Q2 2021 MRC Global Inc Earnings Call
[music].
Greetings and welcome to MRC Global second quarter earnings Conference call. At this time, all participants are in a listen only mode. A brief question and answer session.
Although from a presentation if anyone should require operator assistance during the conference. Please press star zero on yourself from Keypad. As a reminder, this conference is being recorded and.
It is now my pleasure to introduce your host Monica O'brien from Investor Relations.
Thank you and good morning, welcome to the MRC global.
Second quarter 2021 earnings conference call and webcast and we appreciate you joining us on the call today, we have Ralph <unk>, President and CEO, and Kelly Youngblood Executive Vice President and CFO.
And 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 August.
And will from 2021, the dial in information is in yesterday's release, we expect to file our quarterly report on form 10-Q later today and it will also be available on our website.
Please note that the information reported on this call speaks only as of today July 32021, and therefore, you're advised that the information may.
No longer be accurate as of the time of replay.
And our remarks today, we will discuss various non-GAAP measures, including net debt adjusted gross profit adjusted gross profit percentage adjusted SG&A adjusted net EBITDA and adjusted EBITDA margin and adjusted net income.
We are encouraged to read our earnings release.
And securities filings to learn more about our use of these non-GAAP measures and to see a reconciliation of these measures to the related GAAP items, all of which can be found on our website. In addition, the comments made by the management team of MRC Global during this call may contain forward looking statements within the meaning of the United States Federal Securities laws. These forward looking.
To reflect the current views of the management of MRC Global However, MRC global's actual results could differ materially from those expressed today you are encouraged to read the company's SEC filings for a more in depth review of the risk factors concerning these forward looking statements and now I'd like to turn the call over to our CEO Mr. <unk> <unk>.
Thank you Monica.
Good morning, and welcome to everyone. Joining today's call I will begin with second quarter highlights and cover some of the key drivers influencing our business today I will then turn over the call to Kelly for a detailed review of the financial results before wrapping up with a discussion of our outlook for future quarters.
Second quarter revenue.
<unk> increased 13% sequentially exceeding our previous expectations led by extremely strong revenue growth and our gas utilities business. This is our largest sector and it has continued to expand as our customers undertake safety and integrity projects and upgrade residential meters.
Our upstream production and midstream pipeline businesses were also up by 13% and 6%, respectively as energy market conditions improved and oilfield activity levels increased bucking the trend our downstream and industrial sector declined modestly and the second quarter following a strong 12% improvement.
And the first quarter.
Our adjusted EBITDA for the second quarter came in at $36 million or 5.2% of total sales.
Both of these results are the best we have achieved since the third quarter of 2019.
We remain focused on balance sheet strength and financial flexibility.
<unk> long term debt at the end of the second quarter stood at $297 million, while net debt was 234 million and these are the lowest long term debt and net debt balances since our company went public in 2012, our leverage ratio is at 2.2 times well within our preferred operating range.
Range, we generated $23 million and cash from operations and the second quarter for a total of $47 million and the first half of this year.
This cash flow result for the second quarter exceeds our previous guidance due in part to extended lead times on some of our inventory purchases. However.
We still plan to increase our inventory levels modestly and the second half of the year and order to match anticipated higher activity levels.
Now I'll turn to some of the key drivers affecting our business. The first is inflation, we are experiencing inflation across all product groups to varying degrees depending on product.
Where we see the most inflation impact as our carbon steel products, particularly line pipe as those prices have increased and the 50% range over the last 6 months as we have discussed on previous calls inflation is generally good for our business as many of our contracts are structured as cost plus 8%.
<unk> markup the net.
Topic I would like to address is the supply chain with the rapid increase and economic activity. We are seeing issues with the availability of certain products and experiencing numerous freight delays operationally we are navigating this environment with Isis.
Isolated disruptions, which at this point have not been material, we have seen some product orders delayed due to raw material shortages and plant outages free.
Freight costs have moved up significantly along with delays, but we are generally able to pass on higher inbound freight costs to our customer.
<unk>, however, certain outbound freight costs may not be fully reimbursable by contract customers and.
And have introduced some modest pressure on margins.
Supply chain issues are expected to continue for the near future as economic growth has outpaced manufacturing capacity and certain.
Yes.
The third driver for our business is the rise and commodity prices increased oil and gas prices typically translate into increased activity and the U S and international oilfields, which has a positive impact on our upstream production business, the ioc's and larger independents, who comprised.
The largest share of our upstream customers had generally exercise capital restraint and the first half of this year.
However, with growing conviction and the strength of the oil price recovery. We expect these customers to increase their completions activity over the next few quarters, our midstream pipeline business, which includes natural.
