our public company history at 0.6x. We expect this metric to further improve as we continue to generate cash throughout this year. Our strong cash generation profile provides us the opportunity to repay our term loan early, which we intend to do in the current quarter.

Kelly will address this in more detail later. Finally, our international revenues grew 7% year-over-year and 3% sequentially. This business is poised for double-digit revenue improvement for the full year supported by a backlog that is 38% higher than a year ago. Our international team's success and landing new projects, particularly those involving the energy transition in LNG has supported our growth in this segment. I would now like to highlight 3 important initiatives at MRC Global that illustrate what we are doing to improve our customer service, enhance our revenue growth and maintain a disciplined cost structure. First, our digital strategy that began several years ago continues to evolve and deliver great dividends in the form of additional sales and an improved customer experience.

U.S. orders placed digitally hit a record 66% of total orders in Q1 of 2024. This is up approximately 2,100 basis points over 5 years ago and up 150 basis points over Q1 2023 levels. We have developed and deployed a user-friendly digital customer service platform that in addition to product ordering provides self-service features such as order expediting, order documentation and past order histories. This useful functionality drives efficiency and cost savings for our customers and for us while increasing customer loyalty and retention. One exciting initiative that we have underway is development of a digital quoting tool that leverages artificial intelligence to improve the accuracy and timeliness of our quotes for customer product orders.

This tool uses AI to match customer parts and descriptions to our own to expedite the quoting process. This provides multiple benefits. It saves time for our salespeople in assembling a quotation. It improves our responsiveness to urgent customer needs, and it facilitates a more accurate quote-to-cash process. We are in beta testing mode now, and we plan to roll out this quoting tool to our sales team this summer. And finally, I want to elaborate on our North America enterprise resource planning project that we discussed on our last earnings call. We are enthusiastic about the functionality that the new Oracle cloud-based ERP system will bring to our business. We anticipate many enhancements to our current business processes including standardized operating procedures, improved accuracy relating to the management of customer orders, increased inventory efficiency and forecasting and enhanced monitoring and reporting of our financial performance.

Our customers will benefit through more streamlined systems integration that can enable trouble-free digital commerce. I am pleased to report that this ERP project remains on budget and on schedule. We expect to be fully implemented and running on the new system in the second half of 2025. We have assigned some of our best performing team members to this ERP project, and we are excited about its potential to transform many aspects of our business. Turning now to our outlook. Our strong financial performance in the first quarter provides a very encouraging start to the year and higher confidence that we will achieve the 2024 financial targets discussed on our last call. As mentioned earlier, we believe our business has stabilized from the declines we experienced in the second half of last year.

We are optimistic that the first quarter will likely be the lowest revenue quarter of the year, and we will see steady growth in the coming quarters. From a sector perspective, for our great gas utility sector, some of our larger customers continue to focus on their destocking efforts, but the sequential growth experienced this quarter and stabilization seen in backlog is signaling that the worst is likely behind us. The long-term market fundamentals and growth potential of our gas utilities business remain very positive, and we expect that 2025 will see improvements over 2024 revenues. We continue to expand our wallet share with existing Gas Utility customers while targeting new utilities and service areas to increase our market share. We are targeting new utility contracts this year that should solidify our strong market position even further.

In the DIET sector, we are optimistic that we will experience revenue growth this year from a strong level of refinery and chemical plant maintenance activities supplemented by a growing slate of projects. We remain excited about energy transition opportunities with the majority of our 2024 revenue in this subsector expected to occur with renewable fuels and wind power projects in our international segment. Additionally, we are building a healthy backlog in North America for carbon capture project activity that is expected to deliver late this year and into next year. Turning to our PTI business, we expect consistent steady growth for the remainder of the year. We expect oil prices to remain relatively strong on the back of positive economic activity and for natural gas prices to likely improve from the currently low historical levels due to targeted production curtailments and inventory declines.

