Q4 2019 Earnings Call
Greetings welcome to MRC Global's fourth quarter earnings Conference call. At this time, all participants are going to listen only mode. A brief question and answers that Gen will follow the formal presentation.
If anyone needs operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
Now my pleasure to introduce your host Monika Broughton Investor Relations. Thank you you may begin.
Thank you and good morning, everyone welcome to the MRC Global's fourth quarter and year end 2019 earnings conference call and webcast. We appreciate you joining us today on the call we have Andrew Lane, President and CEO, Jim Brown, Executive Vice President and CFO, and Kelly Youngblood Executive Vice President as previously announced.
Jim will be retiring at the end of the month and Kelly, who will be assuming the role as CFO for March 1st they were both participate on the earnings call. This morning.
There will be a replay of today's call available by webcast on our website MRC global Dot com as well as my phone until February 28, 2020, the dial in information isn't yesterday's release, we expect to file or 2019 annual report on form 10-K later today and it will also be available on our website.
Please note that the information reported on this call speaks only as of today February 14, 2020, and therefore, you're advised that information may no longer be accurate as it's a time everyplace.
And our remarks today, we will discuss adjusted gross profit adjusted gross profit percentage adjusted EBITDA and adjusted EBITDA margin you were encouraged to read our earnings release in securities filings to learn more about or uses 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.
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 immersed peak level.
However, MRC global's actual results could differ materially from those expressed today.
You are encouraged to read the companies as they see filings for a more in depth review of the Respecters concerning these forward looking statements and now let's turn the call over to our CEO Mr. Andrew Lane.
Thank you Monika good morning, and thank you for joining us today and for your continued interest in MRC global.
Before we get started I would like to recognize that this marks Jim's final earnings call with us.
And he will be missed.
We posted 32 earnings calls together over the past eight years and.
Jim has contributed greatly to advancing the strategic objectives that the company, including our IPO in April 2012.
I want to wish him well as much deserved retirement.
Kelly joins us this quarter with his first earnings call and we're pleased to have him Kelly is a proven corporate CFO and is well positioned to take over after smooth three months transition.
I'm looking forward to working when Kelly in the introducing him to those of you who don't already know.
Today, I will review the company's 2019 highlights and progress on our strategic objectives.
And then I'll turn call over to Jim for more detail review the financial results for the fourth quarter before I discuss the market fundamentals behind our current outlook for 2020, and then Kelly will wrap up with our current 2020 outlook.
In late 2018, as we headed into 2019 the market consensus was that 2019 would see a double digit increase any MP capital spending.
That all shifted quickly in the first half of the year.
Now in hindsight capital spending for 2019 ended up being 10% to 15% lower than 2018.
This was a substantial change in direction in a relatively short period of time.
And we immediately responded by reducing operating costs and inventory levels.
These actions resulted in substantial cash generation, which allowed us to return cash to shareholders and reduced debt.
We have a sound long term strategy to maximize returns, which we will continue to make progress against despite market conditions.
Oh I address our progress on our strategic objectives I want to highlight a couple of items from this year's performance.
2019 revenue was 3.66 billion, a 12% decline over the prior year.
Driven by a reduction in customer capital spending levels and the completion of several large nonrecurring projects in 2018.
The year over year impact of which was $260 million.
Excluding the nonrecurring projects our base business declined 6%.
Substantially less than the overall market due to our diversity of end markets.
We also achieved adjusted gross margins of 19.5% for the year consistent with our 2018 margins of 19.6%.
Excluding some one off.
Q4 items noted in the press release, our adjusted gross profit margin was 19.7% for the year.
Since becoming a public company that is the highest annual margin we have achieved.
With that our valves centric strategy and our continued shift to higher margin products and services is working even in this current challenging market.
As we saw revenue began to fall short of expectations due to the weak market conditions. We took immediate action early in the year beginning in Canada, and then in the United States.
We reduced recurring SDMA by $25 million in 2019, as compared to 2018 by reducing head count and streamlining our operational footprint.
We closed or consolidated six locations, including two you asked regional distribution centers in San Antonio and Tulsa.
Which are scheduled to close early 2020.
We will be able to more efficiently serve these markets from our new Laporte facility.
We also decreased our head count by 360 employees or 10% of our workforce.
Do thousand 19, we generated $242 million of cash from operations.
Above our expectation of $175 million to $225 million as we are aggressive in managing working capital.
This resulted in free cash flow of $200 million and the cash flow yield of approximately 20% based on this week stock price levels.
The free cash flow was used to reduce debt and the complete our share repurchase program.
Since 2015, when we began this program we have returned $375 million to shareholders and we have repurchased 24.2 million shares.
We are committed to maximizing shareholder returns and consider all capital allocation allocation options.
Regarding our strategic objectives, we continue to pursue market share growth as one of the major tenants and their strategy.
Our approach is to increase share by obtaining the expanding multiyear MRO contracts with customers.
2019, we renewed or were awarded several notable contract, including in southern California, gas, which increased our gas utilities business, giving us sales or contract with nine of the 10 largest gas utilities in the country.
We also are awarded an integrated supply agreement with Centerpoint energy as we discussed last quarter, which is currently in the implementation phase.
And expected to generate 20 million that $30 million, an incremental revenue in 2020.
Our gas utilities business continues to grow and we expect that trend to continue.
The compound annual growth rate for this part of our business since 2012% to 7.5%.
In 2020, we plan to report our gas utility business separate from our more volatile midstream transmission and gathering business to provide more transparency to this distinctly different business.
