Q4 2020 MRC Global Inc Earnings Call

And.

And.

Okay.

And <unk>.

[music].

Greetings and welcome to the MRC Globals fourth quarter, 'twenty and 'twenty earnings Conference call.

At this time all participants are in a listen only mode.

For the question and answer session will follow the formal presentation.

And what you require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

And there is now my pleasure to introduce Monika Broughton Investor Relations. Thank you and you may begin.

Thank you and good morning, everyone welcome to the MRC Global fourth quarter 2020 earnings conference call and webcast. We appreciate you joining us on and on the call today.

On the call, we have Andrew Lane, President and CEO, and Kelly Youngblood Executive Vice President and CFO, there will be a replay of today's call available by webcast on our website MRC global dot com as well as by phone until February 26, 2021, the dial in information is in yesterday's release, we expect to file our annual.

Our report on form 10-K later today and it will also be available on our website.

Please note that the information reported on this call speaks only as of today February 12, 2021, and therefore, you're advised that this information may no longer be accurate as of the time and free play.

And our remarks today, we will discuss adjusted gross profit adjusted gross profit percentage adjusted EBITDA adjusted EBITDA margin adjusted SG&A adjusted net income adjusted diluted earnings per share free cash flow and free cash flow. After dividends and you are encouraged to read our earnings release and securities filings to learn more about our use of these non.

Non-GAAP measures and and see a reconciliation of these measures to the related GAAP items, all of which can be found on our website. In addition, the comments made by the management of MRC Global during this call may contain forward looking statements within the meaning of the United States Federal Securities laws.

These forward looking statements reflect the current views of the management of MRC Global However, MRC global's actual results could differ materially from those expressed today, you're 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.

Julie.

And thank you Monica good morning, and thank you for joining us today and for your continued interest and MRC global.

I'll begin with the company's full year and fourth quarter of 2020 highlights and discuss the progress of our strategic objectives.

I will then turn over the call to our CFO Kelly Youngblood for a detailed review of the financial results and our 2021 outlook.

And 2020, we encountered enormous challenges as a result of the oil and gas commodity price collapse from oversupply and energy demand destruction related to the COVID-19 pandemic.

These macro oil and gas drivers caused a significant pullback in customer spending and 2020.

It was a year that we are pleased that behind us and I want to begin by acknowledging migrate team for their hard work and vigilant stay and safe.

And focused on our customers and delivering value for our shareholders are.

Our 2020 safety results were the best recorded safety performance and our company's history, which I am very proud of.

I think it is notable to reference our 2020 results against 2016, which was the last major oil and gas downturn and resulted in our previous lowest revenue year and the last decade.

I think the comparison and helps to highlight the significant actions, we've taken and reposition the company for the future.

We ended 2020 with $2 $5 6 billion and revenue and $97 million of adjusted EBITDA compared to the bottom of the last downturn in 2016, where we had $3 billion and revenue and $75 million of adjusted EBITDA.

This represented 29% higher profit was 16% lower revenue.

EBITDA margins improved 130 basis points as well.

Bottom line is our strategy is working and we've improved profitability with the strategic actions we've implemented.

This improvement reflects strong execution and the success of our long term strategy with.

We've rebalanced, our product portfolio by pivoting to higher margin valve products and by reducing exposure to lower margin line pipe.

We have also improved profitability by structurally reducing operating costs and increasing our investment in E Commerce, which provides cost savings and additional streamlining opportunities.

We've expanded our market share with regulated gas utilities, which provides stability and future growth.

Many of our strategic initiatives began five years ago.

We've seen the benefits realized over the past year as we rose for the challenge of the pandemic by accelerating those initiatives.

Adjusted gross margin was 19, 7% for 2020, which is an all time high for our company. Despite the significant challenges this year.

This is evidenced that our access to increase profitability, we are having a positive impact.

This is primarily a function of our valve centric strategy, including the investments, we've made and expanding our valve modification and automation capabilities.

<unk> are now 40% of our total business meeting our multi year ago.

We have increased the amount of revenue through our valve engineering and modification center, despite the difficult conditions from the pandemic.

We've generated approximately $50 million and revenue from this facility, which plans to double that revenue by 2023, as we take additional market share.

We also took aggressive cost reduction measures this year, reducing our normalized SG&A costs by $113 million.

We closed or consolidated 27 facilities this year to streamline our footprint and operate more efficiently pushing more of the sales into the already see from the branches.

Reevaluating inventory needs and reducing transportation between facilities.

We also reduced head count by nearly 600 or 19% and 2020.

These operating cost reductions are largely structural and positioned the company well for the market recovery and enhanced margins and returns.

Our gas utility sector has been a bright spot and our business and is one example of the diversity of end markets and our business.

And 2020, the gas utility sector was a third of our total company revenue and our largest sector.

While it was also impacted by the pandemic restrictions during the year customers pushed hard to make up ground and gas utilities experienced growth of 21% and the fourth quarter of 2020 over 2019.

This sector has long term secular growth independent of commodity prices and given our business relative stability as demonstrated in our results.

And it is an area, where we are the proven market leader.

We continue to make strides and gaining market share as evidenced by our Centerpoint contract, which continues to ramp up and is expected to continue growing in 2021.

In addition to our gas utility sector. Our diversity of end markets is also evident and our downstream and industrial sector.

Both provide a level of protection against the steep activity declines and the upstream production and midstream pipeline sector.

The chemicals and other industrial sub sector, which are less oil and gas dependent represent approximately two thirds of the downstream and industrial sector.

And which combined with our gas utility sector, they make up over half of our total revenues, which is a noteworthy diversification.

Yes.

We accelerated our E Commerce initiative in 2020 to further increase profitability, we continue to make progress transitioning customers to our MRC go platform and our.

We're on track with our goals.

In 2020, 42% of our North America revenue was generated through E commerce channels.

By implementing a customer centric lower cost to serve model, coupled with shipping savings and improved price differentiation, we are targeting to deliver annual profitability improvements between five and $10 million by 2022.

I also want to highlight our balance sheet and capital allocation efforts this year.

The business generated $261 million of cash from operations.

This was due to the great efforts by our team around inventory reductions operation footprint improvements improved customer receivable collections and better aligning supplier payables with current customer receivables.

And our profitability improvements.

Working capital efficiency is a major tenant of our strategy and we achieved 17, 5% of net working capital to sales this year.

This capital efficiency was a record for our company.

And we use our excess cash to repay debt, reducing it by $168 million from 2019, and reducing our net debt by nearly half or $255 million down to $264 million for.

Significantly, beating our target.

We repay the ABL box, leaving no scheduled near term debt maturities as our term loan does not mature until September of 2024.

We also ended the year with $119 million and cash and the balance sheet and $432 million of availability on our ABL.

While this year has been one with multiple challenges we have successfully overcome them and continue to reposition the company for the future we.

We have significantly reduced operating costs and debt and completely realign the organization and the capital structure to fit the economic conditions positioning us for the recovery.

We continue to execute on our long term strategic objectives, delivering superior service to our customers expanding our E commerce platform and delivering value to our shareholders.

Looking forward, we are focused on achieving some key corporate goals over the next couple of years to take advantage of the impending cyclical recovery that's expected in 2022 2023.

Those goals are to.

And to continue and market diversification and less commodity price dependent businesses, such as gas utilities chemicals and other industrials.

To yield 20% plus adjusted gross margins consistently.

And to capitalize on structural cost reductions to increase incremental margins and improve EBITDA margins to uphold upper single digit percentages.

To achieve 45% of revenue from valves consistent with our valve centric strategy.

To grow our gas utility business to $1 billion and revenue.

To achieve 50% of global sales through our E Commerce platform.

To continue debt reduction and further strengthening our balance sheet.

And to evaluate accretive M&A opportunities, while maintaining financial discipline and strong balance sheet metrics.

We believe these goals will position MRC global for success and yield superior returns.

Finally next week, we celebrate our 100 year anniversary. This is an important milestone and we are proud to be among the few elite companies that can claim this milestone.

And as a testament to the generation of the people who helped build this company over the last 100 years.

And with that I'll now turn the call over to Kelly to cover the financial highlights for the quarter and our 2021 outlook.

Thanks, Andrew and good morning, everyone I will start with an update from the financial targets. We previously laid out and I am happy to report that across the board, we met or exceeded all commitments and here's a brief recap of those items, let's start with revenue sequentially.

Sequentially, we got and fourth quarter revenue to be down in line with historical seasonal trends, which is typically a 5% to 10% reduction.

However, our fourth quarter revenue came in much stronger and was nearly flat for the third quarter with only a 1% decline and.

As a reminder, we had several full year targets as follows first we expected to exit the year with a normalized SG&A run rate of $100 million or less which we exceeded and the third quarter and again and the fourth quarter at $96 million.

Compared to 2019, we expected and this year with at least $110 million and cost savings and we came in and came in at 113 million slightly exceeding our goal.

Second our adjusted gross margins for the fourth quarter and full year came in at 19, 7%.

Exceeding our mid 19% and target.

Third we met our target to decrease inventory by at least $170 million coming and slightly higher at $173 million we.

We also improved our working capital efficiency, beating our 19, 5% to 19, 9% and targeted range for the net working capital to sales ratio, which actually came in at 17, 5%.

Fourth we raised our guidance last quarter with the expectation that operating cash flow would be greater than $220 million, which we significantly beat coming in at $261 million for the year.

And finally, we committed to pay off our ABL this year and to reduce our net debt to list and 300 million, we achieved both of those targets with net debt coming in at $264 million.

We also committed to use all of our excess cash this year to pay down debt, which we did and reduced our net debt balance by nearly half, resulting in a new leverage ratio of two seven times and.

Our term loan does not mature until September of 2024.

We are proud of these achievements and believe our results are evidence of the proactive measures we took to reposition the company, which will benefit us going forward.

Now moving on to the quarter quarter's results as previously mentioned fourth quarter revenue was essentially flat with the third quarter as the upstream and gas utility sectors experienced growth, while the midstream pipeline and downstream and industrial sectors contracted.

Sales and the upstream production sector improved driven primarily by higher year end activity and our international segment.

The gas utility sector also contributed to the increase while the midstream pipeline sector continued to decline due to the due to the further tapering off the pipeline projects.

And in the downstream and industrial sector, and we experienced a more typical seasonal falloff in activity.

And the U S segment revenue was $448 million this quarter and 3% lower than the third quarter of 2020.

Downstream and industrial and the midstream pipeline and secures both experienced a sequential decline and as expected, partially offset by an increase and each of the gas utilities and the upstream sectors.

The U S gas utility sector revenue increased 5% sequentially.

Seasonally the fourth quarter tends to be the lowest for the year.

However, like many things in 2020, this year was unusual and that our customers actually increase spending and the fourth quarter.