<unk> gathering systems around new production also benefits as completion activity picks up.
On our last earnings call I discussed some of the waste and MRC global is participating in the global energy transition.
To reflect the growing importance of this sub sector to our overall business.
Beginning in the third quarter, our downstream and industrial sector is being renamed the downstream industrial and energy transition sector, while the energy transition portion of our sector revenue is relatively small at this point. It is an area of high focus and growth potential similar to where we were.
And with our gas utilities business, a decade ago, we remain committed to helping our customers achieve their green energy and de carbonization and initiatives as a valued distribution partner <unk>.
Given this backdrop I would like to highlight some of the energy transition projects, we've already been awarded or are tracking.
Future participation.
We currently supply PBF products to biofuel carbon capture geothermal hydroelectric power and wind projects and various parts of the world.
We are supplying.
In 12 unique biofuel projects that are underway 4 of which are in our.
For National segment.
We are supplying stainless and carbon steel pipe valves and fittings to a large scale carbon capture facility in Canada.
As a result of our performance on the first phase of and offshore wind farm in Europe. We were recently awarded the second phase where we will.
Providing pipe valves fittings, and flanges and some of which are high alloy metals.
And the Australia, we are supplying PBF to a large renewable energy project for hydroelectric power stations, where also the MRO and projects supplier to several geo thermal locations around the <unk>.
Interim looks.
Looking to the future. We are currently tracking 30, new biofuel projects 21, carbon capture and storage projects and 12 hydrogen projects.
Given our existing relationships with many of these project sponsors and our extensive international presence, especially in Continental Europe.
<unk>, which has been leading the global energy transition, we believe MRC global is well positioned to capture a disproportionate share of this business going forward.
And with that I'll turn the call over to Kelly to cover the financial highlights for the second quarter.
Thanks, Rob and good morning, everyone.
And my comments today will be focused on sequential comparisons so unless stated otherwise we're comparing the second quarter of 2021 to the first quarter of 2021.
Total sales for the second quarter were $686 million.
A 13% increase U S gas utilities business driving the improvement followed.
U S upstream and midstream pipeline sectors.
Gas utility sales, which are primarily U S based were $269 million and the second quarter, 28% higher rebounding from seasonal spending declines and the first quarter as customers continued to execute on their integrity upgrade plans.
By the compared to the second quarter of 2020 revenue was up $64 million or <unk>, 31%.
This quarter the gas utility sector represented 39% of our total revenue and we now believe this sector is well on track to reach $1 billion and revenue next year.
Downstream and industrial sales were.
For the $91 million and the second quarter of 2021 modestly lower by 2% driven by the U S segment.
As a reminder, this sector increased 12% and the first quarter due to increased repair and turnaround activity related to the February freeze that impacted the Gulf Coast region.
This sector.
Sector now represents 28% of our total revenue.
Upstream production sales for the second quarter of 2021 were $143 million, 13% higher driven by strong sequential improvement and the U S and international segments.
This sector is now 21% of total revenue.
Midstream pipeline sales, which are primarily U S based were $83 million and the second quarter of 2021, a 6% increase.
This sector now represents 12% of total revenue.
Now I will summarize the sales performance by geographic segment.
U S revenue was $558 million for the.
The second quarter up 15% with increases in all sectors, except the downstream and industrial sector as activity levels improved.
The U S downstream and industrial sector revenue declined modestly by $2 million or 1% due to less turnaround and maintenance activity compared to the first quarter, where we.
Covid from winter freeze related repair work.
U S upstream production sales were up $13 million or 19% due to higher customer completion activity.
And related build out a facility infrastructure.
This improvement is in line with U S well completions, which also increased 19% over the same period.
The U S midstream pipeline sector revenues increased $5 million or 7% from improved market conditions and small project activity.
Canada revenue was $30 million and the second quarter of 2021 down 6% as a result of spring breakup related declines in the upstream production sector and the timing.
Timing of project activity that impacted the midstream pipeline sector.
International revenue was 98 million and the second quarter of 2021 and increase of 5% primarily related to the upstream production sector due to an increase and MRO and project activity and on.
Australia.
Poor and Norway.
Now turning to margins are.
Our gross profit percent was 16, 3% and the second quarter as compared to 16, 9% and the first quarter of 2021.
LIFO expense came in at $11 million, and the second quarter as compared to $4 million and the first quarter.
Single-acting margins.
Adjusted gross profit for the second quarter was $134 million or 19, 5% of revenue modestly higher compared to the first COVID-19, 4% margin.
