Q3 2019 Earnings Call
Greetings and welcome to the MRC Global's third quarter 2019 earnings conference call. At this time, all participants are any listen only mode. A brief question answer session will follow the formal presentation.
If anyone should require operator said, we'll turn the conference. Please press star zero when your telephone keypad.
As a reminder, this conference is being recorded it's now my pleasure to introduce your host Jim Brown Executive Vice President and Chief Financial Officer.
Randy you may begin.
Thank you in that good morning, everyone.
Welcome to the MRC Global's third quarter 2019 earnings conference call with cash.
Appreciate you joining us today.
I'm honored to broaden our executive director of Investor relation is on maternity leave so on the call. Today. In addition, myself, we have Andrew Lane, President and CEO .
There will be here.
Replay of todays call available by webcast on our website MRC global Dot com.
As well as by phone until November 15th 2019.
The dial in information is in Yesterdays release, we expect to file our quarterly report on Form 10-Q later today and it will also be.
A little on our website.
Please note that the information reported on this call speaks only as of today November 1st 2019, and therefore, you're advised that information may no longer be accurate and so the time of the replay.
And our remarks today, we'll discuss adjusted gross profit.
Gross profit percentage adjusted EBITDA and adjusted EBITDA margin.
You're encouraged to read our earnings release and security filings to learn more about our use of these non-GAAP measures and to see a reconciliation of these measures to the related gap items, all of which can be found on our website.
Right.
In addition, the comments made by Matt 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 are the management of MRC Global However, the MRC global's actual.
It's could differ materially from those expressed today.
Encouraged to read the company's as she sees 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. Andrew Lane.
Thank you Jim.
Good morning, and thank you all for joining us today and for your continued interest in MRC global.
Hey, I will review the company's third quarter 2019 operational highlights.
And then I'll turn the call back over to our CFO , Jim Brown for more detailed review other financial results.
The focus on returns event.
Best of capital by our customer base across our three market sectors continues to take hold.
He is out there that customers are pursuing that discipline approach the spending.
Consequently, our third quarter sales were lower than in the second quarter.
Significant deviation from historical experience.
We believe this.
Try and they're spending restraint well continue in the fourth quarter.
Given this market backdrop and the weaker Q3, we took actions to reduce operating costs, beginning last quarter with several cost reduction efforts, including the voluntary retirement program.
We also decided to go farther and our container with additional.
Reduction efforts in the fourth quarter.
The savings results from these programs will become more evident in the fourth quarter and will be fully realized next year. After these initiatives are complete.
We also continue to make progress toward our long term strategic objectives to maximize shareholder returns by gaining market.
Were maximizing profitability and working capital efficiency and optimizing our capital structure.
Ill address how we are progressing toward our strategic objectives first let me start with a third quarter results.
Third quarter 2019 revenue was 942 million a 4% decline from the second quarter if this.
Here.
This decline was entirely in our midstream businesses as our upstream and downstream sectors each reported modest growth.
Our gas utility business, while somewhat lower than we had originally expected continues to grow.
In fact gas utility sales for the first nine months of 2000.
As a 19, our 7% higher then they work and the first nine months last year.
Given our current view of the year, we expect to generate more cash from operations than previously projected which is consistent with our business model.
Inventory on receivable balances are declining from second quarter levels.
As.
Duration of cash flow from operations, which was $126 million in the third quarter allowed us to not only fund are relatively small capital expenditure needs and our preferred stock dividends, but also lower net debt by $100 million.
And that border.
Consistent with our work.
Capital strategies, we expect to achieve our working capital the sales target up 20% by the end of year supporting our cash from operations view of at least 200 million, but full year, which implies a free cash flow yield for 2019 up more than 15% at current stock price levels.
Now I would like to highlight our progress on one of our key strategic objectives to grow market share with new customers.
And maintain market share with existing customers.
This quarter, we were awarded several new contracts in our midstream sector, two of which were with gas utilities.
First we were awarded.
They knew integrated supply agreement with Centerpoint energy, which includes the recent acquisition a background.
Centerpoint is the second largest gas utility in the country, serving over 7 million metered customers across eight states.
We expect to implement this new contract through the middle of next year and when it's fully implemented.
I don't apply it will become one of our largest midstream customers.
Second we also won a new pipe bidding them plans contract with southern California gas also known as so-called gas, which is a subsidiary of Sempra.
The largest gas utility in the country, serving 22 million customers. This.
The new customer opportunity and with this contract. We are now serving nine of the Tad largest gas utilities in the country.
We have focused on gas utility since 2006, and our service is unmatched in that space.
The sub sector continues to grow independent of commodity prices and we expect.
This trend to continue as gas utilities continue to upgrade and expand their networks. We are uniquely position in this space and continue to grow through our combination of comprehensive expertise and superior service levels.