This was a function of customers buying for large scale multiyear programs, including low pressure service line replacements cast iron pipe replacements and <unk>.

Gas transmission modernization projects, all and various parts of the country.

Also driving the increase was catch up work previously hindered by pandemic restrictions earlier in the year.

And as well as new market share gains for Centerpoint is that contract continues to ramp up as we add locations and we also gained new regions with Duke energy.

The U S downstream and industrial sector revenue declined by 9% sequentially.

And as customers completed critical maintenance and turnaround activity and the third quarter and resumed capital spending discipline and the remainder of the year.

The U S upstream production sales were up 3% sequentially due to additional customer spending on well completions and the difference between recent well completion counts and our results were primarily due to customer mix.

A large portion of the completions activity was driven by private operators.

Side of our core customer group.

The U S midstream pipeline sector revenue declined 23% sequentially as production levels have declined.

Customer spending has been reduced and.

Projects continued to be delayed or canceled.

Activity in the near term is expected to be focused on maintenance and small upgrades two facilities.

Canada revenue was 23 million and the fourth quarter of 2020 down $4 million or 15% driven primarily by the midstream pipeline sector as projects continue to taper off or they are canceled.

International revenue was $108 million and the fourth quarter of 2020, a sequential increase of 14%.

Across all sectors, driven primarily by projects in Australia, and the U K, including a downstream turnaround project and the U K.

Also stronger foreign currencies relative to the U S dollar favorably impacted sales by approximately $2 million.

Now I will cover sales performance by sector.

Beginning with the gas utility sector sales were $217 million and the fourth quarter of 2020, which was a $9 million increase 4% higher than the third quarter.

It is our largest sector, making a 37% of our fourth quarter revenue and approximately a third of total 2020 revenue.

Given it is 99% U S based the sequential change was described in my earlier U S commentary.

Never.

I would also like to note we had a significant 21% increase from the fourth quarter of 2020 compared to the same quarter last year as many customers increase their spending and the fourth quarter of 2020, the catch up work previously delayed from pandemic restrictions.

And the downstream and industrial sector fourth quarter 2020 revenue was 174 million a sequential decrease of 6% driven by the U S segment as described earlier.

And this sector now represents 30% of our total fourth quarter revenue.

The upstream production sector fourth quarter, 2020 revenue increased $8 million or 7% sequentially to $126 million.

The increase was led by international which was up $6 million, primarily in Australia, and the U K.

And this sector now represents 22% of our total fourth quarter revenue.

Midstream pipeline sales, which were primarily U S based were $62 million and the fourth quarter of 2020, a 16% sequential decline.

This sector represents 11% of our fourth quarter revenue and continues to be our most challenged sector and.

And is expected to remain under pressure in the near term.

Now turning to margins.

Gross profit percentage was 15, 5% and the fourth quarter of 2020 as compared to 19, 5% and the third quarter.

The decrease reflects the impact of $12 million of inventory related charges recorded in the fourth quarter of 2020 as well as LIFO expense of $1 million recorded during the quarter.

As compared to LIFO income of $11 million and the third quarter of 2020.

Adjusted gross profit, which adjust for the impact of inventory related adjustments and LIFO for the fourth quarter of 2020 was $114 million or 19, 7% of revenue as compared to $115 million and 19, 7% for the previous quarter essentially flat.

Line pipe prices were higher and the fourth quarter of 2020 as compared to the third quarter.

Due to an increase and hot rolled coil prices based on the latest pipe logic index average line pipe spot prices and the fourth quarter of 2020.

For 3% higher than the previous quarter.

Line pipe prices are expected to continue to rise and the near term as HRC prices are experiencing hyperinflation, putting upward pressure on line pipe prices.

Pipe logics shows line pipe prices have been steadily increasing since October with the January 2021 price higher than any monthly price in 2020.

And 8% higher than December.

Generally inflation is a positive for our business, depending on the timing and duration of the inflationary event.

Across our product line portfolio line pipe historically has experienced the most volatility and pricing while the others are relatively stable.

Reported SG&A costs for the fourth quarter of 2020 for $97 million or 16, 8% of sales as compared to 100 million or 17, 1% of sales and the third quarter.

Normalized SG&A after adjusting for severance and other charges in the fourth quarter was $96 million or 16, 6% as compared to $97 million or 16, 6% of sales and the third quarter.

I'll address our 2021 expected run rate shortly.

We have reduced operating costs by 113 million.

In 2020 as compared to the previous year on a normalized basis.

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 recovery begins.

We have taken many actions over 2020 to reduce these costs, including closing or consolidating 27 facilities.

Interest expense totaled $6 million and the fourth quarter of 2020 slightly lower than the third quarter on lower average outstanding debt balances.

We expect to yield interest savings of approximately 3.002 million 21 on lower average balances from all of our debt reduction efforts in 2020.

Our effective tax rate for the fourth quarter was 29%, which is within the normal range for us is higher than the U S statutory rate as a result of state income taxes and.

And differing rates and our foreign operations.

Net loss attributable to common shareholders for the fourth quarter of 2020 was $11 million or <unk> 13 cents as compared to a loss of 3 million or <unk> <unk> per diluted share in the third quarter.

On a normalized basis, we're moving severance and restructuring charges LIFO the gain on our facility sales and other charges during the quarter. Our adjusted net loss attributable to common shareholders and the fourth quarter was $4 million or <unk> <unk> per diluted share.

As compared to $8 million or <unk> <unk> per diluted share and the third quarter of 2020.

Adjusted EBITDA and the fourth quarter of 2020 was $22 million or three 8% compared to the previous quarter, which was $24 million or for 1% and.

And year to date, our adjusted EBITDA was $97 million or three 8%.

Our net working capital at the end of the fourth quarter of 2020 was 448 million $89 million lower than at the end of the third quarter.

And on a trailing 12 month basis, our working capital excluding cash as a percentage of sales was 17, 5% at the end of the fourth quarter of 2020.

This was below the low end of our targeted range for this year of $19 five to 19, 9% a significant improvement.

Going forward, we expect this metric to trend lower than historical averages.

We generated $83 million of cash from operations in the fourth quarter of 2020 and.

$261 million for the year.

Our fourth quarter free cash flow was $80 million and our free cash flow after the preferred stock dividend was $74 million for.

For the full year 2020.

Free cash flow was $250 million and our free cash flow after the preferred stock dividend was $226 million.

Capital expenditures were $3 million and the fourth quarter of 2020 and $11 million for the year at the low end of our guidance.

We will continue to invest and critical projects such as our E commerce initiatives and system upgrades next year and.

We expect our full year 2021 capital spend to fall within a range of $10 million to $15 million.

During the quarter, we entered into agreements to sale and leaseback for properties.

This transaction generated net proceeds of $29 million and the fourth quarter and is reflected in investing activities and the cash flow statement.

Resulted in a 5 million pretax gain which we excluded from EBITDA.

The proceeds were used to further reduce our net debt.

And as a result of this transaction, we will begin incurring an additional 600 $680000 and quarterly lease expense beginning in the fourth quarter.

Our debt outstanding at the end of the fourth quarter was $383 million compared to $551 million at the end of 2019.

We reduced total debt by $26 million and the fourth quarter and $168 million this year.

Our net debt is now half of what it was a year ago significantly strengthening our balance sheet.

And our leverage ratio based on net debt for $264 million was two seven times.

The availability of our ABL facility is currently $432 million and we had $119 million of cash at the end of the fourth quarter.

Now I would like to share our thoughts from the 2021 outlook. We are more optimistic about the future due to recent constructive macro drivers, including oil prices recovering to pre pandemic levels continued OPEC plus disciplined and the start of the global vaccine distribution, which will gradually lead to demand.

February.

However, the rate of recovery will be dependent on any further surges and pandemic infections and the pace of the global vaccine rollout.

And as oil demand recovers, we expect to see further economic improvement and the beginning of a multiyear energy up cycle.

However, we believe this recovery will look different than prior cycles with operators, having a more disciplined approach to returns.

And growing production and the future.

We also expect to see more consolidation take place within our customer base, which we believe will be positive for us.

Due to the nature of a larger client portfolio. We also believe that the structural cost reductions and actions taken to strengthen our balance sheet.

Will position us well to take full advantage of the and pending recovery.

For the full year provided that the impact of the pandemic moderates and oil prices remain intact. We are optimistic that total company revenue will grow and upper single digit percentage compared to the second half of 2020 run rate.

From a sector perspective, this translates to a mid single digit improvement in all sectors, except for the upstream production sector, which is expected to be up double digits.

From a geographic view, we expect the U S to increase from current levels upper single digits, and Canada to increased double digits.

While international is expected to have a decline and the low single digits as non repeating projects and 2020 were completed.

On a year on year basis for the total company. This translates to a flat to low single digit decline with all sectors decreasing except for gas utilities, which is expected to increase upper single digits.

We expect to hold our adjusted gross margins consistent with 2020 levels at the mid 19% level and as previously guided we expect to keep our quarterly SG&A cost that.

100 million or less throughout 2021.

This is higher than our second half 2020 run rate, primarily due to the decision to and our employee furlough program at the end of the year.

Which increased our quarterly run rate by over $3 million.

Our normalized effective tax rate remains and the 26% to 28% range. However, our quarterly tax rate may fluctuate certain discrete items reported against a low pretax income can give rise to large changes in the effective tax rate.

Cash flow will be driven more this year from operating profits instead of working capital reductions. We're currently targeting cash flow from operations of $75 million to $100 million and 2021, we will continue to focus our excess cash on debt reduction and we believe we will continue to make significant progress.

During our leverage ratio as well.

Now let me provide some color on how we see the first quarter playing out and we currently expect a modest sequential revenue decline of low to mid single digits and the first quarter due to the typical seasonal delay related to customer budget resets, especially in our international segment.

And the ongoing impact of the pandemic.

All of our sectors are expected to experience low to mid single digit declines.

Adjusted gross margins are expected to be flat to modestly lower and we expect to have a temporary working capital increase from the first quarter.

Due to the delivery of long lead time items for 2021 inventory that will result in a burn of cash. However, this is the only quarter. This year that we anticipate not generating cash.

In summary, our fourth quarter and full year 2020 results reflect the proactive focus on the levers that we can control.

We have exercised strong cost controls and inventory management, resulting and robust cash flow generation aggressive debt reduction and solid margins and a very challenging market environment.

We remain committed to our strategy to deliver shareholder value, regardless of where we are and the cycle.

Company is well positioned to take advantage of the eventual market recovery and our diversified business model helps to ensure that we will outperform our peer group.

And with that we will now take your questions operator.

Thank you we will now be conducting a question and answer session.

Like to ask a question. Please press star one on your telephone keypad.