And as mentioned by Rob line pipe, which was 15% of total second quarter revenue is.
Experiencing hyperinflation base.
Based on the latest pipe Logics index average line pipe spot prices and the second quarter of 2021 were 46% higher than the second quarter of 2020.
This increase has resulted in higher LIFO cost than previously expected.
Prices are expected to continue to increase.
And about the year, which will likely result, and further LIFO expense in 2021.
While it is a difficult number to predict we're currently modeling and additional $28 million of LIFO expense in the second half of the year.
SG&A costs for the second quarter were 102 million on 2014, 9% of sales.
As compared to $126 million or 29% of sales and the same period of 2020.
The $24 million year over year decrease and SG&A as a result of the significant cost reduction actions taken last year.
And are now fully embedded in our run rate.
On a normalized basis SG&A was.
And third and $1 million for the second quarter adjusting for facility closure cost and Korea.
Sequentially, our adjusted SG&A increased approximately $3 million due to the timing of certain professional service fees recorded during the quarter.
However, as a percent percentage of revenue our SG&A improved by 100.
150 basis points down to 14, 9%.
Adjusted EBITDA and the second quarter of $2021.36 million versus $24 million and the first quarter.
Adjusted EBITDA margin for the quarter were 5.2% versus 3.9% and the first quarter driven by higher revenue.
<unk> and our continued focus on cost controls.
Our incremental EBITDA margin was 23% comparing the second quarter.
2021 to the second quarter of 2020, well above historical levels, which typically averaged in the mid teens.
Our effective tax rate was 20%.
<unk> due to the mix of global earnings for the quarter. However, our normalized effective tax rate remains unchanged and the 26% to 28% range.
For the quarter, we had a net loss attributable to common stockholders of $2 million or <unk> <unk> loss per share. However, normalizing for LIFO expense recorded in.
The quarter, we had adjusted net income attributable to common stockholders of $6 million or <unk> <unk> per share.
At the end of the second quarter of 2021, our percentage of net working capital to sales was 17, 6% much better than our historical averages and an improvement compared to a normalized value.
Percentage 10, 5% and the first quarter.
We generated $23 million of cash from operations and the second quarter of 2021.
Longer than expected inventory lead times related to supply chain and logistics issues impacted our anticipated increase in inventory balances.
We also experienced stronger.
You have 8 during the quarter, which resulted in additional cash generation.
However for the second half of the year, we expect to increase inventory levels and response to higher anticipated sales activity and supply chain disruptions hopefully begin to stabilize.
And our long term debt outstanding at the end of the second quarter of 2021 was.
Sales were $97 million and net debt was 234 million. This is the lowest level of debt and MRC public company history, we reduced total debt by $85 million compared to the first quarter of 2021 due to an excess cash flow payment related to our credit agreement.
Our lower debt level will also result and interest.
2 hundreds of approximately $5 million on an annualized basis going forward.
Our leverage ratio is now reduced to 2.2 times significantly better than our peak last year of 3.8 times and the last 18 months, we have reduced our net debt position by 55% and we expect to continue to make progress on.
At the end of the second quarter the availability on our ABL facility was $444 million, we had $63 million of cash and our liquidity was $507 million.
We also anticipate completing and extension to our ABL facility during.
During the third quarter with similar terms as our current ABL.
Now turning to our 2021 outlook.
We are optimistic about the future as the economy continues to strengthen and confidence grows that oil demand will return to 2019 levels and the near future.
While there are moderating forces.
Customer capital discipline, and customer mix and reinstatement of pandemic restrictions.
Our solid first half performance, improving backlog and encouraging customer conversations all contribute to our positive outlook.
So for the full year, we expect total company revenue will grow and the mid single digit.
Such as age range as compared to 2020 versus our previous guidance of low single digit percentages.
From a sector perspective, we expect a high double digit increase and sales for gas utilities and flattish revenue per downstream and industrials.
Partially offsetting these improvements we expect a mid single.
Percentage of percentage decline and upstream production revenue and a low single digit percentage decline and the midstream pipeline sector.
However, when comparing the second half of 2020.1 through the first half we expect growth and all our sectors also averaging in the mid single digit range.
From a geographic view, we expect the U S and candidates and increased mid single digits and international to decline mid single digits for the full year of <unk> 21 versus 2020.
And although our international business is expected to decline slightly this year, the anticipated ramp up and international activity should be supportive for growth.
Single day 2022.
As we typically experience a lag between and improvement in drilling and completion activity and our business, which has longer lead time and project oriented.
Sequentially, we expect the third quarter company revenue to be up low single digits compared to the second quarter.
The upstream and midstream.
