Q2 2020 MRC Global Inc Earnings Call
Greetings and welcome to the MRC Global's second quarter 2020 earnings call.
This time all participants are in listen only mode. A brief 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 is now my pleasure to introduce your host Ms. Monika Broughton Investor Relations for MRC Global thinking you may begin.
Thank you and good morning, everyone welcome to the MRC Global's second quarter 2020, <unk> earnings conference call. Upon what can we appreciate you joining us today on the call we have Andrew Lee President and CEO, Kelly Youngblood Executive Vice President CFO.
There will be a replay of today's call available by webcast on our website MRC global Dot com as well I phone until August 12 2020.
The dial in information is in Yesterdays release.
We expect if our quarterly report on form 10-Q later today. They will also be available on our website.
Please note that the information reported on this call speaks only as of today July 29, 2020, and therefore, you're advised that this information.
Longer be accurate at the time everybody.
And our remarks today, we will discuss adjusted gross profit adjusted gross profit percentage adjusted EBITDA adjusted EBITDA margin.
Adjusted EPS Gionee adjusted net income and adjusted diluted earnings per share.
You are encouraged to read our earnings release and Securities filings are there more better uses these non-GAAP measures and to see a reconciliation of these measures that related GAAP items, all of which can be found on our website.
In addition, the comments made by the management MRC global during this call may contain forward looking statements within the meaning of the United States Federal Securities laws. These forward looking statements reflect the current views of the management of MRC Global However, MRC global's actual results could differ materially from those expressed today you were encouraged to read the company's FCC filings for a more into.
To review the risk factors concerning these forward looking statements.
And now I'd like to turn the call over to our CEO Mr. Andrew Lane.
Thank you Michael Good morning, and thank you for joining us today.
Are you a continued interest in MRC global.
Today, I will provide an update of our covert 19 pandemic response, the company's second quarter 2020 highlights.
Well its progress against our strategic objectives, including our E Commerce initiative.
I'll wrap up with some recently announced customer contract wins.
I'll, then turn it over the call to our CFO Kelly Youngblood for a detailed review the financial results.
First let me start with an update on the disruption caused by the global covert 19 pandemic and our response.
You are well aware that pandemic unrelated mitigation measures have created significant market uncertainty and severely reduced current demand for oil and gas.
Sequentially, we took a $301 million pre tax charge this quarter related to an impairment of goodwill and intangibles along with the restructuring charges for severance.
Facility closures and inventory write downs.
The demand deterioration and associated customer spending reduction was also having in our results, particularly in upstream, which followed the declining completions.
However, our end market diversity proved to be a mitigating factor.
Other continues to be significant uncertainty as to the duration of this disruption.
We continue to proactively take aggressive measures to optimize our cost structure and better position the company for the ultimate recovery.
We are a critical supplier to the global energy infrastructure system and that designated essential provider and Fortunately have had no closures of any of our facilities.
In order to limit exposure and provide a safe working environment, we have implemented various safety measures for employees, including remote working for those who jobs permitted.
Which covers about 60% of our total workforce, including nearly all our corporate employees.
This quarter as the number of Iris cases began to decline we began solely phasing back employees to return to working in our facilities.
However, as hot zones appeared and new restrictions were put in place in certain states.
We have slowed or stopped all rolled back I'll return to work plans.
We've also made changes with respect to our real estate and office locations.
Moving some employees to apart at work from home status.
I want us to downsize our footprint in certain facilities.
We required daily body temperature checks before entering our facilities, we continue to stagger shifts at our warehouses to promote social distancing and are providing personal protective equipment as well as additional deep cleaning that up facilities.
From a supply chain perspective, the key manufacturers that we rely upon have all returned to normal capacity levels.
Given our inventory position and reduced demand, we fulfilled orders with little disruption.
However, if shutdowns are we established at our suppliers locations order fulfillment rates could increase.
Moving on now to our second quarter results. This quarter has been one of our most challenging with customers significantly reducing spending.
Our revenue declined 24% sequentially as all sectors decline, except gas utilities, which was up slightly highlighting one of our positive attributes of our business.
Our diversity of end market sectors is providing a significant level of protection against the steep activity declines the industry is experiencing in the upstream and pipeline sectors.
With that said market conditions conditions continue to be challenging and it did variation in commodity prices and customer budgets have been severe.
Therefore, we have acted swiftly to aggressively optimize our cost structure.
To better align with current revenue levels and our expectations for the near future.
We are focused on managing the levers of the business, we can control and operating costs is completely within our control.
The profitability improvement measures. We've implemented include head count reductions and the closing of facilities as well as the acceleration of our E commerce initiatives, which I'll cover in more detail shortly.
In the second quarter, we reduced head count by over 300 for a total of 380, this year or 12% reduction.
Since mid year 2019, we reduced head count by 687 or 19%.
We also closed or consolidate an additional 11 facilities and the second quarter on par with the expectations, we provided last quarter.
Total of 13 facilities this year.
Since the middle of 2014, we have closed 97 facilities or 36% of our global facilities.
And reduced head count by 2133 or 43%.
However, we are now taking further actions to reduce our footprint and currently plan to close an additional 12 facilities and the second half of this year.
With all the actions we've taken and are planning we are projecting over 100 million dollar annual reduction and ask Gionee from 2019 out of normalized basis.