For the top 19 total educate your line is and the question queue.

And you May press Star two if you would like to remove your question from the queue.

For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.

One moment, please while we poll for your questions.

Yeah.

Thank you. Our first question comes from the line and Sean Meacham with Jpmorgan. Please proceed with your questions.

Thank you good morning, guys.

And good morning, Sean.

And maybe first thanks for.

All the feedback regarding the outlook.

In terms of the progression for topline and.

In 2021.

Are you expecting a more a return to a more traditional cadence in terms of second and third quarters being your best.

And perhaps a little bit flow are things like and the first quarter and have you been a drop off and the fourth quarter, So you're thinking about.

And then the cadence through the year and.

Maybe any additional comments within the segments would be helpful as well.

Yes, Sean let me talk to the K and Tim and Kelly will address the segments.

We very much think this is going to be a more typical normal.

Year outlook for us sequentially first quarter being the lowest quarter, which is normally the case as budgets get reset and you get some seasonal impact.

Improvement in the second quarter, and a third quarter, we expect to be our best quarter, and then falloff of some seasonality and the fourth quarter, but still.

Stronger second half and the first half is a strong feeling for us.

We believe the vaccination and the Covid impact will go away and it impacts us a lot with our customers because we're an infrastructure company for our construction company as you know and.

So we require large crews to be working and doing improvements on whether its pipelines.

Tank batteries or refineries, we need construction of V go in and we think we've finally gotten to a point after last year.

Seeing that.

<unk> really impact us positively and the second half.

So I think very typical for us which is.

Back to return to our normal sequence and second and third quarter being the big construction with a tilt towards the second half just because of the Covid impact.

And Sean maybe I'll add a little color on the individuals' individual sectors.

If you look at upstream one of the reasons that we're we're kind of guiding Q1 to be down.

And maybe slightly here and the first quarter is Q4 was unusually strong.

And we guided that and the last call we talked about the typically theres, a 5% to 10% decline and seasonal decline and the fourth quarter.

We actually saw and the U S upstream market and a 3% improvement, but then on top of that we had on the international side, a really big improvement on upstream, which we knew this was kind of coming all year, but that was about a 14% improvement from Q3 to Q4 on the international side that just won't repeat.

And Q1, right Youre going to so you've got the budgets resetting and Q1 for upstream, but then you've got for you kind of falloff from the international.

<unk> side as well, but.

As we've talked about and the prepared comments, we do think on the upstream side that based on our current run rate and I want to make sure that that's clear and right through the year over year change, but there is also the second half run rate, which has been pretty consistent for us and Q3 and Q4.

And for upstream.

Double digit pretty strong double digit increase.

We're expecting that on a year on year basis that will be it will be.

A decline.

And then as Andy said on the other ones you know midstream is going to be the.

The one sector for us thats going to continue I think to have some.

And some headwinds here and the near term.

We're projecting that to be.

Well based on the current run rate up up single digits, but a pretty strong double digit year on year decline and.

And then downstream.

Customers are getting back to work there there is still some COVID-19 impacts that we're experiencing on the on the downstream side and all of the activity is really focused more on critical maintenance.

And you know more smaller and critical turnaround projects.

And you would think with lower refining utilization that usually would lead the more turnaround work that we would we would have more turnaround activity, but we're really seeing customers focus more on COVID-19 restrictions budget cuts and.

And even here and this year I think and the first half of the year, we're not we're not expecting a lot of big turnaround projects. We think there could be some materialize and the second half of the year, but if they're not critical of those could likely push into 2022, but the time will tell.

And exactly how that works out.

Yes, thanks for that feedback I think that's really helpful.

And then if we just.

Walk down the income statement a little bit.

And thinking about gross margins.

And G&A so on gross margins.

And it sounds like.

Near term do you think that.

And you'll be able to sustain recent levels, but it sounds like from the presentation, there's longer term expectations and being able to continue to accrete to higher margins and you just talk about the kind of the near term versus the long term as you see and Andy and then on G&A.

I'll talk a little bit of.

Left here in the first quarter, but it's kind of a 95 to 100 run rate for 'twenty, one and on a quarterly basis is that the right way to think about.

And your G&A spend.

Yes, Sean so and.

Let me do the G&A first yes, youre exactly right and.

As Kelly mentioned in his comments, we had a 10% furlough for everybody in the company and 2020. So we ended at the end of the year. So we're getting back to more normal business and so that has a $3 million impact, but we also will get the full year benefit from the cost reductions we made and some of those were even in November.

December.

So I think that 95 to 100.

Right way to think about it and.

And on margin, yes, we're saying mid 19.

As our.

Kind of a normal run rate.

Continue the target and we continue to move towards a 20% adjusted gross profit margin as we continue to make changes and the company.

The valve centric strategy, just moving from our 40% to 45%.

We will get us a big part of that way and staying.

Stainless business comes back and the chemical petrochemical is very accretive on margin and.

<unk> for us.

And area of bright spot, which hasnt been for over a year as line pipe pricing.

Demand is still very weak.

With new project demand being the most pessimistic outlook of any of our end markets.

But HRC hot rolled coil.

Pricing has significantly increased and the last two months.

And you know you know line pipe is down.

Down, 15% last year and rebounded towards the end and finished around 6% down but in January and spiked and.

It's at a higher price per ton.

Across the board than all of 2020 back to 2019 levels, which are much better for us so.

We expect the demand and is still being weak, but the cost is going up so pricing is improving and so and inflation and line pipe will help us.

And then everything else will be kind of normal demands and.

But we're very consistent and that area and.

And with our decrease in.

Waiting towards the carbon pipe.

We even more stable and our margins, but I see and the last thing I would say on margins.

The efficiency coming into the business and <unk>.

E Commerce and more transactions directly with customers through that platform is adding.

Margin stability, but also SG&A benefit.

And can I add to that a little bit got it very helpful.

The only thing I would add is.

Sean real clinical and that if you if you kind of look at near term drivers on margins I think.

As Andy will explain there was a line pipe pricing net of stabilizing which is going to be very helpful. You talked about E Commerce I think.

And our valve centric strategy and <unk> and <unk>.

Continuing to grow that part of our business, which is accretive to overall margins and <unk>.

Going to be helpful. And then of course, you know just leveraging our buying power with suppliers globally that that's something that we're obviously focused on and then I think even longer term. If you look at the international business, which is accretive if you look by geography, we get much better margins on the international side and so we will have.

A bit of a transition year and 21 for international but as that business Pops back up here in 2022, and 2023, the higher revenue and the higher margins there will help us make progress.

The 20% sustainable level margins going forward and then just our focus on the downstream and industrial side of the business, which that piece is also accretive to overall margins.

We really got a lot of focus internally right now and growing.

Even outside of the refinery side, which were very strong and that and the TM Petro Chem and other industrial sectors and.

And that's that's accretive margins as well and then and on top of all of that just a better market I think is going to help us.

And as well.

Very good.

Thank you.

Sean from them.

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

Thanks.

I'll start with a bigger picture question, but as we see some of the major oil companies talking about.

Yeah.

For a definitive plans around emissions.

Emissions reductions and just increasing investment and clean energy.

Are you getting any more clarity and what the opportunity might be for MRC and those areas going forward.

Yes, good morning, Doug, Yes, we see courseware.

Barry and much in touch with their changes and.

I see it as limonene limited impact and this coming year, even and that coming a couple of years.

They are shipping portion of the budget, maybe from fibers and to 10 or 15% of their total spend into renewables.

And we see that as an area, we will watch very closely.

And then largely and MRO type of business. So we're going to be looking at those investments and what comes out of that as far as and MRO opportunity through distribution and I don't see it playing out much as it changed for us and the next couple of years, but longer term. When you go out five to 10 year window, yes.

I think it will be a.

Bigger portion of our business, we're a pure industrial distributor business model. So.

While today it may be focused more on upstream.

And it may and the future be focused more on renewables and I and our product mix will change, but structurally we don't need to change the company because it's adaptable very much to just different product lines and then we'll also be looking at M&A. When you think out a couple of years.

And guys are if there's other distributors and in this space, that's emerging and we saw.

Certainly believe will be and a much better stronger balance sheet position.

Specially in 'twenty, two 'twenty three that.

It's most likely that we would be acquisitive to grow into that area at a faster pace.

And that all mix makes sense.

And then maybe just a little more color and how you expect the relationship between your Red net revenue and the rig count plays out and fully appreciate that you're more levered to the majors and large e&ps and so much of the gain that we saw in the fourth quarter and probably in the first quarter is being driven by private but just maybe some broad strokes about how you expect.

That relationship to be and is there an opportunity to capture.

More activity from the private given the for digital platform rollout.

Yes, Doug that's a good point and.

Wow.

And you think about our business as you described very well, 56% of our revenue comes from the majors and so we're very much weighted to them on multi year contracts and when as they pick up activity we.

We do very well and our target has not been on the <unk>.

And a small private money private equity back one and two rig operators I do think the change and E Commerce platform.

Lynn opens up opportunity for us.

Kind of tap into that even more thats largely driven by the regional distributors.

More so than the two major ones and so we're going in that direction and we are active program to look at the 3000 smallest customers and our mix for.

From a transactional base and make.

Making the change from them and not showing up and the branch and the start and order but order.

Order to completely online through our platform and just have it delivered or picked up.

<unk> and that brings that opens up a lot of opportunity for us to tap into customers, we haven't targeted and and.

And the past.

And also brings us some good efficiency on that and then rig count and we really don't track rig count very closely and we don't have anything downhole.

We only started our work as you know from the well.

And but we do track well completions very closely.

Theres given quarters like this last quarter, we had a big pickup and completion activity and the U S. But it mostly benefit the right companies benefit the frac companies.

And it was small players and we had a 3% pick up.

And that but when I look at the year attracts very much the rig count the completion count was down 57% U S well completions for the year and our revenue our U S upstream was down 54% and over many years, we track very closely that any given quarter. It can be variable, but at the end.

For the day over a year period, we will track our upstream revenues, which are tie ins and tank battery facility related very closely to the U S completion count.

Yes.

Okay, and then just one housekeeping item.

Do you expect to have to pay any portion of the term loan just given where the secured leverage ratio played out through the year.

Yes, very good question.

At the end of the year I mean, you see our reported number on the leverage ratio of two seven and so that certainly implies you know that when we get above the two five hurdle on our.

And our leverage ratio there is excess cash flow provision there and so we're.

Technically that is something right now that we.

We would expect to pay if you just look contractually and our credit agreement, but we're having some discussions right now with the creditors.

And we'll we'll know more here and a couple of weeks about a possible amendment and not that we need to do that necessarily I think it's just a kind of nice to have to hold on to some additional liquidity there it.