Growth and tours are expected to have the most improvement with mid single digit growth.
And downstream and industrial and is expected to increase low single digits, while the gas utility sector is expected to be flat to modestly higher coming off its highest quarterly revenue in company history.
And we still expect the fourth.
And second Avenue to decline seasonally but at the low end of the historical range of 5% to 10%.
We also expect our adjusted gross profit margins to remain and the 19, 5% range as inflation improvements are moderated by mix shifts.
Regarding SG&A as we pivoted to.
To a growth phase and SG&A as a percentage of total revenue is the more relevant metric that we're focused on.
So while absolute SG&A costs may modestly increase going forward due to increased activity levels and the reinstatement of certain discretionary costs and the percentage of revenue trend will continue to improve.
SG&A as a percentage of revenue. This year is expected to average and the low 15% range, but is expected to gradually decline and the 13% to 14% range over the coming years.
We expect our normalized effective tax rate to remain and the 26% to 28% range. However, our quarterly tax rates may.
Wait a certain discrete items can give rise to large swings in the rate.
And finally as mentioned earlier, we expect to increase our inventory and the second half of this year due to improved market conditions.
We are already seeing and further growth expected in 2022.
The cash impact.
Fluctuate continue to fluctuate by quarter, given the uncertainty of delivery dates, but our current forecast is to be cash flow neutral in the second half of this year.
We also plan to continue to prioritize excess cash towards debt reduction and lowering our leverage ratio.
Now I'll turn it back over to Rob for closing comments.
<unk> could I ask Kelly I want to add a few thoughts on our business outlook and corporate goals before opening for Q&A with.
Regarding our outlook for the second half of 2021 as Kelly said, we continue to see positive momentum our backlog of business has continued to increase as we move through the first half of this year and we expect revenues across all sectors.
<unk> business to increase and the second half of this year versus the first half.
We are also increasingly optimistic about our opportunities for growth next year strong commodity prices should benefit the upstream production and midstream pipeline sectors, while increased turnaround and project activity benefits to the downstream.
And of our continued mid to upper single digit spending increases by our gas utility customers should allow us to hit our target of $1 billion of revenue and 2022, a year earlier than we had previously expected.
While we enjoyed a solid second quarter, we retained important financial imperatives.
Yes that we must achieve at MRC global over the coming quarters, we must transition to a consistently positive net income we must increase our returns on invested capital beyond compensatory rates, we must increase our EBITDA margin percentages and to the upper single digits.
Parroted as our revenues increase and we achieve higher flow through rates to the bottom line.
And we must achieve a share price that reflects our improving business outlook exciting growth prospects and greater consistency and our financial results.
I will close by highlighting that we recently issued our fourth.
Digital ESG report earlier this month and doing so we've made considerable progress and expanding our disclosures in key areas.
Just as we are committed to assisting our customers and achieving their ESG goals, we must ensure that our own ESG initiatives are well aligned with societies rising expectations.
With annual we encourage you to read our latest report on the company website and with that we will now take your questions operator.
Thank you.
We will now be touching a clutch a question and answer session. If you would like to ask a question. Please press star 1 on your telephone keypad and a confirmation.
Your line is and the queue you May press Star 2 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, 1 moment, please while we poll for questions.
Our first question is from.
So on engineered and Jones with Stifel. Please proceed.
Hey, good morning, and this is Adam Farley on for Nathan.
Good morning.
Good morning, bigger distributors with more purchasing power should have better access to products.
MRC seen any market share gain opportunities in this.
Environment, and how is it going about taking advantage of them.
Yes.
And with our customers.
Think MRC global has benefited and a market where there have definitely been supply chain issues and challenges I think we benefited from the fact that when you.
Look at our supplier base and a lot of cases, we are 1 of the top customers of our main suppliers, 1 and 2 are number 1 and number 2 and a lot of cases and your point is well taken that we've got an opportunity here, where there is limited access in some cases to product.
We have established relationships, where we have a deep customer relationship with our suppliers that we get preferential access to these materials.
So I do think it has given us an opportunity to gain some share here and certainly in our gas utility space, we're gaining share there and you'll.
You see that and our financials now going forward, we do continue to see some challenges in the supply chain we.
And we don't think that the supply chain issues are over however, we are looking for these issues to moderate both in terms of inflation and product pricing.
And availability and timing.
Timing of deliveries, but but we certainly have.
And opportunity to gain share as we've had preferential access to material and and looking forward. We would certainly look to for that to either continue or for the.
The entire supply chain issues to abate to the point where.
We're certainly and is as good or preferential basis.
Okay, and then shifting gears to the.
Energy transition projects.
