Q4 2021 MRC Global Inc Earnings Call

February 16, 2022

Okay.

Greetings and welcome to MRC Global fourth quarter 2021 earnings Conference call. At this time, all participants are in a listen only mode.

A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Monica Broughton Investor Relations for MRC Global also sought hill. Please go ahead.

Thank you and good morning, welcome to the MRC Global fourth quarter 2021 earnings conference call and webcast. We appreciate you joining us on the call today, we have Ralph <unk>, President and CEO , and Kelly Youngblood Executive Vice President and CFO . They.

There will be a replay of today's call available by webcast on our website MRC global.

Com as well as by phone until March 2022, the dial in information is in yesterday's release, we expect to file our annual 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 16, 2022, and therefore, you're advised that information may no longer be accurate as at the time of replay.

In our remarks today, we will discuss various non-GAAP measures, including net debt adjusted gross profit adjusted gross profit percentage adjusted SG&A adjusted EBITDA adjusted EBITDA margin and adjusted net income unless we specifically state otherwise references in this call to EBITDA refer to adjusted EBITDA you are encouraged to read our earnings release and <unk>.

<unk> 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 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 are encouraged to read the company's SEC filings for a more in depth review of these risk factors concerning these forward looking statements and now I would like to turn the call over to our president and CEO , Mr. Rob <unk>.

Thank you Monica good morning, and welcome to everyone. Joining today's call I will begin by discussing some of our notable achievements for 2021 review of our fourth quarter results at a high level and discuss some of the key business drivers underpinning our optimistic outlook I will then turn over the call to Kelly for a detailed review of the quarter and our 2022.

<unk> planned before providing a brief recap.

Our key financial achievement in 2021 was the significant improvement in our bottom line, we realized full year EBITDA of 146 million, 51% higher than 2020, and an EBITDA margin of five 5% a 170 basis point increase our revenue grew approximately four.

4% in 2021, so our Bottomline performance clearly benefited from improved gross margins and a more streamlined cost structure that we implemented in 2020.

We will continue to maintain control on our costs, even as our markets recover in order to drive more of our incremental revenue to our profit line.

I also want to highlight the continued growth and success of our gas utilities business, we exceeded our $1 billion revenue target for this sector two years earlier than predicted as revenue grew 21% in 2021 gas utilities accounted for 38% of our companywide revenue last year and it remains the largest.

<unk> of our four business lines, we continue to be very optimistic that this sector has many years of strong profitable growth ahead.

Our cash management and balance sheet efforts in 2021 have positioned us extremely well for the future we generated $56 million of cash from operations in 2021, despite having increased our gross inventory levels to capitalize on the market recovery, we continue to streamline our inventory to favor higher turning products and <unk>.

Prove our overall working capital efficiency, we achieved a 15, 6% net working capital to sales ratio significantly better than our historic rates and our 18% target.

And we reduced our debt by $86 million in 2021 to enter to end the year at a net debt to EBITDA leverage ratio of one seven times a record low for our company since going public.

Turning now to the fourth quarter, our fourth quarter 2021, EBITDA came in at $47 million up 21% over the third quarter and more than double the amount reported in the fourth quarter of 2020 in fact during the past three quarters, where revenue has been fairly constant we have seen a sequential rise in EBITDA margin.

<unk> from five 2% to five 7% to six 9% our fourth quarter EBITDA margin percentage was the highest for our company. Since 2018. This exceptional figure was aided by increases in customer pricing to counter inflation excellent work by our supply chain team and meeting customer demands and some <unk>.

Larger product orders at attractive margins on.

On our last call, we guided the fourth quarter revenue would buck our seasonal trend of being sequentially lower than the third quarter and our team achieved this with a nearly identical $686 million revenue result.

This was driven by 33% growth in our Canadian revenue as upstream activity picked up nicely.

Our U S business experienced only a modest 1% decline, where typically is down seasonally by 5% to 10%.

International revenue was up 6%, but we experienced a strong increase in backlog, which sets the stage for a stronger 2022 and 2023.

Our upstream production business was up 6%, while our midstream pipeline sector, and our downstream industrial and energy transition or diet sector were each up 2% gas.

Gas utilities took a breather in the fourth quarter down 5% after outsized revenue increases in previous quarters of 2021.

Adjusted gross margins across all four business lines were higher in the fourth quarter due to improved pricing in our customer agreements to help counteract inflationary effects.

Looking forward to 2022 and beyond I want to discuss some of the key drivers for each of our four business lines as I mentioned earlier, our gas utilities business is our largest sector by revenue having achieved a compound annual growth rate over the last 10 years of 10%. The future of this business is very bright and underpinned by longer term.

Drivers such as gas distribution system integrity management, and utility hookups infrastructure build outs for new home construction.

Aging pipeline infrastructure and tighter safety regulations drive our customers' integrity management programs. As an example, we are servicing many conversions of older steel or cast iron lines to polyethylene pipe.

In fact, the pipeline and hazardous materials safety administration indicates that approximately 38% of U S gas distribution mains and service lines are over 40 years old.

Housing starts that drive gas infrastructure build out are expected to remain strong, especially in the U S Southern and Western States, where many of our customers operate.

In addition, our customers are continuously improving the functionality of their systems with for example, the installation of smart meters to replace manual ones.

Recent analyst projections and company earnings indicate a double digit increase in capital expenditures for our largest gas utility customers in 2022 over 2021, supporting our expectations our gas utilities business is less volatile than our traditional oilfield dependent businesses as activity is largely independent.

Of commodity prices, our next largest sector, the downstream industrial and energy transition sector or diet now comprises 29% of our total revenue with the recent development of our downstream center of excellence, our focus on energy transition opportunities in the general increase we're seeing in our customers' budgets, we're expecting strong growth.

In this sector in 2022 and beyond.

We began to see an increase in maintenance and turnaround spending for the petroleum refining and chemical industries in the fourth quarter of 2021 much of a previously delayed due to the pandemic.

In 2022, we expect more significant improvement with our U S diet sector up double digits in fact, industrial information resources or IR projects, a double digit increase in U S downstream turnaround maintenance and capital spending in 2022.

We also expect that our international downstream business, we will see a similar pickup in activity, but on a lagged basis relative to the U S market.

The rapidly growing energy transition space remains a key area of focus for MRC global in 2021, we supplied various green.

And de carbonization projects, including biofuel refinery conversions hydrogen production offshore wind and hydroelectric facility.

Because energy transition work is longer dated due to its project nature. We currently have more energy transition backlog than the total revenue that we generated in 2021, although it is still early days for this sub sector. We expect that energy transition revenue will grow from the tens of millions to the one hundreds of millions over the next few years.

MRC Global's traditional energy focus sectors upstream production and midstream pipeline collectively comprised 33% of our revenue in 2021 <unk>.

Both sectors are poised for major growth with the anticipated multiyear upcycle that has only recently begun hi.

Higher oil and natural gas prices are supportive of significant growth in the U S, Canada and many of the international markets, where we operate.

North America capital spending by energy producers is expected to increase on average in the mid 20% range. This year. According to industry analysts and company reports and some analysts or even calling for 30 plus percent spending rises in the Permian basin.

Expected production increases should drive our upstream revenue to increase by a strong double digit percentage in 2022.

Our midstream business is expected to benefit primarily from spending on gathering and processing systems and rise by low double digits. This year.

As a company we are targeting a minimum of $3 billion in revenue and a minimum of $190 million in EBITDA. This year. These numbers reflect a 12, 5% improvement in revenue and a 30% improvement in EBITDA over 2021 levels. We are hopeful that we can exceed these figures.