It doesn't change our net debt position at all it doesn't change our leverage ratio, but if you pay down the term loan at each into your available liquidity somewhat.

And if we just and the environment. We're in although it's a much better situation now and it was a few quarters ago, it's always better.

And our finance person and I think you would agree it's always better to have.

More available liquidity and less and so just stay tuned on that one and we will we'll have more information coming out soon.

Thank you.

Thank you.

Thank you our next questions come from the line of Jon Hunter with Cowen and company. Please proceed with your questions.

Hey, good morning.

Yeah.

So just had a question on the margin outlook and 2021, you got it to the mid 19th you did 19, seven and and <unk> and <unk> and it seems like you've got a good number of <unk> and the way of pricing and mix.

So is that guidance just a dose of conservatism or is there any reason, we would think that margins could dip a little bit.

From where we were on our fourth quarter.

Yes, John I, just think it's a good reasonable guidance to start the year.

And we do have some volume impact from Covid that.

And it will impact us and the first half of the year and.

And.

But.

And the big one would be where we get pressure on margins as deflation and line pipe and we don't have that.

Large projects, where the lower margins and we don't have that and so the.

I don't see a lot of risk to the downside.

And now.

To forecast a big upside at this point, but it's in.

And in my view, it's a very stable.

That for them from a perspective on margin right now we are bringing in gas products stainless and valves like we normally do at the beginning of the year. So.

From a working capital perspective, as Kelly mentioned in his comments, we will have a build and those inventory, but those tend to be our high margin activities going forward. So we're building up the inventory and anticipation that there'd be some inflationary impact later in the year. We already know there is significant and line pipe.

Waiting for the demand pick up a little bit there. So I think there's definitely as you mentioned theres more chances.

Our positive outlook, there, but I think that's a good place to start mid 19.

Thanks, Thanks, Andy and then just taking it a step further I guess.

To look at the goal to get 20% plus.

Margin is that something youre thinking could be achievable.

And kind of towards the end of this year early next year.

And then a similar question on the goal to get to kind of high single digit EBITDA margins.

The timeframe.

Of getting there and so is that something you think is achievable in 2022.

Yes, John it really depends on the pick up other.

Recovery.

And I feel much more confident if we talk about 'twenty two 'twenty three.

I think we can get there and those two years.

Everything's going and strategically and that direction.

If you look at the margins and.

For.

45% of our revenue coming from valves and I didn't talk about it yet today, but $100 million will come from our new valve complete Assembly modification center.

There is a lot of our.

Market share gains on the midstream valve assemblies that we built that facility got it running and 1918 19 and.

The $50 million in 'twenty and will ramp up to a 100 million that is a very high margin activity for us because we're doing it.

It's more like manufacturing margins, because we're doing a lot of manufacturing welding and the assembly and testing.

And you add that as a mix you add our core valve business you add the 50 per cent will come through ecommerce and we continue to make structural changes on lowering SG&A.

And 'twenty two 'twenty, three and so I see us getting back to that 7% to 8% EBITDA margins that we've we've.

We've had before but this time it'll be on much lower revenues than it took the last time to get to those levels, but it's.

Fundamentally a very tall and platform and we've guided before for incremental EBITDA that would be and the 10% to 15% range as the business picks up and volume picks up for us with it and all the changes structurally we've made that Kelly talked about.

And I feel confident it will be and the 15% to 20% incremental EBITDA margins in those years as the business volume picks back up so I think those factors all together get us to the 20% margins and you get to the 12%, 13% SG&A and 7% to 8% EBITDA net.

And our goals and targets that's been mined for a while and I think we're tracking towards that.

Thank you. That's that's helpful color and then one more maybe for Kelly.

Just on the.

Cash flow target for the year I know you talked about working cap being a consumption and <unk>, but how are you thinking of the working capital impact to your cash flow and 2021.

Yeah, John It's a really good question and I kind of alluded to it slightly in the prepared comments that when you look at the cash flow generation and we head into 2020. It was very rough percentage is kind of 80% driven by working capital releases and 20% by operation.

Results. If you will this year, it's going to slip just the opposite of that will be about 80% driven by operations and 20%.

From the working capital side, and you know and we've got it.

And the guidance commentary of 75 to 100 million range and so.

And the working capital component of that that 20% level.

And is largely going to be driven by further inventory reduction.

Yes, John let me just add a comment and Kelly covered it well, but if you.

We realized we were seven.

Thinking about net working capitals for percentage of sales.

17, and a half in 'twenty, and 'twenty, which was a record for us.

We see it we would guide it wasn't in our formal guidance, but I think a good way to think about it is for 2021.

18% or less so we will maintain a very high level of efficiency and.

And that net working capital as a percentage of sales.

And with some additional inventory reductions as we optimize the platform given given the view of the business today, So I think it's and.

And then Kelly you mentioned 75 to 100 main cash.

Flow from ops.

A good point for us to start with.

Great. Thanks, Andrew you and Kelly and I'll turn it back.

Thanks, Tom.

As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.

Our next questions come from the line of Nathan Jones with Stifel. Please proceed with your questions.

Yes. Good morning, this is Adam Farley on for Nathan.

Hi, good morning, and Ed Mcmahon.

Hey, good morning, turning for the gas utility revenue, a really strong <unk> year over year.

And that is from customers catching up on spending and some market share gains.

And so I guess my question is how sustainable are current spending levels do you think there's going to be further catch up and 'twenty 'twenty one.

Yeah, Adam and.

Let me take that one eight we feel very positive on gas utilities, and we talked and the guidance.

Bob.

The increase over the second half and just a year on year outlook, it's going to be up.

High single digits, and two factors, yes, centerpoint contract, which was a very large one and for US continues to ramp up we'll get a full year run rate on that we had other contracts do is as the contract picking up activity.

And <unk> fully out of the bankruptcy now major utility for Sun and the West coast picking up and activity. So three big accounts and the other big impact is we're coming off a year of a full year of COVID-19 impact and and this impacts the gas utility business as you can't get the service person.

And al.

And to People's homes, and a lot of that guide.

Shut down during the 2020.

Peak of the Covid people are figuring out how to tolerate that and get some more work done and the customers are figuring it out.

And certainly believe it will have minimal impact from that kind of shut down and the second half and so if you look at our customer contracts are already in hand, and we still have others, we're targeting for growth.

That we hope to talk about it during 'twenty and 'twenty, one and then just to return to the spend and the catch up from the spend that was for these utilities and regulators they have budgets and.

Your day normally spend a budget, except for the Covid impact and so we see it back to growth for sure in 'twenty and 'twenty, one and that's a that's a really solid part of our business.

And that's good to hear and then shifting over to the supply chain.

<unk> seen any.

Strength on your supply chain and extended lead times and there may be higher transportation costs.

While higher transportation costs, yes for sure, especially in the U S and trucking with all of the E Commerce.

As you know very well the ecommerce volume across every industry is really driving up the trucking. So we are seeing trucking costs and in the U S, especially.

Increase and we're managing through that with our carriers.

From a supply chain standpoint.

We manage with a very long window. So a lot of the long lead time valves.

We would even use and 'twenty two.

We're planning for.

To make sure we have those deliveries in 'twenty and 'twenty, one and so we take a very long window there.

Well, we haven't seen a lot of shuttered mills, and especially in the U S with the huge downturn and pipeline demand and that's probably the most pessimistic outlook is and.

New construction of midstream pipelines.

If you go back to.

Got it and 17 18, 19, we would normally track $40 50 projects and.

And the midstream area of new construction and were tracking less than 10 today. So the pricing is coming up.

And on line pipe, but the demand is still very weak and a lot of mills are still shut down so.

If demand picks back up we'll see some of our core mills pick back and go back to activity and I think it will have a bigger impact more in 'twenty two 'twenty three.

It is mostly a price.

<unk> impact and instead of a ton increase tons this year.

Okay, and thanks for taking my questions.

Okay.

Thank you Adam.

Thank you. Our next question comes from the line of Ken Newman with Keybanc capital markets. Please proceed with your questions.

Hey, good morning, guys.

Nice quarter.

Good morning.

I just wanted to circle back and good morning.

Good morning, and I, just wanted to circle back to the the higher line pipe prices you just mentioned.

And I'm, just trying to think about the relationship between higher prices and and maybe some of the volume expectations that are embedded into the full year revenue outlook.

Can you just help us quantify what's embedded from higher material costs into the revenue and then just how do we think about the lag.

And from higher price inventory until it gets the leverage and flow through on the margins.

Yeah and so.

Yeah.

And we're although activity is going to pick up from the low point of the third and fourth quarter as we guided.

But a year on year, it's down double digits and.

So I think you're Inc.

Pricing and will impact the first half of the year, but there won't be a lot of volume driven that.

Pricing will still be good and the second half and we'll see some volume pick back up but on a yearly basis. We see this as you know.

And out of all of our end markets. The most pessimistic, we just don't see with the production coming down a lot of activity and Newbuild and that was normally drives most of the volume from a tons basis, we're going to see the integrity work getting done, especially in the second half mid to summer months and the second half.

Valve replacements and.

And the integrity projects will be done, which where you have a good visibility on that will exceed the $50 million, we did last year and so it'll be replacement line pipe.

And new valve automated valves and shutdown valves.

For midstream will be the driver but.

And so what will.

I don't think you're going to have a lot of.

Increase in that outlook and Kelly you have anything to add to that and the only other thing I would add Ken is when you look and line pipe as a percentage of our total revenue, it's only about 11%, 12%. So it's a.

It's not one of the biggest drivers out there just just wanted to point that out.

Right now and that makes sense.

Okay, and then as a follow up you know I think last quarter, we talked a little bit about some potential share gain opportunities given some of the customer consolidations that we saw I'm just curious.

Any update to share gains and the quarter or the opportunity to gain share as the year progresses.

And with some of the some of these other companies getting acquired by your your larger customers.

Yes, I can.

As we said last quarter and you referred to it as a big positive for US, we do very well with the larger customers, so consolidation and the midsized customers or acquisition by and large customers are a smaller player is always turned out to be a positive for us.

Many of those are going through the early stages still.

The ones that had been announced and of course, they are more focused right now on the synergy savings and the combination and the consolidation between companies that occurs so I see it as a much bigger impact and the summer months and and the second half of the year because they will go through that first there there'll be some contract rationalization.

And as there always is between.

And.

And the procurement groups the contracting philosophy, they had different companies.

So we will work through that and have new contracts put in place.

But definitely we see it as a positive for us.

And second half of this year and into next year and a lot of those that had been announced run and manage the competitions and we do very well and that manage the competition environment. So I think theres more upside and then any downside so what's been announced so far and Ah and probably we're not done with the consolidation from that.

Customer group.

Right.

Just one more if I could just squeeze it and.

