Q3 2022 MRC Global Inc Earnings Call

Greetings welcome to MRC Globals third quarter 2022 earnings conference call.

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

A question and answer session will follow the formal piece and teaching if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to Monica Broughton Investor Relations. Thank you you may begin.

Thank you and good morning, welcome to the MRC Global third quarter 2022 earnings conference call and webcast. We appreciate you joining us on the call today, we have Rob foothills, President and CEO , and Kelly Youngblood Executive Vice President and CFO .

There will be a replay of today's call available by webcast on our website MRC global dot com as well as by phone until November 23rd 2022, 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 November nine 2022, and therefore, you're advised that information may no longer be accurate as of the time of replay.

In our call 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. The EBITDA refer to adjusted EBITDA, you're encouraged to read our earnings.

Release and securities filings to learn more about this argues of these non-GAAP measures and to see a reconciliation of these measures to the 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, actual results could differ materially from those expressed today you are encouraged to read the company's SEC filing.

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. Rob Sighthill. Thank you Monica good morning, and welcome to everyone. Joining today's call I'll begin with a few comments about MRC global's revenue diversification progress over the past few years, because we believe this is irrelevant.

Topic for our shareholders I will then provide a high level review of our third quarter results, our growth drivers and our positive business outlook before handing off to Kelly for a detailed review of the quarter I would close with a brief recap before Q&A session.

We have seen a remarkable transformation in our business in recent years as our revenue sources have shifted dramatically to become more diversified and stable historically, our company's revenue was derived primarily from traditional oil and gas activity. For example in 2014 approximately two thirds of our revenue was driven by our upstream production and midstream pipeline sector.

Today, these two sectors of calculus, and one third of our revenue.

Gas utility customers now drive the largest component of our revenue at 40% with the remaining portion of 31% being from our diet sector, which itself is rapidly becoming more diverse this means that more than 70% of our revenue today is derived independently of the traditional oilfield is therefore more resilient from swings in commodity.

Mrs that caused volatility in oilfield activity and profitability. We believe at this point is often overlooked by our traditional investor base and perhaps we are not receiving full credit for the improvements in our revenue risk profile that this diversification brings.

In addition, our gas utilities business is primarily driven by safety and integrity projects that are clearly in the public's interest along with enhancements and upgrades to ageing infrastructure, such as smart meters that improve utility efficiency. As a result. This sector is generally more resistant to economic downturns and has proven over the past decade.

B, our most stable source of revenue in addition to now being our largest.

Clearly MRC global has a very different end market and revenue mix today and.

And we believe this revenue diversification allows for meaningful growth across multiple less correlated pathways and that this transformation offer significant value creation potential for our shareholders. Even so we've achieved this while retaining our position as the leading P V F distributor to upstream and midstream customers.

We intend to maintain this leadership position in fact, we will be in Midland, Texas. Later this week to celebrate the Grand opening of our newest service center that will enhance our ability to serve energy producers operating in the all important Permian basin.

Moving now to our third quarter results I am very pleased with the sequential increase in revenue of 7% over the second quarter, while driving more of our revenue to the bottom line. We also set new margin percentage records. This quarter for adjusted gross profit and adjusted EBITDA, which helped us to generate positive quarterly cash.

So during a period of robust revenue growth a major accomplishment.

Generating cash throughout the cycle. It was one of our primary objectives that I will discuss in more detail later.

Drilling down into each sector. The gas utilities business continues to hit new milestones with $359 million of revenue in the third quarter. Its highest quarterly revenue to date growing 14% sequentially. We are currently running 26% ahead of 2021 revenues for this sector and anticipate exceed.

A $1 2 billion in revenue for the full year.

With a 7% sequential improvement our diet sector is now expected to exceed $1 billion in revenue. This year. This sector has benefited from numerous energy transition projects are increasing focus on the chemical space and increased maintenance and turnaround activity of petroleum refineries. This sector is rapidly ritu.

Turning to revenue levels not seen since 2019.

Our two traditional energy sectors upstream production and midstream pipeline.

Each declined slightly in the quarter as several large customer opportunities slipped into the fourth quarter. The exciting news is that our U S upstream backlog improved 38% sequentially on strong demand supporting our expectation of an unseasonably good fourth quarter.