Larger public E&P companies are expected to drive a higher percentage of the activity in 2024 in the U.S. oil field, which is favorable for MRC Global as our PTI revenue is driven predominantly from this customer base. We expect less cyclicality and activity levels going forward as these larger customers tend to operate with increased levels of financial discipline. We are bullish on MRC Global's ability to gain market share, especially in the Permian Basin, as larger PTI customers complete announced acquisitions and reassessed their supply chains and purchasing contracts. As we have stated previously, we generally do more business with the acquirers than we do the targets and the quality focus that we bring is better appreciated by larger operators who adopt a longer-term perspective when purchasing PVF products for their oil and gas maintenance activities and new development projects.

Another positive for the PTI sector is that our international oil and gas business is expected to expand, and we should benefit from our strong position in Europe and our growing presence in the Middle East. We continue to focus on controlling our cost structure in an inflationary environment. As mentioned on last quarter's call, we are aiming to further optimize our SG&A costs in 2024 to maintain a minimum 7% adjusted EBITDA margin. We have made significant progress elevating our EBITDA returns over the last few years, and we are committed to not losing this momentum in 2024. Among other initiatives, we are becoming more efficient in our staffing levels lowering our freight costs and optimizing our service delivery costs. We are off to a good start as our adjusted SG&A cost for the first quarter of 2024 were $2 million lower than the prior quarter.

In summary, we have started the year off significantly better than expected, and we believe the low point for our business activity is in our rearview mirror. While we continue to believe that 2024 will be a transitional year in terms of our top line growth, we have never been a stronger company, and we have multiple opportunities for value creation ahead of us. We remain optimistic about the fundamentals of all 3 business sectors and their long-term outlook given our strong market position and the expectation of growing demand for our products and services for decades to come. Importantly, for our shareholders, our recent improvements in our gross margins, our cost structure and our working capital efficiencies have positioned us to generate more consistent earnings and cash flow across the business cycle.

This year, we expect to generate approximately $200 million or more in operating cash flow, which will make us an even stronger company with minimal net debt going into 2025. This will allow us significant flexibility to consider various capital allocation strategies as we approach 2025, and including distributing excess cash to our shareholders. And with that, I will now hand it over to Kelly.

Kelly Youngblood : Thanks, Rob, and good morning, everyone. My comments today will be primarily focused on sequential results comparing the first quarter of 2024 to the fourth quarter of 2023, unless otherwise stated. Total company sales for the first quarter were $806 million, a 5% sequential increase and a 9% decline compared to the same quarter last year. From a sector perspective, Gas Utilities sales were $266 million in the first quarter, a $13 million or 5% increase. The growth was the result of increased product sales for upcoming projects and normalization of certain customer buying patterns related to their recent destocking efforts. Although some customers continue to focus on reducing their levels of safety stock, we have seen a stabilization in backlog and average daily sales so far this year that is encouraging.

We continue to expect 2024 to be a transition year for our Gas Utilities customers with lower project activity due to higher interest rates and elevated construction costs, but we are expecting increased spending as we move into next year. The DIET sector first quarter revenue was $276 million, an increase of $18 million or 7% due to an increase in mining-related sales, refinery project and turnaround activity and chemical market share growth in the U.S. International diet revenue also increased primarily due to an LNG project in the Middle East as well as renewable gas and chemical projects in Europe. The PTI sector revenue for the first quarter was $264 million, an increase of $7 million or 3%, primarily due to increased sales of valves and polyethylene pipe for well completions in the U.S. As mentioned by Rob, we are optimistic about the recent trends in customer consolidation and supportive commodity prices, which should be a nice tailwind for our business going forward.

From a geographic segment perspective, U.S. revenue was $667 million in the first quarter, a $34 million or 5% increase as all sectors improved. Gas Utilities led the growth up $13 million, followed by the DIET sector, which increased $11 million and the PTI sector, which was up $10 million. International revenue was $110 million in the first quarter, up $3 million or 3%, driven primarily by improvement in the DIET sector in the Middle East and Europe. The outlook for our International segment remains positive with expectations for double-digit revenue growth in both the PTI and DIET sectors. Canada revenue was $29 million in the first quarter, up $1 million as increases in the DIET sector revenue offset a decline in the PTI sector. Now turning to margins.