Additionally, we are targeting that Q4 exit SGN, a run rate of approximately $100 million significantly lower than our previous guidance.
We generated $47 million in cash from operations in the second quarter, bringing the year to date total to 84 million as we continue to work down inventory and optimize our branch structure for optimal working capital efficiency.
We continue to target over $200 million, an operating cash flow for the year.
Debt reduction is my top near term priority and so far this year, we have reduced overall net debt by $64 million since year end 2019.
We're on track to pay off the JBL bounced by the ended the year.
We are committed to providing our customers exceptional service and delivering value to our shareholders regardless of the economic conditions.
Part of our long term strategy is to gain market share, while maximizing profitability and optimizing working capital and we believe our E. Commerce platform MRC go well allows us to accomplish this.
It delivers a robust customer experience that improves our service levels and reduces our operating costs are sir.
We are committed to this solution then have designated the executive to lead this change and accelerate adoption of digital interaction with our customers.
On a trailing 12 month basis, 31% of our total revenue is generated through E commerce, and 45% of our top 36, North American customers transact electronically.
In the second quarter of 2020 ecommerce was 36% of our global revenue.
And we expect these percentages to continue the increase over the next few years.
Consistent with our digital digitalization and ecommerce strategy. We recently made a milestone we expect to our goal the service more customers from this platform.
We currently sell the thousands of small volume yet important customers. We have begun to migrate these transactional customers to the platform offering them a new online sales channel.
This solution Leverages and extends the capabilities of our MRC go ecommerce platform, which was previously only available to the larger managed accounts.
This new channel features a centralized customer service center, located or Houston operations complex.
And enables a more differentiated service offering for different customer tiers.
We aim to transition these transactional customers to MRC go by the end of 2020.
Deliveries will be made from our regional distribution centers directly to the customer delivery location and supporting our efforts to consolidate inventory and drive down our working capital.
By implementing this lower cost to serve model, coupled with direct shipping savings and improved price differentiation were targeting to deliver annual profitability improvements between 5 million and $10 million by 2022.
As we expand this channel our intent is to build the customer experience learnings in their our premium MRC go managed account solution.
Consistent with our gold increase large customer E commerce adoption in parallel with transactional customers leading to overall revenue growth in the years to come.
We also continue to drive market share gains by obtaining an expanding multi year MRO contracts with customers. This quarter, we have renewed several agreements with gas utility customers, including three of our 10 largest BG any dominion and teco energy each for five years.
This sector continues to grow as our customers continue to grow and execute their multiyear gas distribution integrity management programs.
We already undisputed leader as one of the only PBF suppliers to this sector due to our deep expertise and reputation for superior service quality.
Growing market share, especially early in a shrinking market isn't important strategic objective and we have a proven track record of achieving this objective.
Also there have been recent corporate transactions and asset Divesture announcements among some of our customers, including the sale of bps downstream refining assets to any else.
He announced plan by shell to us sell selected refining assets and he announced acquisition of noble energy by Chevron.
Well change always creates some level of uncertainty we are well positioned with each of the customers at the facility level as well as the corporate level and expect to maintain our increased market share in each of these transactions.
We continue to be focused on our long term strategic objectives, delivering superior service to our customers and delivering value to our shareholders.
We are the PBF market leader with a strong balance sheet and not just managing through this market turbulence to survive we were investing in the future to thrive.
But the permanent structural facility and personnel reductions and MRC go investments that we are making in 2020.
We will have the most efficient operating structure in my 12 years that MRC.
We are well positioned to take advantage of the eventual market recovery and we'll continue to execute against our strategy to increase market share maximize profitability and working capital efficiency as well as optimize our capital structure.
So with that I'll now turn the call over to Kelly to cover the financial highlights for the quarter.
Thanks, Andrew and good morning, everyone.
Total sales for the second quarter of 2020 was 602 million, 39% lower than the same quarter last year with each of our geographic segments and sectors reporting a decline in year over year comparisons.
Sequentially revenue decreased 24%, there's all sectors declined with the exception of gas utilities.
The monthly revenue progression this quarter started with a 27% decline in April sales compared to March followed by an additional 8% reduction in may.
The first half of June was tracking to be similar or even lower than may revenue, but we experienced in inter quarter rebound with June coming in stronger than expected with a 13% month over month improvement.
You US revenue was 474 million this quarter, 41% lower than the second quarter of 2019 with declines at all sectors led by upstream production followed by downstream and industrial.
The midstream pipeline sector, and finally gas utilities.
The U.S. upstream production sales were down 65% in the second quarter over the same quarter last year due to significant customer budget reductions and related curtailments in activity levels.
The reduction in revenue was in line with 62% decline and well completions over the same period.
The U.S. downstream and industrial sector revenue declined by 41% in the second quarter compared to last year as customers delayed maintenance and turnaround activity and close facilities due to lower demand as well as nonrecurring project work.
The U.S. midstream pipeline sector revenues declined 49% in the second quarter.
Compared to last year due to reduced customer spending and the timing of certain projects.
The U.S. gas utility sector sales declined 18% year over year as customers Paul spending due to the impact of cobot 19 restrictions, but are expected to resume their originally planned budget spending in the second half of this year barring any additional impediments due to the virus.
Canada revenue was 28 million in the second quarter of 2020.
52% from the second quarter of last year as the Canadian upstream production sector was adversely affected by the pandemic.