You, obviously did a lot of work to take out some structural cost last year, I think you're going to get a lot of those benefits expected in 'twenty one day.

Do you feel like the footprint is that a reasonable level.

Given some of your improving optimism or are there still more room to take out and there's still more structural work that you think you can you can do and 21.

Yes, okay.

We're really at a very stable platform now and are focused more on positioning the company for improved market coming.

You know, we're going to watch it.

If there's any area.

For a little bit and if the upstream I don't think the upstream will disappoint us I think it will improve some.

And the overall market and especially by the second half of the year.

<unk> midstream will work look at our dedicated personnel and midstream Canada.

Canada would be the only one if Canada disappoints.

From what our current outlook is that gets structurally challenged as you know with the pipeline not going forward.

Heavy oil coming in by rail.

No pipelines to either coast up there no need for the gas and the U S.

And so we it's an area, where we continue to monitor and May have some we made a major structural footprint.

Our branch footprint change and 2000, Twenty's and so we don't see that we're just looking at the personnel needed up there, but that's a relatively small.

$30 million business for us roughly.

So I think we don't have an active program, we don't have and active retirement program and we're in active significant personnel reduction program at all and starting out on 'twenty and 'twenty. One we think we've got to the cost and the platform and a good place and we want to be building momentum and the second half as we go into what we think is to better years coming.

Very good color. Thanks.

Thank you Ken.

Thank you I would now like to turn the floor back over to management for any closing comments.

Thank you for joining us today and for your interest and MRC Global and we look forward to having you on our next first quarter conference call in April have a great day and goodbye.

Ladies and gentlemen, thank you for your participation and this does conclude today's teleconference. You may disconnect. Your lines at this time have a wonderful day.

[music].

[music].

[music].

Greetings and welcome to the MRC Globals fourth quarter, 'twenty and 'twenty earnings Conference call.

At this time all participants are in a listen only mode.

A question and answer session will follow the formal presentation.

And what you require operator assistance during the conference. Please press star zero on your telephone keypad.

And as a reminder, this conference is being recorded.

And now my pleasure to introduce Monika Broughton Investor Relations. Thank you and you may begin.

Thank you and good morning, everyone welcome to the MRC Global fourth quarter 2020 earnings conference call and webcast. We appreciate you joining us on and on the call today.

On the call, we have Andrew Lane, President and CEO, and Kelly Youngblood Executive Vice President and CFO, there will be a replay of today's call available by webcast on our website MRC global dot com as well as by phone until February 26, 2021, the dial in information is in yesterday's release, we expect to file our Andrew.

Our report on form 10-K later today and it will also be available on our website.

Please note that the information reported on this call speaks only as of today February 12 for 2021, and therefore, you're advised that this information may no longer be accurate as of the time and free play and.

Our remarks today, we will discuss adjusted gross profit adjusted gross profit percentage adjusted EBITDA adjusted EBITDA 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 securities filings to learn more about our use of these non <unk>.

GAAP measures and and see a reconciliation of these measures to the related GAAP items, all of which can be found on our website. In addition, the comments made by the management of MRC Global during this call may contain forward looking statements within the meaning of the United States Federal Securities laws. These forward looking statements reflect the current views of the management of and.

Marci Global however, MRC global's actual results could differ materially from those expressed today, you're 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 Lee and.

Thank you Monica good morning, and thank you for joining us today and for your continued interest and MRC global.

Again with the company's full year and fourth quarter of 2020 highlights and discuss the progress of our strategic objectives.

And then turn over the call to our CFO Kelly Youngblood for a detailed review of the financial results and our 2021 outlook.

And 2020, we encountered enormous challenges as a result of the oil and gas commodity price collapse from oversupply and energy demand destruction related to the COVID-19 pandemic. These.

And these macro oil and gas drivers caused a significant pullback in customer spending and 2020.

It was a year that we are pleased to have behind us and I want to begin by acknowledging migrate team for their hard work and vigilant stay and safe.

Mainly focused on our customers and delivering value for our shareholders.

Our 2020 safety results with a vast recorded safety performance and our company's history, which I am very proud of.

I think it is notable to reference our 'twenty and 'twenty results against 2016, which was the last major oil and gas downturn and read.

Delta and our previous lowest revenue year and the last decade.

I think the comparison and helps to highlight the significant actions, we have taken and reposition the company for the future.

We ended 2020, with 256 billion and revenue and $97 million of adjusted EBITDA compared to the bottom of the last downturn in 2016, where we had $3 billion and revenue and $75 million of adjusted EBITDA.

This represented 29% higher profit was 16% lower revenue.

EBITDA margins improved 130 basis points as well.

Bottom line is our strategy is working and we've improved profitability with the strategic actions we've implemented.

This improvement reflects strong execution and the success of our long term strategy with.

We've rebalanced, our product portfolio by pivoting and the higher margin by products and by reducing exposure to lower margin line pipe.

We have also improved profitability by structurally reducing operating costs and increasing our investment and ecommerce, which provides cost savings and additional streamlining opportunities.

We've expanded our market share with regulated gas utilities, which provides stability and future growth.

Many of our strategic initiatives began five years ago.

We are seeing the benefits realized over the past year as we relative to the challenge of the pandemic by accelerating those initiatives.

Adjusted gross margin was 19, 7% for 2020, which is an all time high for our company. Despite the significant challenges this year.

This is evidenced that our access to increased profitability are having a positive impact.

This is primarily a function of our valve centric strategy, including the investments, we've made and expanding our valve modification and automation capabilities value.

<unk> are now 40% of our total business meeting our multi year ago.

We have increased the amount of revenue through our valve engineering and and modification center, despite the difficult conditions from the pandemic.

We've generated approximately $50 million and revenue from this facility, which plans to double that revenue by 2023, as we take additional market share.

We also took aggressive cost reduction measures this year, reducing our normalized SG&A costs by $113 million.

We closed or consolidated 27 facilities this year to streamline our footprint and operate more efficiently pushing more of our sales into the already seen from the branches.

Reevaluating and inventory needs and reducing transportation between facilities.

We also reduced head count by nearly 600 or 19% and 2020.

These operating cost reductions are larger and structural and positioned the company well for the market recovery and enhanced margins and returns.

Our gas utility sector has been a bright spot and our business and is one example of the diversity of end markets and our business.

And 2020, the gas utility sector was a third of our total company revenue and our largest sector.

While it was also impacted by the pandemic restrictions during the year customers pushed hard to make up ground and gas utilities experienced growth of 21% and the fourth quarter of 2020 over 2019.

This sector has long term secular growth independent of commodity prices and given our business relative stability as demonstrated in our results.

And it is an area, where we are the proven market leader.

We continue to make strides and gaining market share as evidenced by our Centerpoint contract, which continues to ramp up and is expected to continue growing in 2021.

In addition to our gas utility sector. Our diversity of end markets is also evident and our downstream and industrial sector.

Both provide a level of protection against the steep activity declines and the upstream production and midstream pipeline sector.

The chemicals and other industrial sub sector, which are less oil and gas dependent represent approximately two thirds of the downstream and industrial sector.

And which combined with our gas utility sector, they make up over half of our total revenues, which is a noteworthy diversification.

Yes.

We accelerated our E Commerce initiative in 2000, Twenty's and further increased profitability, we continue to make progress transitioning customers to our MRC go platform and our.

We're on track with our goals.

And 2020, 42% of our North America revenue was generated through E commerce channels.

By implementing a customer centric lower cost to serve model, coupled with shipping savings and improved price differentiation, we are targeting to deliver annual profitability improvements between five and $10 million by 2022.

I also wanted to highlight our balance sheet and capital allocation efforts this year.

The business generated $261 million of cash from operations.

This was due to the great efforts by our team around inventory reductions operation and footprint improvements improved customer receivable collections and better aligning and supplier payables with current customer receivables.

And our profitability improvements.

Working capital efficiency is a major tenant of our strategy and we achieved 17, 5% of net working capital to sales this year.

This capital efficiency was a record for our company.

And we use our excess cash to repay debt, reducing it by $168 million from 2019, and reducing our net debt by nearly half or $255 million down to $264 million for.

Significantly, beating our target.

We repay the ABL box, leaving no scheduled near term debt maturities as our term loan does not mature until September of 2024.

We also ended the year with $119 million and cash and the balance sheet and $432 million of availability on our ABL.

While this year has been one with multiple challenges we have successfully overcome them and continue to reposition the company for the future we.

We have significantly reduced operating costs and debt and completely realign the organization and the capital structure to fit the economic conditions positioning us for the recovery.

We continue to execute on our long term strategic objectives, delivering superior service to our customers and expanding our E commerce platform and delivering value to our shareholders.

Looking forward, we are focused on achieving some key corporate goals over the next couple of years to take advantage of the impending cyclical recovery that's expected in 2022 to 2023.

Those goals are to.

And to continue and market diversification and less commodity price dependent businesses, such as gas utilities chemicals and other industrials.

To yield 20% plus adjusted gross margins consistently.

And to capitalize on structural cost reductions to increase income rental margins and improve EBITDA margins to uphold upper single digit percentages.

To achieve 45% of revenue from valves consistent with our valve centric strategy.

To grow our gas utility business to $1 billion and revenue.

To achieve 50% of global sales through our E Commerce platform.

To continue debt reduction and further strengthening our balance sheet.

And to evaluate accretive M&A opportunities, while maintaining financial discipline and strong balance sheet metrics.

We believe these goals will position MRC global for success and yield superior returns.

Finally next week, we celebrate our 100 year anniversary. This is an important milestone and we are proud to be among the few elite companies that can claim this milestone.

And as a testament for the generation of the people who helped build this company over the last 100 years.

And with that I'll now turn the call over to Kelly to cover the financial highlights for the quarter and our 2021 outlook.

Thanks, Andrew and good morning, everyone I will start with an update from the financial targets. We previously laid out and I am happy to report that across the board, we met or exceeded all commitments and here's a brief recap of those items, let's start with revenue sequentially.

Sequentially, we got and fourth quarter revenue to be down in line with historical seasonal trends, which is typically a 5% to 10% reduction.

Our fourth quarter revenue came in much stronger and was nearly flat with the third quarter with only a 1% decline.

And as a reminder, we had several full year targets as follows first we expected to exit the year with a normalized SG&A run rate of $100 million or less which we exceeded and the third quarter and again and the fourth quarter at $96 million.

Compared to 2019, we expected to and this year with at least $110 million and cost savings and we came in and clean it and at 113 million slightly exceeding our goal.

Second our adjusted gross margins for the fourth quarter and full year came in at 19, 7% Inc.

Exceeding our mid 19% target.

Third we met our target to decrease inventory by at least $170 million coming and slightly higher at $173 million we.