On a sweet spot where MRC clays.
For energy transmission projects maybe.
And maybe.
Biofuels and then are there certain.
Areas and you could accelerate maybe through acquisitions too.
And maybe accelerate that.
Yes, I think you hit on it well.
There are obviously are various opportunities and the energy transition space that span the gamut and probably.
1 of the more natural places for pipe valves and fittings distribution is the biofuel.
Space and.
And a lot of cases as you know this is.
Our conversions.
Existing refineries so a lot of the equipment that we would typically provide and more of a.
Petroleum fed.
And finally, we're in a petrochemical complex. These are replaced by different feedstocks, but the products.
That are required are very similar.
And maybe with some metallurgy differences. So I think biofuels has certainly been a big part of it.
The energy transition space for MRC global to date, probably 60% of what we've done has been and the bio biofuel space, but going forward as we talked about in our prepared comments.
We definitely see applications outside of that space.
Even currently as I mentioned were and carb.
Carbon capture hydroelectric.
Wind and.
And we certainly are looking for opportunities and hydrogen and I mentioned, we're tracking a lot of projects there so theres going to be and evolution into this space developing really from our our I would say first foray and strength and biofuel to other areas.
As we think about the energy transition more broadly and how it impacts our strategy. We certainly feel that this is going to be a bigger part of our business is going to be a bigger part of the world economy, We've got to figure out.
A leading distributor how we can play in that space and so we're going to continue to keep our eyes open for how we can.
Can both grow this business organically and potentially grow it inorganically as the opportunities present themselves.
Obviously, our balance sheet is and really good position now and we talked about the fact that this is in the best shape on a on a.
Debt net debt basis since the IPO in 2012, so we have financial.
NAV stability and strategic flexibility, we haven't had before so we will certainly keep our eyes open for opportunities to expand in the energy transition space.
Thanks for taking my questions.
Youre welcome.
Our next question is from Tommy Moll.
And with Stephens. Please proceed.
Good morning, and thanks for taking my questions.
Hey, Tony.
You mentioned on your upstream business, you ought to see a tailwind in the coming.
And coming months and quarters from increased completions activity, which I think is commentary consistent with with others.
And the industry on.
I'm just curious.
How much visibility you have there.
Any insight you have into how far forward customers are making decisions is it really more just managing to the remainder of this calendar year, maybe where there's some some budget left or do you have any sense of.
Early 'twenty 2 at this point.
Yes.
And we certainly are talking to our customers about their spend going forward and as we mentioned in our prepared comments.
'cause we tend to serve <unk> and larger independents and as we know a lot of these customers have.
And have taken a pledge to be more capital restrained a lot of the recovery.
And the upstream space has been muted as it relates to our business, although it's up and certainly not up to the level that <unk> seen and increased oilfield activity.
And so a lot of what we have is anecdotal through.
Discussions with our customers, but clearly.
And there is there's going to be a need for replacement of loss production due to the high decline rates.
Coupled with.
A growing conviction that both the recovery and world economic activity and the maintenance of of <unk>.
Healthy commodity prices is more secure as we look to 2022. This is really what gives us confidence.
And the growth of this space Kelly you have anything you want to add to that no. Rob I think you covered it well.
Thanks, Rob that's helpful.
Following up.
Following up I just wanted to ask.
SG&A.
And I heard the commentary loud and clear that as we go through an up cycle here.
Dollar amount, maybe up but you're more looking at the percentage of revenue.
Is there any more wood to chop on the fixed cost.
Hi, there.
Going forward should we.
And do you think about this is managing.
The variable piece.
Through the up cycle.
Yes, I've mentioned on a previous call that when you have a.
And our network of locations like we do both here in North America and worldwide, where we've got over 120 locations.
Constantly looking at that network to make sure that it's optimized in terms of our location relative to our customer base and then the entire hub and spoke system that we've got set up between our regions and our branches.
Is optimized so we're always taking a look at fixed costs I think we took a lot of those fixed costs out.
And last year as part of our rationalization, but we certainly.
Take a look at that.
All the time and certainly on the on the edges Youll see is pruning and adding where it makes sense because as you know our customer customer base does move around whether thats.
Oilfield movement or.
Our balance of business with.
With our other sectors I think the other.
The other thing that's important to note is that last year was really a year of austerity in terms of discretionary pay and benefits as it related to our employee base, obviously, a big part of our SG&A is related.
Personnel costs and clearly as the market recovers.
We expect that some of these.
Some of these discretionary costs and benefits will return to our cost base, but but not.
And any disproportionate to the growth that we're going to have in terms of our revenue and our profitability.