And associated customer budget cuts as well as the midstream pipeline sector, which was lower due to nonrecurring projects.
International revenue was 100 million in the second quarter of 2020.
Declined to 17% from the same quarter, a year ago, driven primarily by reduced spending in the downstream and industrial sector.
Followed by upstream production.
Due to the conclusion of the future growth project for TC go in Kazakhstan.
Weaker foreign currencies relative to the U.S. dollar also unfavorably impacted sales by approximately $6 million.
Now, let me summarize and sales performance by sector.
The upstream production sector sector second quarter 2020 revenue decreased 53% from the same quarter last year to 134 million.
Declines were across all segments led by the U.S., which was down 122 million or 65%.
The upstream production sector now represents only 22% of our total second quarter revenue.
Midstream pipeline sales, which are 94% US based were 87 million in the second quarter of 2020.
They 50% decline from the same quarter in the prior year.
This sector now represents 15% of total revenue.
And consist of transmission and gathering customers.
Activity levels typically follow the upstream sector.
Many projects that were scheduled to go forward have been delayed or canceled due to reduced demand and associated lower commodity prices.
Yes utility sales were 205 million in the second quarter of 2020, 17% lower than the same quarter a year ago.
The decline was driven primarily by lower activity levels from pandemic restrictions as well as one specific customer that recently came out of bankruptcy.
This sector is now 34% over overall revenue.
Up from 25% just last quarter.
Because of the sector is independent of commodity prices it reduces for relative volatility in our overall revenue.
And with the current market headwinds it as much more resilient that our energy specific businesses.
We continue to see significant growth opportunity in this end market.
Sequentially the gas utility sector increased 2% this quarter, primarily due to market share gains.
In the downstream and industrial sector second quarter 2020 revenue was 176 million declining 37% [noise] from the second quarter of last year, driven by the U.S. segment as maintenance spending was temporarily delayed.
Now turning to margins.
Our gross profit percent was 13.1%.
The second quarter of 20 twinning as compared to 17.7%.
In the second quarter of 2019.
The decline reflects the impact of 34 million of inventory related charges related to the write off of excess and obsolete inventory.
Including the exit of our Thailand business.
LIFO income of 6 million was recorded in the second quarter of 2020 as compared to 1 million of LIFO income in the second quarter of 2019.
Adjusted gross profit for the second quarter of 2020 was 118 million or 19.6% of revenue.
[noise] as compared to 190 million a 19.3% for the same period in 2019.
Adjusted gross profit removes the impact of the inventory adjustments in LIFO just described.
The improvement in adjusted gross profit reflects the positive margin product mix from increased fell sales.
The sequential reduction in adjusted gross profit percentage of 20 basis points reflects primarily line pipe deflation along with other margin pressures.
Line pipe prices were lower in the second quarter of 20 twinning over the same quarter in 2019 due to reduced demand based on the latest pipe logics index average line pipe spot prices in the second quarter of 2020.
Were 20% lower than the second quarter of last year.
Relative to the first quarter of this year average line pipe prices were 8% lower in the second quarter of 2020.
Line pipe prices are expected to continue to decline throughout the year, which should result in further LIFO income in 2020.
Given the current market conditions in the near term outlook for the energy sector in the second quarter, we conducted an impairment test and recorded a 242 million pretax impairment charge related to goodwill and intangibles.
Which resulted in a total write off of the goodwill and our international segment.
And reduces the U.S. balance to 264 million.
The portion of the charge related to impairment of intangibles totaled 25 million.
And was made to indefinite lived assets. Therefore, there was no change to future amortization expense.
This gionee costs for the second quarter of 2020 were 126 million or 20.9% of sales.
As compared to 133 million or 13.5% of sales in the same period of 2019.
Adjusting for 7 million of severance charges, along with 15 million of charges associated with the closing with closing facilities and terminating leases.
As to you in a for the second quarter was 104 million or 17.3% of sales.
As Andrew mentioned adjusting or SGN, a cost is the main lever we control.
And we will continue to make adjustments as needed to it to the market volatility.
When we saw the severity of the revenue reduction this quarter, we immediately took action to help mitigate the impact.
Other than the actions previously mentioned some of the other key levers pooled include a.
They voluntary and involuntary reduction in force of over 300 employees.
Reducing certain employee benefit programs such as bonuses the other incentive awards.
And our four one k. matching.
We also furloughed personnel, which will remain in place until we get a better field, where the market stabilizes over the coming quarters.
With all the restructuring actions taken in planned.
Expect over 100 million in cost savings in 2020.
Compared to 2019 based on adjusted numbers.
Approximately 60% of these cost savings were structural in nature.
And position the company for strong incremental margins as the market improves.
Other expenses also included $3 million of asset write downs associated with facility closures in Canada and international.
Interest expense totaled 7 million in the second quarter of 2020, which was 3 million less than the second quarter of 2019 due to lower average debt levels and interest rates.
Our effective tax rate for the quarter was 6%, which is lower than average due to the goodwill impairment charge, which is not deductible for tax purposes.
Net loss attributable to common shareholders for the second quarter of 2020 was 287 million or $3.50 per diluted share as compared to net income in the second quarter of 2019, which was $18 million or 21 cents per diluted share.
On a normalized basis, removing the impacts of impairments and restructuring charges.
As well as LIFO.
