Q3 2020 MRC Global Inc Earnings Call

The dial-in information is in.

Yesterday's release we expect to file our quarterly report on form 10-q later today and it will also be available on our website. Please note that the information reported on this call speaks only as of today October 29th, 2020. And therefore you are advised that this information May no longer be accurate at the time of Replay and our remarks today. We will discuss adjusted gross profit adjusted gross profit percentage just bought I just added on margin adjusted sg&a adjusted net income adjusted diluted earnings per share free cash flow and free cash flow after dividends, you are encouraged to read our earnings release and maturity filings to learn more about our use of these non-gaap measures and to see a Reconciliation of these measures to the related Gap items. All of which can be found on our website 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 views of our management of MRC Global. However, MRC Global wage

Results could differ materially from those expressed today. You were encouraged to read the company's SEC filings for a more in-depth review of the risk factors concerning these forward-looking statements. And now I'd like to turn the call over to our CEO. Mr. Andrew Lane. Thank you, Monica. Good morning, and thank you for joining us today and for your continued interest in MRC Global, I'll begin with an update of our COVID-19 Democrats Ponce. Then the company's third-quarter 2020 highlights as well as progress against our strategic objectives including e-commerce, and then I'll wrap up then turn over the page to our CFO Kelly Youngblood for a detailed review of the financial results, the third quarter experienced modest sequential improvements and activity levels in certain areas of our business includes a Gas Utilities and downstream in industrial as many customers were able to resume activity after pausing are slowing activity levels in the second quarter due to COVID-19 concerns dead.

While others including Upstream production and Midstream pipeline continue to experience declines as the demand Destruction for oil and gas continues our end Market diversity has been a positive and provides relative stability and growth compared to our peers. However, despite recent improvements. There is still substantial uncertainty in the broader Market resulted in limited visibility given this we continue to take aggressive measures to optimize our cost structure reduce debt and generate cash to better position the company for the ultimate recovery.

Given are important role in the energy supply chain. We are a critical supplier to the global energy infrastructure system and its designated essential provider today. We have been fortunate to not have any facility closures related to the pandemic. We saw a peak of internal cases in July and it has trended down since our current Global case count is 11 a.m. Please or or .4% of our total Workforce as part of our pandemic response plan. We have begun phasing back employees to return to the office based on local or Regional a virus positivity rates as well as average daily case counts for the previous week, which determines what percentage of employees can safely return this changes weekly and our office locations range from 25% to 100% who have returned to the office. Our plan allows us to customize our response to fit the local area to provide a working environment a log.

local conditions

We continue to require a daily body temperature checks before entering our facilities in addition to staggering shifts at our warehouses promoting social distancing and of course providing personal protective equipment as well as additional deep cleaning at our facilities from a supply chain perspective. There's been no change since last quarter the key manufacturers that we rely upon them all we turned a normal capacity levels given our inventory position and the reduced demand. We have a failed orders with little disruption. However, if there is a second wave of the pandemic off and shutdowns are re-established order fulfillment risk could increase

Moving on to our third quarter results. This quarter is seen some encouraging improvements particularly in our Gas Utilities and the downstream and Industrial sectors, these two sectors made up 68% of our total revenue for this quarter which supported our total company company Revenue decline of only 3% sequentially our diversity of end markets sector May provide substantial protection against the Steep activity declines in the Upstream production and Midstream pipeline sectors. The gas utility sector is now our largest sector at 36% of total revenue this quarter, we expect this sector to continue growing as our customers grow and execute their multi-year Gas Distribution Integrity management programs.

The next couple of years we expect the Gas Utilities sector to be a 1 billion dollar per year business. This is a real bright spot in our portfolio, and we are the proven market leader in this page.

We also achieved adjusted gross margins of 19.7% this quarter despite being in a deflationary environment as our long-term strategy to shift to a more valve Centric organization has succeeded in the first nine months of the year 40% of our sales were from valves automation measurement and instrumentation or the van me product group Thursday. We were on Pace to achieve our goal of generating 45% of our total revenue from the product group in 2023.

However, well some of my areas of our business or positive overall, we still face a challenging environment. Therefore we continue to evaluate the business and aggressively cut costs to better align the correct Avenue levels and our expectations for the near future the profitability Improvement measures. We've executed include numerous cost-saving actions, including headcount reductions off and the closing are consolidating of facilities. We also have continued investing in our e-commerce initiatives, which is part of a broader long-term strategy to improve profitability efficiency and customer relationships. I'll cover this in more detail shortly.

In the third quarter, we reduced headcount by approximately 140 for a total of 520 this year or a 16% reduction since the end of 2019. We also closed or Consolidated an additional nine facilities in the third quarter for a total of 22 facilities this year.

ma'am

Close or consolidate another six for a total of 28 this year with all the actions we've taken and are planning. We're expecting more than 110 million dollars and a reduction in sg&a from 2019 on a normalized basis even better than we had previously estimated.

