Q1 2020 Earnings Call

Sg&a cost for the first quarter of 2020 were $126 million or 15.9% of sales as compared to $139 million or 14.3% of sales rep same period of 2019.

This thirteen million dollar reduction is a result of cost reduction actions taken last year that are now fully embedded in our run rate in 2020 as well as some recently implemented employee benefit reductions.

Given the current economic environment. We are taking additional actions in the second quarter that's previously previously mentioned by Andrew and we will see the benefit of these cost reductions in the second half of the year.

Greetings and welcome to the MRC Global first quarter earnings conference call at this time. All participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder. This conference is being recorded. It is not my pleasure to introduce your host Monica broad investor relations for MRC Global you may begin with. Thank you and good morning everyone welcome to the MRC Global first quarter 2020 earnings conference call and webcast. We appreciate you joining us today on the call. We have Andrew Lane president CEO and Kelly Young Thug blood Executive Vice President and CFO. There will be a replay of today's call available by webcast on our website MRC Global as well as my phone number.

Sgna this quarter included six billion dollars of bad debt expense higher than our historical run rate approximately half of this expanse relates to customers that have recently begun bankruptcy proceedings and prior down Cycles are bad debt expense has not been very significant. Then we expect this cycle to be no different. We are very fortunate that the majority of our receivables are with high-quality investment-grade customers with solid balance sheets.

Interest expense told eight million dollars in the first quarter of 2020 which was $3 less than the first quarter of 2019 due to lower average debt levels and interest rates are effective tax rate for the quarter was 36% Which is higher than average do today discreet tax charge relating to our share-based Compensation Plan, excluding this impact the effective tax rate would have been 29% which differs from the US Federal statutory rate of 21% as a result of state income taxes and differing for an income tax rates.

May 13th 2020

The dial-in information is in yesterday's release we expect to file their quarterly report on form 10-q later today, and they will also be available on our website. Please note that the information report on this call speaks only as of today April 29th, 2020. And therefore you are advised that the information May no longer be accurate as of the time of Replay in our remarks today. The oldest wage adjusted gross profit adjusted gross profit percentage adjusted ebitda and adjusted ebitda. Margin, you are encouraged to read our earnings release and securities filings to learn more about our use of these non-gaap measures in to see a Reconciliation of these measures to the related Gap 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 MRC Global. However, MRC Global is actual results could differ

That income attributable to Common shareholders for the first quarter of 2020 was $3 or $0.04 per diluted share as compared to the first quarter of 2019, which was twelve million or $0.14 per diluted share.

adjusted

Even in the first quarter of 2020 was $34 million versus fifty six million for the same quarter a year ago adjusted ebitda margins for the quarter were 4.3% versus 5.8% for the same quarter last year driven by declining sales volumes. However, even detrimental is on a trailing twelve months worth 15% which is in line with expectations and historical averages all three of our segments generated positive adjusted ebitda this quarter.

Our working capital at the end of the first quarter of 2020 with 701 million Thirty 1 million lower compared to the end of 2019 excluding cash is percent of sales are worth capitals on a trailing 12-month basis was 19.3% at the end of the first quarter of 2020 better than our Target.

Really from those expressed the day you are encouraged to read the company's SEC filings for a more in-depth review of the risk factors concerning these forward-looking statements. And now I'd like to turn the call over to our CEO Los Angeles. Thank you, Monica. Good morning, and thank you for joining us today and for your continued interest in MRC Global today, I will discuss some of the more pressing topics reviewing company's first-quarter 2020 highlights as well as our progress against our strategic objectives, then turn over the call to our CFO Kelly Youngblood for detailed review of the financial results month.

We were taking actions to keep this ratio lower than our original Target of 20% by aggressively managing the working capital balances. We expect net working capital as a percentage percentage of seem to be 19.5% to 19.9% in 2020.

We generated $37 billion in cash from operations in the first quarter of 2020 and is Andrew mentioned because of our counter-cyclical nature. We expect to generate strong free cash flow this year.