Adjusted net loss attributable to common shareholders for the second quarter of 2020 was 8 million or 10 cents per diluted share as compared to adjusted net income in the second quarter of 2019, which was 17 million or 20 cents per diluted share.
Adjusted EBITDA in the second quarter of 2020 was 17 million versus $60 million for the same quarter a year ago.
Adjusted EBITDA margins for the quarter were 2.8% versus 6.1% for the same quarter last year.
Driven by declining sales volumes previously described.
EBITDA Decrementals on a trailing 12 months were 13%, which is in line with historical averages as compared to last cyclical downturn.
Our net working capital at the end of the second quarter of 2020 was 615 million 58 million lower than the end of the first quarter.
On a trailing 12 months basis or working capital excluding cash as a percentage of sales was 19.8% at the end of the second quarter of 2020. This is within our targeted range for this year of 19.5% to 19.9%.
We generated 47 million of cash from operations in the second quarter of 2020, and 84 million through the first half of the year.
We are still targeting to generate 200 million or more in cash from operations. This year.
Capital expenditures were 3 million in the second quarter of 2020, and 5 million so far this year.
As we prudently manage these costs, we continue to spend where it makes sense such as our E Commerce initiative.
And we expect our full year capital spend to fall within a range of 10 to 15 million lower than our previous guidance.
Our debt outstanding at the end of the second quarter was 474 million compared to 551 million at the end of 2019.
We have reduced total debt by 77 million so far this year.
Our leverage ratio based on net debt of 455 million was 3.3 times outside our stated target range of two to three times.
While we expect this ratio will increase throughout the year due to the current market headwinds our debt is very manageable.
Cash flow profile allows us to generate strong cash flow in this type of environment.
We continue to focus on debt repayment and plan to reduce the ABL balance to zero by the end of the year.
The availability of our ABL facility is currently 411 million and we had 19 million of cash at the end in the second quarter.
We currently have no financial maintenance covenants in our debt structure.
We have one spring covenant in our ABL that becomes applicable should our availability approach. The final 10% of capacity that we do not envision getting anywhere close to this threshold even under extended stress scenarios.
Our backlog at the end of the second quarter of 2020 was 392 million.
87 million lower than the into the first quarter due to fewer projects and the decline.
Customer spending levels.
We have chosen not to provide any specific annual guidance, except for the key items, we control given the extreme uncertainty and volatility those items include SGN, they primarily as well as capital allocation.
We plan to make further reductions to our SGN a structure during the second half of this year, including reducing head count by another 100 to 150 positions.
In closing an additional 12 facilities.
With all these actions we are targeting a Q4 exit rate of 100 million.
This will represent over a 100 million annual improvement on an adjusted basis.
From a capital allocation perspective, our priority is debt reduction in all available cash will be used to pay down debt.
Regarding the second half of the year, while there is too much uncertainty do provide any specifics we can provide some general pillar.
As previously mentioned in the gas utility sector experienced a slowdown from the pandemic restrictions that we do have an expectation that it could be stronger in the second half of the year.
However, it will likely not be enough to overcome the shortfall from the other sectors, which are expected to remain under pressure.
Also given the current market headwinds, we're expecting the fourth quarter two experience significant client budget exhaustion, but it is too early to estimate the full impact.
So in summary, our second quarter 2020 results reflect the incredible challenges of this market.
But I believe also proves that our management team is committed and proactively taking the appropriate measures to adjust our business as needed to whatever market we are given.
We remain committed to our strategy to deliver shareholder value, regardless of where we are in the cycle and position the company to take advantage of the eventual market recovery.
With that we will now take your questions operator.
Thank you we will now be conducting a question and answer session.
Back to ask a question. Please press star one on your telephone keypad confirmation turn will indicate your line is in the question.
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Our first question comes from the line Sean Meakim with Jpmorgan. Please proceed with your question.
Thank you Hey, good morning.
Hey, good morning, Jonathan.
So we just talked little bit about at the end Kelly touched on it but.
The forward outlook for revenue given the diversity of end markets sounds like you expect further erosion on the topline.
You asked upstream activity seems like it's stabilizing maybe at least on an exit to exit basis.
Threeq use average will still be lower quarter over quarter.
Just curious if gas utilities offer.
Catch up as Kobin restrictions ease just any thoughts on downstream.
As began to turnaround season in the fall.
And then maybe just a follow on effect, we've had pretty strong reaction in the pipeline and midstream how do you see that unfolding if we get some stabilization in the upstream.
Yes, Sean let me start with some high level comments on the end of.
As it did those end markets and then Kelly will give some more specific guidance related to it but upstream I think you're you're exactly right I mean, when we look at the quarter sequentially and are we track much more closely to well completions and then rig count as you know.
And so with the well completion of down 55% sequentially and 62% year on year.
That's very much.
In North America that very much parallels are our view of the upstream. It has bottomed I think where you know we're sitting here around 250 rigs.
In the U.S. it seems to have leveled out some those there. So I think that will stay consistent in the third quarter.
But then you'll have a budget exhaustion fourth quarter impact Canada's ad.
Recovery from spring break up but still very low from historic times around 40 rigs up upstream completions is very low there.
So we do see a little bit improvement in the third quarter and a little bit of improvement in the fourth quarter in Canada.
But in the U.S., we see it tailing off the other direction and we see a flat international.
Activity levels in the midstream pipeline.