Approximately two-thirds of these cost savings or structural which means we should have a better-than-average incremental ebitda in a recovery. We are focused on managing what we can control and optimizing the cost structure squarely within our control.

We're also focused on generating cash and optimizing the capital structure so far this year, we generated $178 in cash from operations as we continue to work down in Tori and rationalize our Branch structure for Optimum working capital efficiency. We're very confident in our continued ability to generate cash and expect greater than $220,000 in operating cash flow this year. This gas generation along with the cash. We expect to receive from the sale of properties will allow us to make a substantial reduction in debt above or targets so far this year. We have reduced overall net debt by $150 million dollars to a balance of $369 million with plans to reduce name that that below $300 million by the end of the year, which is substantially better than previously expected.

This includes paying off the balance by the end of the year, which we are well on Pace to achieve.

We're 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 of probability and optimizing working capital our e-commerce strategy underpinned by rmrc go platform is a key strategic pillar for MRC Global. Our vision is a great and end and digital Supply that digitally links MRC go to our customers and vendors across every touchpoint. Our immediate goal is to expand our digital capabilities and differentiate ourselves to a world-class customer experience that facilitates online purchasing and a range of other value-adding features.

Consistent with that direction in April this year. Were you pointing executive delete execution of our e-commerce strategy and in July, we hired a season vice president of e-commerce with deep industrial distribution life experience consistent with the importance of this initiative. We continue to invest in people and Technology to enable our digital expansion. We continue to build out a long history of digital integration with customers which started with B2B EDI Integrations in the 1980s and September twenty twenty 48% of our North America. Revenue was generated through our various digital channels over the last twelve months 49% of revenue from our top 36 customers in North America and 68% of our money Revenue all came through digital interaction in July of this year. We started migrating smaller transactional customers MRC go to facilitate this month.

Have expanded our centralized.

Customer service group located at our Houston operation complex and we have stratified these customers to facilitate a tailored service offering where practical and cost-effective we're back during direct delivering direct from our regional distribution centers to the customer delivery location supporting our efforts to consolidate inventory and drive down are working capital by implementing this month cost to serve model couple was shipping savings and improved price differentiation. We are targeting to deliver annual profitability improvements between five to ten million dollars by 2022 as we expand this channel. Our intent is to build the customer experience learning to into our premium MRC go managed accounts solution consistent with our goal to increase large customer service option in parallel with transactional customers globally over the last twelve months. A third of our Revenue was generated three Commerce channels. We are accelerating our customer Lounge.

Efforts and expect that at least half of our Global Revenue will be transacted digitally within 3 years. We also continue to drive market share gains by obtaining the expanding foam multi-year mro contracts with customers this quarter. We have renewed several smaller agreements with several Downstream customers growing market share, especially in a shrinking Market is an important strategic objective and we have a proven track record of achieving this objective. We remain focused on a long-term strategic objectives delivering Superior Service to our customers and delivering them to our shareholders. We have significantly reduced operating costs and debt in this turbulent time, exceeding our initial estimates and completely realigning the organization and the capital structure. The the the economic conditions are Diversified portfolio of sectors is a differentiator for us and significantly helps us to reduce volatility in our Revenue as demonstrated in this quarter's Reserve.

And our e-commerce initiative continues to take root and we're making progress and converting customers to our digital platform.

We are well positioned to take advantage of the eventual Market recovery and we will continue to execute against our strategy to increase market share maximize profitability and working capital efficiency wage. Well as optimize our capital structure and I'll turn the call over to Kelly to cover the financial highlights for the quarter. Thanks, Andrew and good morning everyone. I'm very happy to report did not only did we exceed our guidance coming into the court, but we were also on track to meet or exceed all of the full-year financial targets laid out earlier this year for the third quarter of our guidance was for Revenue to be down upper single-digits as a percentage, but we were only down 3% largely due to our Diversified business model, which has become a significant damage later for MRC global.

on a sector basis are actually

Results were in line with our guidance except for our Downstream and Industrial sector which increased 5% sequentially exceeding our guidance of a low single-digit decline.

Now I would like to remind you of the full-year targets previously laid out with an update on our progress first was to exit the year with a normalized sg&a run rate of 100 million month, which we exceeded in the third quarter with a new run rate of 97 million compared to 2019. We expect to end this year with at least $110 billion in cost savings month. I will provide more comments about our expectations for the 2021 s g n a run-rate later in the call. Second was to decrease inventory by at least 170 million thoughts are well on track to exceed with a year-to-date reduction of more than 100 million.

Next was to generate cash flow from operations of at least two hundred million. And today we are raising this guidance to be greater than 220 million.

And finally, we committed to pay off or this year and we ended the third quarter with only a $25 million abl balance with $40 billion in cash. So I think it's safe to assume that easily. Check this box in the fourth quarter.

We also committed to use all of our excess cash this year to pay down debt, which we have done and reduced our net debt balance here today by 150 million to a current balance of $360,000. And today. We have a new Target to reduce our net balance to 300 million or less by the end of this year and I will provide more details on this later.