We are also anticipating improving prospects for our midstream pipeline sector starting in the first half of 2023. This business typically lags gross in the upstream sector by a few quarters as gathering and processing assets are required after well completions activity.

Our international business grew sequentially by 9%, despite the unfavorable impact of weaker foreign currencies that shaved 500 basis points of the increase for the quarter, our underlying international business is solid as evidenced by a growing backlog in spite of foreign currency headwinds.

As a company we continue to focus on improved efficiency and profitability and I am delighted with our team for delivering adjusted EBITDA margins of nine 1% in the third quarter. This is the highest EBITDA margin ever achieved by MRC global and it reflects our commitment to deliver improved bottom line results for our.

Shareholders. This outcome was enabled by higher gross margins and continued cost discipline. Our adjusted gross margin of 21, 9% in the third quarter was also a company record and an outstanding achievement structurally we are a much leaner organization than we've ever been and we anticipate that our cost control and.

Increasing operating leverage will continue to benefit our financial results in future quarters, Kelly will provide further detail about the drivers of the higher quarterly margins in his remarks.

As we look to 2020 three and beyond we believe each of our sectors is underpinned by a compelling growth story, both in the near term and longer term I want to take a moment to highlight the specific drivers for our future growth.

I'll start with our gas utilities business, it's our largest sector has long term durable growth and is a clear differentiator for us over the past five years, we've achieved an impressive 10% compound annual growth rate in our revenue.

Going forward, we anticipate utility customer budgets to remain healthy and to be largely driven by safety and integrity projects because of our strong market position, we are able to deliver purchasing benefits to our customers, while establishing preferential long standing relationships with our key suppliers.

During the pandemic, we were able to access scarce gas products supplies, when others, including some gas utilities themselves could not as experts in this space, we were able to offer product alternatives to our customers that were technically equivalent when the preferred brand or product could not be accessed this kind of performed.

<unk> builds trust, we believe there is ample room to grow this business, whether it be through expanding our product mix with existing customers or by adding new customers and utility service areas to our existing network.

Gas utilities should be a major growth engine for years to come the.

The second growth or I would like to highlight is the upstream production and midstream pipeline sectors. We believe we are in a multiyear up cycle for our traditional oilfield business driven by growing energy demand years of under investment in production capacity and the rebalancing of energy flows stemming from the Russia, Ukraine War that will increase the call.

On North America, and European Energy production, our international upstream business has picked up in response with expanded work opportunities in both the U K North sea and offshore Norway.

Upstream production is on track to achieve approximately 30% revenue growth. This year looking forward, we anticipate that U S. Well completion spending will be increasingly weighted towards the ioc's and larger independent producers. We are highly levered to these customers setting up for a strong performance in the future.

Our growing upstream business means of growing midstream business as the fundamentals are linked.

As production continues to grow the need for gathering and processing infrastructure, and new intrastate takeaway capacity increases, which benefits our midstream business. The five year outlook for both our traditional energy sectors is very strong.

Our energy transition business, which comprises the fastest growing part of our diet business sector continues to shine.

Increasing levels of investment are supported by our global focus on climate initiatives expansion of related government stimulus and regulatory enactments and advances in technology that improve the affordability of clean energy alternatives. The recent passage of the inflation reduction Act provides U S players and opportunity to access.

Attractive investment in production tax credits that persists through 2035.

The energy transition begins as a project business, whether it would be a greenfield development or a brownfield conversion. We have developed a very strong project execution team that is well versed in the energy transition technology is being utilized and the specific products required for the application. This makes MRC global the logical partner not only for our <unk>.

And customers, but also for the engineering procurement and construction companies, who are typically responsible for specifying and purchasing the materials and products required for these projects in 2022, the reconfiguration of petroleum refineries to process organic and waste feedstocks to produce renewable fuels has.

Apprised, the bulk of our energy transition revenue.

Our energy transition backlog includes a wide variety of projects, including the previously announced offshore wind farm in New York in.

In the medium term carbon capture is expected to grow in importance with the addressable market, reaching 55 billion by 'twenty 30. According to rise to add energy. In addition, an increasing number of hydrogen projects are expected to be approved and funded we expect to generate approximately 100 million of energy transition revenue this year.