Third and the transmission and gathering sub sector, we signed a new two years.
Contract with one out a leading midstream service provider in the United States. This fly them with valves for their pumping stations.
As we have emphasized before expanding market share is a core component of our strategy.
Consistent with our strategy to high grade our portfolio to higher margin product and service offerings, We announced last.
Last quarter that we were completed the initial construction on a 127000 square foot midstream valve and engineering center, expanding our Houston operations complex and Laporte, Texas.
This new facility is focused on midstream valves and will provide us the expanded capabilities to better penetrate.
That market.
We believe the near term sales opportunity in midstream valves alone could be $100 million over the next two years, allowing us to expand our share in the midstream sector.
The first nine months of 2019 valve sales were 39% of our total sales.
We are on track to.
Deliver 40% of our salesmen valves in the near future.
Furthermore, we plan to increase sales from the valve product group to 45% of total sales and the next three years.
The addressable oil and gas valve market in the United States is $2.6 billion across upstream midstream and downstream.
Dream.
We have approximately 40% of that market with plans to grow our overall share.
Last quarter, we announced our comprehensive digital supply chain solution called MRC go a cloud based portal that allows our customers to transact with us and an easy and seamless matter.
This initiative fits in with our broader strategic objective to grow market share by enhancing the customer experience.
We are rolling this out sort of the current catalog customers first and expect it continues to expand this to our largest customers over the next 12 to 18 months.
This initiative is fully on track and will support.
At a more streamlined cost structure overtime as well.
Over the next three to five years, we expect our revenue through e-commerce nearly double.
And finally in the third quarter, we continued to return cash to shareholders as part of our capital allocation strategy as previously announced early in the quarter we.
Parts as an additional $13 million of shares leaving $12 million remaining under our current authorization.
Since 2015, when we began our share repurchase programs.
Every participant totaled 23.4 million shares returning $363 million to.
Yes.
We are committed to maximizing shareholder returns, while we continually evaluate all capital allocation options.
Taking a determination based up on both short and long term cash needs.
And finally this week the board of directors and I amended my employment agreement for certain pursuant to which the term of.
My employment was extended until May 2023.
A prior employment agreement was set to expire in May 2020.
I look forward to continuing to serve as president and CEO for the next several years.
I'll now turn the call over to Jim to cover the financial highlights for the floor.
Well good morning again.
Total sales for the third quarter of 2019 were $942 million.
Which were 12% lower than the third quarter of last year with each of our sectors in geographic segments reporting a decline in the year over year comparison.
Sequentially from the second quarter revenue decreased 4%.
U.S. revenue was $763 million into third quarter of 2019.
11% lower the third quarter of 2000, they gene with decreases across our three market sectors.
In addition to the capital discipline exhibited by our customers U.S. downstream revenue.
By 22 million because of the winding down at the show, Pennsylvania Chemical project.
You asked midstream sales were impacted by 26% decline in the transmission and gathering sub sector.
And U.S. upstream sales were down 11%.
Lower activity levels and customer specific.
The timing and circumstances driving the decrease.
Canadian revenue was $57 million in the third quarter of 2019 down 27% from the third quarter of last year and see upstream sector continues to be adversely affected by weak Canadian oil prices and the government.
Mpos production limits.
Canada continues to be structurally challenged and we see little likelihood of improvement in the near term.
We enter took actions there to reduce cost to fit the current activity levels and plan to continue this work into the fourth quarter, resulting in a more streamlined cost structure.
Going into 2020.
International revenue was $122 million in the third quarter of 2019 down 9% from the same quarter a year ago.
Primarily to the concluding of a major project in Kazakhstan, as well as the impact of weaker foreign currencies.
Excluding the project and the FX impact sales grew $23 million, reflecting improving international market conditions, particularly in Norway in the United Kingdom.
Now, let me summarize the sales performance by end market.
Upstream sector third quarter 2019 sales.
<unk> decreased 15% from the same quarter last year to $287 million across all geographic segments.
Specific to the Permian Basin, our revenue declined 18% in the third quarter of 2019 versus the same period last year.
Yes, the Permian remains our most active.
Upstream area.
Midstream sector sales, which are primarily you, but U.S. based were $370 million in the third quarter of 2019.
Down 12% from the same quarter the prior year.
Transmission and gathering sub sector was down as several customers are spending last year.
More disciplined approach to spending and project timing.
Our gas utility business, which represents 23% of our overall revenue in the third quarter continues to show growth.
Since 2012 is part of our business, which is not related to commodity prices as a compound annual growth rate of.
8%.
And we expect another year of mid to high single digit growth in 2019.
In the downstream sector third quarter 2019 revenue was $285 million down 8% from the third quarter of last year.
The U.S. downstream sector drove the.
Cline, primarily due to the winding down of projects, including the show Chemical project mentioned earlier.