This quarter, we also were awarded and integrated supply agreement with Chevron in Canada for their MRO business.
As we are currently doing their project work in Canada. This latest when means we have a substantial portion of the chevron PBF spend under contract.
This is an example of our relentless pursuit to gain share of wallet with our customers.
And continually finding new growth opportunities even in the currently muted activity levels in Canada.
This positions us well for future growth.
And finally, we also renewed our integrated supply contract with anything else, a leading chemical company for another three years.
In 2018, we continued investing in higher margin product and service offerings as part of our strategic objective the shift toward higher margin margin product offerings and the increase our sales from valves I'm pleased to say that for the year valve sales totaled 39% of total revenue surpassing our.
Previously stated goal of 38% and the highest in our history.
And specifically for the fourth quarter valve sales totaled 40% of our revenue putting us on track to achieve our near term goal of 40% to 42% of revenue in 2020, and our longer term goal of 45% of revenue in 2023.
Our new 127000 square foot midstream valve engineering and modification center, which we are proud to have completed in 2019 gives us additional and more extensive capabilities and we expect to see results from this facility take shape and in 2020.
As we discussed last quarter, we think the opportunity for market share gains in midstream valves could be $100 million over the next couple of years.
To continue to grow market share and maximize profitability. We also made investments in technology do thousand 19, we announced our comprehensive digital supply chain solution called MRC go a.
A cloud based portal that allows our customers to transact with us in an easy and seamless manner.
The feedback from customers has been very positive and we continue to roll out this solution to our customers. We currently have 80 customers on the system already and we expect the revenue we are in through E commerce to double in the next three to five years.
Finally, as you know the Corona viruses impacting the World, then, particularly China, the full impact of the virus and how it will influence macro oil demand and global supply chain is still on no.
Our direct exposure is very low as sales in China were less than $3 million in 2019.
We currently have only one employee based in China.
From a supply chain perspective, we are currently well position as we have approximately $350 million of valve inventory.
To meet the current demand.
To date, we have not seen a significant disruption to our supply chain.
However, as we source many of our commodity valves from China, and China produced as many valve components that are assembled in both Europe and the United States.
Protracted restrict then the movement of people and product could cause delays in receiving inventory.
We are actively monitoring the situation and in communication with our suppliers about their plan.
As well as looking for alternative suppliers outside of China to help mitigate any potential impact if the corona virus impact extend longer term.
I'll now turn the call over to Jim.
Thanks, Andrew and good morning, everyone total sales for the fourth quarter 2019 were $766 million, which were 24% lower than the fourth quarter of last year with all geographic segments declining.
Sequentially revenue declined 19% above historical averages as customer budgets were exhausted early.
And they continue to be focus on cash capital discipline.
US revenue was 608 million in the fourth quarter of 2019, 22% lower than the fourth quarter of 2018.
With declines across all end market sectors led by midstream transmission and gathering.
The us midstream sector sales were down 21% in the fourth quarter of 2019 over the same quarter in 2018, primarily due to gathering and processing customers reduce their spending throughout the year in response to the upstream sectors lower activity levels.
And in favor more capital discipline themselves.
Gathering and processing customers activity levels or correlated with upstream sector.
Yes utilities were also down due to lower sales GPG any related to their bankruptcy.
This sub sector also experienced lower sales due to nonrecurring pipe deliveries in 2018.
US upstream sales were down 29% in the fourth quarter of 2019 over the same quarter in 2018.
Due to several customer specific conditions as well as supposed exhaustion and customer capital discipline.
You asked downstream revenue declined 17% in the fourth quarter of 2019 over the same quarter 2018.
Primarily due to the conclusion of the shell, Pennsylvania chemicals project.
Sequentially fourth quarter 2019 use segment sales were down from the third quarter by 20%, primarily due to seasonal appliance exacerbated by budget exhaustion.
Canadian revenue was $43 million in the fourth quarter 2019.
Down 46% from the fourth quarter last year, driven by government imposed production limits.
And the international segment fourth quarter, 2019 revenue was $115 million down 24% from the same quarter a year ago.
Primarily due to the conclusion of the Tcl project in Kazakhstan, as well as weaker foreign currencies.
Excluding both the project in the impact from currency International sales increased $5 million or 5% primarily in Norway in the United Kingdom.
Turning to our results based on end market sector.
Upstream for upstream sector fourth quarter 2019 sales decreased 34% from the same quarter last year to 224 million with declines in all geographies segments as described earlier.
Midstream sector sales, which are primarily us based were 298 million in the fourth quarter of 19.
Down 20% from the same quarter last year.
Sales in our transmission and gathering sub sector were down 34% or $57 million in sales on our gas utility sub sector were down 9% or $18 million in each case, comparing fourth quarter 2019, the same period in 2018.
For 2019 gas utilities represented 60% of total midstream sales.
It is important customer group in which we have a unique competitive position and we will continue to grow market share.
In the downstream sector fourth quarter 2019 revenue was 244 million a decrease of 18% as compared to the fourth quarter of 2018.
Driven by the use.
The us declines primarily due to conclusion of the shell, Pennsylvania Chemical project as described earlier.
Turning to margins gross profit percent increased 20 basis points to 17.1% in the fourth quarter of 2019 as compared to the fourth quarter 2018.
The improvement reflects the impact of lower LIFO expense.
LIFO expense of $1 million and $14 million was recorded in the fourth quarters of 2019 in 2018, respectively.
Gross profit in the fourth quarter of 2019.
Was also negatively impacted by $3 million for the final settlement of a multi year customer project.