Adjusted gross profit for the first quarter was $174 million or 21.6%, a 40 basis point improvement over the same quarter 1 year ago and a 30 basis point decline sequentially. This marks the eighth consecutive quarter with adjusted gross margins exceeding 21% as we have been successful at maintaining a higher-margin product mix and a higher contribution of revenue from our International segment which is accretive to overall company gross margins. Reported SG&A for the first quarter was $125 million or 15.5% of sales as compared to $125 million or 16.3% for the fourth quarter. This quarter included $3 million of pretax charges related to activism response, legal and consulting costs. Excluding these costs, our adjusted SG&A for the first quarter of 2024 was $122 million or 15.1% of sales and a $2 million sequential improvement as a result of our cost control measures.

Adjusted EBITDA for the first quarter was $57 million or 7.1% of sales, an 80 basis point increase from the fourth quarter due to higher sales, elevated gross margins and reduced SG&A costs. Tax expense in the first quarter was $8 million, with an effective tax rate of 30% as compared to $2 million of expense and a 9% effective tax rate in the fourth quarter. The first quarter of 2024 effective tax rate was higher than the U.S. statutory rate due to foreign losses with no tax benefit while the fourth quarter was favorably impacted by a net reduction in a foreign valuation allowance. For the first quarter, we had net income attributable to common shareholders of $13 million or $0.15 per diluted share, and our adjusted net income attributable to common stockholders on an average cost basis, normalizing for LIFO adjustments and other items was $17 million or $0.20 per diluted share.

In the first quarter, we generated $38 million in cash from operations, primarily from increased EBITDA and more efficient working capital metrics. We believe we are on track to meet or exceed our operating cash flow guidance of $200 million this year. We also expect to have continued working capital efficiency gains as we progress through the year which will result in higher cash generation in the second half of the year. Turning to liquidity and capital structure. Our current availability on the ABL is $645 million and including cash, our total liquidity is $791 million. Our leverage ratio based on net debt of $149 million was 0.6x, a new record low for the company and we intend to repay our Term Loan B this quarter with a combination of cash and drawing on our ABL facility.

This will also reduce our ongoing interest expense burden by 150 basis points for any balance that remains on our ABL. Now I'll cover our outlook for the second quarter and full year 2024. For the second quarter, we expect sequential revenue to be up low single digits for the total company with increases in each of our sectors. We also expect sequential improvement in each of our geographic segments, with our International business leading the improvement with an upper single-digit increase. Our outlook for the full year remains in line with the guidance provided on our Q4 call. Although we are off to a very good start to 2024, our annual revenue guidance is weighted more heavily to the second half of the year in the current quarter is when we typically build backlog to support this growth.

We also expect a quarterly revenue cadence similar to past years with revenue growth in the second quarter and third quarter and a seasonal decline in the fourth quarter. We continue to view 2024 as a transitional year with total company revenue expected to be similar to or slightly lower than 2023 levels. As a reminder, we are also targeting the following key metrics for 2024. Average adjusted gross margins of 21% or better, average adjusted EBITDA margins of 7% or better, average adjusted SG&A cost as a percent of revenue below 15%, we expect to generate $200 million or more in operating cash flow. Capital expenditures are expected to be in the $40 million to $45 million range in 2024, higher than our normal run rate of approximately $15 million as a result of our ERP implementation.

And finally, we expect our effective tax rate in 2024 to be in the range of 26% to 28%. And with that, I would like to turn it back to Rob for closing comments.

Rob Saltiel : Thanks, Kelly. The first quarter has started off with solid performance with a return to sequential quarterly revenue growth. It also bears repeating that our company is in a very strong financial position. We have transformed MRC Global into a more efficient and consistently profitable company with a strong balance sheet that is poised for future success. These are the 2024 highlights I want to summarize before opening for Q&A. We continue to target $200 million of cash from operations this year, and we are on track to meet or exceed that target. We expect average adjusted gross profit to remain in the 21% range in 2024 and are targeting average EBITDA margins of 7% for the full year. We intend to pay off our term loan B in full in the current quarter.

We expect to exit 2024 with a minimal net debt position and be in a positive net cash position in 2025. As we generate consistently strong levels of free cash flow over the coming quarters, we will have ample financial flexibility to consider various capital allocation strategies, including returning excess cash to our shareholders. And with that, we will now take your questions. Operator?

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