Now turning to margins gross profit percent increased 240 basis points.
18.5% in the third quarter of 2019.
As compared to 16.1% and.
Third quarter of 2018.
The improvement reflects a benefit of $2 million from LIFO income in the current quarter as compared to $26 million of life will expense in the prior year.
Adjusted gross profit for the third quarter of 2019 was 188.
Million dollars or 20% of revenue.
As compared to 215 million and 20.1% for the same period in 2018.
Adjusted gross profit was flat due to less low margin products Gerrick work this year.
And higher relative sales and our valves product.
James offset by deflationary pressure in line pipe prices.
We continue to shift our product mix to higher margin valves as part of our bow centric strategy.
Line pipe prices were lower in the third quarter of 2019 versus the same quarter in 2018 as.
The effects of tariffs in quotas and a softer line pipe market have been priced in.
Based on the latest pipe logics, all items index average line pipe spot prices in the third quarter of in 2019.
Or 19% lower than the third quarter of 2018.
Line pipe pricing today is below tweet tariff levels, the combination of lower sales prices due to soft demand.
Oversupply and small diameter pipe.
The higher cost of inventory on hand has put pressure on line pipe margins.
Hi prices are expected to continue to remain under pressure.
Crusher, given the soft demand in oversupply situation.
As DNA cost for the third quarter of 2019 were $137 million or 14, and a half percentage of sales as compared to 140 million or 13.1% of sales in the same period of 2018.
Third quarter SGN eight expense included severance costs of $5 million.
The cost reductions in the third quarter eliminate a 180 positions, which is expected to result in annual savings of approximately $12 million.
We plan to continue our cost reduction efforts in the fourth quarter.
The further actions that are expected result in additional severance and restructuring charges.
Our effective tax rate for the quarter was 28% up slightly from our prior guidance.
The effective tax rate in the third quarter a year ago zero.
As a result of $6 million.
The tax benefits primarily related to the adjustment of a provisional amounts recorded in 2017.
Associated with a tax cut in jobs Act of 2017.
Net income attributable to common shareholders for the third quarter of 2019 was $15 million.
Or 18 cents per diluted share.
And $18 million or 20 cents per diluted share for the third quarter of 2018.
Net income attributable common shareholders for the third quarter of 2019 includes after tax severance charges of $4 million.
Or five cents per diluted share.
Adjusted EBITDA in the third quarter of 2019 was $62 million versus 80 million for the same quarter year ago.
Adjusted EBITDA margin for the quarter were 6.6% as compared to seven and a half are saying in the third quarter of last.
Last year, driven by the lower sales volume this year.
All three of our segments generated positive adjusted EBITDA this quarter.
Our working capital at the end of the third quarter of 2019 was $828 million 68 million lower than it was at the end of 2000.
Women 18.
Working capital excluding cash as a percentage of trailing 12 month sales was 20.6 person at the end of the third quarter 2019.
We expect to continue to work inventory down to achieve our targeted working capital level of 20% Ivy ended the year.
We generated $126 million of cash from operations in the third quarter of 2019.
Inventory and receivable levels fell as expected with the slow down in the business.
For the full year 2019, we expect to generate cash flow from operations of at least 200 million.
Yes.
Capital expenditures were 6 million in the third quarter of 2019 for a total of 12 million for the first nine months of a year.
Our debt outstanding at the end of the third quarter was $627 million compared to 684 million at the end of 2018.
And our leverage ratio based on net debt of 602 million was 2.5 times up slightly from the 2.3 times at the end of 2018.
The availability on our ABL facility was 477 million and we had 25 million cash at the ended the third quarter.
Regarding our outlook for the remainder of 2019.
As is our customary practice, we don't plan to update the full year guidance. This late in the year.
However, we do expect the fourth quarter to be down seasonally from the third quarter.
Historically, it's down in 5% to 10% range and we.
I expect that it will be at the high end of that range or greater considering the capital discipline from customers and budget exhaustion.
Looking ahead to 2020, given that our customers are just beginning the budgeting process now.
It's too early to give a complete guidance Nevertheless.
Early estimates showing double digit decline in U.S. spending, which were primarily impact our U.S. upstream business.
Although our midstream and downstream customer base are also now focused on returns and capital discipline.
However, the new modification shop, new contract wins, and a strong gas utility business.
Should help offset the lower overall activity levels.
As we've done in the past, we will continue to execute our long term strategy even against the softer market and we are well positioned regardless of where we are in the cycle.
And with that we'll now take your questions operator.
Thank you.
We will now be conducting a question answer session. If you like asking a question. Please press star one on your telephone keypad, a confirmation code when to get your line is in the question Q. You May proceed start to if you would like to remove you're correct question from the Q4 participants using speaker equipment, and maybe nets or does that bring handset before passing the starkey one on that leaves while we pull for questions.