Year, and we look for this to expand significantly in the coming years.

The fourth area that I'd like to discuss is the chemical sub sector also within our diet sector. The chemical sub sector is a large market with approximately $2 $5 billion of annual P. D. F opportunity. We are a relatively small position in this sector, but we are poised for expansion about a year ago, we assembled the team with unrivaled chemicals expertise.

Tasked with identifying opportunities and growing our market share we are at the beginning stages of market penetration, yet we have seen meaningful traction with new customers or chemical sub sector revenue has grown 24% versus the third quarter of 2021, and the outlook remains positive, especially in the north American market, which benefits from low fee.

Stock costs.

There is significant opportunity for MRC global to deliver strong growth in the chemical space as this market expands and we gained market share.

And finally I'd like to discuss the global LNG market also part of our diet sector natural gas is a logical transition fuel to a lower carbon future and the U S has abundant supplies that can be exported economically and reliably to world markets as LNG. The increased focus on energy security and the displacement of Russian gas.

Will help facilitate growth of LNG production infrastructure in the U S. In parallel the regasification and transmission facilities in consuming markets here in the U S. We are already active in supplying large quantities of PBF to approved LNG projects with orders in our backlog that are expected to deliver next year, we expect.

Multiple LNG projects to gain approval in the U S. This decade as the U S is poised to remain the world's leading LNG producer.

Reflecting on my tenure at MRC Global I believe we have made significant progress in many areas that make us a stronger and more investable company first we are driving more of our revenue to the bottom line. We do this by being smart about the markets, we pursue and the products and services, we provide and by closely managing our costs.

Second we've expanded our project focusing capabilities to complement our traditional MRO strength. This allows us to play a first mover role in the energy transition and to position our company for bigger ticket orders in other areas such as the chemical space and third we are expecting to generate positive cash flow from operations. This year.

Even as we've grown our revenues by approximately 26% and our gross inventories by 197 million improving the efficiency of our working capital allows us to consistently generate cash flow across the cycle. Our goal that we have for 2023 and beyond generating cash consistently is a prerequisite for a versatile and flix.

<unk> capital allocation program that allows for greater growth and shareholder returns. We are committed to this and Kelly will cover it further in his prepared remarks.

Turning to our outlook for next year, while still preliminary early indicators are positive and supported by conversations with customers are solid and growing backlog and our previously discussed growth drivers and business fundamentals, while we plan to provide additional clarity on our fourth quarter earnings call today, We expect 2023.

Revenue to increase by a double digit percentage for another year of strong revenue growth.

We also are targeting 2023 full year EBITDA margins to exceed 8% another significant step forward in margin expansion and bottom line profitability for the company operating cash flow in 2023 is expected to be substantial as we continue to improve working capital efficiency and convert more EBITDA.

Cash <unk>.

Currently we are targeting over $100 million in operating cash flow in 2023 in summary, we are very optimistic about next year's outlook for MRC global.

Lastly, I want to commend our people who've done such a great job in advancing our business in 2022 like many companies at times, we've been challenged to attract the necessary personnel to support our growth in such a strong and competitive job market. In response, we have developed new channels of recruiting improved our onboarding and training.

Processes and shared our most highly skilled resources over more locations and geographies relentless commitment to customer service is in our DNA and our employees have stepped up to the challenge as they always do as a result, we continue to retain the trust of our existing customers, while cultivating new ones and wood.

I'll now turn the call over to Kelly.

Thanks, Rob and good morning, everyone. My comments today will be focused on sequential comparisons. So unless stated otherwise we are comparing the third quarter of 2022 to the second quarter of 2022.

Total sales for the third quarter were 904 million, a 7% sequential increase outperforming our previous expectations gas utilities in diet led to increase as both of these sectors continued to outperform.

As utility sales were $359 million in the third quarter, a $45 million or 14% increase as our customers continue to progress on their integrity and meter replacement programs. These integrity programs are vital to the safety and reliability of our customers' gas distribution networks, making the activity in this sector more stable in the <unk>.

Of an economic slowdown.