We also improved our working capital efficiency efficiency, beating our 19, 5% to 19, 9% and targeted range for the net working capital to sales ratio, which actually came in at 17, 5%.

Fourth we raised our guidance last quarter with the expectation that operating cash flow would be greater than $220 million, which we significantly beat coming in at $261 million for the year.

And finally, we committed to pay off our ABL this year and to reduce our net debt to list and 300 million, we achieved both of those targets with net debt coming in at $264 million.

We also committed to use all our excess cash this year to pay down debt, which we did and reduced our net debt balance by nearly half, resulting in a new leverage ratio of two seven times and.

Our term loan does not mature until September of 2024.

We are proud of these achievements and believe our results are evidence of the proactive measures we took to reposition the company, which will benefit us going forward.

Now moving on to the quarter quarter's results as previously mentioned fourth quarter revenue was essentially flat with the third quarter as the upstream and gas utility sectors experienced growth, while the midstream pipeline and downstream and industrial sectors contracted.

Sales and the upstream production sector improved driven primarily by higher year end activity and our international segment.

The gas utility sector also contributed to the increase while the midstream pipeline sector continued to decline due to the FERC due to the further tapering off the pipeline projects.

And in the downstream and industrial sector, we experienced a more typical seasonal falloff in activity.

And the U S segment revenue was $448 million this quarter and 3% lower than the third quarter of 2020.

Downstream and industrial and the midstream pipeline sectors, both experienced a sequential decline and as expected, partially offset by an increase and each of the gas utilities and the upstream sectors.

The U S gas utility sector revenue increased 5% sequentially.

Seasonally the fourth quarter tends to be the lowest for the year.

However, like many things in 2020, this year was unusual and that our customers actually increased spending and the fourth quarter.

This was a function of customers buying for large scale multiyear programs, including low pressure service line replacements cast iron pipe replacements and gas transmission modernization projects, all and various parts of the country.

Also driving the increase was catch up work previously hindered by pandemic restrictions earlier in the year as well as new market share gains for Centerpoint is that contract continues to ramp up as we add locations and we also gained new regions with Duke energy.

The U S downstream and industrial sector revenue declined by 9% sequentially and.

And as customers completed critical maintenance and turnaround activity and the third quarter and resumed capital spending discipline and the remainder of the year.

The U S upstream production sales were up 3% sequentially due to additional customer spending on well completions and the difference between recent well completion counts and our results were primarily due to customer mix.

A large portion of the completions activity was driven by private operators.

Side of our core customer group.

The U S midstream pipeline sector revenue declined 23% sequentially as production levels have declined.

Customer spending and reduced and.

Projects continued to be delayed or canceled.

Activity in the near term is expected to be focused on maintenance and small upgrades two facilities.

Canada revenue was $23 million and the fourth quarter of 2020 down $4 million or 15% driven primarily by the midstream pipeline sector as projects continue to taper off or they are canceled.

International revenue was $108 million and the fourth quarter of 2020, a sequential increase of 14%.

Across all sectors, driven primarily by projects in Australia, and the U K, including a downstream turnaround project and the U K.

Also stronger foreign currencies relative to the U S dollar favorably impacted sales by approximately $2 million.

Now I will cover sales performance by sector.

Beginning with the gas utility sector sales were $217 billion and the fourth quarter of 2020, which was a $9 million increase 4% higher than the third quarter.

It is our largest sector and making a 37% of our fourth quarter revenue and approximately a third of total 2020 revenue.

Given it is 99% U S based the sequential change was described in my earlier U S commentary Hello.

Never I would I would also like to note, we had a significant 21% increase and the fourth quarter of 2020 compared to the same quarter last year as many customers increase their spending and the fourth quarter of 2020 to catch up work previously delayed from pandemic restrictions.

And the downstream and industrial sector fourth quarter 2020 revenue was 174 million a sequential decrease of 6% driven by the U S segment as described earlier.

And this sector now represents 30% of our total fourth quarter revenue.

The upstream production sector fourth quarter, 2020 revenue increased $8 million or 7% sequentially to $126 million.

The increase was led by international which was up $6 million, primarily in Australia, and the U K.

And this sector now represents 22% of our total fourth quarter revenue.

Midstream pipeline and sales, which are primarily U S. Based were 62 million and the fourth quarter of 2020, a 16% sequential decline.

This sector represents 11% of our fourth quarter revenue and continues to be our most challenged sector and.

And is expected to remain under pressure in the near term.

Now turning to margins.

Our gross profit percentage was 15, 5% and the fourth quarter of 2020 as compared to 19, 5% and the third quarter.

The decrease reflects the impact of $12 million of inventory related charges recorded in the fourth quarter of 2020 as well as LIFO expense of $1 million recorded during the quarter as compared to LIFO income of $11 million and the third quarter of 2020.

Adjusted gross profit, which adjust for the impact of inventory related adjustments and LIFO for the fourth quarter of 2020 was $114 million or 19, 7% of revenue as compared to $115 million and 19, 7% for the previous quarter essentially flat.

Line pipe prices were higher and the fourth quarter of 2020 as compared to the third quarter.

Due to an increase and hot rolled coil prices based on the latest pipe logic and.

<unk> average line pipe spot prices and the fourth quarter of 2020.

For 3% higher than the previous quarter.

Line pipe prices are expected to continue to rise and the near term as HRC prices are experiencing hyperinflation and putting upward pressure on line pipe prices.

Pipe logics shows line pipe prices have been steadily increasing since October with the January 2021 price higher than any monthly price in 2020.

And 8% higher than December.

Generally inflation is a positive for our business, depending on the timing and duration of the inflationary event.

Across our product and portfolio line pipe historically has experienced the most volatility and pricing while the others are relatively stable.

Reported SG&A costs for the fourth quarter of 2020 for $97 million or 16, 8% of sales as compared to 100 million or 17, 1% of sales and the third quarter.

Normalized SG&A after adjusting for severance and other charges in the fourth quarter was $96 million or 16, 6% as compared to 97 million or 16, 6% of sales and the third quarter.

I'll address our 2021 expected run rate shortly.

We have reduced operating costs by $113 million in.

In 2020 as compared to the previous year on a normalized basis.

Approximately two thirds of these savings are structural in nature, which not only makes us a more streamlined organization should also allow us to have stronger incremental margins once the recovery begins.

We have taken many actions over 2020 to reduce these cost including closing or consolidating 27 facilities.

Interest expense totaled $6 million and the fourth quarter of 2020.

Slightly lower than the third quarter on lower average outstanding debt balances.

We expect to yield interest savings of approximately 3.002 million 21 on lower average balances from all of our debt reduction efforts in 2020.

Our effective tax rate for the fourth quarter was 29%, which is within the normal range for us is higher than the U S statutory rate as a result of state income taxes.

And differing rates and our foreign operations.

Net loss attributable to common shareholders for the fourth quarter of 2020 was $11 million or <unk> 13 cents as compared to a loss of 3 million or <unk> <unk> per diluted share in the third quarter.

On a normalized basis, we're moving severance and restructuring charges LIFO and the gain on our facility sales and other charges during the quarter. Our adjusted net loss attributable to common shareholders and the fourth quarter was $4 million or five cents per diluted share.

As compared to $8 million or <unk> <unk> per diluted share and the third quarter of 2020.

Adjusted EBITDA and the fourth quarter of 2020 was 22 million or three 8% compared to the previous quarter, which was $24 million or for 1% and.

And year to date, our adjusted EBITDA was $97 million or three 8%.

Our net working capital at the end of the fourth quarter of 2020 was 448 million $89 million lower than at the end of the third quarter.

And on a trailing 12 month basis, our working capital excluding cash as a percentage of sales was 17, 5% at the end of the fourth quarter of 2020.

This was below the low end of our targeted range for this year of $19 five to 19, 9% a significant improvement.

Going forward, we expect this metric to trend lower than historical averages.

We generated $83 million of cash from operations and the fourth quarter of 2020 and.

$261 million for the year, our fourth quarter free cash flow was $80 million and our free cash flow after the preferred stock dividend was $74 million.

For the full year 2020, our free cash flow was $250 million and our free cash flow after the preferred stock dividend was $226 million.

Capital expenditures were $3 million and the fourth quarter of 2020 and $11 million for the year at the low end of our guidance.

We will continue to invest and critical projects such as our E commerce initiatives and system upgrades next year and.

And we expect our full year 2021 capital spend to fall within.

And a range of $10 million to $15 million.

During the quarter, we entered into agreements to sale and leaseback for properties.

This transaction generated net proceeds of $29 million and the fourth quarter and.

As reflected in investing activities and the cash flow statement.

It resulted in a 5 million pretax gain which we excluded from EBITDA.

The proceeds were used to further reduce our net debt.

As a result of this transaction, we will begin incurring an additional 600 $680000 and quarterly lease expense beginning in the fourth quarter.

Our debt outstanding at the end of the fourth quarter was $383 million compared to $551 million at the end of 2019.

We reduced total debt by $26 million and the fourth quarter and $168 million this year.

Our net debt is now half of what it was a year ago significantly strengthening our balance sheet.

And our leverage ratio based on net debt of $264 million was two seven times.

The availability of our ABL facility is currently $432 million and we had $119 million of cash at the end of the fourth quarter.

Now I would like to share our thoughts from the 2021 outlook. We are more optimistic about the future due to recent constructive macro drivers, including oil prices recovering to pre pandemic levels continued OPEC plus disciplined and the start of the global vaccine distribution, which will gradually lead to the demand.

February.

However, the rate of recovery will be dependent on any further surges and pandemic infections and the pace of the global vaccine rollout.

And as oil demand and recovers, we expect to see further economic improvement and the beginning of a multiyear energy up cycle.

We believe this recovery will look different than prior cycles with operators, having a more disciplined approach to returns.

And growing production and the future.

We also expect to see more consolidation take place within our customer base, which we believe will be positive for us.

Due to the nature of a larger client portfolio. We also believe that the structural cost reductions and actions taken to strengthen our balance sheet will position us well to take full advantage of the and pending recovery.

For the full year provided that the impact of the pandemic moderates and oil prices remain intact. We are optimistic that total company revenue will grow and upper single digit percentage compared to the second half of 2020 run rate.

From a sector perspective, and this translates to a mid single digit improvement in all sectors, except for the upstream production sector, which is expected to be up double digits.

From a geographic view, we expect the U S to increase from current levels upper single digits, and Canada to increase double digits. While international is expected to have a decline and the low single digits as non repeating projects and 2020 were completed.

On a year on year basis for the total company. This translates to a flat to low single digit decline with all sectors decreasing except for gas utilities, which is expected to increase upper single digits.

We expect to hold our adjusted gross margins consistent with 2020 levels at the mid 19% level and as previously guided we expect to keep our quarterly SG&A cost that $100 million or less throughout 2021.