So in summary, we are very proud of the progress made today and Bolivar results are evidence of the proactive measures. Our management team has taken to pull all levers within our control in response to the current market headwinds.

Before covering the financial results. I wanted to provide our perspective on some of the recent corporate transaction announcements among our customer base in summary. We believe the majority of these announcements were very positive for MRC Global in the event one of our key customers, which are typically the larger enps acquire a smaller producer. It is generally positive for us and we can easily down the acquired company's business into our existing customer contract.

Also in many cases it can open new doors as the operator re-evaluates their supplier options and our offering is uniquely tailored to serve the larger operators. We have a unique and different differentiated position in that respect in all the recent announcements with maybe one exception. We are already well aligned with the acquiring company and in many cases the company being acquired as well. So we believe the net result of these combinations will lead to him or see global gaining us Upstream market share in 2021.

Going to the quarter's results total sales for the third quarter of 2020 were $585 million a 3% decline compared to the second quarter.

Us Revenue was $463 Million this quarter 2% lower than the second quarter of 2020 as the Gas Utilities and downstream and Industrial sectors increase sequentially took the Midstream Pipeline and Upstream sectors experience further declines.

The u.s. Gas Utilities sector Revenue increased 3% sequentially as several customers began recovering from pandemic restrictions and gradually returned to work as well. As a recent. Mom. Sure gain was Center Point, which is in the early stages of ramping up.

We expect our gas utility customer base to continue with their originally planned budgets barring any additional impediments due to the pandemic. Although some of the twenty-twenty spend will now he's over 220 21

the US Downstream and Industrial sector Revenue increased by 4% sequentially as customers began to resume work following pandemic restrictions for critical maintenance and turnaround activity.

The US Upstream production sales were down 8% sequentially due to continued curtailment and activity levels with certain customers, but still outpaced well completions which were down $29 for the same.

The US Midstream pipeline sector Revenue declined 21% sequentially as customer spending has evolved into maintenance mode and projects from earlier in the year continued to taper off.

Canada Revenue was twenty-seven million in the third quarter of 2020 relatively flat sequentially, but only a 1 million dollar decline.

International Revenue was $95 million in the third quarter of 2020 a sequential decline of 5% driven primarily by reduced Upstream spending from weaker demand due to the pandemic wage and lower overall project activity.

Stronger foreign currencies relative to the US dollar favorably impacted sales by approximately 2 million.

Now I will cover sales performance by sector. I wanted to begin with Gas Utilities the Gas Utilities sector, which is now our largest sector and has distinctive characteristics compared to other our other offices Gas Utilities sales were $200 million in the third quarter of 2023 million or 1% higher than the second quarter.

This sector is 99% US based in his now 36% of our overall Revenue up from just 25% in the first quarter.

It is unique relative to other sectors given its drivers are completely independent of commodity prices and the customer base is different than our other end markets countries in this sector are regulated utilities also known as local Gas Distribution companies or ldcs who owned and maintained large gas infrastructure networks in the cities or regions for residential and Commercial customers.

We have contracts with 18 of the top 25 gas utility companies in the US names you may recognize include include Atmos. Nice or Duke PG&E and Southern Company. These customers operate under a guaranteed rate of return model and have an incentive to continually maintain and upgrade their Gas Distribution networks to safely provide natural gas to homes and businesses. We used to fly these customers not only with traditional PDF but also with gas products such as smart meters risers plastic pipe tracing wires and shooting Services. We are integrated with approx 75% of our gas utility customers meaning we supply all their gas products manage their warehouses provide logistic services and manage all their inventory.

This is part of the value proposition. We offer these customers which includes our product expertise and experience as well as our efficient Inventory management Services. Typically before becoming customers most Gas Utilities manage their own Supply warehouses and buy directly from manufacturers, but Supply Chain management is not always a core strength to these companies.

Over the last twenty years we have built this business up to about eight hundred million annually in Revenue today and expected to grow to over 1 billion in the next few years back as 2010 or gas utility sector has demonstrated a 9% compound annual growth rate because these customers are operating in a regulated environment. They're spending levels typically increase to 7% per year to adequately manage their infrastructure. This provides a stable level of growth for our business as we continue to fulfill their gas product needs while also reducing the relative volatility and our overall company Revenue.

It is much more resilient than our energy specific businesses and relatively recession-proof. This sector should continue to grow without market share gains. However, we continue to age to treat this Market with new customers and we have multiple Avenues to grow by widening or reach with existing ones as well.

For example, we recently began implementing a new contract with Centerpoint, which we will see the full benefit of as we enter twenty Twenty-One. We are uniquely positioned in the wage Undisputed leader with differentiated expertise.

And the downstream and Industrial sector third quarter 2020 Revenue was $185 million a sequential increase of 5% driven by the US segment as described earlier the downstream industrial production sector now represents 32% of our total third-quarter revenue.