And.
Our first question is from Sean Meakim JP Morgan. Please proceed with your question.
Thank you Hey, good morning.
Good morning shot.
Hi, Andy I'd like to maybe dig it there's a lot to dig into here from your prepared comments I'd like to focus.
On the area, where you have some control so I think is revenue mix and costs.
Well, we start with the mix.
Can you talk about what a normalized gross margin could look like if you're able to take that that valves next to 45% in a few years, what's required to get you there and what does that come at it what products.
Comedy expensive them I'm thinking maybe line pipe, but maybe you can help us help elaborate on that.
Yeah shot.
Exactly right, yes, so I, we havent changed our goal Jim and I've been working on this for several years that change the mix I started five years ago.
So when we decreased our emphasis on carbon pipe increased our emphasis on valves, but all this has been a targeted towards consistently delivering.
20% plus adjusted gross margins.
And I think I'm confident we're going to get there where sporadically a achieving that now.
We did last two quarters of last year of course, we just did in the recent quarter. So we can get there but the goal is to consistently have that and then moved up from there as we continue to the multiyear plan, that's what our bout centric strategy. So I'm confident in that part of it it's a.
Big addressable market that we talked about.
We have a leading 40% market share we just added a brand new capability would the engineering a modification shop.
Which brings in house machining, a welding painting pressure testing some more manufacturing type.
Margins in that complete a midstream valve assemblies that we'll do so based provider of midstream valves and actuation.
Historically, we've said that out the third parties to do the complete machining and assembly and painting and testing I will now have that all in house and.
Her to our customers a complete assembly.
I'm confident that there's 100 million grow up and that over the next one to two years.
That's a nice addressable market for us.
And I'm confident in getting to our 45% goal that we stated and all that leads.
Through a higher mix, yes, you're exactly right.
Right, there will be less emphasis on especially a low lower margin. He ardelle views small diameter line pipe out as the mix change.
That sounds very positive I appreciate that feedback. So then to come back at cost you're taking a pretty aggressive approach the cost structure.
And it sounds like and I think given the forward outlook, that's warranted or what's the right level going a run rate as you go into next year. How you just think about the impact on EBITDA margins.
Yes, let me start and Jim can really talk or add some comments to my comments, yes, I think it's right.
For us that plan or to be aggressive here on the cost side to make sure weekend and still deliver a really strong EBITDA percent in the 6% range, regardless of the that the macro changes on the topline. So we've taken out a 230 positions.
Since the land of last year, so roughly six and a half or side of the workforce.
We're continuing to streamline we made some part of the changes in October that'll impact in the fourth quarter.
A couple of things we continue to look at more efficient ways to run our business hopping up some resources in our reach.
Total distribution centers is an area, where we're working on to be more efficient and also MRC go our online business that connection with our customers is going to allow us to.
Centralized more technical support more centralized quoting support which will be more efficient for us.
To serve the customers also so there'll be some more efficiency come from that mostly in in 2020.
So we're working on several things along with just the overall reductions to position us to be in a at a good position going into next year.
Yes, Sean I would say you know with the actions we took.
In the quarter in some of the things or planning.
Our quarterly run rate next year ought to be 730 million a quarter.
Very helpful. Thank you Beth.
Thank you shot.
Our next question is from Nathan Jones Stifel. Please proceed with your question.
Good morning, everyone.
Good morning Nathan.
Following up on that last question I think you're.
Right right on it DNA with 133.
Maybe one study to if we take out Deborah.
12 million units.
Oh baby jogger dotted issue.
Sure.
Hi.
On meaningfully below 130 accordingly.
Well it certainly has the potential Nathan I mean, a little we're going to go through our own internal budgeting exercise here that in the next several months in putting our plans together, we do have some desires and plans to continue.
You need to invest in our ecommerce strategy. So I think that's going to cause a us to add some cost to our budget. That's a nice long term investment and we've seen some nice early success than that so oh, yeah. I think at this time is probably a probably safe to say that we ought to be under sub one third.
Okay Fair enough and then I just wanted to follow up on.
Sure I just your initial tech like next year.
Probably revenue down double digit constant traded Oh.
Upstream that double digit across the portfolio.
I guess, if you could dropping out straight minute only dropped the downstream.
Yeah, Nathan let me start.
Jim I can add some comments I would look at it a couple ways. It's early on that budgeting cycle.
You know, where specifically talking about double digit or 10% decline focused around the drilling rig and drilling completion U.S. spending estimates.
But they vary from 5% to 10%.
So where I would look at that as the big impact.
That were planning for next year and then.
Yeah.
Midstream will still be a in a solid position will have growth again in gas utilities and well have grow payments.
Permian Basin, and we'll have some growth in midstream a new contracts picked up and a accordingly that to a new gas utility contracts, which are significant to us. So I think it's not across the border then downstream relatively flat to maybe slightly down so it's not the 10% across the board.