Our customers' spending levels top of our expectations I will now turn the call over to Kelly to cover the financial highlights for the quarter and more details about our 2022 outlook.

Thanks, Rob and good morning, everyone. My comments today will primarily be focused on sequential comparisons comparing the fourth quarter of 2021 to the third quarter of 2021, unless otherwise stated.

Total sales for the fourth quarter were $686 million consistent with the previous quarter and our earlier guidance typically we experienced a seasonal decline in the fourth quarter in the range of 5% to 10%, but we experienced a sequential improvement in our Canadian business, which was up 33%, mostly offset by declines in our international.

<unk> and U S segments.

Gas utility sales were $258 million in the fourth quarter, a 5% decline.

This is a smaller decline relative to prior year averages due to typical seasonality from holidays and weather in the U S. This was partially offset by an increase in Canadian activity.

And the diet sector fourth quarter revenue was 201 million, a sequential increase of $4 million or 2% driven by project deliveries in the international segment for MRO and facility upgrades for petrochemicals refining and energy transition related projects.

The upstream production sector revenue for the fourth quarter was $140 million, an increase of $8 million or 6% sequentially.

The increase was driven by the U S and Canada, which were both up partially offset by international.

Higher commodity prices, along with improved customer spending drove an increase in well completions and workovers translating into higher activity levels.

Canada's upstream business benefited from an increase in deliveries of valves and line pipe for certain project orders and international upstream sales were lower due to delays in MRO and project activity from reinstated pandemic restrictions, however, backlog increased 20% during the quarter.

Midstream pipeline sales, which were primarily U S based were $87 million in the fourth quarter and 2% growth as upstream activity continued to improve driving an increase in gathering and processing work along with smaller projects.

Now I'll move to sales performance by geographic segment.

U S revenue was $566 million in the fourth quarter, 1% lower as our gas utility business experienced normal seasonal declines.

This was partially offset by increases in our upstream production and midstream pipeline sectors, while the diet sector was unchanged.

Canada revenue was $40 million in the fourth quarter up $10 million or 33% driven primarily by the upstream and gas utility sectors.

International.

Revenue was $80 million in the fourth quarter, a 6% decline driven primarily by a decrease in upstream production, partially offset by an increase in our diet sector.

Now turning to margins.

Adjusted gross margin for the fourth quarter was $148 million 21, 6% of revenue and our annual adjusted gross profit percentage was 21%. Both of these metrics were new records for MRC global since becoming a public company.

The improvement was related to the pricing related benefits of inflation, our preferred supplier position and proactive supply chain management.

Our preferential position and ability to navigate supply constraints allowed us to realize attractive margins during the quarter on several larger product product orders, resulting in overall improve company profitability and related margins.

We believe inflation will continue in the near term, but possibly begin to stabilize in the latter part of the year.

Inflation generally benefits our business and we are experts at managing the supply chain for inflationary and deflationary pressures.

Our gross profit percentage was $15 six in the fourth quarter up 170 basis points compared to the third quarter due to the same drivers as previously mentioned.

LIFO expense in both quarters were similar at $30 million in the fourth quarter and $32 million in the third quarter.

Reported SG&A costs for the fourth quarter were $106 million or 15, 5% of sales as compared to $102 million or 14, 9% of sales in the third quarter.

Adjusted SG&A after adjusting for severance and other charges in the fourth quarter was $105 million or 15, 3% of sales as compared to $102 million or 14, 9% of sales in the third quarter.

The increase in cost was due primarily to head count increases corresponding with higher activity levels and increased property tax assessments in the fourth quarter.

EBITDA for the quarter was $47 million or six 9% compared to the previous quarter, which was $39 million or five 7%.

For the full year, our EBITDA was $146 million or five 5%, a 51% increase year over year.

For the quarter. This was the highest EBITDA margin achieved since the third quarter of 2018.

For the last three quarters, we have improved EBITDA on an absolute and percentage basis, despite similar levels of revenue.

Reflecting strong cost discipline, and our ability to pass through higher prices.

This resulted in incremental EBITDA of 46% for the year, another record and our public company history.

Interest expense totaled $23 million in 2021 5 million less in 2020.

As a result of lower average outstanding debt balances.

We experienced $1 million of tax expense in the fourth quarter on a $3 million pre tax loss due primarily to tax expense in a foreign jurisdiction related to a provision for a valuation allowance on certain deferred tax assets.

For the quarter, we had a net loss attributable to common shareholders of $10 million or a <unk> 12 cents loss per share. However, normalizing for LIFO expense recorded in the quarter. Our adjusted net income attributable to common stockholders was $14 million or <unk> 17 per share.

We also continue to improve our capital efficiency as evidenced by a percentage of net working capital to sales, which was 15, 6% at the end of 2021 significantly better than our historical averages and a solid improvement compared to 17, 5% in the same quarter a year ago.

We generated $40 million of cash from operations in the fourth quarter and $56 million for the year driven by stronger earnings exceeding our previous guidance to remain cash neutral in the second half of the year.

Capital expenditures were $4 million in the fourth quarter and $10 million for the full year at the low end of our guidance and consistent with historical ranges.

We expect our full year 2022 capital spend to fall within a range of $10 million to $15 million as we continue to invest in e-commerce and system upgrades.

Our debt outstanding at the end of 2021 was $297 million a reduction of $86 million from 2020 further strengthening our balance sheet.

Our leverage ratio based on net debt of $249 million was one seven times, which is below our previously stated goal of two times.

We expect to make further progress on our leverage ratio as our EBITDA continues to grow with the expected market recovery and we continue to reduce net debt.

We ended the year with available with availability under our ABL facility of $484 million and $48 million of cash for a total liquidity position of $532 million.

We are very pleased with our backlog position that continues to signal solid growth momentum as we transition into 2022.

At the end of December our backlog was $520 million up 18% over the third quarter and up over 50% compared to the fourth quarter of 2020.

Sequentially, we experienced a double digit growth across all sectors and segments of our business.

And as of today, our backlog is over $600 million up 17% compared to the end of the year.

Although the timing of when the backlog translates into revenue can fluctuate. This significant improvement gives us confidence of a meaningful improvement to both our revenue and profitability in 2022.

Which brings me to our outlook.

As Rob outlined earlier for the total company.

We're targeting revenue in 2022 to come in at $3 billion or greater and a minimum of a $190 million and EBITDA, depending on how our customer spending levels materialize throughout the year.

From a total company perspective, this translates to a double digit improvement in all sectors, except for diet, which is expected to be up upper single digits.

From a geographic view, we expect the U S and Canada to increase double digits and international to increase mid single digits.

We will continue to demonstrate strict cost controls, but expect our SG&A cost to increase modestly on an absolute basis as activity levels improve and we restore certain compensation related benefits that had been reduced during the pandemic.

But as a percentage of revenue, we anticipate our SG&A cost to continue to trend lower.

Our normalized effective tax rate for the year is projected to be between 23% to 26%, but could fluctuate from quarter to quarter due to discrete items.

As activity levels improve this year, we will increase our inventory levels I believe for the full year, we can generate higher cash flows in 'twenty two 2022 than we did in 2021.

Excess cash will continue to be prioritized towards balance sheet strength and growth in the business.

As we look at the cadence of revenue throughout the year. There is nothing to suggest that our quarterly revenue won't follow the typical seasonality.

We expect each quarter to improve upon the other with the exception of the typical seasonal fourth quarter decline.