Segment.
It's falling off a lot for two reasons one the overall project span.
From a demand standpoint, and the second impacted the line pipe pricing that we talked about being down 20% year on year. So we get.
Both the volume and the price impact on pipelines, there, but when I look at the the pipeline.
Projects out there we have 10 active projects and 18 were tracking if you go back a year. Your two years ago and 18 19, we normally have 2025 projects active and 40 to 50 projects were tracking so the pipeline work is definitely half which parallels the rate.
John drop a 50 by over 50%.
The pipeline work trials, a quarter or two but it's the same metric gas utilities. It was a bright spot. It was up during the quarter sequentially is down a little bit year on year.
Mostly because of the the cove it impact.
You know a lot of integrity work that would be upgrades of gas meters and systems in residential homes and the internal work that goes with up putting the new system and are in place did just really got deferred in the second quarter because of of covert access.
I know refining and turn around but we had a pretty good spring turnarounds fashion, but a lot got pushed to the well we felt was the third quarter.
We've seen some of that push not only a out of the third quarter, but into next year. So we see the turnarounds being down year on year around 20%.
From a from a year ago, and then it and Thats the biggest impact on refining we see overall spending on refining.
Being down also in parallel.
If you look at refining utilizations below 80%, 77% or so that should be a lot of a turnaround activity being done, but I think construction projects that are being deferred.
Also for co vid reasons, so that's kind of a high level, but Kelly will give more specific on the sectors. Yes, yes, Sean you know looking at that kind of Q3, specifically as Andy said, you'll visibility is still not perfectly clear, but if you look at gas utilities, we do expect and we said that in our prepared comments some level of improvement.
In gas utilities, it feels like for the third quarter.
You know because of the virus issues still out there we're kind of anticipating maybe a modest single digit like a low single digit improvement and gas utilities for the third quarter.
And then if you switch over to downstream.
It will be down, but but you know kind of low single digits as well and you mentioned the Turner excuse me the turnaround work.
That we thought we're going to hit Q3, it looks like that's going to get pushed into next year. So a low single digit top decline for downstream and then of course upstream and midstream is going to be impacted the most.
And we.
I think you'd mentioned early on maybe some stability in those markets, but for us and our customer mix, we're still anticipating.
That those two markets are going to be under the most pressure and we'll probably experience.
Double digit decline.
So when you net all of that out for the total company.
Feels like will be down sequentially not up.
But we're not anticipating a double digit decline for the overall company probably more single digit.
It could be mid to upper single digit, we'll see how it all shakes out.
And then maybe just a little more color. If you look at July revenue and just kind of how things are tracking right now we talked about in the prepared comments that we got a little bit of a boost in June and the last two weeks that we were not expecting but unfortunately risk it kind of reverted back in July we're running back similar to may levels.
From a revenue perspective, which if you look at kind of a Q2 average revenue, which was around 200 or million or so right. Now July is tracking to come in probably up 8% to 10% lower than the average that we saw in Q2.
Got it Thats very helpful. Thanks for a detailed to both the deal.
So then.
Your next question I think is around the proper run rate for Gionee and so when you strip out in the pieces in the quarter I.
I think that no the underlying one of four number for the quarter is a good one historically good times percentage of revenue gene and maybe runs like 12% on.
Full year basis.
Last cycle, we peak, maybe closer to 17% kind of around those levels now, but trying to get that in line.
What are you targeting whats a realistic target near term and then like say next one to two quarters versus the next.
46 quarters, and where do we get to the right Rightsizing DNA relative to that revenue base in terms of trying to protect profitability now versus.
Having the ability to serve higher revenue numbers at some point on the line finding that balance.
Yeah, No no Sean I'll take that when you know maybe just a few.
Few comments on SGN, a in general and then I'll get back to answer your specific question.
You know if you go back to Q1, we had reported SDMA of 126 million, but if you recall, we had about 6 million of bad debt expense that was in there. So none of the true normalized run rate was about 120.
And as we saw the revenues rapidly declining in Q2, we took very aggressive action to try to get ahead of that.
And and so you know if the 104 million that we have right now if you look at kind of held that's broken out well probably even more important you know let me let me mention Sean the Q4 run rate that were really targeting here is 100 million.
Compared to the one or for that we ended this quarter and if you look at kind of held thats breaking out to get from that 120 run rate in Q1, ultimately to the 100 that we're going to end up with it the ended the year.
We had voluntary and involuntary.
Reductions in force.
Thats about 8 million of their quarterly run rate, we had facility closures of about 6 million or so in savings there to bring the number down and those are true structural cost savings that we're going to maintain even as things start to get better and that represents I think for the quarter. It was about a 60%.
Structural.
A number that we talked about in our prepared comments, but if you look at by the time, we get to that 100 million. It will really be about two thirds of the costs that were taking out is going to be truly structural in nature versus variable.
And then on the variable side of course, you know we had we've had furlough reductions we've had some change in benefits like for a one k. managing reduction in over time things like that which which makes up.
The difference there.
But you know with everything moving so quickly it's hard to give you an exact percentage I think we were you know of 17% or so this DNA as a percent of revenue. This quarter I think you know it it it's probably going to hang around that at that level here, but we'll continue to work that down and it really is just a function of where revenue.
Ends up and we're tracking a very closely and as we said on the call on the prepared comments Sean. We're we're prepared will continue to use SGN a is a lever and take additional actions is needed to.