First let me address some of the critical items that are top-of-mind as the leading distributor of pipe valves and fittings to the energy industry. We are well-positioned and navigate this most recent set of challenges and I'm stronger company while we are experiencing unparalleled demand destruction from the covid-19 pandemic oversupply exacerbated by the recent old price war and now storage capacity constraints. We are not new to cyclical downturns and we know the leverage to pull we are a critical supplier to the energy industry and as a distributor, we have a cyclical cash flows a strong balance sheet and sufficient liquidity even under extended stress scenarios.

Capital expenditures were two million dollars in the first quarter of 2020 and while our business is not capital-intensive. We are prudently managing his costs while continuing to spend it makes sense for the future of the business such as our e-commerce initiative.

We're dead outstanding at the end of the first quarter was 521 million compared to $551 million at the end of 2019. Our leverage ratio based on net worth a $493 million was 2.7 times within our stated target range of two to three times.

Our liquidity is $465 million in the second quarter. We expect to generate significant cash from operations. This year. Our debt is appropriate for our business with favorable terms of no near term maturities. However, debt reduction is my top near-term priority. And then the first quarter we bought three million dollars of interest in our Term Loan be at a 23%. We reduced overall gross debt by Thirty million dollars since year-end 2019 our cash flow generation. This year is expected to be adequate to pay down our abl and then leaving our nearest debt maturity our Term Loan at September 2024 given the expected decline in Revenue this year. We believe we will generate in excess of two thousand a million dollars in cash from operations.

Well, this ratio could increase throughout the year. Our debt is very manageable and our cash flow profile will allow us to generate strong cash flow with a target of reducing the office to 0.

The availability you want to facility is currently $437 million and we had twenty-eight million of cash at the end of the first quarter Although our liquidity May fluctuate each quarter from changes in Nashville and working capital. We fully expect average liquidity for the year to remain at these similar levels.

We currently have no Financial maintenance covenants in our debt structure. We have one springing Covenant in our abl that becomes applicable should our availability approach the final 10% of capacity, but we do not Envision getting anywhere close to this threshold even under extended stress scenarios.

after deducting

3rd dividend and capital expenditures at those cash flow levels. We should generate free cash flow of over $160.

During the quarter. We also be purchased three million dollars of our Term Loan facility at a 23% discount to par.

While we were making some significant changes with respect to our cost structure a long-term strategy is the same we continue to execute against that strategy.

In the first quarter, we plan to remain opportunistic when we have the ability to repurchase our debt at a significant discount Department again, debt-reduction is our priority this year off and where we will focus our free test flow generation Our backlog at the end of the first quarter of 2020 was 479 million Thirty million dollars lower than the end of 2019 due to fewer projects and the recent declines and customer spending levels.

However, the backlog for u.s. Gas Utilities is up 22% in the first quarter of 2020 above the end of 2019 as those customers are expected to continue their plan on spending albeit somewhat delayed due to covid-19 impacts.

Given the extreme uncertainty and volatility in the market. We have chosen not to provide any specific annual guidance except for the items. We control these items include a m s g name and working capital reductions as well as our focus on paying down or AVL balance of this year leaving only our Term Loan, which is due in September of 2024.

Also do the challenging headwinds that we expect for the remainder of the year. We are targeting a Q4 sg&a exit run rate of no traitor than $115 Million result of an annualized improvement of approximately ninety million, excluding the impact if any Severance the restructuring charges the majority of actions to achieve this target will take place in the second quarter month.

In summary, our first quarter 2020 was a solid quarter given the mini market challenges we faced. However, our near-term expectations are for a week energy Market in the second quarter of however with our current available in quiddity, very low Capital requirements and our ability to generate strong free cash flow in a declining Market. We feel well positioned to take on the current market headwinds. We are facing these challenges head-on and are positioned to take advantage of any opportunities, and we will emerge and even stronger company than the market recovers month with that. We will now take your questions operator. Thank you. We will now be conducting a question-and-answer session. If you'd like to ask you a question. You may press star one on your telephone keypad a confirmation total indicate. Your line is in a question to you may press star to if you would like to remove your question from the Q4 participants using speaker equipment. It may be necessary to Pig.