And $5 million for the non cash write off of excess and obsolete inventory in our international segment.
Excluding the impact of these items gross profit would have been 18.1% in the fourth quarter 2019.
Adjusted gross profit for the fourth quarter 2019 was $146 million were 19.1% of revenue.
As compared to 202 million and 20% for the same period in 2018.
Excluding the impact of $8 million of items. Just described adjusted gross profit would have been 20% in the fourth quarter of 2019.
Slide five prices steadily decline throughout 2019 in Stark contrast to the increases experienced in the first half of 2018 due to tears and quotas.
Based on the latest pipe logic, all items index average line five spot prices in the fourth quarter of 2019 or 20% lower than the fourth quarter 2018.
And 4% lower than the third quarter of 2019.
For the full year line pipe prices were 11% lower than 2018.
SDMA costs for the fourth quarter of 2019 were $141 million or 18.4% of sales as compared to a 148 million or 14.7% of sales in 2018.
Both periods included severance and restructuring costs of $4 million each.
The fourth quarter of 2019 also includes $5 million of pre tax charges related to the doubtful collection of a product claim against foreign supplier.
And $3 million for an end of year adjustment for insurance receivables.
Excluding these items from both quarterly periods as gene 80 declined $15 million or 10% as we cut costs to better align with market conditions.
Interest expense totaled $9 million in the fourth quarter of 2019, which was 1 million less than the fourth quarter of 2018.
Due to both lower average debt levels and lower interest rates.
Our effective tax rate for the quarter reflects $5 million of Ics tax expense on a 19 million dollar pre tax loss.
This unusual situation is due primarily to losses, including the write offs described earlier incurred for works foreign jurisdictions with no corresponding tax benefit.
And additional taxes related to new recently issued changes in certain tax regulations.
These factors are also responsible for the full year tax rate of 41% higher than our expected rate of 25%.
Net loss attributable to common shareholders for the fourth quarter, 2019 was $30 million or 37 cents loss per diluted share.
Results include those certain items previously described.
Only $19 million after tax or 23 cents per diluted share.
Adjusted EBITDA in the fourth quarter of 2019 was $23 million versus 63 million a year ago.
Adjusted EBITDA margins for the quarter were 3% down from 6.2% a year ago.
Our working capital at the end of 2019 was $732 million 164 million lower than it was at the end of 2018.
And working capital excluding cash as a percentage of sales was 19.1% at the end of 2019.
Exceeding our target of 20%.
Our operations generated cash of $108 million in the fourth quarter of 2019 as the market slowed and we brought down accounts receivables and inventory levels.
For the full year, we generated 242 million in cash from operations.
We spent $75 million per share repurchases in 2019.
12 million of which was spend in the fourth quarter completing our share repurchase program.
We also reduced outstanding debt by $133 million to 551 million at the end of 2019, and our leverage ratio based on net debt of 519 million was 2.6 times at the end of 2019, well within our stated preferred range.
The availability on our ABL facility was $451 million and we had 32 million in cash at the end of the year.
We have no financial maintenance covenants in our debt structure and our nearest maturity is September 2022.
We have a strong balance sheet as we move into 2020.
And now I'll hand, it to Andrew to provide our car current macro views underlying our outlook.
Thanks, Jim after only two years 2017 in 2018 of a recovery in the energy sector 2019 ended up being a much more difficult year than most thought going into it.
The industry has become more efficient at drilling and production has increased despite less wells being drilled.
We have seen the reduction of 900 drilled but uncompleted wells during the past nine months.
And less capital being spent.
2020 looks to be on a similar trajectory with analysts showing MP capital expenditures in the U.S. to be 7% to 12% lower as compared to 2019.
Global spending in international as expected the increased modestly in 2020.
However, with the non repeat of a large capital projects that finished up in early 2019, we expect 2020 international revenue to decline.
The MP spending increase in international and offshore is concentrated with national oil companies, who are not our core customers as they buy PVF directly from manufacturers.
Following the significant slowdown in spending that occurred in November and December of 2019.
We expect a slow start to the year as customers continue to be more discipline and cautious about spending within their cash flow and level loading their budget throughout the year.
We have more exposure to some of the larger aisle season, the United States Who's spending is increasing our focused in areas, where we operate.
We also benefited from the stability of our gas utility business, which is now 24% of our total revenue and is not commodity price dependent.
While we're not immune to the industry trends, we do have more diversity in our end markets supporting revenue and us off market.
We are encouraged by a moderate increase in January revenue over the low levels. We saw in November and December.
We have built a strong long.
Term strategy for all phases of the cycle and we continue to execute the strategy to increase shareholder returns focused on market share higher returns and cash flow.
We plan to continue to focus on expanding market share with new and existing customers, increasing our gross margins through our valves centric strategy as well as penetrating the midstream valve market further with our new modification job.
You should expect to us to continue to invest in the future by continuing to increase customer use of our ecommerce platform MRC go as we transition more customers so that platform.
As we have always done we continue to be focused on containing operating costs and finding new ways to be more efficient.
I'll now turn the call over to Kelly to cover our guidance for 2020.
Thanks, Andrew the coming year will no doubt have headwinds for the industry and MRC Global is no exception.
Our focus in this environment must be to create our own success by continuing to grow market share optimize our cost structure and strengthen our balance sheet to better position the company for the eventual market recovery.
Given the market fundamentals outlined by handy, we regarding our revenue to fall within a broad range of 3.2 to 3.7 billion in 2020.