The Upstream production sector third quarter 2020 Revenue decreased 16 million or 12% sequentially to 118 million declines were across all segments led by International which was down ten million due to less project and mro work primarily in Norway the Upstream production sector represents 20% of our total third-quarter wage.

Pipeline sales, which are 88% US based were $74 million in the third quarter of 2020 a 15% sequential decline.

This sector now represents 12% of total revenue and consists of transmission and Gathering customers activity levels. Typically follow the Upstream sector and many projects that were originally scheduled coming back to the year. I've been delayed or canceled due to reduced demand and Associated lower commodity prices. Now turning to margins are gross profit percent was 19.5% in the third quarter of 2020 as compared to 13.1% in the second quarter. This increase reflects the impact of $34 million in inventory related charges recorded in the second quarter month as well as lipo income of eleven million recorded in the third quarter of 2020 as compared to six million of Life income in the second quarter.

Adjusted gross profit which adjust for the impact of inventory related adjustments and lifo for the third quarter of 2020 was $150 million or 19.7% off as compared to 118 million and 19.6% for the previous quarter a 10 basis-point Improvement.

Lime pie prices were lower in the third quarter of 2020 as compared to the second quarter due to reduced demand based on the latest pipelogix index average line pipe spot prices in a third quarter of 2020 were 4% lower than the previous quarter line pipe prices are expected to continue to decline which should result in further life of income in 2020.

Reported sg&a cost for the third quarter of 2020 with 100 million or 17.1% of sales as compared to $126 million or 20.9% of sales in the second place.

Normalized sg&a for the third quarter was 97 million or 16.6% of sales after adjusting for the net impact of five million Severance charges partially offset bought two million recovery of a supplier bad debt.

We will continue to adapt our cost structure is needed based on how the market progresses in the coming quarters. We have reduced operating costs by 77 million so far this year as compared to last year on a normalized basis and we are on Pace to deliver 110 million or more of cost Savings in 2020. Approximately two-thirds of these savings are structural in nature, which not only makes us a more streamlined organization, but should also allow us to have stronger incremental margins once the market begins to recover.

At the end of this year, we plan on eliminating our employee furlough program that has been in place since July 1st. However, even after eliminating this program do to further reductions. We are in process of actually we expect our 2021 quarterly sg&a run-rate to be at 100 million or less.

interest expense total seven million in the third quarter of 2020 the same as the second quarter and our effective tax rate for the third quarter was 63% Which is higher than average due to losses and foreign jurisdictions for which there is no corresponding tax benefit and the reversal of a current year net operating loss benefit recognized in a prior quarter off, but no longer expected to be realized

net loss of tribute

All to Common shareholders for the third quarter of 2020 was 3 million or 4 cents as compared to a loss of 287 million or $3.50 per diluted share in the second quarter when they normalized basis removing Severance and restructuring charges and the recovery of bad debt as well as lipo are adjusted net loss attributable, shareholders for the third quarter was 8 million or $0.10 per diluted share which was the same as the second quarter of 2020.

Adjusted ebitda in the third quarter of 2020 was 24 million as compared to the previous quarter, which was 17 million. Despite a lower Revenue base driven by strict cost, froze and slightly higher gross margins.

Adjusted ebitda margins for the quarter were 4.1% versus 2.8% for the previous quarter.

You're today adjusted. Ebitda is $75 million the same as the full year 2016, which was the trough of the last downturn.

By comparison here today third quarter adjusted ebitda margins are 3.8% versus 2.5% in 2016 a 130 basis-point Improvement on the same level of adjusted ebitda.

Our net working capital at the end of the third quarter of 2020 was $500,000 million seventy eight million lower than the end of the second quarter when a trailing 12 months basis are working capital excluding cash as a percentage of sales was 19.5% at the end of the third quarter of 2020. This is at the low end of our targeted range for this year of 19.5 to 19.9%

We generated $94 million of cash from operations in the third quarter of 2020 and 178 million through the first nine months of the year as previously mentioned. We are on target to generate greater than 220 million in 2020.

Or third quarter free cash flow was $91 million and our free cash flow after the preferred stock dividend was $85 million.

For the first nine months of the year are free cash flow was 170 million and our free cash flow after the preferred stock dividend was 152 million.

Capital expenditures were three million in the third quarter of 2020 and 8 million year-to-date. We continue to invest in critical projects such as our e-commerce initiative and we expect our full moon to fall within a range of 10 to 15 million in line with our previous guidance.

We recently entered into agreements to sell and lease-back for properties. This transaction is expected to generate net proceeds of approximately 28 million dollars in the fourth quarter off which will be used to further reduce our net debt as a result. We will begin incurring an additional $600,000 in quarterly least expensive beginning in the fourth quarter. However, long with all our debt reduction efforts this year including the proceeds from the sale leaseback transactions, we expect to save nearly six million in annual interest expense in 2012, or as compared to twenty twenty.