Your handset before pressing the star key. Our first question comes from the line of James West with evercore is I please receive with your question. Good morning.

Good morning, James. So Andy and Kelly you want to ask for macro question first, then I want to dig into it the MRC a bit, but you guys have seen a fair number of downturns as have I and our careers here on this one feels different. It feels harsher. It feels like it may have some legs to it. You know, how are you guys thinking when you take these strategic actions with them or see? How are you guys thinking about the depth and the longevity of this down turn off?

Yeah, James.

Thanks for joining us. And and let me take that question. Yeah, I mean I like you and many probably before you I started in nineteen eighty-two. So for the last forty years every cycle we've gone through and this one is difficult. You had a Health crisis on top of a macro oil price crisis and took the two together are pretty significant. So I would say, you know, we've been through many oil and gas price Corrections over the forty years, but we've never dealt with the Health crisis on top of it. So it does feel differently to me from previous ones. I had the way I look at it is it may go a few months longer than people think but it won't go forever on the house prices side. It's going to take a few quarters if not longer for the supply and demand to correction to on the old price side to correct dead.

So we're in a leading position. We're in a very strong contract position with our customers. So those are the priorities were protecting our employees with you know, our mileage, you know, James. Well, we're not at all of her field service model oil field service High Personnel High Capital Equipment fixed costs High R&D technology costs very hard to change that model A short-term. We're significantly different than that. We are have a very liquid asset with inventory so we can pull a lever very easily and liquidate inventory page and and produce a lot of cash. So we've always been counter-cyclical when things slow even more than we think at times. We have a very liquid asset to to generate cash pull down in Tori. We are very flexible Personnel structures of what we've done on. This one is, you know, we we have many customers that we are still very active would dead.

And want our service and need our service. So we you know, we when times are good we run into shifts because activities high so we've been able to adapt our model very quickly took the coronavirus and covid-19 hit to change to split shifts stretch out or Branch Personnel space out our warehouse and and our regional Distribution Center Personnel. So we and then more call the corporate group and the the support groups from home. So our model fit very well to adapt to this environment. So that's how we're looking at Thursday. We're going to use furloughs in the next couple of quarters more than we'll have some reductions primarily in the Upstream side of our business where we see it's a longer-term recovery, but in other parts of odd business where we think it's more of a short-term health impact the economy General economy impact we're going to furloughed so that we bring them back all dead.

play bass quick as things returned so that

We can talk a long time about that but that's what we've done and and I agree with you James. It's a it feels different but we're we're changing things quickly in the company.

Understood that's that's very helpful. And I appreciate that. And so I guess my follow-up is as you think about strategy right now, literally a little bit of time and cost control Debt Pay downs. But when do you plan to become offensive, you know, there's going to be a lot of opportunities out there for em in the very near-term typically on the Upstream side, which is going to get somewhat decimated in the next few months. When when do you think your strategy or View kind of shift toward focusing on that rather than just the okay. Let's button down the hatches.

Yeah, James, the near-term priority is button down the hatches and for me, I don't have m&a in the near-term view. Like we said my priority right now is pull the levers that we know adjust the cost of both operating costs and the fixed costs and and the inventories structure payoff or a BFF which we will do by the end of the year. So put our put the company in a strong position. So we Have No Loot near term maturities will have no debt maturities till September twenty twenty four months and people that think we are you know in a debt crisis or just a wrong about our model. So we'll have a very good Runway unless you think covid-19 is going to be around 6:24. We're going to be in very good shape. So it allows us to we don't need any new debt. We won't have any short-term debt payouts allows us to be aggressive on the

Contract but our our offense of moves which we've continued have been more on market share gains and contracts and we we talked about eversource picking up additional scope and winning that country. We didn't give the details but it's a ten year contract at around 50 million a year. So very good total five year contract with ten million growth and Noble and Ameren were smaller. So we've got two Gas Utilities wins a mixed team win an international ioc type of valve with him. So our and then last quarter we talked about Centerpoint, which was a huge the Centerpoint Vectren combined business. We're ramping that contract up so that in normal times is more like a 70 million a year contract more like Fifty this year. So and that's also Gas Utilities. So we're very much offensive when any contract comes up. Yep.