The midpoint of this range suggest a 6% decline compared to 2019, which is significantly better than current spending estimates as a result of our diversification to different end markets, along with our exposure to large you'll see customers and the gas utility sector.
From a sector point of view, we expect the upstream business to declined the most in the high single digit percentage range as customers continue to curtail spend and focus on capital discipline.
Midstream is expected to decline by mid single digit percentage driven by the transmission and gathering sub sector, which typically tracked closely with the upstream portion of the business.
This decline will be partially offset by gas utilities, which is expected to continue its growth trend.
We believe gathering and processing customers will spend less this year in response to lower upstream spending capital discipline.
We expect to continue to participate in the Permian takeaway buildout projects with our transmission customers.
However transmission activity outside of the Permian will likely decline.
Our gas utility customers will continue to spend based on their multi year system replacement programs and we continue to gain market share in this space.
The downstream sector is expected to decline a mid single digit percentages will due to the completion of projects, partially offset by a solid turnaround schedule expected in 2020.
By geography, we expect to us in Canada to decline by mid single digit percentage and international to be down low single digit percentage.
The us business decline is primarily driven by projected declines in upstream and transmission and gathering spending in 2020.
Our Canadian business is over 70% upstream and is expected to be negatively impacted by crude differentials and government imposed production restrictions.
Our international segments underlying business is improving but on a year over year comparison will be negatively impacted by the 20 million dollar decline from residual revenues related to the TCOS future growth project in Kazakhstan.
Completed in 2019.
Regarding the projected pace of activity, we expect the first quarter of 2020 to be on par with the fourth quarter with a year progressing like it has historically with the third quarter being the strongest.
We expect our 2020 gross adjusted gross profit percentage to range between 19.6, and 19.8% above our 2019 results as we continue to execute our bell centric strategy and penetrate the midstream bell market with our new modification sharp capabilities.
Our goal is to consistently perform at 20% or higher in the next few years.
We expect adjusted EBITDA to be between 160 and $200 million.
And we expect diluted earnings per share to be between 19 and 56 cents.
Given expectations around stabilizing line pipe cost, we expect our LIFO expense in 2020.
To be between zero and $10 million of expense.
In 2020, we expect SGN, a expense will be approximately $510 million to $530 million.
Which at the midpoint is lower than 2019 by 5%.
However, it is normal to see quarterly fluctuations in SGN expense during the year.
Also want to point out that our amortization expense will decrease by approximately $14 million in 2020.
As compared to 2019 due to intangible assets associated with a prior acquisition that came to the end of their useful life.
We expect the effective tax rate to be 26% to 28% for the full year 2020.
And for capital expenditures, we expect to spend approximately $15 million to $20 million inline with 2019 as we continue to invest in our ecommerce technology.
In facility upgrades.
Cash provided by operations is expected to be approximately $110 million to $160 million.
More than 2019 due to the forecast reduction in revenue and a more stable working capital balance. We also expect to maintain a 20% working capital to sales ratio.
And after returning 375 million to shareholders over the last four years, our focus in 2020 will be on prioritizing the use of our excess cash to reduce debt shoring up an already strong balance sheet.
Despite the lower the slower market conditions and reduction in revenue in 2020, we remain focused on our long term strategy.
For shareholder returns through gained market share maximizing profitability and having an efficient working capital structure.
We have historically generated cash in periods of slow or new growth and we believe this year will be no exception.
And finally.
I want to say that I'm very pleased to be at MRC global and I'm looking forward to working closely with Andrew in the strong executive management team has put in place to deliver the best results possible at every point in the cycle and provide superior value to our shareholders.
With that we will now take your questions operator.
Yeah I feel like ask your question. Please press star one and your telephone keypad a confirmation to indicate your line is in my question Q You May Press Star too if you like to remove your question from MCU and for participants using speaker equipment and may be necessary to pick up your handset before pricy must Cherokee.
Our first question is from Sean Meakim with Jpmorgan. Please proceed.
Thanks, Good morning.
Hey, good morning, Sean.
Hi, Jim Congrats on your retirement, it's been great working with you over the years.
Thank you John enjoyed.
And Kelly good Debbie onboard looking for to working with you again.
Yeah same here so I appreciate it.
All right so with all the pleasantries out of the way.
To start maybe could we just talk a little bit about the upstream and midstream guides.
I think it's where you're probably gonna get the most pushback from investors considering how much pressure. There is from the same said investors to be disciplined on spending.
I think the drop off at year end of 19, probably reinforces those concerns. So I think most people on the color going to be pretty well attuned.
To this strong I see mix and the gas utilities as part of what supports those assumptions but.
We have upstream spending is down 10% to 15% in the us in 2020.
Could we talk about confidence levels.
Hi, Scott any decline in upstream and mid single digit for midstream.
Yes, John let me start on that one and let me start with the fourth quarter.
On the tail off there and I think from the last call.
We had talked about our seasonal decline of 5% to 10% how they'd be at the high end or more.
And it just played out even more of more significant drop off and it was.
Do you look at October.
We were right on track for what would be normal fourth quarter around 290 million revenue.
And the end the tail off a accelerated with the budget exhausted and we finished December with 233 million revenue. So you can see a significantly more than normal for us.
In the upstream environment. It was very much concentrated on three major customers for us Chevron, who had been very active through three quarters curtailed a lot of budget spending in the fourth quarter.
Occidental and Anadarko, both curtailed budget and we're going through the normal.
Merger major merger activities distractions, and then CRC on the West Coast also.
Budget curtailments, so those three specific upstream customers, where the bulk of our fall off.