Specific to the first quarter. We are currently projecting a low to mid single digit increase in revenue as customer budgets reset and the construction period and turnaround season begins to ramp up later in the quarter.

EBITDA margins in the first quarter are expected to moderate due to the non repeat ability of certain fourth quarter high margin sales and an increase in compensation related benefits, but will step higher throughout the year as activity levels improve.

In summary, our fourth quarter and full year results reflect significantly improved profitability strong cost discipline aggressive supply chain management.

And a solid balance sheet position.

We set several records in 2021 due to the cost optimization initiatives taken in 2020, and we are optimistic about our 'twenty two 2022 market outlook now I'll turn it back over to Rob for closing comments. Thanks, Kelly I want to recap a few highlights from our call today before opening for Q&A 2021.

EBITDA was $146 million or 51% increase over 2020, improving.

Improving bottom line performance remains the focus of our management team.

Our largest sector gas utilities is do you expect it to remain a strong growth engine for us in 2022 and beyond due to compelling secular trends.

While we were in the early stages of the energy transition MRC Global's customer base.

Our geographic presence and technical capabilities position us well for future success, we expect the energy transition to become a significant driver of growth in the coming years.

Improving fundamentals gives us increasing confidence of a multiyear up cycle for our upstream and midstream energy businesses.

Our balance sheet is in excellent shape due to cost discipline and improving market fundamentals. We remain we maintain significant financial flexibility as a result.

And finally, we expect that MRC global will meet or exceed $3 billion in revenue and $190 million in EBITDA in 2022.

Based on our forward view, we believe that 2023 and 2024, we will see meaningful improvements on these results and with that we will now take your questions operator.

At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May press star two if he would like to remove your question from the queue for.

Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please while we poll for questions.

Our first question is from Nathan Jones with Stifel. Please proceed with your question.

Good morning, everyone.

Good morning Nathan.

Wanted to start off on gross margins.

Nice progression on an adjusted gross margins as we went through the.

First quarter about <unk> fourth quarter about 'twenty, one and a half.

You talked about an expectation for a bit more inflation as we start 2022 that maybe moderates in the back half of the year if that happens should we see it taking gross margins and maybe.

Somewhat of a decline as inflation flat that added makes impact that just kind of what your expectations for gross margins from here.

Yeah. Thanks, Nathan Thanks, Nathan this is Rob.

I think you make a good point around the fact that our gross margins have been really strong.

In 2021 and really.

Hit a new really nice high level and in the fourth quarter of last year and Youre also correct in saying that we do expect continued inflation as we worked through the first half of this year.

Our outlook for 2022 does suggest that our gross margins may moderate slightly so that they'll they'll continue to begin with to handle.

But as inflation moderates and our inventory levels get more reset to current pricing on there certainly.

Potential for that gross margin to come off a little bit from where it was last year. Our team continues to do a very good job of getting our price updates into counter inflation. So that's been one of the things is certainly been helping our gross margins as well.

But we do think that the.

Gross margins in the 20% range or certainly realistic for the full year 2022, and they underpin our outlook.

Yeah.

Maybe just.

Talking a little bit more about gross margins for the longer time.

That's a bit of volatility around depending on product mix and what the inflation level is and things like that but the gross margins have expanded.

Over the last several years can you talk about the drivers of that gross margin expansion, whether or not you think does gross margin construct surely continued to move higher over time in kind of a more normalized operating environment. Thanks.

Yes, I think it's I think it's a good question I think we're doing a lot of things in terms of.

Maintaining.

Real good discipline on what we buy and how we buy it I think our supply chain team has done a great job of peaking around the corner and figuring out.

Where prices are going to go on particular items that we purchase for our customers. So I think that certainly gives us some strength in.

Our gross margins going forward again, when we have these inflationary times, we've talked many times about the fact that inflation is typically good for our business and so to the extent that inflation moderates, that's probably a net negative for us rather than net positive, but look we're doing everything we can to maximize.

Our bottom line focus obviously that starts with having healthy gross margins and it's something that we spend a lot of time.

We spent a lot of time looking at it.

As a big driver of our ultimate profitability.

Kelly you want to add to that.

Nathan I was just going to add another comment there.

Bob kind of touched on it the product mix is very important I think and as we continue to grow our diet sector, especially in the chemical space and the other industrial space I think those will be accretive margins, we have a high value content in the diet sector that is accretive to margins, but then I would also say the geographical mix is very important as well.

<unk>.

International typically lags the improvement in North America by as much as about nine to 12 months, but the <unk>.

Margins are better on the international side. So as we continue to improve that business here and we think this is a multi year recovery not just in 'twenty, two that international will be better, but in 'twenty, three and beyond as well and that mix of higher international content is going to be very accretive to our overall margins as well.

So can you just be a 20% gross margin business over the long term.

Yes, we can yes, we can.

Excellent. Thank you.

Okay.

Our next question comes from Jon Hunter with Cowen. Please proceed with your question.

Hey, good morning, everyone.

Hey, John Good morning.

So.

First question I had is just on.

The top line guidance and I appreciate it's at least $3 billion for the year.

So call it 12 to 12, 5% growth year over year, that's kind of in line with what.

We were discussing at the time of the last call and since then U S onshore activity.

Gone up quite a bit.

Yes.

So im curious if theres anything.

Offsetting that incremental growth.

That might give you a bit of a pause in your growth outlook or is it simply a healthy dose of conservatism.

Well great question, we did say that we are targeting a minimum of $3 billion of revenue. This year, and we think 12, 5% growth on the top line is pretty healthy.

And that's underpinned as we said in our prepared text by <unk>.

Our growing backlog, so we've actually grown our backlog across all geographies all sectors and all product classes.

Virtually by double digits.

In addition to that.

We continue to see really strong response in the marketplace and as you point out some strengthening fundamentals.

In the in the upstream and midstream businesses, which obviously will will grow to an outsized proportion relative to our gas utilities, and our and our diet sector.

So we're feeling quite good about the topline growth for next year. If we can come in ahead of $3 billion.

Exceed that number that would be great, but we think $3 billion is a good good guidance for for providing right now.

Thanks for that and then.

Turning to G&A.

It's going to be up on an absolute basis. If you just annualize the adjusted number from <unk> year $4 20 for the year.

Is that kind of how youre thinking of things.

And how the guidance was put together for 'twenty two.

Yes, let me just say a few things about our G&A first of all we continue to look at how our company is structured and make sure that we're optimizing everything that we do in terms of cost. So so even as we look across our.

Our network of service centers, we always want to make sure that we're in the right geographies and that each of the service centers as if you will pulling its own weight. So we continue to look at optimizing our network and reducing our G&A cost that way.

As we mentioned in our prepared tax we have been adding some head count here in the fourth quarter you have seen that that contributed to a G&A increase obviously as activity increases head.

Our head count is is directly proportional laden inversely proportional to that so we may have some head count increases as we go to next year for this year.

Versus 2021, but also keep in mind and we're certainly aware of this we are in inflationary times and our employees are feeling that inflation. So we know that we've got to make sure that our wages are consistent with where the market has moved we're looking at kind of low.

Low to middle single digit adjustments in compensation for our employees generally that's going to be underpinning some growth in the G&A number in addition to that certain benefits that were curtailed.

<unk> during the pandemic, we will be bringing those back on a phased basis throughout here in 2022.

So look we do see an increase in G&A this year versus last year, but we're going to do in a very controlled fashion and make sure that as we look at any kind of metrics of G&A intensities of G&A versus revenue versus profitability, we want that to continue to work its way down.