And much offensive as Kelly mentioned and continuing that compound growth of 10% a year in our gas utility business.

And we split that out so that you had a very clear view if you have concerns about the Midstream pipeline, which will slow more dramatically this year. Our gas utility now is very visible with the financial for the last two years and will continue to spend more time talking about that model. So that's both Gas Utilities and general mro contracts and our course our van a strategy is heat of the company winning a lot more Midstream valve contracts because of our investment in the facility. They're those are in my mind are all very offensive moves, but without the need for m&a.

Okay, understood. Thanks honey. It's very helpful.

Thank you James.

Our next question comes from the line of Shaun Meachem with JPMorgan. Please proceed with your question.

Thank you morning.

Good morning, Shawn.

Sandy I appreciate the guidance you put out with respect to cash from operations and free cash flow 140 million of inventory liquidations have Big Driver. Can you maybe just bought some parameters or ranges around receivables getting converted to cash and just how you see that you have raw Cadence of cash flow as we go through 2020.

Yeah, Sean Kelly will address that one? Hey Sean. Yeah, it's a good question. You know, if you look I mean obviously we gave the inventory number so pretty pretty easy to factor in that part, you know, the working life will change when you look at receivables. I mean obviously with revenues coming down receivables are going to come down as well. But if you look at the working capital change over all you know, what we've kind of plugged into our model is the the amount that received, you know, the the pickup you get for working capital receivable side coming down. We're we're just kind of assuming that that will be somewhat offset with accounts payable, you know, the pull back and a TV which will be a decline. You know, what your work against that number I think in reality. We're probably being a little conservative on that because we've got a lot of initiatives in place, you know with with, you know, some of our suppliers right now, you know to push days payable how farther but if you look at the kind of split over all of the two hundred million that we guided to 4 for Thursday.

You know, you can probably assume, you know, a quarter to two thirds of that is going to be specific to the inventory change and and the remainder is really just the normal change and operating activities in the cash flow statement. Yeah, Sean. Let me just add to Kelly's comments. I think he covered it really well, but on the working capital a couple of things have happened, of course, we'll have I mentioned we've closed 2 facilities which are significant forest size-wise in the first quarter and then we'll close another fourteen facilities in the second and third choice of them in the second quarter and a couple in the third quarter. We've also spent a lot of time giving the the challenges we're facing is really analyzing the inventory. We have both at our fulfillment centers or Regional distribution centers and the branch footprint and the with slower activity have less need for safety stocks or daily use stocks at the branch level. So we've done a lot of analysis.

Optimize that we in the first quarter, we've identified twenty million up front that we can pull out of the branches.

That better served that the regional distribution centers will have more savings from looking at that as we've closed but fourteen additional branches and optimize around the the region distribution says I'm already in place. So I think there's a there's a part of the working capital is as pulling down because of slow activity, but we're also I think taking steps because of this downturn to even further off my Czar whole operating structure, especially in the US to be more efficient. So I see some of those games and working capital efficiency, and and that's why we've got it down from our previous twenty percent of working capital as a percent of Revenue to 19329. I mean 19

52199 but I think a good chance we'll be on the low end of that range because we're bringing more efficiency into the model.

Got it. That's very helpful. And the second quarter is seeing a pretty dramatic drop off and activity particularly in the upstream and parts of Downstream. Just giving some of the acute pressure in North America. Could you give us a sense of what you're seeing as we're just about a month into the quarter across your segments.