As Jim said in his comments really well see what the final by just come out for next year spending and then they also you know our major customers.
Tend to mute that impact for us and so you know the majors tend to.
Keep a longer term view I think a their reductions will be a lot less than that the.
Well they just for the U.S. upstream so we'll stay active with them and so I think those offset and then that the number of contract wins, we have will definitely offset so it it's too early to get from numbers, but.
I would that be my guidance at this point.
I get it I just wanted to make.
Sure.
People weren't expecting.
Double digit decline across portfolio.
Yeah.
He gave me if I gave you asked this question Ali I got on the call little bit like you adjusted gross margin not getting back up to 20, <unk> here I think with a very light right.
Even the trajectory that does it being on a with that I'd make issue related to tell you Craig.
Now how did you actually get back up to 20 <unk>.
Yeah, Let me talk about the mix make and then Jim can add or more comments, but yeah, yeah I mean it.
Continues on our strategy, our vows are doing very well, they're holding up out there not seen the kind of declines in the other product lines, and so and you're saying so that's what they're positive from a mix change for us.
We're just starting to the shift southern midstream complete assemblies, which are even higher margin. So that's a.
All of them out and then the negative on the margins usually has been are on a lower margin that we've talked about E.R.W. small diameter line pipe sales those are particularly weak in the third quarter. So from that mix change that helped US and then Jim you have anything to add.
No that's the biggest.
Driver.
So you starting to see.
You know clearly.
Volume challenges here.
Hey, your cost.
Any pricing pressure on.
Outside of.
<unk>.
Okay.
No not not.
Really I mean, the stainless tends to be a a longer lead time to valves that definitely longer lead time more technical so they tend to not react or the short term cycle changes line pipe as you mentioned, that's the big one and that's reacting to.
The whole environment up the inflation and tariffs of.
18, the U.S. steel mills are increasing pricing and then in 19 demand coming down a plenty of supply and a deflationary pricing all year long in line pipe. So that's the big swing factor for us but.
Gas products, Oh, if anyone plans everything.
That's a.
All held up really much more.
Steady for us, it's really just midnight they swing in that line pipe and.
And the margins there.
Maybe just one mall I take it didn't head count out if it sounds like you've taken any green.
Hi, how are you thinking about.
Whether or not you need taking money out yeah, I think going into next year.
Yeah. So we have taken footprint out I'm glad that we haven't concluded that.
Into the comments, but we've continued to l. or why we started in 15 and 16.
2015, and 16 to really look at the structure out of a in a 50 $55 barrel environment, what do we need to service our customers. So there's been a lot of streamlining over a couple of years.
We continue to I made a major after this year in the second and third quarter.
The streamline the smaller.
Yes.
Well you struggle to in a downturn to environment to make a a good EBITDA.
So we have close additional branches. This year, we also looked at a small locations or consigned inventory for customers, we looked at our footprint on pipe locations and what do we need.
And then and I was eight our pipe yards also during the quarter.
So a lot of streamlining so we are being our Q, but we'll have 260 locations.
Going forward from our previous 300.
Our next question is from Blake Hirschman Steven the.
Operated please proceed with your question.
Hi, good morning, guys.
Good morning.
Large projects kind of rolling off had been a hit this year on the top line of being something like 260 million or show.
Which seemingly kraken easier company specific calm next year will nodes.
Projects be flush through by the end of this year or should we be thinking about you know a lingering impact into 2020 as well.
Well most of those projects have a pit flush through a will have a little bit of year over year comparison or comps a headwind of maybe 40 50 million.
Dollars of revenue going into 20, but no not a large amount like we had coming into 2019.
Got it and then on that issue in a you mentioned some cost actions in Canada I was curious how did those headcount reductions split out you too.
Geographically yet I mean is it is it mostly U.S., Canada aware and can you got.
In any further or is this kind of a bare bones bare bones level. Thanks.
Most of the most of the reductions that we saw the core to the 118 part of our voluntary retirement program, where we're in the U.S., we have been making.
In cats in Canada, we continue to do that.
In terms of your question about the bare bones I'm not sure were quite to that level yet based on me up based on the current activity levels. So that's why we said we still have some further actions that we're looking at your in the fourth quarter. Yeah. Blake just give you a little more color to that cuts.
In the U.S., where a larger workforce was roughly 5%.
Cash and international was 3% and the cut in Canada was 19% and a corridor.
So oh, we just not optimistic about retired in Canada.
But and as Jim said, we still look at ways to streamline.
The u.
Yes structure international spending picking back up our intakes picking back up so we're in a pretty good position there.
So were at 30 354 employees at the end of third quarter, which is at a level lower than we had in 2016.
Language generating.
Higher revenue than that so we have taken fundamental costs out of the business, both and so these and though and the way we operate.