The diet sector third quarter revenue was $276 million, an increase of $17 million or 7% driven by the U S followed by international.

This sector continues to increase driven by growing energy transition work, primarily renewable biofuel projects in the U S as well as mining customer spending refinery and chemical turnaround projects and general maintenance activities.

Also as mentioned by Rob This business is expected to exceed the $1 billion Mark this year, making it our second largest sector behind gas utilities, and our highest growth sectors. So far this year.

The upstream production sector revenue for the third quarter was $176 million, a decrease of $2 million or 1% driven primarily by seasonality in Canada, partially offset by modest increases in the U S and international upstream businesses.

Our U S upstream sector had several customer shift work to the fourth quarter as evidenced by a 38% sequential increase in that backlog, suggesting a strong Q4 and in a nice start to 2023.

Additionally, we believe IOC and larger independent operators will play a more dominant role in activity next year, which positions us well as we were more highly levered to larger operators as opposed to private operators.

Our underlying international upstream business is also positioned well for the coming year, and we expect strong growth despite foreign currency headwinds moderating the activity improvement.

Midstream pipeline sales were $93 million in the third quarter down $4 million or 4%.

The revenue in this sector tends to be more of a regular due to less predictable line pipe sales. An example, being this quarter with lower revenue caused by the timing of certain projects.

The outlook for midstream pipeline moving into 2023 continues to be strong as higher production levels increase the need for more gathering processing and takeaway infrastructure.

Now I'll cover sales performance by geographic segment.

U S revenue was $768 million in the third quarter, a $51 million or 7% increase led by the gas utility sector, followed by the diet and upstream production sectors, which we covered earlier.

Canada revenue was $37 million in the third quarter, a $3 million or 8% decline compared to the second quarter, primarily due to seasonal impacts on the upstream production sector, which we expect to reverse in the fourth quarter.

International revenue was $99 million in the third quarter, a 9% increase with diet and upstream increasing despite a 5 million foreign currency headwinds.

The diet sector drove the increase due to a chemical project in a refinery turnarounds and refinery turnarounds in the U K additional project work in the Netherlands, including Biofuels and finally, an increase in New Zealand from project work on a geothermal power facility.

Now turning to margins.

Adjusted gross profit for the third quarter was $198 million or 21, 9% of revenue a 60 basis point improvement over the second quarter and a new company with <unk>.

Compared to a year ago. It was 190 basis points higher as we continue to benefit from higher sales volume and the positive impact of inflation, our preferred supplier position and proactive supply chain management.

As we have mentioned in previous calls over the past two years. Our line pipe product group has experienced the most significant inflation impact of all of our product groups.

This has been a nice tailwind supporting growth in our overall company average margins for both gross profit and EBITDA.

Historically gross margins for line pipe have been dilutive to company gross margins, but due to recent demand increases inflation and our ability to pass this higher cost on to our customers gross margins for line pipe have trended much higher than pre pandemic levels.

Going forward, we believe line pipe gross margins will begin to moderate before the coming year will remain elevated compared to historical levels.

Outside of line pipe the other products, we sell have also experienced inflation and contributed to higher margins. However, because these product groups are not considered commoditized, we do not expect a significant deflationary impact in the future.

So if we normalize back to pre pandemic historic levels for line pipe inflation. It has benefited our quarterly gross margins. This year by 50 to 100 basis points varying by quarter.

And although gross margins will continue to fluctuate each quarter due to many variables, including one pump sales. We believe we can continue to generate overall average adjusted gross margins of 21% or higher in the coming quarters.

SG&A costs for the third quarter were $120 million or 13, 3% of sales as compared to $120 million or 14, 2% of sales in the second quarter.

As a percentage of revenue SG&A improved by 90 basis points sequentially, and 160 basis points year on year.

Absolute SG&A costs remained consistent with the second quarter.

And for the full year, we expect SG&A as a percentage of sales to be approximately 14%.

EBITDA for the quarter was $82 million or nine 1%, a 340 basis point improvement over last year, and a new MRC global record for adjusted EBITDA margin.

Due to our revenue growth adjusted gross profit margin improvement and continued cost discipline. We were able we were able to drop more revenue to the bottom line with incremental EBITDA of 20% in the third quarter versus last year, a level elevated from historical averages.