And so as Kelly said in his comments.
If you look at the percentage of SG&A relative to revenue, even in a and inflationary environment as it relates to wage wage pressures and potential augmentation of our workforce, our SG&A will be a lower percentage of our revenue and.
And we will still be able to increase margins going forward.
Thanks Robyn.
Go ahead Kelly.
Oh, Yes, I was just going to add on to that I mean, we covered some of this on the prepared remarks, but even with the slightly elevated SG&A costs, we had this quarter.
On a basis point comparison to last quarter, we were down.
On a 150 bps.
So I think we're going to kind of move away from providing and like an absolute dollar amount is guidance and.
Just switch more to as a percentage of revenue and.
And the way just to give a little bit of color. There if you look historically.
And we've been in a down market the percentage of SG&A.
As a percentage of revenue will get up call. It 16, and 17% range I think we hit a little over 17% 1 quarter last year, but in a more improved market, we used to get down into a 13% to 15% range and so for 2021.
You don't take a full year average.
Thinking.
Of that low 15% range between call. It 15 to $15.3 type range, but over the next couple of years as revenues continue to improve I think youre going to see that step lower again very much from comparison to what we've seen historically, where you get down and that $13.14.
14% range.
And which is a good place to be.
Thank you all for the context, there and hopefully not Overstaying my welcome by asking 1.1 other related.
Cycle.
And here just on the working cap side.
You mentioned that we ought to see inventory build as we go into Q.
It makes good sense, given the circumstances, but looking more into the future next year, if you want to pick a year.
How should we think about how youll manage that just in terms of percentage of revenue or what's a good way to frame, what we should expect to see there.
Yes, Tony I think.
3 if you think back and previous years, we would quote working capital as a percent of revenue and roughly 19% to 20% range.
And we're doing much better than that.
We were much lower than that this quarter, I think less and 18% and.
And so that's the way, we're kind of tracking it going forward when we model.
Working capital and our future projections as more kind of.
So the 18% range will continue to work on that as much as we can and we're looking at centralizing inventory more.
Minimizing the amount of stock, we keep and the.
Customer service centers that we have out.
And the field and so over time, I think that could improve even more but for the next call. It the next year or 2 I would target more on a 17% to 18% range.
Thank you Kelly I'll tell you and if I could.
Okay, and if I could just add to that.
Free focused on capital efficiency as it relates to <unk>.
Our investment and inventory.
Inventory I think we are moving out a lot of the slow moving stuff that was in.
And inventory.
Before we went into the pandemic.
And a bit of a downturn last year and going forward.
As Kelly mentioned, and we're really centralizing our approach to inventory to ensure.
We're very prudent and that and that we focus on a high turn items. So.
I think youll continue to see capital efficiency improve as we go forward.
Thank you, Rob I will turn it back.
Our next question is from Jon Hunter.
<unk> with Cowen and company. Please proceed.
Hey, good morning.
And so.
So I wanted to ask on on the margins I appreciate the margin commentary and it seems like Youre looking for kind of flattish and.
Mid 19, 5%.
<unk> level.
I guess I'm curious.
Some of the inflationary impacts and on some supply chain issues. So is there a way you can quantify what margins, perhaps would've been excluding some of the supply chain disruptions.
Yeah. So John that was that was a difficult 1 and let me let me kind of explain why there's a lot of puts and takes into our margins. Every every month every quarter as I'm sure you can imagine.
On the positive side.
Some of the things that are influencing margins positively as obviously inflation and.
And I think more so on the line pipe.
Part of the business, where we had a lower average cost and with the spike and prices were able to sell line pipe at a much better margin and Thats 1 of the reasons and went from line pipe, 12% of our revenue in Q1 up to 15% of our revenue in Q2.
The mix is obviously very important just over all the.
Valve concentration and the more downstream type work, we get is accretive to our margins, but then on the negative side.
International revenues were slightly down this year and international margins overall are accretive to the company average so that works against us.
With price adjustments we've.
Got price adjustments here and the first half of the year, but theres always a lag effect and that can have some pressure on margins until you get all of those price adjustments fully baked in.
And we mentioned and I think and Rob's prepared remarks.
Some of the higher logistics costs that we're seeing right now free cost of containers.
And things like that that if it's inbound freight we can typically pass that through.
Outbound freight it's not always a guaranteed to cheat and pass that through so that can weigh against margins and then just.
The gas utility and and we wanted to make this point that I think it's pretty common knowledge the gas utilities can work against.
From a gross margin perspective, but when you look at the <unk>.