Outstanding at the end of the third quarter was $409 Million compared to $551 million at the end of 2019. We have reduced total debt by $65 million in the third quarter and $140 million so far this year. Our leverage ratio based on net debt $369 billion was 3.8 times, but is expected to decline further in the fourth quarter due to additional free cash flow generation and proceeds from a real estate sales.

In the near term, we expect to operate in a range of 2.5 to 3.5 times net debt-to-ebitda and expect the fourth quarter will be well within that range are dead manageable in our cash flow profile allows us to generate strong cash flow and a challenging macro-environment debt repayment remains a priority for the company and as mentioned earlier, we expect our net off balance to be less than three hundred million by year-end compared to the balance coming into the year of $519 million.

The availability of our abl facility is currently $437 million and we had forty billion in cash at the end of the third quarter as a reminder. We currently have no Financial maintenance coverage in our debt structure.

Regarding our outlook for the fourth quarter barring a significant second wave of pandemic development. We expect the fourth quarter to experience a normal seasonal decline in activity, which is sickly ranges between five and 10%

We are starting the quarter in a strong position with October Revenue tracking closely to September which was the strongest month in the quarter.

It's still too early to provide guidance on 2021. Our business is dependent on our customer spending levels, which today we have only limited visibility. We will plan to provide our thoughts as wage received more information, which is typically after the budgeting season takes place in the fourth quarter.

So in summary our third quarter results reflect our proactive focused on the levers that we can control and we have exercise strong cost controls and inventory management packaging and robust cash flow generation aggressive debt reduction and solid margins in a challenging Market environment.

We remain committed to our strategy to live or shareholder value regardless of where we are in the cycle or company is well positioned to take advantage of the eventual Market recovery.

It was that we will now take your questions operator. Thank you. Ladies and gentlemen at this time. We will be conducting a question-and-answer session. If you'd like to ask a question. You may press star one on your telephone keypad. A confirmation tone will indicate your line is in the question to you may press star to if you would like to remove your questions to make you for choosing speeds equipment. It may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Shawn me with JPMorgan. Please proceed with your question.

Thank you. Hey, good morning.

Good morning, Sean. So Andy Kelly to start the e-commerce progress has been really impressive. You know, it's consistent with what we've seen elsewhere during the pandemic thoughts. Are you able to quantify how much Ecommerce mix of sales is translating into less GNA spend and how we think about that in terms of your past two months 50% of sales from e-commerce over the next three years Zoom how that how that can translate to impact on G&A as a percentage of sales.

Yep, y'all showing I'll start off with that one and Andy may want to add on but yeah eCommerce, you know, if you look at the total company right now, we said this in the prepared remarks about a third of our Global Revenue, you know, it's just very rapidly. We got the 48% of our North America Revenue here in the month of September, you know, it's kind of getting the quarter so making really good progress and you know our commitment we put out there on the transactional customer based primarily as we've been moving those customers onto the platform is to you know, kind of generate another five to ten million dollars of profit off over the next you know year or two and you know, that's going to be made up of you know, kind of a reduction and and internal sales reps. It's you know, less handling of inventory Thursday. It's lower freight cost, you know, because we'll be up to centralize more and reduce our our working capital in our our TCS, you know as we centralize more and so we're not we're not putting any specific day.

Target's out there right now, but I can tell you it is going to be very helpful in supporting margins and and you know will continue to help grow margins as we go forward. And so that's you know, that's one of the benefits that's why we're continuing to invest in it. So I let me if I can let me just add a couple of comments Kelly covered it. Well, you know if it's our business model very well. That's why we've been investing in this area for six years. And of course the current code environment is accelerated the adoption of this but our our business model is multi-year contracts, the major customers name electronically to them and make it easy for them to do business with us, whichever Channel they want ranches major projects or or e-commerce orders. And so we we've been working on this we feel very confident. We'll get to our 50% of Revenue. They will have efficiency gains and the thing that's been done in parallel. Kelly talked about the 5 to 10 a.m.

Kind of cost reductions coming out as we moved to this model in the next couple of years, but all the investment in our regional distribution centers have a month now being converted into fulfillment centers. So there's not a big cat fix in I want to say that message. It's a nominal amount of Optics, which is just in the e-commerce Specialists and we mentioned in outside of a new vice president on the commercial side. These kind of things are are incremental to us and also a couple of million incremental capex on the software side. So a very minor in my mind topics and Catholics increased but a very big efficiency game as we've closed these branches and it's tied to our sixty two thirds two thirds or 67% of our business on the structural cost changes not coming back that they're structural and change.

in in manner because

As we won't be opening these branches these deployed branches and the personnel and he's deployed branches on the turnaround of the business. It'll come from these fulfillment centers income three Commerce that brings us a great deal of efficiency to our model.