In the upstream and midstream.
All of our major customers curtailed spending the DCP the Williams.
And and then also had a very low demand for line pipe.
Also with the demand that we did have.
Was very much at the lowest price of the year, whether the deflation that we solve around 18, 19%. So it had both the a volume impact and the price impact.
But nothing significantly changes except for the budget.
Curtailments I will say that January has picked up and activity as you'd expect with new budgets pick up.
But we're basically a forecast not flat first quarter.
As things ramp back up.
On the low point of December and certainly Danilo is much better than both November and December revenues.
On the other 2020 outlook.
It's very much specific to our customers as it is both in the tail off last year.
But also in the this spending when you look at the overall spend yes, we feel that you asked land upstream and midstream type activities spending will be down 7% to 12% as an industry. When we look at our specific top 25 customers that make up a little over half our revenues.
We see their spending down in the 3% to 5% range. So the while the general small customers PE private equity backed customers and others may be down more significantly.
We feel good about our guidance.
On upstream being down high single digits as a based on our customer mix on midstream. The same thing will be down on price. When you think about line pipe.
Starting at the current level of line by pricing a much lower than we started that last year. So bad will have an impact on midstream.
And some volume too.
Also on projects, mostly in the in the gas arena, but then.
We feel very good about gas utility. So we'll have a decline on midstream pipeline work and we'll have an increased on the year on gas utility work. So we have that offsetting factor.
And one more small wrinkle to that how about your confidence level in Threeq, you as being your strongest quarter given the seasonality we've seen in recent years in the upstream.
Yes, we're projecting that I think we'll go back Sean to what's a more normal it's up we've had very unusual experiences the last two years as.
Especially last two to one our highest revenue was March and a curtailed through the whole year as budgets were pulled back.
But thats not normal for our business.
The third quarter as the main construction quarter for both tank batteries and pipeline and gas you gas utility work so.
We believe it's going to return for us more normal.
Almost sequential basis, and improving second quarter best quarter, and third quarter, and then some tail off the seasonally in the fourth quarter.
Got it I appreciate that I, just lastly men on the DNA guidance.
Could you talk about the flex points around the range. So in other words is it just based on activity or could we see a scenario, where you had the midpoint of revenue, but still drive the gene a lower.
Through more disciplined and just curious what what type of scenario would you see that leaves you at the upper end of that range.
Yes.
Address the second part of your question first on the entire upper end to the DNA range, we have to see revenue much much up towards the high end of the revenue ranges, we have to bring on some resources or additional variable.
Costs too.
To meet that.
We have committed to spend some more.
On the MRC go and commitment issuers. So that's a that's going to drive some of the increase over what we've said in the past, but if we come into the midpoint of the revenue range, we're much more likely to be below the midpoint of operating costs for for some of the reasons, we've talked about in the past, where we just manage to those levels.
Yeah, Shaun I'll just add to.
I'd just add to Jim's comment we finished the year it a little over 3200 employees.
Which was a level of less than we had in 2016, which was a very low point for the business. So we feel very good about where in a strong position to see some incremental as written revenues pick up some that and the second half will see incremental profitability from that.
And we also.
It took another step in.
In 2019, we closed six locations.
That we talked about an appropriate prepared remarks, and so we were getting to a very efficient delivery standpoint, with less employees and so I think that was in both impact than that would tend to be more towards the low end of the as DNA guidance.
That's a expecting yes, that's it that's great feedback thank you.
Our next question is from VEB, then that with Scotia Bank. Please proceed.
Hey, guys.
Thank you for taking my question I.
I guess, we already spoken about upstream and midstream thinking the downstream that was actually OSAT bright spot me that downstream revenues will decline so much.
I believe showed Franklin project, what's on all the other already done into Q2. This if we can expand on why we saw declining.
Option revenues in Fourq, you would be helpful.
Yeah and.
Downstream in for Q is really just general activity spending I think some risk profitability on the spreads for customers. Some of it you know related to US is always related to the Io sees where they may be pulling back on some downstream spend as they invested and completed some budget spend in the upstream.
Team.
We always have that dynamics there was also a.
Tail off of about 5 million and turnaround expenses activity in the fourth quarter from the third but you're right. There wasn't that much in the shell, but as we think about 2020, we see an improvement in our customer base turnaround activity of double digits.
Which is good for us where I have to overcome 20 may end up shell.
That was in the first half of 2019 that won't repeat in downstream.
But otherwise we we feel good we have very solid position in our downstream.
Segment that is less muted than the swings in upstream pressure.
Okay, because I was.
Curious about the 2020 guide to that maybe talk about midstream mid single digit decline in downstream if that if my thinking was maybe getting it like 20 530 million from that shows Franklin projects anybody feet dig that out on a year would it be has yet to get basis.
It looks like the act the underlying activity is flat to maybe modestly down, but maybe I'm underestimating impact appealed frankly.
No you're exactly right on shelf Franklin is right at 20 million 23, exactly but right. There and then you are I think you're right. It where we are forecasting kind of a 2% to 3% decline in capex with our in the downstream portion and offset by some additional.
You know roughly 10, the 10 to 13 million UV ink additional turnaround revenues in the year.
Positively got it.
Okay.
And going to just.
Last quarter flat revenues, but you have talked about how January is bedded that in November and December.
I understand I'm upstream activity is still influx, but typically the midstream revenues seasonally improving one Q.
Is that it is that not well how are you seeing this year that midstream could be seasonally up but if you can expand on why you think you could be flat.