Yes, yes, John .

John the only other thing I would add is as a percentage of revenue is certainly going to continue to trend lower as our revenue improves.

In 2020, a normalized SG&A was 16, 5% this.

This year 2021, I should say we were $15 three.

It's certainly going to have a 14 handle on it in 2022 I think.

For modeling purposes for the full year I think if you are in that kind of middle of 2014% range.

Five or so give or take that's probably where we're going to end up so it'll continue to trend lower and ultimately we are hoping to get it down even to a 13% or lower type level as business continues to improve but you've got to take.

Steps to get there.

Got it understood and then.

Just last one for me is.

I noticed.

Cash from ops.

Guidance a bit above.

The 21 level of $56 million. So how are you thinking about working capital.

In that environment I mean, clearly you are growing this year. So it was $50 million or so a reasonable working cap.

Consumption.

Assumption there and then what else do we need to be considering on the cash side in terms of cash taxes interest in anything else.

Yes, I'll offer some commentary and then turn it over to Kelly for more particulars, but but look we're trying to buck.

The trend of being in a growth phase of the market and consuming cash and we're really excited about the fact that our outlook for 2022 does show not just cash flow generation, but increased cash flow generation over what we did in 2021 and this is occurring even as we expect to.

To increase our inventory levels to serve this growing market.

A lot of this has to do with the fact that we're continuing to focus on capital efficiency. So we've increased our inventory turns from somewhere around three to trending towards five.

Turns over just the last year a lot of that was facilitated if you will by the pandemic, where we really reset our inventory levels by disposing of some older slower moving inventory and then really being disciplined about restocking inventory that moves it at higher turn levels. So this capital.

<unk> certainly plays a big part of our confidence on cash generation and we think we think investors value that we think that we need to be challenged not just during down cycles, but obviously during an up cycle to continue to generate cash a lot of that is obviously coming from our EBITDA.

But we are maintaining our working capital efficiency on our inventory and our accounts receivable and other uses of cash. So that we can continue to deliver strong cash flow for our investors Kelly, Yes, John I would just add one maybe get specific to the numbers Youre right. This year we.

We consumed or had to change in working capital of close to $50 billion I think of about $48 million or so.

The cash generation before the working capital change was about $100 million are a little bit little bit above that.

The way, we're looking at 'twenty, two right now and the way we're modeling it is that that cash generation before the change in working capital is like a 40% to 50% improvement on that saw a significant improvement from just cash being generated from the business closer to that 150, Mark and then but we will be consuming more in working cap.

Little because of the business is getting better we do intend to grow our inventory position and just a data point on that because it sometimes with LIFO, our inventory gets a little bit confusing when you look at our balance sheet. If you just look at our gross inventory, where we finished 2021, we were roughly $630 million.

We intend to grow that inventory position in 2022, I think it will it will be north of $700 million. Okay. We're going to grow it by that kind of number I'm not going to get more specific than that but still even with that.

Early significant increase in inventory, we still think we will generate more cash overall than we did in 2021.

Very helpful. Thank you.

Youre welcome.

Our next question comes from Doug Becker with Benchmark Research. Please proceed with your question.

Thanks.

Done a really good job, reducing net leverage and 2021 is it reasonable to think about net leverage going below one times by the end of <unk>.

2022.

And Jim and then just what's kind of the optimal long term capital structure in what I'll call the new normal Decarbonising world.

Yes, great Great question, well first of all you make a really good point that we've done an excellent job.

Some of this certainly occurred before I arrived here of really getting our balance sheet in great shape, we've we've reduced our cost structure, but but really importantly for investors.

We've reduced our net debt and we've reduced our leverage ratio down to where it stands now around one seven.

And maybe a little ambitious to say that we're going to get under one, but we're certainly going to approach one.

As we move through this year, we've already given you the $190 million EBITDA numbers. So you can do the math and figure out it's going to be in the low ones. One point something this year and look we think our investors value that.

I think <unk>.

Marci global.

Has potentially been penalized in the market because we had a balance sheet that certainly during challenging times, we've looked to be a bit stretched and we think that it may have also be limiting.

Two our financial flexibility as we look for potentially inorganic ways to grow. This company. So we're really focused on maintaining a solid balance sheet, we're not quite there yet I think as we move through this year with our optimistic outlook and the cash that we're going to generate.

We should have a really excellent balance sheet at the end of 2022 and.

That will certainly set the stage for us to do hopefully greater things in the future. That's how we look at it today.

Makes sense, maybe jumping to the gas utilities revenue guidance.

The lesson that segment grew over 20% last year.

Digital revenue growth is that kind of a low double digit or could it be a little bit higher given given what we saw last year.

Yes, it's in the lower double digit I mean, when you grow 2021% in 2021 like we did.

We felt it would be a little too bold to predict that kind of growth. This year. We do think that double digit growth is very achievable for the gas utility space for all the reasons that we talked about in our prepared notes and system integrity projects are continuing around the U S. And then we're really encouraged by what we're seeing in.

In terms of housing starts which is a big driver of infrastructure build out new utility hookups and the like so we love this gas utilities business. It has been a business that we built 100% organically and it has continued to grow as we said annual growth rates exceeding 10% over more than a decade.

So we think we're getting more back to kind of the average annual growth rate in 2022.

Could it could surprise to the upside, but that's what's underpinning our outlook.

Got it.

Anything changed in Canada in particular, just the fourth quarter was really good or is that just some of the normal lumpiness of the business.

Yes, I mean look our Canada business is heavily levered to the upstream.

Just to clarify specifically with with gas utilities.

Yes, we have a limited.

<unk> position in Canada, that's an opportunity for growth for us in our gas utility space, we are seeing that business pick up.

<unk>.

Given the strong franchise that we have here in the lower 48, we think that Canada can certainly be an opportunity for us to grow our gas utility business going forward.

And maybe just a last one just on the chemicals and petrochemical opportunity I know, it's something you've highlighted in the past.

Excellent.

Are now kind of up and running.

Just any way to think about the size of the opportunity, particularly in that that chemical and petrochemical market.

For MRC book, we think it is.

Significant opportunity for us.

As a driver of our diet sector.

One of the things that is really hampered the.

The industry in the downstream has been delay and a lot of projects due to the pandemic, we're starting to see a more.

Much greater backlog of turnaround and upgrade projects developing for 2022 and beyond so without quantifying specifically how much we might get this year. We are we are certainly projecting the chemical sub sector of the diet sector to grow this year.

And to continue to grow further as we move through through time.

But a lot of what we've done in the downstream had been hampered in 'twenty one.

Because of the pandemic and is really picking up just now.

Got it thank you.

Youre welcome.

Yeah.

Our next question is from Ken Newman with Keybanc capital markets. Please proceed with your question.

Hey, good morning, guys.

Good morning.

I do want to go back to that comment on the energy transition.

Said going from tens of millions of dollars to hundreds of millions and opportunity over a couple of years I know youre not trying to quantify how much will monetize this year, but maybe give us a little bit more directional color in terms of the visibility for the projects you are bidding for and just how do you view the cadence of those wins kind of coming through as we go through 'twenty two.

Yeah. It's a good question. The first thing I would say is that we are tracking.

Dozens of projects.

That are being contemplated or in the process of getting approved.

In total for the U S and international markets Interestingly.

We had we generated more revenue from the energy transition outside the U S than we did inside the U S. In 2021, and we're really excited about the growth opportunities of the entire energy transition space, but the fact that that we are a global company with large positions.