Got it. That's very helpful. I think that that paints a picture well and then so on cash flow in the balance sheet well done on the execution of the working capital liquidation. I think going into twenty one with less than three hundred million of net debt is good progress. Once again shows the counter-cyclical Cashflow nature of the business. And so I understand it's too early for guidance and 21, you know, uncertainties only growing this wage the macro and the oil price move, but can we maybe just think through a couple of scenarios and their impact on cash flow? So I'm thinking if we get further so they can go about Revenue next year if we see generally sequential improvement from the first quarter. How should we think about further flexon working capital? Are we consuming cash and then environment or can we hold it flatter on the office? If we're in a flat to down environment from a revenue perspective. Can we think about how much more cash can be harvested from the balance sheet next year?

Yeah. Yeah Sean great question. So yeah, I think you know if you if you if you think you know, we're not giving any guidance on 21 obviously, but just you know kind of talking through your scenario if we're in a Flash environment or even a flat to down type environment in 21, we still think from a working capital perspective. There's still a lot of opportunity on the inventory side that we can continue to bring that number down, you know receivables are just kind of a function, you know, whatever happens with revenue and you know, there's no we don't we're very fortunate, you know with a customer base that wage. Yeah, we don't have a lot of you know collection issues or aging problems. We had a few bankruptcy top hits earlier in the year, but nothing nothing moving out there right now that really has us concerned with on our side. So we have good, you know good bso's from our perspective. But so you really see I think in twenty one, you know in that kind of scenario that you were laying out more wage.

Community with inventory and that should help us continue to generate cash in 21, even if it's still is a difficult environment yet. So I'll just add a couple of comments, you know, if you look at our guidance and where we sit here end of the third quarter and our increase guiding forecast, lo andar lo balance on the abl you know, the way I look at it as long as we've been Kelly and I've been working towards this year. We will finish this year with twenty-twenty with the abl paid off and if you just do the math on our cash flow with a cash balance we have now we'll end up around eight hundred million in cash balance at the end of the year. So we're going to be in a very good position will have zero debt due until 2024 wage be sitting on some cash and have the short-term debt paid off and as Kelly said, you know, this is a we have a big model a big Global Supply Chain, it takes a while to turn off.

Some of the purchase orders on really long lead-time valves that come from all over the world. So you

No, the first couple of quarters of this year took a while for us to switch from nineteen into this year. And so we're not done. So you're going to see some as you saw the third course. I'm good inventory reduction as we right-size the inventory. We need to carry for this level of Revenue will have another good quarter in the fourth quarter as we're guiding to and as Kelly said we expect to have a good cash flow for next year will quantify it more when we get into February time frame with the with our guidance for next year.

So they are all Flex with sales, but inventory still more work to do which which will be helpful. Very helpful. Thank you.

That's correct. Thank you Shawn.

Our next question comes from the line of Doug Becker with Northland Capital markets. Please proceed with your question.

Thanks. You've done a really good job and Shifting The Mix to higher margins. It looks like adjusted gross margins could trough well above 19% this cycle. I guess we think out a couple of years. It's a 21% gross margin unrealistic revenues approaching three billion dollars again. Just trying to get a sense for what the opportunity is going for their given the choice between the down cycle. Yeah Doug. Thanks and let me start and then Kelly can add something to it. You're you're seeing the results of our big shift to it. We call the page Centric strategy for the company and we've been working on this for over five years. So you can see the difference in this town year compared to the 15 16 downturn we're off tomorrow is that just too gross margins went to the Seventeen eighteen percent range when we had a lot heavier waiting on both line pipe and carbon fittings. Those type of product lines were very heavily wage.

The 40% plus now in valve business. It's a much more complex. We're doing a lot more valve Automation value-added Services where most recently added modifications. So we're doing a complete valve kids for the Midstream sector bolt replacement pipelines and new and so those are of course a lot more value added a lot more service and Engineering so higher-margin. So we really have transformed the business to this higher-margin model. That was our strategy. It's holding up even in a bad year. So we see it going back. You know, we've had I've had a goal for many years to get us the 20% plus consistently deliver on our adjusted gross profits. We've hit it a couple quarters but not consistently. So I think yes as we get them returned to three billion plus Revenue. I did say I wouldn't go to commit to Twenty-One, but I come in to we're going to get back to our original goal of the 20% plus Club.

Just and leave from this model.

Yeah. I can just maybe to add on a couple of things. I mean and you covered it obviously very well. But you know, I think you know depending on what happens with volumes and you know just activity levels here in the fourth quarter. We could see a little bit of pressure there. You know, we I think we touched on that someone in our prepared comments, but the good thing is with the product mix we have it's tens of basis points, you know, so it's definitely going to stay in the month for the 19th probably mid nineteen top range, which is really positive for us. We've seen some pressure in the US and Canada markets, but it's been very, you know, kind of modest and been offset of improvement in margins actually on the international side. So that's been very positive. And and the other thing I would point out, you know, obviously the the valve mix is very important. But you know as we talked about in our call if you look at the downstream and the gas utility markets that makes up 68% of our Revenue base right now and Gas Utilities is a very stable business for us, you know. Yep.

a lot of fluctuation in margins and

And if you look at the downstream part of our business the margins there are actually a creative to the overall company margins. And so that that has really helped, you know, provide some input into our margins this year just the the mix and the diversification that we have which truly is a differentiator for the company right now, but I do think in the coming quarters probably where we will still seemed a little bit of pressure is in the Midstream side and you know, that's a function of you know projects that we you know enjoyed last year and early this year just continuing to taper off and then Thursday, you said the line pipe, you know product line because of you know, the commoditized nature of if we think we'll continue to see pressure there some some more more maybe to come on the Midstream side off the other pieces of the business or certainly helping to prop everything up.