SG&A requirements for that business and look at the EBITDA or operating income effect of gas utilities, it's actually accretive to our overall margins. So we don't we don't try and get too hung up, especially now with the gas utilities almost 40%.
This revenue.
It's really more to be think it's more appropriate I think to be thinking about our margins from an EBITDA perspective, more so than a gross margin perspective.
And if I could jump in there Kelly, thanks for bringing that up John I mentioned this on the last call. Obviously, we are.
We take a close look at gross margins because.
On a reported in terms of determining how much can flow through to the bottom line, but but more important for us and we think our shareholders is.
And our bottom line margins or EBITDA margins and and for this quarter, we crossed over the 5% threshold, we talked about a longer term goal.
Higher single digit margins and.
And perhaps this point.
Was last at least until Kelly, just made and I'll make it again and that is that even though our gas utility business may have a lower gross margin.
In aggregate and be somewhat dilutive to the gross margin.
Looking at what the cost to serve and the variability, but SG&A with.
Is there and sales.
Sales and we.
It's accretive so as you see our gas utility business grows you see our downstream and industrial business grow we <unk>.
Those are accretive to our bottom line margins..1 interesting fact is that our gas utilities are probably.
Are definitely the most integrated with us.
And digitally of any of our customer base and so we get lots of efficiencies.
In terms of the size of orders repeat ability and cost to serve those sorts of things so.
And so hopefully that gives you a little bit of color on how we think about that and and and to focus on bottom line margins and the impact of the growth of our different sectors on those.
And margins.
Thanks.
That's helpful and then.
Kind of an unrelated follow up related to your energy transition, you're you're tracking and necessarily biofuel projects carbon capture and hydrogen.
And I'm curious if you've identified.
And addressable market or.
And if you are able to discuss the kind of content and MRC.
And I would get in terms of revenues on on any 1 of these given projects going forward.
Well look the total addressable market I think we all know it's huge and.
And growing.
And I think.
And each day, but let me give you a little bit of color of the projects that were.
Currently involved in and these are projects that may not come to fruition in terms of billing.
For a few quarters out this number is approximately about $40 million to MRC global.
And and this is obviously very early days.
And this space for us, but it just gives you a flavor for 4.
It is relative to the overall picture is still small overall, but growing fast and.
As we said and in previous comments, we really need to figure out how we can get.
A bigger piece of this pie, we do think we're advantaged in terms of our global footprint and our existing customer relationships. Many of these customers are leading the charge into the energy transition as they diversify.
But looking even beyond that we want to be a big player and the energy transition.
Got.
On a nice foothold already and we see great growth opportunities going forward.
Yes.
Thanks for that Rob.
And then I guess just last 1 from me is in terms of the revenue progression and.
And the third quarter, you guided and it up I think low single digits. So curious where you are.
Currently at the end of July here in relation to the low single digit increase and on what kind of seasonal drop off youre expecting and the fourth quarter.
Yes, John we are tracking well.
Obviously, no no changes to what we would say, but we're tracking very well there and I think.
And I'll.
Talk about it more from a backlog perspective.
And Q1, our backlog was up something like 13%. We went up a few more percent here in Q2 that just quarter to date here July 30th compared to June 30, our backlog was up about 7% at this point.
So that.
And that gives us confidence and the numbers we're providing.
Great. Thanks Kelly.
And it back.
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Our next question is from Ken Newman with Keybanc capital markets. Please proceed.
Okay.
Hey, good morning, guys.
Good morning, Ken.
Yes.
I understand the moving pieces and gross margins.
Indicated cost of serve going forward and I'm curious if you could just clarify if there's any change to how you're thinking about run rate EBITDA margin exiting the year I think he mentioned.
And that 5% to 6% type of range last quarter.
Yeah, we are Oh, I'll start it and.
But kelly and I didn't hear but for the quarter as you know we crossed 5 per said Ah.
In terms of our EBITDA margin and we think the the rest of the year is probably going to be in that range.
That the.
And the growth prospects for the second half of the year are certainly less extreme than what we saw quarter to quarter.
And the lower Q1 to Q2, but as we move into next year with anticipated continued growth in and.
And in certain of the sectors that have already moved up a bigger growth potentially in midstream and upstream and our downstream business. We can see those EBITDA margins move up even further as we go.
GAAP greater.
And from leverage, but I think you ought to be thinking about this year.
B and around the 5% range on EBITDA margins moving into the higher single digits as we move through 2022, Kelly you want to add to that.
And maybe just a couple of other points from I think you've covered it well but.
Just to reiterate we were 3.9% and Q1.
Jumped up to the 5.2% number here and in Q2.
The highest.
The absolute EBITDA number and margin number that we've had since Q3 of <unk> 19.