Got it thanks for the color.
Thank you.
Our next question is from Walter Liptak Seaport Global Securities. Please proceed.
With your question Hi, Thanks, Good morning, guys.
Good morning, all.
Wanted to.
Just as a couple more questions on the the midstream outlook and we've seen some of the midstream.
Capital budget projections, and some of the or the gas gathering and processing.
Since companies have got fairly good sized declines for.
Capex in 2020, you know when the 20, 40% range and so I wondered if.
What are you hearing from your customers, maybe the projections that we saw wrong, maybe it's just too early to to know what 2020 is going to look like but.
No I guess anymore color you can give us about about your customers and not including the <unk> market share wins, just you know some of your major customers.
Yeah, Walt I I think a couple of things one thing and midstream when we talk midstream pressure you start with the line pipe and pricing and if you look at this year.
The price per tons down 17%.
We think it's kind of leveled out here at this point. So we don't see that kind of drop off next year, a much smaller muted drop so of course that will stimulate some more project activity with the of more costly out cost effective out of line pipe.
Ah supply and so that's one thing I you know we feel very good about the centerpoint back trends are so cal gas on a one out wins. So that's market share gains I wouldn't and we also previously talked affordable for about en Ling another big market share gain so those even now.
A flat or down market are nice pick ups for us and then when you look it up.
You look at our pipeline main business, we still have ever talked about these 20 active projects right now pipeline for major pipeline project, we do allow smaller gathering and tie ends but 20 major revenue.
Project.
12 of them in the Permian and we'll still see incremental will do.
80 million in Permian pipeline to this year and I'll then we're estimating 100 million next year, because we still have some bottlenecks situations.
Hi, better work out customers are working through so that's going to happens, though you look at our.
The midstream business in 2019 were up 31%, so thats a bright spot for sold as the market share gains from the contracts. We've got some core projects going forward and were very strong in the Permian pipeline work. So I think the overall marketing some of the smaller MLP season and.
Some of the overall spending.
Going to be down in the area, you're talking about but we have a few things on our favor as a low contracts and end market share gains that.
We'll hold up next year, Okay understood appreciate the.
Color, what I wonder, if it's up with a new gas utility wins.
Is it knowable yet.
But the revenue opportunity for 2020 or is that still to be determined.
Well it Directionally I will be a give you more when we give formal guidance, but directionally it will definitely be up.
You know that's that's a bit as we mentioned in our prepared remarks, we have nine.
End of the 10 top contracts now for gas until ease a little more information we have 18 of the top 25.
And it's close to a 900 million dollar business. This year for us and why that clearly said at a that will be a billion dollar revenue base.
Clos in the next two years.
In that business.
So well get more about the outlook for 2020, but.
It's very stable business, we've retained all our current contracts and then we have to the new contracts that were very excited about.
Okay. Thanks for providing more clarity I appreciate it.
You bet.
Our next question is from that May Snob Howard Weil. Please proceed with your question.
Hey, good morning, and congratulations on a good quarter.
Thank you very good morning.
I came up.
We spoken about the day good gross margins.
So the my understanding is.
More valves and less so like I helped blankets and gross margins.
So far that's the idea of thinking.
And if he can help I think about in fourth quarter do you think midstream falls more downstream <unk> upstream fall, it's more on what could be that but.
Until the back on gross margins.
Yes, so that.
You have it exactly right. So our higher margin because we have a longer lead time. They turn left we have a global supply chain and we do more assembly and more value add.
All those things that impact our margins favorably in.
Valve business, So and then the midstream valves, which I've talked about adds more manufacturing content. So all those things that the more we grow our valve business that the higher better impact on our margins.
Separates us from a a lot.
Competitors in this market. So that's been our valves centric strategy. So that's exactly.
The main driver and and as we mentioned, yes, the lowest margin business. We do is the small diameter E.R.W. line type that was particularly slow in the third quarter, which also helped the margin and one more I would add that I don't think I mentioned previously was the project fall off so project as Jim talked about.
Previously.
Tend to be in there kind of range of a 10% gross margins you know well below our average so big revenue volumes, but tend to be a lower margin business for us when we get those projects. We had 260 million last I in 2018 were tracking around step forward as Jim.
Mentioned 40, or 50 million that this year, so that lower project revenue also had a change on the.
On the gross margin favorably. So those three things are the biggest movers and now going into fourth quarter 10 month on margin, but I think in terms of you know the drop off so there were going to see in the fourth quarter.
And I expect to be across all or all of the streams.
It'll probably the highest in the upstream in it in the midstream downstream well likely do a little bit better and that should have a slightly favorable impact maybe you know margins in the fourth fourth quarter, all things being equal.
<unk>.
So let's say.
You mean, Israeli like you're going to be ending up quite nicely.