Yep.
Let me talk through events the segment so international.
Starting there.
Q1, we see it down kind of mid single digits and that's solely from.
20 million of TC show Chevron upstream revenue, we head into first quarter last year.
Thats impacting that overall, we see international improving.
Would the spending increase but we have that onetime delta, Canada will be up double digits as it always is in first quarter.
Sequentially, So thats a positive for us but is the first quarter is always a the best up there and then you asked we see basically flat to a very modest increase and midstream a flat in the upstream environment.
And then up slightly up in downstream.
Mostly related to the turnaround spend though occur in the first quarter. So when you take all that plus and minuses that we see basically a flat.
You're just because.
Generally definitely better than November and December, but not at october's level. So we still have a pickup in activity. We have a short month in February and we have a pickup of activity in March that we I expect to have so I think with all those pluses and minuses we end up.
Basically flat for the quarter to start the year.
Does that imply flat margins as well.
For margins as well, but I mean, I should they should be comparable to that high 19 close to 20% that we have in the fourth quarter.
Yes, we expect to first quarter to be in our Nineteensix 1980 range.
Alright, Thank you, but taking my questions and Jim eight was its data what dementia.
Thank you Beth.
Our next question is from Nathan Jones with Stifel. Please proceed.
Good morning, everyone.
Good morning Nathan.
I'll add my congratulations to Jim and welcome to Kelly.
I would like to start off on with the gross margin T. whichever I've held in really well despite the drop off that you've seen in demand. He can you talk about you know I mean, I understand you get some positive mix out of the valve business, then you've got negative pricing.
In the line pot business can you talk about maybe the rest the portfolio, how you're staying competitive behavior or whether you're seeing anything any downward pressure coming on pricing there.
Yeah, Nathan I know you hit the two big drivers.
As we said in our prepared remarks, if you took out the one time expenses that we booked in the fourth quarter that impacted margin we were right at 20%.
Very similar to third quarter margins and very similar to last half of the year before so we we tend to be able to still hit 20%.
Basis in the quarterly it's still our goal they can get to that level.
The valves mix is the biggest impact and we send our comments that the fourth quarter, we had 40% of our revenue coming from valves.
We also have started to book revenue out of our new Midstream modifications Center, which we do a complete assembly, which includes manufacturing welding.
Testing painting coding.
So our full assembly for our customers so that tends to be a lot of value add and and higher margin business. So I think that's by far is still having the biggest positive impact the drop off in the midstream activity. Both in line pipe demand in the fourth quarter course that being our especially in E.R.W.
Pipe that being our lowest margin business up out of mix change has a positive impact on the overall margin and I and then to the rest of your question on the other product lines, all very stable from a pricing standpoint on plans and fading course than our gas products stable with a growing end market.
And then just the stainless steels very similar on the mostly in the chemicals downstream side and general all feel products, reflecting pretty flat pricing in the.
You know the tank battery upstream environment. So we feel good about the Nineteensix 19, 8% range I feel line pipe has basically bottom.
Pre close to bother mean, if it's not that bottom on a on in all of the tariffs that really didn't accomplish much with the run up in inflation in 2018, and all that back back out in 2019. So we're basically at the same level of $1500 tons that we were added the beginning.
18, and it really has flattened out the last three or four months. So we we expect that to stay at that level and so we don't expect it to go down from a margin percentage more but we're not also not forecast that much of an uplift from line pipe.
Okay. That's helpful. And then I guess my next question is a little more of a philosophical one.
You guys work in a highly cyclical industry and you're you're used to saying custom is not necessarily be so disciplined with capital spending.
I certainly invest is putting pressure on aim pace to spend with the net cash flows.
If that maintain.
What do we not be adding new normal level of spending what could crude oil or is unlikely to drive growth in upstream spending from here on outside of oil going to 70 bucks or something like that and if we already knew normal level of spending for for domestic game pace here.
Ed changes you need to make it a business model structural changes you need to make to the footprint in order to preserve your own margins, maybe you need to.
I provide a low level of service to customers here in order to protect your own margins given their low levels and spending it just any any kind of commentary you could give us on how you're thinking about that over the next few years.
Yeah, and eight cents very good question and I think about it a lot and a course, our customer base still very dependent on their cash flows from oil and gas pricing commodity standpoint.
So that that remains and always will remain the big driver and so we've looked at the environment. If you stay in this 50 55 barrels.
There are a barrel WT I environment I.
I think it there's a sustaining level of capex they have to span.
As you go as you know probably very well the steep decline rates in the U.S. production. So.
You got increasing spending you'll eventually production will fall off and they'll have to invest and so I think that is a scenario that we will continue the bulk of our revenue bases and MRO related.
And and really a bulk of our and our revenue in the you asked is off of energy infrastructure. So all tank batteries old pipelines, all the refineries and chemical plants, there's a big long term cycle of MRO replacement revenues that continues regardless of today's commodity price.
Nothing so that gives us confidence in that to address the how do we compete I mean, the one thing we focus on is taking market share and gaining.
Kind of wallet for the customers, we already do have.
And so we still see a lot of room foreign buyer growth in that.
Perspective that we've done very well with contracts. So we're very pleased with the so-called gas on the Centerpoint as two recent wins for us.
And the other on our own what we control is we've done a lot of work over last couple of years and optimizing the the branch infrastructure. We now have 118 branches in the United States.
And seven R&D season, we're closing two in the first quarter as we can more efficiently.
Support on from report so I think we reached a very efficient model from both the headcount and geographic operational footprint. The other big area. We're working out is investing in our MRC go online, which brings us. This ability I think this was part of your question if you.