23% incremental margins over that timeframe so severe.
So very happy with the cost.
We took out and the improvements that we're seeing and margins and just as the revenues continue to go up and just the mix of work that we talked about earlier as well we think it's very achievable like Rob said that when we get into 'twenty, 2 and 23 that will start to step up closer to that 6% and then ultimately up to that kind of 7%.
But it's baby steps right, it's gradual as revenue improves and it doesn't happen overnight, but we feel like we're certainly on track to get there.
Yes.
Switching gears here.
The leverage he said is at the lowest point since your IPO.
And I'm just curious if you could talk about.
About the capital deployment.
And how you're kind of balancing that between what is obviously some pretty strong growth focus over the longer term and where you see the best returns of capital at this point.
And I guess, you know longer term.
Where do you see the leverage target going.
And <unk>.
I'll jump in and I'll, let.
Let the Kelly add to that Ken and look for the near term.
And we definitely want to continue to focus on our our balance sheet.
<unk> continue to strengthen the balance sheet pay down debt.
To even lower levels less and less.
Keep in mind here.
Very early and too.
Recover.
Yeah, and despite our optimism I think we all know that.
There is always uncertainty and space related to.
Energy services.
So we really are thinking about capital allocation and the near term as being further improvement and the balance sheet. This also gives us financial flexibility and strategic.
T J.
Maneuverability as we look further afield potentially get back and look at some inorganic growth opportunities as I mentioned on the last call. It's been quite a few years since we've done a significant acquisition obviously to.
<unk> transformed the company that may be something that we look at and having a strong balance sheet.
Coverage and that position so near term our focus is really on on the balance sheet and debt paydowns.
And maybe just to add on.
And we talked about some of this and the prepared remarks, but our net debt went down to the $234 million Mark this quarter that was largely driven by the.
Excess cash flow sweep payment that we made to $86 million payment. We made back in April so that brought on gross debt down to the $2, 97% with net debt down to $2.34.
And I think we've guided.
Earlier in the year and consistently that we would get down to a 2 point range.
Or maybe better by the end of this year and as you know is the EBITDA continues to improve going into 'twenty, 2 which is the feeling right now and we haven't guided anything specifically at this point, but it certainly feels like the business is going to be better and 'twenty, 2 and and even on into 'twenty 3 and.
And that gets you down.
Without any is this kind of status quo, just fairly conservative growth rates and gets the lever.
Leverage ratio down into the low <unk> range or even lower than 1 when you get into the 2023 time frame.
Well.
That's a long time between here and now, but but it feels like it's certainly headed in the right.
Yeah, and just to remind here too. We also said we're going to be roughly cash flow neutral between now and the end of this year. So it isn't as if the <unk>.
Net debt will continue to produce at the level that it has and the last couple of quarters. So it will be taken a pause there as we.
Restock inventory moving through the second half.
For this year, but to Kelly's point to the extent that our outlook on 22% and 23 comes to fruition, our balance sheets and is going to be on a much better shape than.
And that it's ever been really.
As we look look to the future.
Okay.
Last 1 if I could and I'll jump back in queue.
And correct.
We understand and it's a little difficult to kind of quantify the puts and takes into the impact on margins and the quarter, but since you did highlight.
Some of these challenges around supply chain, particularly on the higher freight costs.
Can you just kind of give us any sense of what's embedded into the guidance from <unk>.
And related to you, whether it's higher outbound freight costs are.
Any other kind of supply chain challenges.
Yes, I would say in terms of the freight costs going forward and the outlook there Ken.
Looking for a lot of this.
And the supply chain issues to moderate.
Certainly.
We're not going to go away overnight, but we do believe the worst is behind us in terms of what you're seeing in terms of steel inflation and.
In terms of ships.
And being stacked up at ports and the lack of containers and the cost of those.
Higher.
So we do believe that the worst of this is is likely to be behind us. Obviously this delayed our ability to restock our inventory by really a couple of quarters, because we tried to lean into the inventory growth early seeing the recovery coming but as we talked about.
We continue to.
Push out a lot of these delivery dates but going forward, we do see some as part of the guidance, we do see some modest inflationary pressures, but certainly subsiding a bit from the extreme inflation, we saw over the last couple of quarters.
Understood. Thanks for the color.
Youre welcome.
<unk>.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session and I'd like to turn the call back to Monica Broughton for closing remarks.
Thank you everyone for joining our call today and for your interest and MRC Global and we look forward to having you join us for our third quarter conference call on October have a good day.
This concludes today's conference you may disconnect. Your lines at this time. Thank you very much for your participation and have a great day.