To get that to get that percentage down to more kind of normalized levels that you mentioned earlier.
Yes, John as if that let me just to add John take Kelly's comments, I think you covered it really well.
We do see another 12 facilities and the second half closing we see another 100 950 in personnel reductions that we mentioned so.
We're going to continue to match up that cost and the operational footprint to revenue base, knowing though that theres a point, where we wanted just maintain.
Core business footprint and not go too far, but when I think about the changes over the last six years I mean, we set in our remarks, we reduced personnel, 43% since the last peak and we reduced facilities 36%.
But one key messages, we have not withdrawn from any of our end markets. So we've shrunk the profile we've consolidated branches we've.
Made investments along the way NRT season, our valve engineering centers.
But we service the same global market and the same customer base, but a significantly lower footprint and so I think thats the important thing I.
I think the Incrementals when we get back to spending increases by our customers will be much stronger than our 15% historical level as we leverage what we've done in this downturn. So I think thats the positive on.
The what we're doing and we just continue to do up tomorrow, the revenue and cost quarterly.
Very good thanks, a lot for all that feedback.
Thanks, Sean.
Thank you. Our next question comes from the line of them Sebastian of with Scotia Bank. Please proceed with your question.
Hey, Thank you gentlemen.
Could you expand on.
Calming down double digit decline upstream like I guess.
And then surprised by that maybe there's a couple of Iowa sees who could be still declining in activity.
But just like if you're going to provide some local that what's driving that double digit decline in upstream.
You have as it is customer specific for us because a lot of the.
Major customers, how then where the rig counts so well into the second quarter and a lot of the bigger large independents and Io sees that our main customer base really have their reductions coming in the third and fourth quarter. So.
That's small one rig the huge drop in rig count I wasn't really our customer base that impacted earlier. So that's why we're we're still even if you assume a flat to 50 breakout a you know it's really our impact on revenues and if you think about it if you look at our Chevron shell Exxonmobil course.
There are integrated up made in down by that their revenues that normally shelter us through the down cycle. There there, they're spending and our revenues with them all and going to be down those top III Lcs, 30% to 40%. This year. So we're seeing you know.
Not only a general industry spending declined but even in our best customers that normally spend through the cycle.
Really retracting in spending in this year.
Not so much and gas utilities, we see those really low low spending declines and our largest refining customer down 40%. So what used to shelter our revenues even more I, we're seeing that kind of spending decline in they even our best top four customers.
Kelly do you want to add anything on the aim I think that covered it perfectly.
I'm thinking about the new midstream.
Segmented just getting an idea of capital projects can you think about how you're thinking about non-GAAP earnings are they getting would be driven by just whatever the U.S. drilling activity drilling and completions activity do but how are you thinking about the other capital projects, maybe in second half an hour so.
It does any insight into how you're thinking about 2021, but it's got the projects.
Yeah, So youre exactly right. The gathering for Asia is for US is flow lines once it really ties to the overall completion activity. So it's the they infrastructure to tie in the wells once it's completed to the tank battery so that very much parallels the completion activity, but major pipelines it really dogs.
About the the need for additional capacity now in the first half of this year, we had some carryover pipeline activity from last year that the Permian.
<unk> for a couple of years, we had the bottleneck in the Permian.
We've worked through that of course with activity and production declining there.
We have a very small percentage of what we had to for the last two years.
I don't see a lot of.
Big pipeline infrastructure I see projects right now in the fourth quarter third and fourth quarter being deferred into next year on some of the both gas oil and NGL, we play in all three pipeline projects.
And and so that that I think will flow into a into next year and so of course, we won't have the the higher activity. The first half so I see it being a difficult year and pipelines next year and then we are Ah I, we mentioned that previously, but if you. If you add the we look at price and volume on line.
Five if you look at a 9% price down in the quarter and 11% volume down.
You get to this lower run rate.
In both the price and volume up from a line pipe and so were down kind of on the.
1300, 49000 ton on line pipe, so that lower level from the pricing is 17 1800 thousand ton to start the year gets you down to a lower price and volume on line pipe going into next year also fireboat those two things of the gathering will reflect the amount of completions, but the big.
Appliance and a lot and the lower line pipe pricing starting will allow both make it a difficult start in 2021.
[noise] anytime may squeeze in one and I apologize if you guys addresses. This just highlight how to think about the gross margins I need to add just inglis margins I didn't decline modestly as we go into second half given the pricing I would assume.
Still under pressure, but lake do we.
Still hadn't having taken 19 handler do we actually falls below 90% margins.
Yes, let me start and Kelly will give you more guidance, but.
So with a line pipe, we just referred to discussed.
Outlook will pressure margins, but we still have a trend towards our up higher valve mix and Weve reached a record in the second quarter of a total revenue was 41% coming from our valve business. So thats the offset on the on the much positive side and we also see a nice pickup and our automation part of.
The valve business, which also has a positive on the margin. So so the line pipe as the negative into valve part is Ed mix changes still the positive and so Kelly.
Yes, yes, Vads I think where you know as Andy mentioned I mean, there is pressure there and we we anticipate additional pressures as long as this downturn goes on but you know the beauty of this business, we're talking like tens of basis points not hundreds of basis points and so I think you know for the rest of this year. We are you.