This ability to service the customer.
From a full service standpoint through branch interaction or account management interaction and then smaller customers. It gives us ability to migrate them through a less lower service level more of an interaction online.
Some more efficient for us to service them that way and so you'll see us over the next couple of years take more operating costs out as we migrate and the hub I into our.
Fulfillment centers, we call them regional distribution centers.
And then more operational efficient way to serve customers and the annual as we send our comments, we expect our ecommerce business the more than double over the next three to four years. So.
As we move more and more to that platform.
We'll have a low cost the interaction with small customers love a.
Full service say interaction with our major customers and will migrate as fast as we can add to our MRC go platform and we said we have at 80 customers already feedback has been excellent.
No there interaction their ability to track orders and expedite orders and and work in our customer portal. So I think we're on the right track and.
Gives another channels interact with the customers and I think thats going to turn out well for us.
That makes a lot of sense do you think that gives you the opportunity over the next few years to to reduce that 118 branches at all.
Yes, definitely Nathan that we close for.
And so I wouldn't expect big changes, but each year as we move more to MRC go and.
Maybe more support comes out of our regional distribution centers that meeting that our local brands I expect that have to continue to go down.
In the U.S. for sure.
Very helpful. Thank you very much.
Thank you are they.
Our next question is from John Hunter with Cowen and company. Please proceed.
Hey, good morning, and thanks for taking my question.
Good morning, John.
Good morning, So the first one I had is just on the guidance you provided for 2020 with revenues down 6%.
You know with one Q guided flat and then assuming a typical fourth quarter.
Decline in revenues in the mid single digits that would imply that twoq and Threeq you are up.
No high single to low double digits.
Revenues per quarter. So could you help me think about why those increases.
May occur or do you have no special contracts coming online or projects push from first quarter and the second quarter.
That may be impacting that revenue progression.
Yeah, John you're right about the progression and I think thats exactly.
More normal for us and we think thats going to be the though that the timing of it this year.
You know, we we've gained contracts we gained market share position we.
One example would be the 20 to 30 million ramp up in Centerpoint activity that occurs in second and third quarter.
We also have some new contracts in midstream that will ramp up during that timeframe, but it's really.
I will return to the budget as I said, we track our top 25 top 30 customers very well and their capex spending is only going to be down 2% to 4%.
This year, so their budgets kick in they normally interacted with lot of revenue from us and second and third quarter. So we feel good about the that timing and then I'd say Oh, we have a good visibility on the first quarter. So we know where we're starting and and then probably the only variable is will be.
Are we going to have a more muted tail off in the fourth quarter. This year. Then then we core saw last year or is it November December going to be up a bigger drop off so we tend to be towards the higher end of our guidance. If we didnt have a dramatic falloff in November December.
But we feel good about the midpoint of our guidance at this point.
Got it. Thank you and then I'm on the margin side, you've guided to this nineteensix Tonineteen eight you did 20% in the fourth quarter, you've talked about market share being.
Focal point of your strategy in 2020 is lower pricing part of.
Gaining your market share or kind of what's driving your outlook for margins could be lower in 2020.
Yeah, It's it's a no it's not lower price strategy, we've never follow that to gain market share.
Hi, I would say theres some pricing early on as we build out by that midstream complete valve Assembly work.
With the incumbent or two that are in that business.
That's relatively new for us to give.
The fall kit and do the full assembly. So there's some pricing pressure with the from the incumbents, but we are I have a long term view, we're going to take that market and so I'm not worried about that it will return to a higher margin we see some pick up in line pipe as midstream budgets kicked in this year.
Of course out at from a blend standpoint that puts a little downward pressure on the mix.
From margin.
It's good for the top line up but it pull in so I think having said all that I, we feel good about the range or and then we continue I think as we look out a couple of years to still move that even hi, Rob.
Great. Thank you I appreciate it and I'll turn it back.
Thanks, John.
Our next question is friends, Steve Barger with Keybanc capital markets. Please proceed.
Hi, good morning.
Oh I see.
Just thinking about your comment that your top 25 customers will be down low single digit versus the industry down high single.
Where are you per share of wallet for that top 25, and I'm just thinking about the market opportunity to take share with customers that are outgrowing versus tracking the industry.
Yes, now we have a very high market share with those I mean, that's a fundamental tenant of our business model.
It is to focus on these top 25 span of course on on years like last year, when they tail off their spending it impacts us a lot but longer term that that's the model. We filed of course, we don't have all their spend so we work on areas of their operation, where we can support them and.
Add to our contract that's the main strategy.
No the though the big bulk of spend that is small one in two rig operators are private equity backed space and then some of those smaller customers. That's never been our core base, they usually buy more transactionally in the in the regions.
So we really focus on these long term multiyear contracts and gaining share.
We've worked on gained will work with BP and Exxon Mobil, we have their downstream valve contract. We're working on getting more of their X T O upstream as an example.
BP, we did a lot for downstream U.S., we're working on gaining more upstream international work form. So those are the things that we work on and and so we I still feel good we have opportunity to grow within those top 25 or 30 customers.
Even in today's environment. The it's up we have a good percentage of the work, but we still have room to grow with them.
Have you identified other outgrow or is where you don't have as go to market share or by definition. If you go take share in a softer environment like this year, adding and people that are undergoing the market.
Yes, we certainly do a in midstream we have targeted list the three four or five customers.
That we've been going after and of course in the upstream in the Permian Basin Theres a.