In Europe and Asia Pacific.

Really gives us confidence that we can take full advantage of this energy transition wherever it develops.

It's a business that today is in sort of the $20 million range that we would like to grow to 40 or $50 million. This year to give you. Some rough numbers. So you can see that $100 million a year is really hopefully not that far off in terms of what we generate.

But we're really excited about the opportunities we're seeing it's fair to say that a half to two thirds of the opportunities are really in the biodiesel realm. So a lot of renewable diesel a lot of conversions of refineries.

To go from a petroleum feedstock to something more organic.

<unk>.

And so those kinds of opportunities really are kind of front and center for us, but as we said in our prepared comments, we're seeing opportunities in hydrogen hydro electric wind power carbon capture these opportunities really span the gamut of all of the things around green energy and de carbonization. So.

Very early days for this sub sector to be a significant contributor to.

Our overall revenue story Thats, why we havent broken it out as a separate sector, but we're very excited about the future of this business and we'll continue to provide color on this as we move through the year.

That's good.

Switching over it sounds like you are looking for some solid volume growth in 'twenty, two and I'm sorry, if I missed this but I am curious if you just talk a little bit about what's expected from higher prices and then maybe help us understand how much of the growth reflects some carryover effects from pricing actions taken in 'twenty one.

Yeah. So Ken I think you may have missed the comments earlier in the call on the inflation.

And I think we said in our prepared remarks that certainly the last couple of quarters, we benefited from from inflation.

We think the next couple of quarters Q1 and Q2.

At least the way we're modeling it that we'll continue to have inflation will continue to push through some price increases with our customers to offset that inflation.

We are thinking, though we start to see some stability.

Or.

We're flattening if you will in the second half of the year.

Especially in things like line pipe.

Which we've really had some good incremental margins on line pipe sales here over the last quarter or two but we know at some point that tailwind is going to turn into a.

A headwind, but the beauty is it's only roughly 15% or so of our revenue. So we will have an impact, but we will have pricing improvements coming through with other product lines that we offer that had been a little bit slower to take off with customers and so net net you put all that together Rob said it I think in an earlier question that.

We still feel very good about a 20 plus percent margin.

Going to be the $21 six we had in Q4, probably not but certainly a 'twenty type handle on it for the full year.

Yes.

I'll ask one more if you don't mind, and then I'll I'll get back in queue, but.

I just wanted to talk a little bit more about the M&A pipeline, obviously, the leverage looks like it's in a really good position you talked about approaching one times going through the year.

Can you just talk about what youre seeing from an M&A perspective, and what the targets are looking like in terms of size and opportunity.

Yes look we are we continually survey the market for opportunities to grow Inorganically.

Inorganically, even as we pursue aggressively our organic growth strategy. As you know this company was really put together through M&A.

The consolidation of <unk>.

Players into.

What has become MRC global.

You've obviously been somewhat hampered in terms of our flexibility given the challenges of the pandemic and some of the strains that were created I think just having a stretched balance sheet. So a lot of those issues are really moving.

Into the rearview mirror and as we look forward we.

We certainly want to consider ways to grow inorganically and having a balance sheet. That's in the shape that it is in now and will likely be in even better shape at the end of this year certainly gives us those opportunities.

We're looking for meaningful ways to create significant value for our shareholders and if we can find opportunities to do that through the M&A realm, we will certainly pursue those.

Thanks.

Youre welcome.

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

One moment please poll for questions.

It appears that there are no further questions at this time I would now like to turn the floor back over to Monica Broughton.

Concluding comments.

Thank you all for joining us today and for your interest in MRC Global and I look forward to having you on our first quarter conference call in May have a good day and talk to you later thanks Goodbye.

This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.

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Greetings and welcome to MRC Global fourth quarter 2021 earnings Conference call. At this time, all participants are in a listen only mode.

I would now like to turn the conference over to your host Monica Broughton Investor Relations for MRC Global also.

Please go ahead.

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 March 2022, the dial in information is in yesterday's release, we expect to file our annual 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 16, 2020, and therefore, you're advised that information may no longer be accurate at the time of replay.

In our remarks today, we will discuss various non-GAAP measures, including net debt adjusted gross profit adjusted gross profit percentage adjusted SG&A adjusted EBITDA adjusted EBITDA margin and adjusted net income unless specifically stated otherwise references in this call. The EBITDA refer to adjusted EBITDA and you are encouraged to read our earnings release and <unk>.

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 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 that.

Current views of the management of MRC level.

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 these risk factors concerning these forward looking statements and now I would like to turn the call over to our president and CEO . Mr. <unk>. Thank you Monica good morning, and welcome to everyone join.

Today's call I will begin by discussing some of our notable achievements for 2021 review of our fourth quarter results at a high level and discuss some of the key business drivers underpinning our optimistic outlook I will then turn over the call to Kelly for a detailed review of the quarter and our 2022 business plan before providing a brief recap.

4% in 2021, so our Bottomline performance clearly benefited from improved gross margins and a more streamlined.

Cost structure that we implemented in 2020.

We will continue to maintain control on our costs, even as our markets recover in order to drive more of our incremental revenue to our profit line.

<unk> of our four business lines, we continue to be very optimistic that this sector has many years of strong profitable growth ahead.

Our cash management and balance sheet efforts in 2021 have positioned us extremely well for the future we generated $56 million of cash from operations in 2021, despite having increased our gross inventory levels to capitalize on the market recovery, we continued to streamline our inventory to favor higher turning products in it.

Prove our overall working capital efficiency, we achieved a 15, 6% net working capital to sales ratio significantly better than our historic rates and our 18% target.

And we reduced our debt by $86 million in 2021 to enter to end the year at a net debt to EBITDA leverage ratio of one seven times a record low for our company since going public.

Larger product orders at attractive margins on.

On our last call, we guided to fourth quarter revenue would buck our seasonal trend of being sequentially lower than the third quarter and our team achieved this with a nearly identical $686 million revenue result.

This was driven by 33% growth in our Canadian revenue as upstream activity picked up nicely our U S business experienced only a modest 1% decline, where typically is down seasonally by 5% to 10%.

International revenue was up 6%, but we experienced a strong increase in backlog, which sets the stage for a stronger 2022 and 2023.

Our upstream production business was up 6%, while our midstream pipeline sector, and our downstream industrial and energy transition or diet sector were each up 2%.

Gas utilities took a breather in the fourth quarter down 5% after outsized revenue increases in previous quarters of 2021.

Adjusted gross margins across all four business lines were higher in the fourth quarter due to improved pricing in our customer agreements to help counteract inflationary effects.

Drivers such as gas distribution system integrity management, and utility hookups and infrastructure build outs for new home construction.

In fact, the pipeline and hazardous materials safety administration indicates that approximately 38% of U S gas distribution mains and service lines are over 40 years old.

Housing starts to drive gas infrastructure build out are expected to remain strong, especially in the U S Southern and Western States, where many of our customers operate.

In addition, our customers are continuously improving the functionality of their systems with for example, the installation of smart meters to replace manual ones.

In this sector in 2022 and beyond we.

We began to see an increase in maintenance and turnaround spending for the petroleum refining and chemical industries.

In the fourth quarter of 2021 much of a previously delayed due to the pandemic.

We also expect that our international downstream business, we will see a similar pickup in activity, but on a lagged basis relative to the U S market.