This was higher than our second half 2020 run rate, primarily due to the decision to and our employee furlough program at the end of the year.

Which increased our quarterly run rate of over $3 million.

Our normalized effective tax rate remains and the 26% to 28% range. However, our quarterly tax rate may fluctuate and certain discrete items reported against a low pretax income and can give rise to large changes in the effective tax rate.

Cash flow will be driven more this year from operating profits instead of working capital reductions. We're currently targeting cash flow from operations of $75 million to $100 million and 2021, we will continue to focus our excess cash for debt reduction and we believe we will continue to make significant progress lower.

And our leverage ratio as well.

Now let me provide some color on how we see the first quarter playing out and we currently expect a modest sequential revenue decline of low to mid single digits and the first quarter due to the typical seasonal delay related to customer budget resets, especially in our international segment.

And the ongoing impact of the pandemic.

All of our sectors are expected to experience low to mid single digit declines.

Adjusted gross margins are expected to be flat to modestly lower and we expect to have a temporary working capital increase from the first quarter.

Due to the delivery of long lead time items for 2021 inventory that will result in a burn of cash. However, this is the only quarter. This year that we anticipate not generating cash.

In summary, our fourth quarter and full year 2020 results reflect the proactive focus on the levers that we can control.

We have exercised strong cost controls and inventory management, resulting and robust cash flow generation aggressive debt reduction and solid margins and a very challenging market environment.

We remain committed to our strategy to deliver shareholder value, regardless of where we are and the cycle.

Company is well positioned to take advantage of the eventual market recovery and our diversified business model helps to ensure that we will outperform our peer group.

And with that we will now take your questions operator.

Thank you we will now be conducting a question and answer session.

Like to ask a question. Please press star one on your telephone keypad.

For the population total will indicate your line is and the question queue.

And you May press Star two if you would like to remove your question from the queue.

For participants using speaker equipment, and they may be necessary to pick up your handset before pressing the starches.

One moment, please while we poll for your questions.

Okay.

Thank you our first questions come from the line and Sean Meacham with Jpmorgan. Please proceed with your questions.

Thank you good morning, guys.

And good morning, Sean.

And they've got it so first thanks for.

And all the feedback regarding the outlook.

In terms of the progression for topline and.

In 2021.

Are you expecting a more a return to a more traditional cadence in terms of second and third quarters being your best and perhaps a little bit flow are things like and the first quarter and have you been a drop off and the fourth quarter. So just thinking about.

And then the cadence through the year and maybe any additional comments within the segments would be helpful as well.

Yes, Sean let me talk for the K and thin and Kelly will address the segments.

We very much think this is gonna be a more typical normal.

And year outlook for us sequentially first quarter being the lowest quarter, which is normally the case as budgets get reset and you get some seasonal impact.

The improvement and second quarter, and a third quarter, we expect to be our best quarter and then for.

And all off of some seasonality and the fourth quarter, but still.

Stronger second half and the first half.

It is a strong feeling for us.

We believe the vaccination and the Covid impact will go away and it impacts us a lot with our customers because we're an infrastructure company for our construction company as you know and.

So we require a large crews to be working and doing improvements on whether its pipelines or tank batteries or refineries, we need a construction of V go and and we think.

And we've finally gotten to a point after last year.

Seeing that.

And that really impact us positively and the second half.

I think very typical for us which is.

Back and return to our normal sequence and second and third quarter being the big construction with a tilt towards the second half just because of the Covid impact.

Yeah, and Sean maybe I'll add a little color on the only individuals individual sectors.

And if you look at upstream one of the reasons that we're we're kind of guiding Q1 to be down.

And maybe slightly here and the first quarter is Q4 was unusually strong.

And we guided that and the last call we talked about the typically theres, a 5% to 10% decline and seasonal decline and the fourth quarter.

We actually saw and the U S upstream market and a 3% improvement, but then on top of that we had on the international side, a really big improvement on upstream, which we knew this was kind of coming all year, but that was about a 14% improvement from Q3 to Q4 on the international side that just won't repeat.

And Q1, right Youre going to so you've got the budgets resetting and Q1 for upstream, but then you've got for you kind of falloff from the international.

<unk> side as well, but as.

As we've talked about and the prepared comments, we do think on the upstream side that you know based on our current run rate and I want to make sure that that's clear advisors the year over year change, but there is also the second half run rate, which has been pretty consistent for us and Q3 and Q4.

For upstream.

Double digits pretty strong double digit increase.

We're expecting that on a year on year basis that will be you know it'll be a decline and.

And then as Andy said on the other ones you know midstream is going to be the.

One sector for us that's going to continue I think to have some you know.

Some headwinds here and the near term.

We're projecting that to be.

Well based on the current run rate up up single digits, but a pretty strong double digit year on year decline.

And then downstream.

Customers are getting back to work there there is still some COVID-19 impact where we're experiencing on the on the downstream side all of the activity is really focused more on critical maintenance.

More smaller and critical turnaround projects.

And you know you would think with lower refining utilization that usually would lead to more turnaround work that we would we would have more turnaround activity, but we're really seeing customers focus more on COVID-19 restrictions budget cuts and.

And and even here and this year I think and the first half of the year. We're not we're not expecting a lot of big turnaround projects. We think there could be some materialized and the second half of the year, but if they're not critical those could likely push into you know into 2022, but time will tell.

And exactly how that works out.

Yeah. Thanks for that feedback I think that's really helpful.

And then if we just walk down the income statement a little bit.

And thinking about gross margins.

And G&A, so on gross margins and at Sao.

Sounds like.

Near term you think that you'll.

And we'll be able to sustain and recent levels, but it sounds like you're based in the presentation.

Longer term expectations and being able to continue to accrete to higher margins.

And talk about the kind of near term versus the long term as you see and Andy and then on G&A.

I'll talk a little bit of a lift here in the first quarter, but it's kind of a 95 to 100.

Run rate for 'twenty, one and Oh.

Quarterly basis is that the right way to think about.

Your G&A spend.

Yes, Sean So and let me do the G&A for US, Yes, youre exactly right and.

As Kelly mentioned in his comments, we had a 10% furlough for everybody in the company and 2020. So we ended at the end of the year. So we're getting back to more normal business and so that has a $3 million impact, but we also will get the full year benefit from the cost reductions, we made and some of those are even in.

Remember December so I think that the 95 to 100.

Right way to think about it.

And on margin yes.

And mid 19.

As our.

Kind of normal run rate.

Hi.

We continue to target and we continue to move towards a 20% adjusted gross profit margin as we continue to make changes and the company and the.

Valve centric strategy, just moving from our 40% to 45%.

We will get us a big part of that way.

Stainless business comes back and the chemical petrochemical is very accretive on margin and.

And for Us.

And area of bright spot, which it hasnt been for over a year as line pipe pricing.

Demand is still very weak.

And with new project demand being the most pessimistic outlook of any of our end markets, but the HRC hot rolled coil.

Pricing has significantly increased and the last two months.

And you know you know line pipe is down.

Down, 15% last year and rebounded towards the end and finished around 6% down but in January it spiked and.

And it's at a higher price per ton.

Across the board than all of 2020 back to 2019 levels, which are much better for us so.

We expect the demand and is still being weak, but the cost is going up so pricing is improving and so and inflation and line pipe will help us.

And then everything else will be kind of normal demands and.

But we're very consistent and that area and with our decrease and a weighting towards the carbon pipe.

And we even more stable and our margins, but I see and the last thing I would say on margins I would say the efficiency coming into the business.

E Commerce and more transactions directly with customers through that platform and <unk>.

<unk>.

Most of you know margin stability, but also SG&A benefit.

So can I add to that a little bit.

The only thing I would add is.

John Real quick on that if you if you kind of look at near term drivers on margins.

As Andy will explain there was a line pipe pricing net of stabilizing which is going to be very helpful. You talked about E. Commerce, I think just our valve centric strategy and contributing and continuing to grow that part of our business, which is accretive to overall margins.

<unk> be helpful. And then of course, you know just leveraging our buying power with suppliers globally that that's something that we're obviously focused on and then I think even longer term. If you look at the international business, which is accretive if you look by geography, we get much better margins on the international side and so we will have.

And a bit of a transition year and 21 for international but as that business Pops back up here in 2022, and 2023, the higher revenue and the higher margins there will help us make progress with that 20% sustainable level margins going forward and then just for our focus on the downstream and <unk>.

Estriol side of the business, which you know that piece is also accretive to overall margins.

You know, we really got a lot of focus internally right now and growing.

Even outside of the refinery side, which were very strong and but in the genome petrochina and and other industrial sectors and.

And that's that's accretive margins as well and then and on top of all of that just a better market I think is going to help us.

And as well.

Very good.

Thank you IRA.

Sean I'm from little.

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

Okay.

Thanks.

I'll start with a bigger picture question, but as we see some of the major oil companies talking about.

There were more definitive plans around.

Emissions reductions and just increasing investment and clean energy.

Are you getting any more clarity and what the opportunity might be for MRC and those areas going forward.

Yes, good morning, Doug, Yes, we see our courseware.

Barry and much in touch and are there changes and.

I see it and limiting eliminates the impact and this coming year, even and net coming a couple of years.

They are shifting a portion of the budget, maybe from fibers and to 10 or 15% of their total spend and to renewables.

And we see that as an area, we'll watch very closely you know where.

And then largely and MRO type of business. So we're going to be looking at those investments and what comes out of that as far as and MRO opportunity through distribution and I don't see it playing out much as a change for us and the next couple of years, but longer term. When you go out for five to 10 year window, Yes, I think it will be.

They vary a bigger portion of our business, we're a pure industrial distributor business model so well.

While today it may be focused more and upstream.

And it may and future be focused more on renewables and and our product mix will change, but there is structurally we don't need to change the company because it's adaptable very much to just different product lines and then we'll also be looking at M&A. When you think out a couple of years.

Guys are if there's a other distributors and are in this space that's emerging.

Certainly believe will be and a much better stronger balance sheet position.

Especially in 'twenty, two 'twenty three that.

It's most likely that we would Bob the acquisitive to grow into that area at a faster pace.

And that all makes it makes sense and then.

And maybe just a little more color and how you expect the relationship between your Red net revenue and the rig count plays out and fully appreciate that you're more levered to the majors and large e&ps and so much of the gain that we saw in the fourth quarter and probably in the first quarter is being driven by private but just maybe some broad strokes about how you expect that.

And ship to be and is there an opportunity to capture.

More of the activity from the privates given the for digital platform rollout.

Yes, Doug that's a good point and a.

While our you know you think about our business as you described very well 56% of our revenue comes from the majors.

And so we're very much weighted to them on multiyear contracts and when as they pick up activity.