Hi night, so those margins what kind of thinking.
And it sounds like back a sustainable <unk> 0.1 that you would you have.
Well what are the puts and takes against that.
I.
Thank God I think that's fair because I think you're gonna you're gonna see is finished the year strong from a margin perspective, and a helps us going into next year.
Relative to where we where we finish 19.
Got it.
Last question anything me, if I just think about the cost.
Thanks cost cutting edge.
Yes that you're thinking when when you think he will.
Got it would that make what would be like in Bama corridor.
It looks like what do I get more second quarter.
Yeah, we will be done beds with it in the fourth quarter.
Well, you know I I hate to.
They've done because you react to the market, but with everything we planned and with our outlook for next year.
We'll be done with our costs coming into fourth quarter. So the first quarter ought to be a clean quarter.
At the new lower run rate.
Thank you for taking my question I guess.
Corridor.
Thank you but.
Our next question from Michael Mcfadden.
Wells Fargo. Please proceed with your question.
Hey, congrats to Monica and the great quarter kicked out of quick.
No problem or just had a couple of quick question a one on the digital.
How are you guys what are your Kb I'm sure. There's how are you tracking this whether its gross margin for invoice asked you in a per touch point is that a future savings opportunity going forward and what's the kind of absorption rate up your customer base into that platform into the MRC growth Globe Pro platform.
Yeah.
As Michael I'm very excited about this part so we Oh, we have roughly an 800 million dollar base business today, It was a little bit higher in 17 and 18.
Those are two years and when we get a significant amount of revenue with that Tc energy.
And they were very.
Customer in the catalog. So it's it's tailed off a little bit through the just because of the changes with that one customer, but the way I look at it we have 80 customers on the platform now we have 175000 of our skews on the platform and we're really focused on ramping up.
And converting our current major customers, which would be the top 25 to 30 customers.
And moving them onto our platform. So it's much better bigger than just a catalog. It's a customer portal gives them a lot of functionality to retrieve that the documents I see their orders expedite their orders C.
Our inventory.
Greetings and real time with them up.
Asked for technical support asked for quote support and get it all online.
And it all has their content. These are all with our major customers that multiyear contract. So it's all a their contract pricing and.
There I am al.
What's visible to us so.
We've done a lot of work over the last two years to get to this point. So our maiden metric right now, there's a number of customers and continuing to get the skews the over on the platform.
And we'll really tracking that that is because we're in there very early stages.
But I I've outlined a the goals for the group, we will be a 800 million run rate.
This year would like 2020 to 23, Oh, we expect to have a billion than a half of our business on that platform.
So we'll have more metrics are related to.
That when we get a little bit bigger.
On this but we've also looked at the efficiency. We think this will bring from both a structure standpoint, a branch structure and also a personnel.
Primarily a in quoting we do today and technical support we do today and all the the branches, we think theres a more efficient model that comes out of this growth in <unk>.
Ecommerce so.
I would say we're very much early days were very pleased.
A lot of a very good customer feedback on that the new platform and a new portal. So I think we have a very good strategy, there and we're going to continue and implement.
Great, though that was definitely helpful color and if I could just.
Switching gears to the EBITDA commentary from earlier I think if I go dig into the 10-K amortization supposed to come down. So are we left to infer the the margin that you're targeting on on the EBITDA outside <unk>, that's coming from better core ops performance and actually nay.
Skews that a little color there.
Sure Yeah, there I mean EBITDA performance is driven by those two things that you just said is lever leveraging the the cost base, including the cost reductions and bringing more revenue and lower margin dollars through.
Through our through our system the drop off in amortization.
The next year, you know do I have a as a positive impact on our reported net income in earnings per share, but that's factored out of the EBITDA. So when you look at the EBITDA improvement, it's coming out of those operational issues not that amortization rollout Oh, yes.
Yeah, the amortization will benefit us nicely next year, when you think about.
Got it and it just a little color on our our segments, Canada of course is a very difficult market. Our EBITDA is writing 2% their international is recovering nicely at 4%.
And then the U.S. is close to 7%. So we still if that makes a business and and.
We feel very good about continuing to move the U.S. number up.
Yeah that if I could just sneak into last one on the market.
Historically, we've seen the last two recessions more of a V shaped kind of.
Recovery this seems like a more of a melt lower on a huge.
Shade can you just give us a little contacts on what the competitive dynamics that band.
Promote large or small competitor standpoint, and how that plays into your growth or whether its project bidding going forward.
Yes, I just found a very high level I would say you.
No in our space in the in the oil.
Oil and gas PBF that market said that we compete in heads up there's really two big players Oh with all the years of consolidation or they go back to you know 2012, 2015, 14 15 timeframe. So.
It's a big market.
Two large competitors I think both doing well in this market and then it's really up falls off to a lot of small competitors and and they have some struggles on a downturn. They don't have the balance seats, the really support carrying the inventory or making a commitment it's like we could make a pre buying.