The rapidly growing energy transition space remains a key area of focus for MRC global in 2021, we supply various green and de carbonization projects, including biofuel refinery conversions hydrogen production offshore wind and hydroelectric facility.

MRC Global's traditional energy focus sectors upstream production and midstream pipeline collectively comprised 33% of our revenue in 2021, both sectors are poised for major growth with the anticipated multiyear upcycle that has only recently begun.

Higher oil and natural gas prices are supportive of significant growth in the U S, Canada and many of the international markets, where we operate.

Expected production increases should drive our upstream revenue to increase by a strong double digit percentage in 2020 to our midstream business is expected to benefit primarily from spending on gathering and processing systems and rise by low double digits. This year.

<unk> spending levels top our expectations I will now turn the call over to Kelly to cover the financial highlights for the quarter and more details about our 2022 outlook.

Thanks, Rob and good morning, everyone.

Comments today will primarily be focused on sequential comparisons comparing the fourth quarter of 2021 to the third quarter of 2021, unless otherwise stated.

Total sales for the fourth quarter were $686 million consistent with the previous quarter and our earlier guidance typically we experience a seasonal decline in the fourth quarter in the range of 5% to 10%, but we experienced a sequential improvement in our Canadian business, which was up 33%, mostly offset by declines in our international.

<unk> and <unk> segments.

Gas utility sales were $258 million in the fourth quarter, a 5% decline.

This is a smaller decline relative to prior year averages due to typical seasonality from holidays and weather in the U S. This was partially offset by an increase in Canadian activity.

The upstream production sector revenue for the fourth quarter was $140 million, an increase of $8 million or 6% sequentially.

The increase was driven by the U S and Canada, which were both up partially offset by international.

Higher commodity prices, along with improved customer spending drove an increase in well completions and workovers translating into higher activity levels.

Midstream pipeline sales, which are primarily U S based were $87 million in the fourth quarter and 2% growth as upstream activity continued to improve driving an increase in gathering and processing work along with smaller projects.

Now I will move to sales performance by geographic segment.

U S revenue was $566 million in the fourth quarter, 1% lower as our gas utility business experienced normal seasonal declines.

This was partially offset by increases in our upstream production and midstream pipeline sectors, while the diet sector was unchanged.

Canada revenue was $40 million in the fourth quarter up $10 million or 33% driven primarily by the upstream and gas utility sectors.

International revenue was $80 million in the fourth quarter, a 6% decline driven primarily by a decrease in upstream production, partially offset by an increase in our diet sector.

Now turning to margins.

Adjusted gross margin for the fourth quarter was 148 million 21, 6% of revenue and our annual adjusted gross profit percentage was 21%. Both of these metrics were new records for MRC global since becoming a public company.

The improvement was related to the pricing related benefits of inflation, our preferred supplier position and proactive supply chain management.

We believe inflation will continue in the near term, but possibly begin to stabilize in the latter part of the year.

Inflation generally benefits our business and we are experts at managing the supply chain for inflationary and deflationary pressures.

Our gross profit percentage was $15 six in the fourth quarter up 170 basis points compared to the third quarter due to the same drivers as previously mentioned.

LIFO expense in both quarters were similar at $30 million in the fourth quarter and $32 million in the third quarter.

Reported SG&A costs for the fourth quarter were $106 million or 15, 5% of sales as compared to $102 million or 14, 9% of sales in the third quarter.

Adjusted SG&A after adjusting for severance and other charges in the fourth quarter was $105 million or 15, 3% of sales as compared to $102 million or 14, 9% of sales in the third quarter.

The increase in cost was due primarily to head count increases corresponding with higher activity levels and.

And increased property tax assessments in the fourth quarter.

EBITDA for the quarter was 47 million or six 9% compared to the previous quarter, which was $39 million or five 7%.

For the full year, our EBITDA was $146 million or five 5%, a 51% increase year over year for.

For the quarter. This was the highest EBITDA margin achieved since the third quarter of 2018.

For the last three quarters, we have improved EBITDA on an absolute and percentage basis, despite similar levels of revenue reflecting.

<unk> strong cost discipline, and our ability to pass through higher prices.

This resulted in incremental EBITDA of 46% for the year, another record and our public company history.

Interest expense totaled $23 million in 2021 $5 million less in 2020 as.

As a result of lower average outstanding debt balances.

For the quarter, we had a net loss attributable to common shareholders of $10 million or a 12 cent loss per share. However, normalizing for LIFO expense recorded in the quarter. Our adjusted net income attributable to common stockholders was $14 million or <unk> 17 per share.

We generated $40 million in cash from operations in the fourth quarter and $56 million for the year driven by stronger earnings exceeding our previous guidance to remain cash neutral in the second half of the year.

Capital expenditures were $4 million in the fourth quarter and $10 million for the full year at the low end of our guidance and consistent with historical ranges.

We expect our full year 2022 capital spend to fall within a range of $10 million to $15 million as we continued to invest in e-commerce and system upgrades.

Our debt outstanding at the end of 2021 was 297 million a reduction of $86 million from 2020 further strengthening our balance sheet.

Our leverage ratio based on net debt of 249 million was one seven times, which is below our previously stated goal of two times.

We expect to make further progress on our leverage ratio as our EBITDA continues to grow with the expected market recovery and we continue to reduce net debt.

We ended the year with available availability under our ABL facility of $484 million and $48 million of cash for a total liquidity position of $532 million.

We are very pleased with our backlog position that continues to signal solid growth momentum as we transition into 2022.

At the end of December our backlog was $520 million up 18% over the third quarter and up over 50% compared to the fourth quarter of 2020.

Sequentially, we experienced a double digit growth across all sectors and segments of our business.

And as of today, our backlog is over $600 million up 17% compared to the end of the year.

Which brings me to our outlook.

As Rob outlined earlier for the total company.

We're targeting revenue in 2022 to come in at $3 billion or greater and a minimum of a $190 million and EBITDA, depending on how our customer spending levels materialize throughout the year.

From a total company perspective, this translates to a double digit improvement in all sectors, except for diet, which is expected to be up upper single digits.

From a geographic view, we expect the U S and Canada to increase double digits and international to increase mid single digits.

We will continue to demonstrate strict cost controls, but expect our SG&A cost to increase modestly on an absolute basis as activity levels improve and restore certain compensation related benefits that had been reduced during the pandemic.

But as a percentage of revenue, we anticipate our SG&A cost to continue to trend lower.

Our normalized effective tax rate for the year is projected to be between 23% to 26%, but could fluctuate from quarter to quarter due to discrete items.

As activity levels improve this year, we will increase our inventory levels, but I believe for the full year, we can generate higher cash flows in 'twenty two 2022 than we did in 2021.

Excess cash will continue to be prioritized towards balance sheet strength and growth in the business.

As we look at the cadence of revenue throughout the year. There is nothing to suggest that our quarterly revenue won't follow the typical seasonality.

We expect each quarter to improve upon the other with the exception of the typical seasonal fourth quarter decline.

Specific to the first quarter. We are currently projecting a low to mid single digit increase in revenue as customer budgets reset in the construction period and turnaround season begin to ramp up later in the quarter.

In summary, our fourth quarter and full year results reflect significantly improved profitability strong cost discipline aggressive supply chain management.

And a solid balance sheet position.

We set several records in 2021 due to the cost optimization initiatives taken in 2020, and we are optimistic about our 'twenty two 2022 market outlook now I will turn it back over to Rob for closing comments. Thanks, Kelly I wanted to recap a few highlights from our call today before opening for Q&A 2021.