Yeah, so just the recap a little bit. The quarter first quarter was a solid quarter for is that March was the best month of the quarter? So am I don't want to say, you know, we were able to function very well even given the covid-19 challenges because of the way we could adapt our model to distance social distancing a spacing in our operation and quickly moved from people from home. And so there was demand there and also we're going to perform much better than the small competitors through this cycle and Thursday, they're less adaptable cuz they don't have our scale. So I it was the quarter was good and shaped up except for the coronavirus impact. It would have shaped up just nicely the way we envision the whole year starting with a tail off last year in November December that carried into January and February and then March looked a lot like October from last year. So that's

That's how I envisioned it. The first quarter is going to be in a normal world. It would take off from there because we don't have a normal world. So it's it drops significantly and I think the second quarter wage to be very challenging from a revenue standpoint. We mentioned half of the Gulf of Mexico projects and turnarounds were pushed which would normally be here in this March April time frame into the fall. It's concerns about well pricing and refining the utilization should the stimulate turn around but then the covid-19 I problems with putting large construction groups together. It's not that we can't deliver the product to do the turnarounds. It's the construction phase and the exposure they're so a lot of Life of that got pushed into the the fall. So those kind of things and of course Upstream is really reacting to low oil and gas prices and the recount drop. So those two are compounded wage.

so I mean

I expect the second quarter to be difficult. April would be down 20. If you average the revenue for the first quarter April, we'll be down 20 to 25% off don't have good visibility can't give you real good guidance for the quarter things are starting to open up in a small way in Texas and which will open up some in the industry in May but we really don't have great visibility even on May and June revenues at this point and we really lack a lot of visibility into the second half the so I think we're at a low Point here and we'll see how things recover going forward, but that's best I can give you at this point Sean.

Understood. Thanks, Andy.

Our next question comes from the line of Deb's with Scotiabank. Please proceed with your question. Hey, good morning guys, and thank you for taking my question.

I guess the morning you talk about money. Can you talk about what you are saying in terms of pricing pressures if any and how should we think about gross margins life we go to the year, obviously one password was pretty strong. But if you can talk about where we can exit for the year, that would be very helpful.

Yeah, but let me start and Kelly can add some comments, you know, the first quarter was strong and it was in line with where we ended last year and what we expected we mentioned that we've now achieved 41% of our revenue from our van me or valve business line, which of course supports higher margins and that's even with the disruptions from both China and Italy and Spain in deliveries. We still feel very good about the year for the valve outlook for business because we're A supplier that our customers can come to with the Deep inventory and valves. There's a lot of supply chain disruption that we were own experience because of our ability to carry that inventory level. So I think that's on the positive side supporting the higher margins will be strong valve business and I feel very good. They will end the year at forty 42% of our revenue from valves. So that's the positive side of the negative side. It line pipe will be impacted further wage.

If you think about it line by prices from a year ago, when we were kind of at the end of the inflationary environment, they're down a little over three hundred three hundred thirty dollars a ton truck went down and probably spot pricing around $50 a ton in the first quarter. So line pipe as a business will come under the most pressure from pricing and and that's expected in this environment. And and of course like in 15 and 16 like in nine and ten these crises leave customers that have a you know, a lot of impact on their cash which we understand they need to look for ways to save money there. So there is pricing pressure from that standpoint in the near-term to get them through to when they have a higher wage is slow. We normally work best at that by finding alternative lower-cost products form and delivering that but certainly it'll be margin pressure this year wage.

but we still feel good about the

We're in a very strong position in gas product. So you don't see the pressure. They're strong position in stainless specialty just lower demand very strong position and vows and then you're going to see a general products in that are mostly Upstream line pipe specifically is going to come under pressure and then some general pressure on the on contract says we try to help align with our customers going through this but Kelly maybe we can give you some more on the color of the the actual amounts. Yeah. Yeah. The only the only thing I would add verbs is, you know, if you look over, you know, kind of the life of Em are and look at margins overtime. Oh they even in the worst times, you know, they may get down to kind of an eighteen percent type level but they always stay in kind of eighteen to twenty percent because you know, the, you know need to kind of pointed out some of the other comments that way we're not you know, your typical type company where you know margins, you know, fluctuate twenty thirty percent, you know from, you know, the top of the the cycle to the bottom of the cycle wage.

Here, you know they remain very consistent over time and and so you know it because of that, you know, you you see you see some pressure obviously on on pricing and the mortgage impact but not to the same extent that you would see with other other type of companies.