Tax expense in the third quarter was $10 million with an effective tax rate of 29% as compared to $6 million of expense in the second quarter.

The difference in the effective rate and the statutory rate is due to and benefited foreign losses state income taxes, nondeductible expenses and deferring foreign income tax rates.

For the quarter, we had net income attributable to common stockholders of $18 million or 21 cents per diluted share.

And our adjusted net income attributable to common stockholders on an average cost basis normalizing for LIFO expense was $36 million or <unk> 42 per diluted share.

We generated $33 million of cash from operations in the third quarter from higher profitability and prudent working capital management.

Working capital as a percent of sales was 16, 6% in the third quarter 130 basis points lower than the third quarter of 2021, as we continue to drive efficiencies.

We also expect to generate cash in the fourth quarter that should result in net positive cash flow from operations for the full year, which is a major accomplishment for the company as we have historically consumed cash in years of strong revenue growth.

And as Rob mentioned generating cash consistently going forward in both years of growth and decline is a key initiative of the company.

Our total debt outstanding at the end of the quarter was 341 million a $15 million reduction from the second quarter and our leverage ratio based on net debt of $312 million was one three times, which isn't which is a significant improvement over the last 12 months when our leverage ratio was two three times.

We expect to make further progress on our leverage ratio as our EBITDA continues to grow and we lower our net debt position with expected cash generation during the fourth quarter.

We ended the quarter with availability under our ABL facility of $612 million and 29 million of cash for a total liquidity position of $641 million.

Now regarding capital allocation priorities, we believe reinvesting in our business to grow our revenues and profit profitability is most beneficial for our shareholders.

A strong balance sheet with lower leverage is also a key priority and essential to gain financial and strategic flexibility as we consider inorganic opportunities to grow the business in the future.

Although this is the plan as of today. This is not static and we will continue to reevaluate our priorities as time passes our cash position grows and strategic options become available.

In addition to the strong revenue and EBITDA performance. Our backlog has continued to increase supporting our positive outlook and the growing momentum in our business in the third quarter, our backlog grew to 773 million a 4% increase over the second quarter.

Regarding our outlook for the remainder of 2022 weeks.

We expect revenue in the fourth quarter to decline low to mid single digits, which is less than our typical historical Q4 seasonality trends.

The full year 2022, EBITA margins are on track to come in over 200 basis points higher than the average 2021 levels, which implies 2022 EBITDA margins in the upper 7% range. This suggests we will have over 50 million higher EBITDA in 2000.

'twenty two than we generated in 2019 pre pandemic with about $300 million less revenue, which is evidence of how we have streamlined the company and gained significant efficiencies over the last few years.

And with that I'd like to turn it back over to Rob for closing comments. Thanks, Kelly I will summarize a few highlights before opening for Q&A, our impressive third quarter and year to date revenue performance combined with supported business fundamentals tangible growth drivers and an expanding backlog has increased our confidence that we will achieve double digit revenue grew.

Again in 2023, we believe that we were in the early innings of an extended up cycle for MRC global our focus on the bottom line has allowed us to realize peak EBITDA margins on significantly lower revenues EBITDA margins are expected to increase further as we grow our revenues and we expect to exceed 8%.

EBITDA margins in 2023.

We appreciate the consistent cash generation is a priority for our shareholders in 2022 marks an inflection point for MRC global revenue growth and cash flow from operations can coexist and we are targeting 100 million in operating cash flow in 2023.

And with that we will now take your questions operator.

Thank you.

Ask a question. Please press star one on your telephone keypad.

She tone will indicate 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.

Our first question is from Tommy Moll with Stephens. Please proceed.

Good morning, and thanks for taking my questions.

Yeah, Good morning Tommy.

Rob I wanted to start on your gas utilities business you referenced a couple of times the ability of MRC to deliver when supply has been tight including four.

Utilities himself to what extent has that execution has been a catalyst for let's say new customer conversations or additions.

And then as a follow on that.

The homeowner customers for all of these utilities are.

We're seeing higher bills himself and.

I wonder if a lot of the pushback there back to the company's curbs the appetite for any of these big projects that you've laid out.