EBITDA was $146 million or 51% increase over 2020 <unk>.

Improving bottom line performance remains the focus of our management team.

Our largest sector gas utilities.

Do you expect it to remain a strong growth engine for us in 2022 and beyond due to compelling secular trends.

While we were in the early stages of the energy transition MRC Global's customer base.

Our geographic presence and technical capabilities position us well for future success, we expect the energy transition to become a significant driver of growth in the coming years.

Improving fundamentals give us increasing confidence of a multiyear up cycle for our upstream and midstream energy businesses.

Our balance sheet is in excellent shape due to cost discipline and improving market fundamentals. We remain we maintain significant financial flexibility as a result.

Finally, we expect that MRC global will meet or exceed $3 billion in revenue and $190 million in EBITDA in 2022.

Based on our forward view, we believe that 2023 and 2024, we'll see meaningful improvements on these results and with that we will now take your questions operator.

Press Star two if you would like to remove your question from the queue participants.

Participants using speaker equipment, it may be necessary to pick up your handset before pressing the saki.

One moment, please while we poll for questions.

Our first question is from Nathan Jones with Stifel. Please proceed with your question.

Good morning, everyone.

Good morning Nathan.

Wanted to start off on gross margins.

Nice progression on an adjusted gross margin through the first.

First quarter about <unk> fourth quarter about 'twenty, one and a half.

You talked about an expectation for a bit more inflation as we start 2022 that maybe moderates in the back half of the year.

If that happens should we see it taking gross margins and maybe a somewhat of a decline as inflation flat that had it makes impact that just kind of what your expectations are for gross margins from here.

Yes. Thank Nate Thanks, Nathan this is Rob.

I think you make a good point around the fact that our gross margins have been really strong.

In 2021 and really.

Hit a new really nice high level in the fourth quarter of last year and Youre also correct in saying that we do expect continued inflation as we worked through the first half of this year.

Our outlook for 2022 does suggest that our gross margins may moderate slightly so that they'll they'll continue to begin with to handle.

As inflation moderates.

And our inventory levels get more reset the current pricing on there is certainly a potential for that gross margin to come off a little bit from where it was last year. Our team continues to do a very good job of getting our price updates into counter inflation. So that's been one of the things Thats certainly been helping our gross margins as well.

But we do think that the.

Gross margins in the 20% range or certainly realistic for the full year 2022, and they underpin our outlook.

Maybe just.

Talking a little bit more about gross margins for the longer term, obviously, that's a bit of volatility around depending on product mix and what the inflation level is and things like that it did gross margins have expanded.

Over the last several years.

Can you talk about the drivers of that gross margin expansion, whether or not you think does gross margin construct surely continued to move higher over time.

Kind of a more normalized operating environment. Thanks.

Yes, I think it's I think it's a good question I think we're doing a lot of things in terms of.

Maintaining.

Real good discipline on what we buy and how we buy it I think our supply chain team has done a great job of peaking around the corner and figuring out.

Where prices are going to go on particular items that we purchase for our customers. So I think that certainly gives us some strength in our in our gross margins going forward again, when we have these inflationary times, we've talked many times about the fact that inflation is typically good for our business and so to the extent that in.

<unk> moderates, that's probably a net negative for us rather than net positive, but look we're doing everything we can to maximize.

Our bottom line focus obviously that starts with having healthy gross margins and it's something that we spent a lot of time.

We spent a lot of time looking at as it is a big driver of our ultimate profitability.

Kelly you want to add to that.

Yes.

Nathan I was just going to add another comment there.

Bob kind of touched on it the product mix is very important I think as we continue to grow our diet sector, especially in the chemical space and the other industrial space I think those will be accretive margins, we have a high value content in the diet sector that is accretive to margins and then I would also say the geographical mix is very important as well.

<unk>.

International typically lags the improvement in North America by as much as about nine to 12 months, but.

Margins are better on the international side. So as we continue to improve that business here and we think this is a multiyear recovery not just in 'twenty, two that international will be better, but in 'twenty, three and beyond as well and that mix of higher international content is going to be very accretive to our overall margins as well.

So can you just be a 20% gross margin business over the long term.

Yes, we can yes, we can.

Excellent. Thank you.

Okay.

Our next question comes from Jon Hunter with Cowen. Please proceed with your question.

Hey, good morning, everyone.

Hey, John Good morning.

So.

First question I had is just on.

The top line guidance and I appreciate it's at least $3 billion for the year.

So call it 12 to 12, 5% growth year over year, that's kind of in line with what.

We were discussing at the time of the last call and since then U S onshore activity has.

Gone up quite a bit.

<unk>.

So im curious if theres anything.

Offsetting that incremental growth.

That might give you a bit of a pause in your growth outlook or is it simply a healthy dose of conservatism.

Well great question, we did say that we're targeting a minimum of $3 billion of revenue. This year, and we think 12, 5% growth on the top line is pretty healthy.

And that's underpinned as we said in our prepared text by.

Our growing backlog, so we've actually grown our backlog across all geographies all sectors and all product classes.

Virtually by double digits and.

In addition to that we continue to see really strong response in the marketplace and as you point out some strengthening fundamentals.

In the in the upstream and midstream businesses, which obviously will will grow to an outsized proportion relative to our gas utilities, and our and our diet sector.

So we're feeling quite good about the topline growth for next year. If we can come in ahead of $3 billion.

Exceed that number that would be great, but we think $3 billion is a good good guidance for for providing right now.

Thanks for that and then.

Turning to G&A.

It's going to be up on an absolute basis. If you just annualize the adjusted number from <unk> your $4 20 for the year.

Is that kind of how youre thinking of things.

And how the guidance was put together for 'twenty two.

As we mentioned in our prepared tax we have been adding some head count here in the fourth quarter, you've seen that that contributed to a G&A increase obviously as activity increases.

Head count as is directly proportional laden.

Inversely proportional to that so we may have some head count increases as we go to next year or this year.

<unk> during the pandemic, we will be bringing those back on a phased basis throughout here in 2022.

So look we do see an increase in G&A this year versus last year, but we're going to do in a very controlled fashion and make sure that as we look at any kind of metrics of G&A intensity, so G&A versus revenue versus profitability, we want that to continue to work its way down.

Yeah, John the only other thing I would add is as a percentage of revenue is certainly going to continue to trend lower as our revenue improves.

In 2020, a normalized SG&A was 16, 5%.

This year 2021, I should say we were $15 three.

It's certainly going to have a 14 handle on it in 2022 I think.

For modeling purposes for the full year I think if you are in that kind of middle of 2014% range $14 five or so give or take that's probably where we're going to end up. So it will continue to trend lower and ultimately we are hoping to get it down even to 13% or lower type level as business continues to improve but you've got to take step.

To get there.

Got it understood and then.

Just last one for me is.

I noticed the cash.

Cash from Ops Guy.

Our guidance would be a bit above.

The 21 level of $56 million. So how are you thinking about working capital.

In that environment I mean, clearly you are growing this year. So it was $50 million or so a reasonable working cap.

Consumption.

Assumption there and then what else do we need to be considering on the cash side in terms of cash taxes interest in anything else.

Yes, I'll offer some commentary and then turn it over to Kelly for more particulars, but look we're trying to buck.

To increase our inventory levels to serve this growing market a lot of this has to do with the fact that we're continuing to focus on capital efficiency. So we've increased our inventory turns from somewhere around three to trending towards five.

Turns over just the last year a lot of that was facilitated if you will by the pandemic, where we really reset our inventory levels by <unk>.