I'll make sense may be touching on the Gas Utilities kind of reiterate that 1 billion dollar Target a couple of years out. Does that include any expansion of your your scope or is that just kind of what you do today? And you know, if we think about that as a 2023 Target, I realize you're not putting a specific date, you know, that's not a 7% compound annual growth rate that certainly doesn't seem unreasonable relative to history, you know is is twenty twenty-three a reasonable goal of achieving that I guess is a way to put it.

Yeah Doug. It's it's very reasonable and a couple of things going. Yeah, so historic the last twenty years. I've been to Nam 9% kegger. And so kind of guiding the 7% cake is more the same except for this down near the only sent back we've had in Revenue. This year was really the COVID-19 packed of construction and homes. They know a lot of this is replacement equipment as a Gas Utilities upgrade low pressure system too high pressure systems are old old equipment into new products for safety. So her inability to get into homes and do projects and for the second quarter primarily and a little bit into the third quarter is really the only reason will show down year-on-year, but it's it's just picking back up now that we've can get more construction going. So we had a big contract with with Center Point. We've talked about on the combination of of Centerpoint and Vectren as a merger dead.

And winning the combined contract. So we will we definitely up in 2021 and gas utility will quantify that more next year when we give some more guidance wage, but I think we get back on our track and it's it's more of the same for the contracts. We have we continue to pick up share in that sector and we continue like winning the center point last year. We're we're going to continue to Target a couple of those even though we have a very large number of the customers already on the contract. We we still have a list of ones we're tracking through from the business down inside to win. So I feel very good that you're in the ballpark head of a billion plus in 2023.

Thank you.

Thank you Doug.

Our next question comes in the line of John Hunter with talents. Please proceed with your question.

Hey, good morning. Andy and Kelly.

Good morning job. So so I just had a question on the progression of revenues in the fourth quarter hear back at the second quarter off. The July was tracking down, you know, eight to ten percent versus the two Q average and September here seems to have exited at the best monthly Brown rate of the corner. So coming off that high run-rate out expect the revenue decline in the fourth quarter to be a little bit muted at versus the typical 5 to 10% decline. So often is the guidance a bit of conservatism and and you could be closer to that 5% Mark or do you have visibility with your customers such that, you know kind of the midpoint of that 5 to 10% range as we should be thinking about

Yeah. Yeah John, I'll I'll take that one here to start with. Yeah. No, I think I think you're probably thinking about it the right way, you know as we mentioned in the prepared remarks the normal seasonal decline if you take out, you know, kind of the outliers the normal seasonal decline, is that 5 to 10% range? We were we actually last year at a 19% fall off but we don't expect this have the feel like we should have that kind of impact this year, but you never really go never really know for sure until you get into kind of late November December what some customers are going to do but we're not we're not hearing of any age, you know, massive or or severe fall off at this point, which is very positive possible very positive. So I think I think what you said, you know with September being the age of the quarter October is coming in very similar to that. We would hope to do better than the high end of that range. But, you know, probably somewhere in the middle is cuz you know kind of what I would probably do for modeling purposes.

Right now and you know, if you if you kind of drill down, you know more from a segment perspective. I would say the us if you think about that 5 to 10% range will probably be released the way we're thinking better right now at the higher end of that range, you know closer to ten Canada, you know more upper single-digits of a decline, but the international is actually going to have a good very good Q4 probably double digits and that's just, you know, kind of the timing of some of the the projects they have going on and you know, there's always some level of risk and deliveries Happening by the end of the year, but it does feel like they're going to have a very good quarter with a double-digit Improvement. And then if I think about it from a second perspective, I mean, you know Gas Utilities, you know, it'll it'll fall off a little bit here in the fourth quarter just a normal seasonal decline, but definitely probably low single-digits Club.

flying down

Streamed, you know cuz he's more of a high single-digit not decline Upstream. I think Down single digits probably, you know feels like it's going to be like low single-digits right now and then Midstream as we talked about earlier in the call, you know is getting a little bit more pressure and it could be down sequentially double-digits wage, you know plays out like we said when you met all that out 5 to 10% range and and you know, kind of feels like probably somewhere in the middle

Thanks Kelly. That's that's very helpful detail. And then my follow-up question is just on margins. I mean, you got it, you know down in the tens of basis points in a quarter of um, do you have a feel for for when you think margins could bottom and um kind of just generally what are you seeing on the pricing side? It seems like there's more pressure off, but do you have any visibility to to the pricing declines kind of leveling off in over the next couple of quarters here? Thanks.