Kind of a you know when you get down to smaller operators are certainly some.
That we'd like to have a bigger share wasn't so I would say in the U.S. midstream smaller operators and also in the Permian basin upstream or two areas, where we've definitely targeted market share gain from ones were not working for today.
Thanks.
As you said that there's been some modest January increase it was encouraging has that persisted into February.
Well the run rate on a daily basis, yes, and by February has fewer billing days so.
You know the revenue is off from January because it less billing days at least at this point than forecast, but on a daily billing rate. It is that same level. So we're encouraged that is picked back up to a new level that is.
Is definitely above November December run rates.
Okay. Good and then just thinking about capital allocation you you've been active on the buyback the past few years, while also reducing some debt if the market remains weak and the share price reflects that does the board lean to one versus the other is the best.
Kind of Avenue to support multiple or the share price.
Hey, I wouldn't say leanest or one of the other we look at it and we look at it every quarter. We just had a board meeting this week.
The short term view right now we just completed our share repurchase from last year of 75, and course 375 million since 2015, So I would say definitely during the last five years the priority with the board has been the share repurchase.
With some debt pay down in parallel.
Right now given the short term outlook in activity had fallen off and they into year, we're really focused on that lease in the first half of.
2020 on debt pay down as the priority from the board, but we we revisit it every quarter. So I wouldn't say, that's it's a 100% debt pay down this year, but right now.
We don't have a new authorization to act on that it's on a cash flow at least in the first half the year will be on debt pay down.
Very good thanks.
Thank you. Our next question is from Michael I'll make 10 with Wells Fargo. Please proceed.
Good morning, everybody.
I just wanted to make it a morning I just wanted to put a finer point on the supply chain considerations, you mentioned belbin inventories hovering near 350 million.
By my math that could equate to four months of demand to start the year given the Q4 in Q1 runway. So I just wanted to get a sense of the lead time, you typically see in that product category relative to other products and any contingency planning you may have from us.
Second sourcing or would tighter inventory is ultimately would equate to a better pricing for customer purchases outside of integrated supply agreements.
Yeah, Michael and so a couple of things there we have a relatively small direct China valve.
Business, it's a viewed more as the commodity valve line.
With a major with one major supplier that one would be the most aspects it would be impacted.
But that that's a very small percentage of our overall valve business.
It can impact the components that are come out of China that go into both Europe and U.S. manufacturing, we haven't seen much of that disruption yet.
And then of course will ramp up our and we have ramped up our orders from U.S. Europe, even Canada manufacturers as we've seen.
This impact and so I think we're in very good shape or at least two three quarters out I don't think we're gonna have a a big impact.
Now I should it go even.
If we talk about two or three quarters out in the end of and the virus is still big impact we might start seeing that we would yes.
Double down and more on our U.S. manufacturing a Europe manufacturing.
Component, so I feel it's isolated the valves, we don't have any other exposure there but.
Well, we're just going to manage it and manage it with our manufacturers that each week and see what needs to be done but its.
I wouldn't say, it's and it's an area we're going to just keep monitoring all the time until that we see some change there.
Got it.
This next question, a little harder to gauge, but it seems like the longer the downturn the more market share potential there is the pickup on the backend given your balance sheet.
And you've mentioned market share gains a couple of times now do youve any anecdotal feedback how this two year downturn will compare to the 2015 2016 downturn in terms of market share.
Yeah, I think in 15 and 16 now that was a much more dramatic downturn it doesn't feel like that at all but I mean, it certainly is a slowdown.
I think the two big players in the field and PBF distribution.
A lot of market share gains in that 15, 16 timeframe as allow the small distributors.
Couldn't get financing then I think to a lot more muted extend this time, but to the same thing I think of the two largest players will do just fine and I think pick up share in this environment and small distributors, a well will struggle.
And so I think that dynamics the same not to the same extent, we had in 15 and 16, but we certainly feel good about.
Coming out of these kind of it periods with more market share and then we went in.
Okay. Okay appreciate that and if I could just sneak one one more in.
Regarding the yes, junaid run rate I think it implies 130 million per quarter, which is still down year over year, but less than I think the implied rate you mentioned last quarter. So is this just.
Constitute a plan for the worst and hope for the bass, maybe some potential back half incrementals.
Well I think it reflects what we mentioned earlier about any incremental increase in.
Hi, Teen MRC goes spend and we also have a phenomenon this going into 2020 with a planning for budgeting for incentive payouts at target levels. We came in significantly below that in 2019. So we're a refreshing, though the accrual for the incentives in 19, but you're right about.
The average run rate in it generally will run.
Those levels.
Okay. That's that's it for me thanks for the time.
Thanks, Mike.
Our final question is from Blake Hirschman with Stephens. Please proceed.
Hi, good morning, guys.
Good morning Blake.
Just a quick line on the large projects for the 2020 guide.
It sounds like something like 40 million 50 million dollar headwind year over year pretty equally distributed between up in downstream is that.
Is that all.
Yes, I can say is $44 million for the year and it's a split roughly equal between Oh up and down.
Okay and.
Our as far as the quarters should those wind down side like first half of the year into Threeq you.
Well, though the comparison by trying to get the third quarter will be a a good comparison there won't be any headwinds by the time you do a third quarter.
Okay perfect. That's it for me thanks, guys.
Thank you Blake.
We have reached the end of the question answer session I would like to the conference back over them on a go for closing remarks.
Thank you for joining us today for your interest in MRC Global we look forward to having you join us for first quarter conference call in May have a good day and get back.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.