On the inflation in the tariff that decision. So a couple of they I think customers in the end that prolong downturn like you describe to you save one large suppliers that same count on it make large commitments for projects in longer term buys a they need.
Thank you got big distributor capability to.
Pretty by and take advantage of the market consolidate buys with major suppliers Prebuy gets a a tariff environment. That's uncertain. So I think those things lead to a you know more activity centralized with a two major players and I think that's the environment. We're in.
[noise].
Thank you very much ethanol.
Our next question is from Steve Barger Keybanc capital markets incorporated. Please proceed with your question.
Good morning, guys.
No warrants they just thinking about the macro challenges and the customer spending discipline next year versus the positive offsets from.
Gas customers, a new contracts you've talked about can you frame up what magnitude of end market decline. You think you can offset by mix and projects just trying to think about outgrowth versus the market.
Jim.
Yeah, I think a I think it's going to be pretty close I'm not sure what the new contract wins will well quite be enough to offset at least.
That's what we're hearing preliminary on market declines are but a that'll be our challenge for next year, but it's nice going into next year, having in our in our back pocket. If you will some of those contract wins to to help us offset that.
Okay.
And just so in that context, given early thoughts on the macro in some of the.
And you're taking would you expect operating cash flow next year can meet or exceed the 200 million of this year.
Well I'm not sure will be quite that high because again without a you know a significant decline next year more of a flat environment, we shouldn't see when should we shouldn't seeing much of the other working capital release next year as we head or.
We will this year.
Understood and any early thoughts on the implications for Capex next year and can you just updated thoughts on capital allocation at <unk> at this point in the cycle.
Yeah, So again capital capital expenditures for us are fairly light, we're running pretty lean this year I'd expect it to be somewhat similar next year.
We've made the big investment in the modification shop in Laporte, So that's behind us.
And then in terms of capital allocation is as we go into next year I think we'll continue to look at it on a balanced perspective, but it's it's likely we'll spend a little time, particularly early on the you're paying down some debt.
And continuing to keep that leverage in that two to three range.
Gotcha, Thanks very much.
Thank you.
Our next question it from John Hunter Cohen. Please proceed with your question.
Hey, good morning.
Morning.
So I just had a couple of questions related to the upstream side of the business. Your upstream revenues increased a little bit from second quarter to a third quarter. Despite an overall decline and completion activity. So I'm wondering what what drove that outperformance and then as you think about.
Upstream revenue declined in the fourth quarter.
What kinda magnitude or are you thinking about I mean, we've heard from one service company that we've talked about 20% to 30% decline in fourth quarter completions activity. So I'm wondering how you think about your upstream.
Revenues in that respect.
Yeah, John that I got a couple of comments on that it's a okay. When you look at our upstream revenues. It's a combination of the timing for investment in effect, so ladies and tank batteries and gas plants associated with that.
Versus the rig count.
Completions.
And and and so we did well and given the market were up 1% or in our U.S. upstream business.
Sequentially, even though the rig count declined 7% as you said, but we had some in a couple of things like the wasn't more of a decrease in adopt talent and so there was.
More completions.
And it's really depends on which customer base you have to our customer base out.
Completion was even overall completions were down our customer base completion activity was up slightly.
So that works very well I you can look at our business over 10, plus years and our no the.
Patients in the United States versus our U.S. upstream sales.
Coral I've mentioned before correlates about 95%.
The number of completions that are done so that's by far the key metric and then you get some variability in quarters based on the spending in the facilities that doesn't always match up matches up closer to that.
Production level than it does and planned production levels than it does the current completions are drilling so those two item combination of what drives our upstream business Yeah, I wouldn't say the reason were.
Forecast and that the top of our historical a sequential decline seasonal decline in fourth quarter or even greater.
Sure. It's because of what you reference I think a upstream activity in the U.S. is going to be very slow and and Canada, which normally has a pickup in activity in the fourth quarter, leading into a strong first quarter of year is not happening. This year. So I think you're going to have a decline in downstream see significant.
And in Canada, and we're forecasting right now for a.
Steep decline in the upstream drilling activity in November December , which I think many have seen in the industry. So that's really what's what's tailing off this year that is not in it at our control.
Great. That's it for me thanks for taking my questions.
Thank you John .
This concludes the question and answer portion on the call I would now like to hand, the call back to management for final comments.
[noise] well, thank you for joining us today and for your interest in MRC Global we look forward to add any.
Joining us for our fourth quarter conference call in February of next year, where we'll discuss our fourth quarter and full year 2019 results as well as our 2020 outlook.
Good day and Goodbye.
Ladies and gentlemen, thank you for your participation that this does conclude today's teleconference.
You may disconnect your lines and have a wonderful day.