We do very well and our target has not been on the.

Kind of a small private money private equity back one and two rig operators I do thing for change and E Commerce platform.

Lynn.

And as up opportunity for us.

And kind of tap into that even more of that's largely driven by the regional distributors and.

More so than the two major ones and so we're going in that direction and we are active program to look at the 3000 and smallest customers and our mix.

From a transactional base and <unk>.

And making the change from them and not showing up and the branch than to start and order, but order our order to completely online through our platform and just have it delivered or picked up.

<unk> and that brings that that opens up a lot of opportunity for us to tap and through customers, we haven't targeted and and the path.

And also brings us some good efficiency out of that and then rig count and we really don't track rig count very closely we don't have anything downhole we.

And he started out work as you know from the wellhead.

And but we do track well completions very closely.

Theres given quarters like this last quarter, where you had a big pickup and completion activity and the U S, but mostly benefit the right companies benefits and Frac companies.

And it was small players and we had a 3% pick up.

And that but when I look at the year attracts very much the right kind of I mean, the completion count was down 57% U S well completions for the year and our revenue our U S upstream was down 54% and over many years, we track very closely that any given quarter. It can be variable, but at the end.

The other day over a year period, we will track our upstream revenues, which are tie ins and tank battery facility related very closely to the U S completion count.

Okay, and then just one housekeeping item.

And do you expect to have to pay any portion of the term loan just given where the the secured leverage ratio played out through the year.

Yeah, Doug.

Good question.

At the end of the year I mean, you see our reported number on the leverage ratio of two seven and so that certainly implies you know that when we get above the two five hurdle on our.

And our leverage ratio, there's excess cash flow provision there and so we're you know.

Technically that is something right now that we.

And we would expect to pay.

Look contractually and our credit agreement, but we're having some discussions right now with the creditors.

Well, we'll know more here and a couple of weeks about a possible amendment and non.

We need to do that necessarily I think it's just a kind of nice to have to hold on to some additional liquidity. There you know it doesn't change your net debt position at all it doesn't change your leverage ratio, but if you pay down the term loan at each into your available liquidity somewhat and if we just and the.

The environment, we're in and although its a much better situation now than it was a few quarters ago, it's always better.

As a finance person and I think you would agree it's always better to have.

And more available liquidity and less and so just stay tuned on that one and we will we'll have more information coming out soon.

Fair enough. Thank you.

Thank you Doug.

Thank you our next questions come from the line of Jon Hunter with Cowen and company. Please proceed with your questions.

Hey, good morning.

So just had a question on the margin outlook and 2021, you guided to the mid 19th you did 19, seven and <unk> and <unk> and it seems like you've got a good number of tailwind and the way of pricing and mix.

And so it.

Is that guidance just a dose of conservatism or is there any reason, we would think that margins could dip a little bit.

From where we were on our fourth quarter.

Yes, John and I, just think it's a good reasonable guidance to start the year.

We do have some volume impact from Covid.

And then it'll impacted and the first half of the year and.

But you know that.

The big one would be where we get pressure on margins as deflation and line pipe and we don't have that.

Large projects, where the lower margins and we don't have that and and so I.

I don't see a lot of risk to the downside.

Not ready to forecast a big upside at this point, but it's a and my view, it's a very stable.

Platform on our from our perspective on margin right now we are bringing in gas products stainless and valves like we normally do at the beginning of the year. So.

From a working capital perspective, as Kelly mentioned in his comments, we will have a build and those inventory, but those tend to be our high margin activities going forward. So we're building up the inventory and anticipation that there'll be some inflationary impact later in the year. We already know there is significant and line pipe.

And just waiting for the demand that they pick up a little bit there. So I think there's definitely as you mentioned theres more chances.

Our positive outlook, there, but I think that's a good place to start mid 19.

Thanks, Thanks, Andy and then just taking it a step further I guess.

To look at the the goal to get 20% plus.

Margins is that something you're thinking could be achievable.

And kind of towards the end of this year early next year.

And then a similar question on the goal to get to kind of high single digit EBITDA margins.

What's the timeframe.

Of getting there and is that something you think is achievable in 2022.

Yes, John it really depends on the pick up other.

Recovery.

And I feel much more confident if we talk about 'twenty two 'twenty three.

I think we can get there for and those two years.

Everything is going and strategically and that direction.

Just if you look at the margins and the.

For.

And 45 per cent of our revenue coming from valves and I didn't talk about it yet today, but.

<unk> million dollars will come from our new valve complete Assembly modification center that is a lot of our.

Market share gains on the midstream valve assemblies that we built that facility got it running and 90 day 18 19 and.

50 million in 'twenty and will ramp up to a $100 million, that's a very high margin activity for us because we're doing that.

It's more like manufacturing margins, because we're doing a lot of manufacturing welding and the assembly and testing.

And you add that as a mix you and our core valve business you add the 50 per cent will come through ecommerce and we continue to make structural changes on lowering SG&A.

And you know and 22 23, so I see us getting back to that 7% to 8% EBITDA margins that we've we've.

And we've had before but this will time it'll be on much lower revenues than it took the last time to get to those levels, but it's for.

Fundamentally a very solid and platform and we've guided before for incremental EBITDA and it'd be in the 10% to 15% range as the business picks up and volume picks up for us with it and all the changes structurally we've made to Kelly you talked about I for.

Feel confident and will be and the 15% to 20% incremental EBITDA margins in those years as the business volume picks back up so I think those factors all together get us to the 20% margins.

And you get to the 12%, 13% SG&A and 7% to 8% EBITDA and net that's been our goals and targets that's been mined for a while and I think we're tracking towards that.

Thank you. That's that's helpful color and then one more and maybe for Kelly.

Just on the.

Cash flow target for the year I know you talked about working cap being a consumption and <unk>, but how are you thinking of the working capital impact to your to your cash flow and 2021.

Yeah, John that's a really good question and I kind of alluded to it slightly in the prepared comments that when you look at the cash flow generation. We had in 2020. It was very rough percentage is kind of 80% driven by working capital releases and 20% by operation.

Results. If you will this year, it's going to slip just the opposite of that will be about 80% driven by operations and 20%.

From the working capital side, and you know when we got it.

And the guidance commentary of 75 to 100 million range and so.

And then the working capital component of that that 20% level.

And is largely going to be driven by further inventory reduction.

Yeah, John Let me just add a comment and Kelly covered it well, but if you.

You realize we were 7%.

Thinking about net working capital as a for percentage of sales 17, and a half and 'twenty and 'twenty, which was a record for us.

And we see it we would guide it wasn't in our formal guidance, but I think a good way to think about it is for 2021.

18% or less so we will maintain a very high level of efficiency and.

In that net working capital as a percentage of sales.

With some additional inventory reductions as we optimize the platform given given the view of the business today. So I think it's and and then Kelly you mentioned 75 to 100 and cash flow from ops is a good point for us to start with.

Great. Thanks, Andy.

And you and Kelly I'll turn it back.

Thanks, Tom.

Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.

Our next questions come from the line of Nathan Jones with Stifel. Please proceed with your questions.

Yeah, Good morning, Adam Farley on for Nathan.

Hi, good morning.

Hi, good morning, turning for the gas utility revenue, a really strong <unk> year over year.

And customers catching up on spending and some market share gains.

And so I guess my question is how sustainable are our current spending levels do you think there's going to be further catch up and 'twenty 'twenty one.

Yeah, Adam and.

Let me take that one eight we feel very positive on gas utilities, and we talked and the guidance.

Uh huh.

The increase over the second half and just a year on year outlook.

And it's going to be up.

High single digits, and two factors as Centerpoint contract, which was a very large one for US continues to ramp up we'll get a full year run rate on that we had other contracts do.

The contract picking up activity.

And <unk> fully out of the bankruptcy now major utility for his time and the west coast picking up and activity. So three big accounts for the other begging and packed as we're coming off a year.

Full year of Covid impact and and this impacts the gas utility business as you can't get the service personnel.

And to People's homes, and a lot of that guide.

Shut down during the 2020 of peak.

Peak of the Covid people are figuring out how to tolerate that and get some more work done and the customers are figuring it out.

And certainly believe we will have minimal impact from that kind of shut down and the second half and so if you look at our customer contracts are already in hand, and we still have other than we're targeting for growth.

And we hope to talk about it during 'twenty and 'twenty, one and then just a return to the spend and the catch up from the spend that was because these are ready for utilities and regulators they have budgets and.

And they normally spend the budgets, except for the Covid impact and so we see it back to growth for sure in 'twenty and 'twenty, one and that's a that's a really solid part of our business.

And that's good to hear and then shifting over to the supply chain.

You guys seen any.

Strength on your supply chain and the extended lead times or maybe higher transportation costs.

While higher transportation costs, yes for sure, especially in the U S and trucking with all of the E Commerce.

As you know very well the ecommerce volume across every industry is really driven up the trucking. So we're seeing trucking costs and the U S, especially.

Increase and we're managing through that with our carriers from.

The supply chain standpoint.

We manage with them.

Long window, so a lot of long lead time valves.

And that we would even use and 'twenty two.

We're planning for.

And make sure we have those deliveries in 'twenty and 'twenty, one and so we take a very long window there.

Well, we haven't seen and a lot of shuttered mills, and especially in the U S with the huge downturn and pipeline demand that's probably the most pessimistic outlook is and.

New construction of midstream pipelines.

If you go back to cash.

Got it and 17 18 19, we would normally track $40 50 projects.

And the midstream area of new construction and were tracking less than 10 today. So the pricing is coming up.

And line pipe, but the demand is still very weak so and a lot of mills are still shut down so.

Well you know if demand picks back up we'll see some of our core mills pick back and go back to activity and I think it will have a bigger impact more in 'twenty two 'twenty three.

It is mostly.

Our pricing impact and instead of a ton increase tons this year.

Okay, and thanks for taking my questions.

And.

Thank you Adam.

Thank you. Our next question comes from the line of Ken Newman with Keybanc capital markets. Please proceed with your questions.

Hey, good morning, guys nice quarter.

Good morning.

And I just wanted to circle back and good morning.

Good morning.

Just wanted to circle back to the the higher line pipe prices you just mentioned.

Trying to think about the relationship between higher prices and maybe some of the volume expectations that are embedded into the full year revenue outlook.

Can you just help us quantify what's embedded from a higher material costs into the revenue and then just how do we think about the lag.

From higher price inventory until it gets to leverage and flow through on the margins.

Yeah and so.

You know we.

Where although activity is going to pick up from the low point of the third and fourth quarter as we guided.

But a year on year.

And down double digits and.

And so I think Youre, Inc.

Pricing and will impact the first half of the year, but there won't be a lot of volume driven that price.

And it will still be good and the second half and.