Okay, and maybe switching the topic a little bit and maybe it's a little too early if you have that, but any changes that you have heard or think about what could happen on the longer-term golf course chemical projects because of the economy.

Yeah, so we haven't heard much from that. I mean you could say whether it's got to be a much lower demand for Plastics and products related to age is terie as a general economy is is slow down or through a recession, but we haven't seen that as a driver kind of on the flipside. The the big plus side is we're still below to suck bucks and you know a million BTUs for gas so feedstocks, very competitive still and I I just don't see that really impacting decision to them. Push out some ramp-up of additional capacity, but the chemical install based the mro work we do with with both chemical and petrochemical. I think that stays whole life, maybe just some of the additional spending especially in the Gulf Coast that we thought would occur kind of in this 2021 time frame maybe moved out a little bit but nothing specifically has been talked about doing

and a global slowing demand

Okay, and maybe if I can ask a quick one Kelly if you can talk about cash taxes, I think like last year cash taxes were around thirty-five million. How do you think about cash taxes? This year is like 15 to 20 million a good call back number for this year or it's too hot?

I think that's to have abs like you said it was around 34 35 million last year. But but this year, you know with the with the business falling off, you know, and just other things were doing around tax money. She will pay some taxes, but I think our our current forecast is showing, you know, let's say five million give or take somewhere in that ballpark. So not not a big number at all.

very helpful

Thank you for taking questions.

Thank you babes.

Our next question comes on the line of Nathan Jones with stifel. Please proceed with your question.

Morning, everyone.

Good morning, Nathan. I've got to take it that seeing how much commentary I can get on the top line expectations hear you guys have a pretty good rule of thumb that page that you generate about $0.10 of cash from operations off of every dollar of decline in Revenue, which would imply it two hundred million of cash remarks about 2.8 birth of Revenue in 2020 down about 25% for the rest of the year given where the cops are I would say that's probably worse in too few and three q and better in 4 q thought maybe if you could just come in if that's a reasonable framework for thinking about you know, the way you guys are thinking about the business at the moment and then in any commentary on you know wage should be worse which bases should be better.

Yeah, Nathan, let me start and see if Kelly wants to add anything. But I mean it's reasonable approach. We look at it a little differently we start with the major customers. And so when you look at our our top 25 customers, they make up 55% of our Revenue. We really start there and look at the you know, the spending levels Chevron and shell or top to customer or Is ExxonMobil BP what these customers are going to spend and then we're very pleased to add total. So we start there when we look at the revenue base and and then I would say so, you know, if you think about it some projections for overall spending or down more like thirty-five forty percent for North America off but the majors are down more like 20% And so that equates to more of our waiting to the major customers. We're going to see the biggest slow down in the south.

Stream, we feel confident about that and and Then followed by Midstream would probably less than half of the slowdown in Downstream and Industrial and flat kind of money on gas utilities, which is a bright spot for us. And and the way Nathan I think about the direct impact and she'll do you look at our earnings release you take the US Bank in business and the US Midstream business and versus our total revenue and they roughly 31% of our Revenue. So the direct impact which I'm not sure everyone thinks about it that way that's how I think about our business our direct Revenue impact to the sale spending levels is roughly 30% of our total revenue so that could be head pretty hard directly, but it's not more than that and so are Downstream industrial our gas utility our International and Canada business all will hold up a little dog.

other than the US that's like

So that's how we look at it and I wish we could get more color. We usually would have given an update on annual guidance at this point, but we just can't we just don't have good visibility John that yeah. I understand that. It's it's pretty opaque on the Outlook at the moment one comment. I was interested that you made that, you know, it's fairly obvious that customers life aside money in this environment. I think one way that customers could go about looking to save money in this environment is to consolidate their spend which would certainly be an opportunity that you guys to take market share. Have you seen customers coming out, you know looking to you know trade volume for pricing where you guys might be able to pick up market share anything like that that you're seeing going on in the market, you know more than would be typical.