Disposing of some older slower moving inventory and then really being disciplined about restocking inventory that moves it at higher churn levels. So this capital efficiency certainly plays a big part of our confidence on cash generation and we think we think investors value that we think that we need to be.

Challenge not just during down cycles, but obviously during an up cycle to continue to generate cash a lot of that is obviously coming from our EBITDA.

We consumed or had a change in working capital of close to $50 billion I think of about $48 million or so.

The cash generation before the working capital change was about $100 million are a little bit a little bit above that.

Little because of the business is getting better we do intend to grow our inventory position and just a data point on that because it's sometimes with LIFO or our inventory gets a little bit confusing. When you look at our balance sheet. If you just look at our gross inventory, where we finished 2021, we were roughly $630 million.

Fairly significant increase in inventory, we still think we will generate more cash overall than we did in 2021.

Very helpful. Thank you.

Youre welcome.

Our next question comes from Doug Becker with Benchmark Research. Please proceed with your question.

Thanks.

Done a really good job, reducing net leverage and 2021.

Reasonable to think about net leverage going below one times by the end of.

2022.

And Jim and then just what's kind of the optimal long term capital structure in what I'll call, the new normal and the Decarbonising World.

Yes, great Great question, well first of all you make a really good point that we've done an excellent job.

Some of this certainly occurred before I arrived here of really getting our balance sheet in great shape, we've we've reduced our cost structure, but but really importantly for investors.

We've reduced our net debt and we've reduced our leverage ratio down to where it stands now around one seven.

And maybe a little ambitious to say that we're going to get under one, but we're certainly going to approach one as.

MRC global has potentially been penalized in the market because we had a balance sheet that certainly during challenging times, but we would look to be a bit stretched and we think that it may have also be limiting.

With our optimistic outlook and the cash that we're going to generate we should have a really excellent balance sheet at the end of 2022 and.

That will certainly set the stage for us to do hopefully greater things in the future. That's how we look at it today.

Makes sense, maybe jumping to the gas utilities revenue guidance.

It wasn't that segment grew over 20% last year double digit revenue growth is that kind of a low double digit or could it be a little bit higher given given what we saw last year.

Yes, it's in the lower double digit I mean, when you grow 2021% in 2021 like we did we.

The U S. And then we're really encouraged by what we're seeing in terms of housing starts which is a big driver of infrastructure build out new utility hookups and the like so we love this gas utilities business. It has been a business that we built 100% organically and it has continued to grow as we said annual.

Growth rates exceeding 10% over more than a decade.

So we think we're getting more back to kind of the average annual growth rate in 2022.

It could it could surprise to the upside, but that's what's underpinning our outlook.

Got it and has anything changed in Canada in particular, just the fourth quarter was really good or is that just some of the normal lumpiness of the business.

Yes, I mean look our Canada business is heavily levered to the upstream.

Like any business.

To clarify specifically with with gas utilities.

Yes, we have a limited position in Canada, that's an opportunity for growth for us in our gas utility space, we are seeing that business pick up.

<unk>.

Given the strong franchise that we have.

Here in the lower 48, we think Canada can certainly be an opportunity for us to grow our gas utility business going forward.

Okay.

And maybe just a last one just on the chemicals and petrochemical opportunity I know, it's something you've highlighted in the past.

Center of excellence.

Are now kind of up and running.

Just any way to think about the size of the opportunity, particularly in that.

Chemical and petrochemical market for.

For MRC look we think it is.

Significant opportunity for us.

As a driver of our diet sector.

One of the things that is really hampered the.

The industry in the downstream has been delaying a lot of projects due to the pandemic, we're starting to see a more.

And to continue to grow further as we move through through time.

But a lot of what we've done in the downstream had been hampered in 'twenty one.

Because of the pandemic and is really picking up just now.

Got it thank you.

Youre welcome.

Yeah.

Our next question is from Ken Newman with Keybanc capital markets. Please proceed with your question.

Hey, good morning, guys.

Good morning.

I do want to go back to that comment on the energy transition.

Yeah. It's a good question. The first thing I would say is that we are tracking.

Dozens of projects that are being contemplated or in the process of getting approved.

In total for the U S and international markets Interestingly.

We generated more revenue from the energy transition outside the U S than we did inside the U S. In 2021, and we're really excited about the growth opportunities of the entire energy transition space, but the fact that that we are a global company with large positions in.

In Europe and Asia Pacific.

Really gives us confidence that we can take full advantage of this energy transition wherever it develops.

To go from a petroleum feedstock to something more organic.

And and.

These opportunities really span the gamut of all of the things around Green energy and de Carbonization. So very early days for this sub sector to be a significant contributor to.

Our overall revenue story, that's why we haven't broken it out as a separate sector, but we're very excited about the future of this business and we will continue to provide color on this as we move through the year.

That's good.

Switching over.

Sounds like you are looking for some solid volume growth in 'twenty, two and I'm, sorry, if I missed this but I am curious if you could talk a little bit about what's expected from higher prices and then maybe help us understand how much of the growth reflects some carryover effects from pricing actions taken in 'twenty one.

Yes, so so Ken I think you may have missed the comments earlier in the call on the inflation I think we said in our prepared remarks.

Certainly the last couple of quarters, we benefited from from inflation.

We think the next couple of quarters Q1, and Q2 at.

At least the way we're modeling it that we'll continue to have inflation will continue to push through some price increases with our customers to offset that inflation.

We are thinking, though we start to see some stability.

Sure.

We're flattening if you will in the second half of the year.

Especially in things like line pipe.

Which we've really had some good incremental margins on line pipe sales here over the last quarter or two but we know at some point that tailwind is going to turn into a.

A headwind, but the beauty of that is only roughly 15% or so of our revenue. So it will have an impact, but we will have pricing improvements coming through with other product lines that we offer that had been a little bit slower to take off with customers and so net net you put all that together Rob said it I think in an earlier question that.

We still feel very good about a 20 plus percent margin.

Going to be the $21 six we had in Q4, probably not but certainly a 'twenty type handle on it for a full year.

Yes.

I'll ask one more if you don't mind, and then I'll I'll get back in queue, but.

I just wanted to talk a little bit more about the M&A pipeline, obviously, the leverage looks like it's in a really good position you talked about approaching a one times going through the year.

Can you just talk about what youre seeing from an M&A perspective, and what the targets are looking like in terms of size and opportunity.

Yes look we we continually survey the market for opportunities to grow.

Inorganically, even as we pursue aggressively our organic growth strategy. As you know this company was really put together through M&A consolidation of.

Players into.

What has become MRC global.

<unk>, obviously been somewhat hampered in terms of our flexibility given the challenges of the pandemic and some of the strengths that were created I think just having a stretched balance sheet. So a lot of those issues are really moving.

Into the rearview mirror and as we look forward, we certainly want to consider ways to grow inorganically and having a balance sheet. That's in the shape that it is in now and will likely be in even better shape at the end of this year certainly gives us those opportunities we are looking for meaningful ways to create.

Difficult value for our shareholders and if we can find opportunities to do that through the M&A realm, we will certainly pursue those.

Thanks.

Youre welcome.

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

One moment, please as we poll for questions.

It appears that there are no further questions at this time I would now like to turn the floor back over to Monica Broughton.

Concluding comments.

Thank you all for joining us today and for your interest in MRC Global and look forward to having you on our first quarter conference call in May have a good day and talk to you later thanks Goodbye.

Okay.

This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.

Q4 2021 MRC Global Inc Earnings Call

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