Thank you.

Yeah, Thanks, Tommy well the gas utilities businesses, we talked about in our prepared comments continues to be a real differentiator for MRC global and we continue to hit new highs in terms of revenue and.

And growth for that business.

Clearly our performance during the pandemic when we had particular supply chain challenges around key equipment for our suppliers has really helped our reputation even further as a reliable supplier of products and services for the gas utility space.

As I mentioned in our comments, we believe that there is ample room to grow this business further with.

With utilities that we don't serve or we don't serve and all of the.

Service areas, where they currently operate and you're 100% right. The performance that we exhibited through the pandemic when supplies were particularly challenged as helped us with regard to those future discussions with customers that are our perspective, and we hope to add to our roster going forward.

So it certainly has been a big help I don't know that we can name any particular customers are on this call, but a lot of what we've done in growing this business organically is leverage the reputation that we built on an existing customer base to new customers and we've talked in the past about those more recent customers that we've added. So this is.

It's certainly been a an opportunity for us to demonstrate what we can do and for the gas utility customers out there who may be listening to this call. We certainly would welcome opportunities to serve you as well.

Your comment about higher energy bills Theres no question.

That our consumers are going to be feeling a pinch in terms of energy bills going forward certainly here in the in the U S where we operate that said that the discussions we're having with customers to date don't indicate any change in investment plans keep in mind. So much of what we do is around <unk>.

Improving the reliability integrity and safety of the existing infrastructure, that's in place and that tends to be fairly inelastic.

With regard to our customer investment plans. So at this point our outlook for our gas utilities continues to be very bright it's the largest business that we have and it continues to have a very bright future in terms of growth for MRC global.

I appreciate the context, Rob. Thank you it and shifting gears to the early outlook you've provided to 23 2023, which is helpful and if I'm reading between the lines here on margins I noted Kelly's comment about some of the.

Headwinds versus tailwind on gross profit specifically around our line pipe.

Tailwind that eventually will begin to moderate here in coming quarters, but reading between the lines that I think what we're setting up for us.

Oh, I'd say, a flattish adjusted gross margin.

Based on what you see today.

And if your EBITDA margin is going to be up over eight points next year, then you would need to deliver some SG&A leverage.

So if you want to correct. The record there. Please do so or if I'm right, let's focus on that G&A leverage and just the philosophy or framework for layering in additional cost while also ensuring to drive that as a percent of sales lower next year. Thank you.

Yeah Tammi. This is Kelly I'll I'll jump in on this and Rob may add on but but no I think I think youre right. We in my prepared remarks.

You know kind of drew a line in the sand that we believe we can maintain gross margins at 21% level or better are you know certainly we have been getting the benefit of line pipe inflation.

But really the last probably 12 to 18 months, that's been at a much higher level than what we saw say pre pandemic and we said it's been contributing this year, depending on the quarter about 50 to 100 basis points and so that that will start to fall off you know when you look at the overall.

Benefit that we've been receiving there, but I do think theres going to be some offsets to that are you know in other product mix as well as geographical mix that.

We believe that we can maintain that 21% plus margin.

So so you know we're averaging this year.

We'll be like you said, you know kind of in that same ballpark.

This year as a full year average and so if we're making that 21 plus percent it should be at least at kind of a similar level of where were turning out or where we should end up for this year on the SG&A side.

That's you're hinting to the point, which is exactly right. We will average this year about 14% SG&A as a percent of revenue but.

But for next year, if we achieve a double digit revenue growth, which we've guided to is kind of an early look here.

SG&A as a percent of revenue will continue to go down further.

And instead of averaging 14%, we should certainly have a 13 handle I think it'll be.

And the low 13% range with a double digit revenue growth. So you get that incremental fall through.

Absolute SG&A will go up some obviously, but as a percent of revenue will continue to benefit.

Thanks, Joe I appreciate it and I'll turn it back.

Our next.

Question is from Ken Newman with Keybanc. Please proceed.

Hey, good morning, guys congrats on the solid quarter.

Thank you morning, thanks, Thanks again.

For my first question Robert There are Kelly I'm curious if you could just contextualize the visibility for the double digit revenue growth for next year and specifically I'm. Just curious if there's any way you can bucket just how much of that outlook is driven by the backlog visibility versus.