You asked the question, 19% or better that that certainly is what we're targeting we're pushing back real hard not to get below that kind of level, but but I would expect it to declined slightly from what we reported this quarter.
That's very helpful. Thanks for taking my questions.
Thanks Ben.
Thank you. Our next question comes from the line of Doug Becker with Northland Capital markets. Please proceed with your question.
Thanks.
As we look a little further out I'm just thinking about the recovery in the working capital requirements, we look back to 2017 and 18.
MRC didn't generate free cash flow is that replenished the inventories, but you've taken a lot of steps in the facilities. The inventory analysis, you've been doing just optimizing the.
Operating structure.
Is there a case to be made that MRC could be generating free cash flow either neutral or positive, even if activities increasing a little bit.
Yes, Doug let me start, but Kelly is going to walk you through this cat focus is something I want to address we definitely feel the cash flow from ops will be greater than 200 million this year.
Especially with ours are softer outlook.
For the second half on revenue so that that in our countercyclical model that leads to more inventory reductions. So Kelly you walk through the free cash flow.
Yeah, Doug you may be asking kind of longer term, but just you know we wanted to clarify just for kind of the rest of this year because we saw some of the notes. This morning that there may be some confusion that as Andy said cash flow from ops. This year, we are still targeting 200 million or more we think nothing's really changed from from the pre.
This quarter.
However, kind of the way we get there.
Maybe has shifted somewhat from one way we described that last quarter in other words, I think revenue will be coming a little bit weaker.
As we've done already kind of talked about for Q3, and then Q4 I don't think we really talked about it but but Q4.
We do think there's going to be a seasonal decline you know for US historically, it was always kind of 5% to 10% down but of course, you look at 2019. It was a 19% sequential decline. So we're not trying to make any call on that yet other than to say that we do think you know the fourth quarter of this year, we'll certainly be down so revenue weaker.
But as a result of that we'll have a great working capital release, you know so lower a are lower inventory and last quarter. Our inventory target. We had put out there are $140 million or more.
Because of the lower revenue, we think we'll expect for that number to go up.
You know probably closer to more like a 170 million or so when an inventory reduction.
And we lowered our capital guidance for the year from the 15 to 20 million range is under 10 to 15 to about a 5 million drop there.
If you look you know the preferred dividends stays the same.
But anyway, you kind of net all of that out and at the end of the day. It feels like free cash flow will be greater than the number we put out there last quarter of 160 million now we're targeting closer to probably around 180 million.
Free cash flow.
And but I think you know I think going forward I think what you were kind of getting add as well was just.
In a in a in a period of growth if we could be generating positive cash as well and that certainly the drove the way we're trying to position. The company you look at the the SG DNA costs. You know we went through the structural changes that we put in place there.
We're trying to centralize more inventory and you know the switch to E. Commerce that we have will allow us to do even more centralization of inventory. So that should all help out from a working capital perspective, So I think you're thinking about it correctly Doug.
Not putting any specific targets out there right now, but that's a that's the way we're trying to approach for the future.
No. That's that's really helpful clarification.
And then just you were alluding to a just a little bit before just the targets for the valve growth.
The intermediate term getting to that 45%.
For years, if that's still on track.
You bet, we saw in the second quarter.
Yes, Doug very much I would you know I have given it a few wells.
Many years back five seven years back when we started to transition.
We we ricci achieved the 40%.
Target that was our initial.
At the start of this year, we're tracking 41% into the second quarter I expect us to finish the year kind of 41, 42%.
So we and now we're still very much ramping up the midstream.
Valve business that modification and engineering shop.
So we we've had growth there weve, a 12 million in new order just in the second quarter. So we're tracking very much that 50 million in the first year 100 million a growth in the second year of from that investment in the mid midstream valve business as I feel very clear that very confident.
Then to get to the 45% total revenue probably sooner than we thought but the guidance is still good that we will get there.
Excellent. Thank you very much.
Thanks, Doug.
Thank you, ladies and gentlemen, as a reminder to during the question Keith Please press star one.
Okay.
Our next question comes from the line of Nathan Jones with Stifel. Please proceed with your question.
Good morning, everyone.
Good morning Nathan.
Just a question on that late June such in revenue that you saw.
That doesn't seem like it maintained into July can you talk about where that came from and what your explanation is a wide why that Ted you cut and then again why didnt hadn't sustained as we've gone into July.
Yeah, Nathan let me just make up a one comment and then Kelly will walk US I think it helpful. The walk through the U.S., Canada International outlook, but I think a couple things happening we were heavily weighted of course to the Gulf coast.
Business and in June and just like our own business of managing through covered we started open back up and then as cases spiked in the that community. We had to pull back we saw activity pick back up in June, but then July we've seen with the resurgence. We know we have very big operations in Texas Luis.
In a in California.
And all three were impacted in July.
By pull back and some spending so the covert cases spike.
And then that construction projects and activity get slowed we were managing 27 cases now.
We got 50 little over 50, 55 people quarantine and it's all family spread and community spread and.
So it has a knock on impact to spending and with our customers whether it last in August September is still on determine but it definitely I think we had some optimism some activity picking back up in June that was encouraging but July at least in the beginning here first few weeks it looks like it.
It wasn't sustained and that's really in the guidance that Kelly is talking about.
Maybe just a very difficult environment to forecast now with August September, but Kelly, maybe by market. My geography, Yeah. No I think I think it would be helpful. We talked we kind of talked earlier through the Q3 guidance.