Yeah, John know on pricing, you know, there's obviously pressure out there. We're getting request from customers all the time to to lower pricing. But you know, I think you know our sales organization and a tremendous job, you know pushing back or offering up alternative products to help bring, you know, pricing down or cost down for a customer base. So that's all been very positive. You know, took the smaller players out there that you know, this weather downturns really impacting their their cash flows right now, you can see, you know more pressure with some of those guys reducing pricing so long, but still, you know going back to what we covered earlier you look at our product mix we have today with, you know, higher concentration of valves lower concentration of lying type, you know, we have you know, sixty percent of our revenue between gas and Charities and downstream which are are you know, much more stable, you know margin businesses for us it it, you know.

We may experience a modest declines in in our margins here in the fourth quarter. And you know, I'm not going to call the bottom, you know, we're not like I said, we're not giving 21 guidance at this point but its revenues kind of stay, you know, where they're at here in the third quarter levels. I would say next year. We're not we're not expecting any significant impact to our margins.

Very helpful. Thank you.

Our next question comes in the line of Steve Barger with keybanc capital markets. Please proceed with your question. Hey, good morning guys. This is Ken Newman on for Steve. Thanks for taking the question.

Morning, some really good color on the consolidations from your customers in the last few weeks, you know prepared remarks. I am curious, you know anything that you're able to integrate some of those acquired inventories for your customers into your system. You just talk a little bit about you know, the potential price impact on those higher volumes and I guess this is kind of talking are you know asking more towards the pricing question for those opportunities given some of those um, those m&a deals that we've seen in the last month.

Yes.

Let me take that one day these we see all these m&a transactions summer. Very favorable light, you know, if it's Armada, we're heavily focused on the major customers off the multi-year contracts long-term agreement and Supply deals. So, you know, we don't have a a broad exposure to the small operators and in fact, so we really focus on this segment of the business. So we see combinations it always has been very positive for us. I mean next time with XTO off with British gas. We got a long history of of our major customers acquiring other players and we benefit from that so you kind of think about these latest view Chevron buying Noble birth. Well known as our largest customer for many years along with cell is a closed number to you know, that will be a net positive as we integrate those together and if it's heightened drama wage.

It's into our e-commerce strategy kind of go fill up the console same thing ConocoPhillips much bigger customer for us than Concho Pioneer a much bigger customer than parsley am having a bigger customer than wpx. So those all are very capable, of course Equitable by and chevron's Appalachian gas assets upstream and Midstream, you know, we're we're equals a good customer of ours. Of course, that one's probably a neutral and then it's Nobles husky the most recent one and now it's husky is a much bigger customer for US Canada. So we'll see how that works out. But largely when you think about all these combinations, they tend to consolidate their spend. They look for bigger suppliers. They look for coughing savings and they're probably Synergy objectives and we can help them with all that and I think so, they played our business model more than others and they play to our strengths. So we think that has the net pack.

They're in I'm sure they're not.

As I kind of think about that in the context of your e-commerce strategy any color on maybe the the general mix of some of these companies getting acquired that are already on the e-commerce platform versus your birth.

Yeah, is that all of our big customers are on the platform? But then as we said number marks, you know, it's heavily weighted to Gas Utilities and balancing customers at the current level wage. So not so much Upstream smaller players and and not so much mainstream which tends to be more projects. So I say, you know these ups and combinations month to our general mro customer focus account management strength and but of course Chevron would be on the e-commerce platform. And as I think you'll see there's a as maybe other ioc's acquire companies that fits well with e-commerce more than these but these fit more with just our general approach to this customer base in in a stream.

Got it. That's helpful. My following question is just about

It was really good color on on your outlook for for you. And my follow-up question is really more about just Downstream maintenance demand and just any comments on what you're hearing from your customers in terms of potential pent-up demand or when they when they plan to really ramp up spend for maintenance.

Yes, it's you know, what? We had a good as we said in Dallas Team Industrial. We had a good third-quarter up sequentially a portion of that was a carry-over from both small-cap. We we look at both large turnarounds as more large-caps Investments of our customers and then they do a lot more smaller maintenance small-cap projects and a lot of that God bird in the second quarter due to covet and due to not doing construction projects in the plants. So we benefit from that and the third quarter you see easily have the fourth quarter tail off, but even the bigger projects wall pushed into twenty Twenty-One. So I would just say a positive definitely not Quantified at this point, but a positive for us is the maintenance and more the large-cap turnaround should be a very good spring turn around twenty Twenty-One time for us.

Very helpful. Thanks.

Thank you.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Thank you for joining us today, and for your interest in MRC Global. We look forward to having you join us in our fourth quarter conference call next year. Have a good day, and good-bye.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. Give me just connect your lines at this time and have a wonderful day.