Yeah, Nathan, that's exactly right and it's exactly what's happening and it happened in in in as I said before we gained share in these downturns cuz off the smaller players are impacted more on the lack of Revenue. They're impacted on their ability to borrow if they need to and so in nineteen-ten we picked up share in 15 and 16. We picked up share in here in nineteen twenty. We're going to pick up share again. It is placed to our strengths and and that's one thing that we have because we're centered on these long term framework Enterprise framework agreements and multi-year agreements. So if customers want a better price from us, we had to have more volume. So that's the level we pull we look for alternative sources to get them a cheaper product if they trade off some quality aspects, but the much bigger lever phone number.

Is to consolidate more they're spend with us which brings more volume through our fixed cost structure and we can give them a better price. So absolutely it's happened. It's happened in every down cycle and am expected that to be the bulk of our discussions with customers here in the second and third quarter of 20 as they to look for the same money and operating expense and we look to to gain market share back down term.

And then just one last one on pricing, I guess in the short-term cuz on the flip side of what we were just talking about there. You have those smaller guys looking to liquidate inventory looking to to you know, Maximum cash flow out of this. Are you seeing any of the you know, smaller competitors here cutting price or in order to liquidate their inventory. That's putting any pressure on your pricing at the moment.

Yes, Nathan that that's another aspect. That's actually exactly right. We they get in a crunch now and their survival mode is just to liquidate inventory is completely off and whatever probably saying get we see most of that activity happening in line pipe with the pipe only type of companies. There's a pipe only Distributors, but we see it also in the downstream Regional players with some smaller kind of General products type of Distributors. And so in the in the short-term that will put some pressure on pricing. Yeah. Yep, exactly. Right, but I think we all set that with the maybe longer term gains from the market share that will position us as things get better, but there will be some of that aspect in in the short-term.

Did you say that blur in commodity kind of production lesson?

valve business

Yes, we see it in the commodity General products General use business as the the biggest thing the low dollar more transactional type business. We see it in line pipe. When that when you get into a deflationary mode, like Kelly was talking about his comments, which we see happening you get people trying to liquidate pipe as as quick as they can cover in pipe. I'm talking about you do not see it involves stainless. We do not see it in gas products in the other areas where it's more of a a longer-term. You got long-term lead time. We're not we're certainly not going to be a yield on pricing on vows when the supply chain and valves could be so disrupted where you have a valuable asset in inventory that we've been able to procure and continue to run the global supply chain and bath so the pricing pressures not coming going to come there.

That's very helpful. Thanks very much.

Thank you, Nathan.

Our next question comes from the line of John Hunter with Town & Company. Please proceed with your question.

Hey, good morning, and thanks for taking my questions.

So I had I had one on just kind of good morning. Yeah, so I had one just on the outlook for revenues and the second quarter wage, you know, we've heard a lot of ofs companies talk about spending down 50% and international down anywhere from ten to fifteen percent, but that's mainly based on the Upstream side. So first I'm curious if you'd agree with that and then you know, how does your Midstream and downstream business look with respect to those declines?

Yeah, I I agree with that level of cutting up staying especially Extreme as we talk about, you know, I I think that that can definitely happen and not just give you let me give you a little color on the Fermi and if we look at our first quarter on the Permian Basin Upstream, which is of course our largest Upstream business in in the World Cup, the Upstream portion of that was down 43% from a year ago so very much in what you're talking about forty to fifty percent lower capex spend in the US Upstream heavily weighted towards the Permian but also the other Shale basins our Midstream farming and business was up 5% cuz we still have some pipeline projects going from the it seems like a lifetime ago, but from the year ago where we had the takeaway capacity limitations so that holds up a little better. And so that's a very typical so we we see the biggest impact of course, and yep.

Upstream spending like

Like the oil field service guys, but less impact than the Midstream but some Downstream would be you know, always had half the impact of the up in mid and gas money essentially no impact that with a flat Outlook there.

That's helpful. Thanks. And then my other question is just on, you know, underlying detrimental to expect in in the second quarter. I mean historically