But when you look and a full year forecast just to kind of maybe put in perspective of kind of the way. We think are things are shaking out as Andy said look at it on a segment basis.
Really Q4 as I mentioned earlier is there's lot of uncertainty around how much budget exhaustion, we'll see there so thats going to be.
Good question, Mark one Hell of the shakes out at the end of the day, but if you look at U.S. specific you know it feels like just a full year 2020 versus 19.
We're probably talking more than 30%, we'll see how much more.
Pending on Q4.
But certainly more than a 30% year over year decline same thing for Canada.
Obviously very highly tied to the upstream markets, so more than a 30% decline there as well.
International is holding up little bit better for us, we think it will be a double digit decline hopefully a lower double digit, but but thats holding in a little bit better than maybe what some of the the market expectations are out there and then and maybe switched back to screens real quick from a four year perspective.
You know upstream is falling closer in line to to what some of the spend estimates are out there you know.
50% or more I think we may.
Hopefully do a little bit better than that but it's certainly as Andy talked about early just the customer mix and the way.
Some of our big clients are going to be shutting down not shutting down but reducing activity levels here in the second half of the year.
That could you are less going to put a lot of pressure on upstream midstream will closely follow that on a year on year basis, maybe not down quite as much as upstream, but we are expecting more of a fall off as Andy talked about earlier in the second half of the year.
And then gas utilities down but.
But more of a single digit type number.
Maybe mid single digits kind of range.
And and then downstream we've talked about last quarter that historically downstream.
Would be about 50% of whatever reduction that you saw for us.
It feels like its heavier this year and.
And we're looking right now at probably about a 30% year over year.
Decline just based on our current estimates.
Just on that guidance change side is that I mean, that's primarily a function of you had expected deferrals out of the second quarter in a in the spring turnaround stage and obviously it was difficult to getting to paperless facilities at that point with all the shutdown from power that.
I think the expectation with.
Some of that would be made up in the fall. Some would maybe go into 2021, you're seeing a larger amount of what you'd expected to go into the fall season, now being shifted out into 2021.
Yes, Nathan that that's exactly right and.
And I would say so I'd fulfill largely impacted with the Covidien impact then that may impact on construction.
It's a plan to spend when you think about we track this very closely that because we're the largest refining and chemical turnaround company in the U.S. by a large amount, but hey, you know you look back in 2018, they spend 75% of what they plan in 2019, they spent 104%.
And in 2020, we expect them to only spend 41% of their plan budgets and the rest being pushed out into 2021. So a significant decline in the amount of span. The projects are there the visibility there the refining utilization is low so you certainly have an opportunity.
To get the work done, but we don't think the.
The construction projects with the current Alf prices environment is going to allow it to get done. So that's a really low percentage from 20 years of being in the refining then and turnaround business of.
Of amount that.
Actually spend from what they started to.
Talk about at the beginning the year.
Okay then.
But more of a philosophical question a bit of a follow up to previous question to that was talking about that 12% to 17% SGN eight.
Range It seems that over the last few you really increase the efficiency.
Probably reduce the cost to serve customers, we transitioning Paypal online to add a guy.
Do you feel a lot that range has structurally shifted to the lets say structurally shifted down and I could maybe give you. An example in 2000 Tonight. Thank you to just under 12.2 billion in revenue just over 10% asked DNA over the last couple of years. It may be over the next couple of years.
The admit it maybe take you get revenue back to that level would you expect that structural DNA to be.
Randy Thanks, Dan age would it be potentially 100 days, despite low a couple hundred basis points lower any kind of color. You can you can give us on just how you think that structural need full ASG in AG customers might have changed at last few years.
Yeah Nathan.
I I made that comment in the prepared remarks. It is the most efficient.
Operating structure, we've had in in the past 12 years, and and and as Kelly mentioned a lot of it even what we're doing in 2020 is structural and lower cost so and that big thing that's evolved over the last two to three is it three years is what you've mentioned the move online and MRC go.
You know we've been focused our largest customers. We've just this month made a change and 1500 smallest transactional customers move them through an online a interaction with us.
And our percent of revenue continues to grow it 31% toll on a trailing 12 month as it was 34% in the second quarter. So we continue to move our model to that that brings a lot of efficiency permanent efficiency to our motto. All these deployed I internal sales resources and service.
Centers that are out and all the branches.
Decreased significantly over the next.
Year to two years, and we were already targeting five to 10 million next year by the end of next year to to get to that lower cost structure, but as things ramp back up to answer your question I expected to be as the revenue comes back the incrementals will be more like 20% than 15, and I expect a lower cost struck.
Actually to be more permanent so we would be at when you get back to those same kind of revenue levels will be at the 12% as DNA, but I'd expect it to be lower because of the MRC go ahead.
The ecommerce impact so it way, it's yet to be proven out, but we certainly won't be going the other direction, adding cost back into the branches revenue picks back up we'll be moving more customers that platform.
So I believe I do believe it it will have a permanent positive impact.
That's very helpful. Thank you.
Thank you David.
Thank you, ladies and gentlemen, we have come to the end of our time allowed I'll now turn the floor back to me Brian for any final comments.
Thank you for joining us today and for your interest in MRC Global we look forward to having you join us for a third quarter conference call have a good day bye.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.