Spectation for pricing action for pricing benefits, just given some of the actions you've taken this year or if theres anything out there that you're embedding in that from a market share gain perspective as well.

Well. Thank you Ken for the question I think you've sort of answered it for us because it really does cover a number of different areas that.

Did factor into our confidence about double digit revenue growth, let's start with the backlog we continue to quote.

The growth in our backlog and the strength in that backlog.

And obviously, that's a business that we booked that we need to bill through delivery of the products and services. So obviously, we feel very confident about the ability to convert that into revenue and as that number grows obviously, our confidence in the and future revenues grow you mentioned pricing.

We've spent a lot of time this year trying to get a the current.

Current level of market pricing into our enterprise agreements you know keep in mind around two thirds of our revenue is based on contracts, we have with with larger customers and in each one of those contracts. There's a there are reset points on pricing to reflect market conditions. So we continue to.

Make sure that these pricing updates are on time and current with the market, but theres always going to be a delay in terms of the the revelation of that in the revenue stream. So.

The updates that we've made this year will only fully appear on an annual basis next year. So that's certainly a part of it as well.

We continue to have discussions with our customers about their outlook for next year. Despite.

Some concerns about the overall economy the sectors in which we operate.

All of our customers are indicating our confidence and budgets for next year. So that certainly gives us you.

A further perspective, there and then specific to our upstream and midstream business.

We're we're seeing very consistently estimates of 20 plus percent capex growth in 2023 over 2022, as we've said before we've got a very strong position in.

In the North American oilfield, we continue to.

Both defend and.

Grow that position.

As evidenced by our New service center in Midland. So, we really feel good about that upstream and midstream sector and as I mentioned in our prepared comments, we've seen specific backlog growth in that upstream space. So really it's a combination of all these factors are normally we wouldn't give guidance. This early.

But we felt that base.

Based on all the factors that we've talked about here that we could do so with confidence.

That's very helpful color.

For my follow on.

Go back onto the margins.

Year over year EBITDA flow through margins, you've kind of been up in the high teens to low 20% range on 20% to 30% plus revenue growth so far.

I think the implied.

Leverage our flow through margin for the fourth quarter.

It comes off a little banking Europe , probably on the seasonality as well as some of those those line pipe comments you made earlier Kelly.

Is this how should we think about the flow through margin.

As we kind of think about the forward growth outlook.

In 2023, and beyond is and I think that the.

The comments you made kind of suggest a low double digit incremental margin through on EBITDA is that what you're thinking the right average operating leverage for the company going forward.

Yeah, Ken it's a great question and it really is a function of what happens with the gross margin story right. So we've drawn the line in the sand at 21%. We were 21, 9%. This quarter. So we're certainly suggesting that we're going to see some decline as the line pipe benefits starts to fall off as I mentioned <unk>.

Earlier, though we think with <unk>.

Some of the other product groups in the.

Growth that we're expecting in some of the accretive margin product lines that we'll be able to offset a lot of that line pipe deflation effect.

But but if we're able to maintain a 21 plus percent level on the gross margin side, we get the SG&A fall through we're not going to have the 20% level type of incremental margins that we are currently posting this quarter, but you know they're going to moderate down I think typically as you probably know if you look at previous cycles are in there.

Kind of an average growth market, we kind of range around the mid teens and that certainly would go that will we will continue to target.

Okay.

And then Kelly just one last quick clarification, sorry, if I missed it but did you highlight what you expect for LIFO expense here in the fourth quarter.

We did not but I will tell you I think I think year to date, we have $50 million of LIFO expense. We're currently estimating another 30, or so give or take so a total year effect of around 80.

And that's pretty similar to last week last year, we were like 77, something like that so a very similar range to what we had last year for LIFO expense.

Very helpful. Thank you.

Thanks, Ken.

Our next question is from Nathan Jones with Stifel. Please proceed.

Hello Nathan.

Anything with us.

Yeah, Hi can you hear me, Yes, Hey, Ken Hey, This was a very good morning. This is Adam Farley on for Nathan.

Oh, Hey, Adam.

Hey, I wanted to follow up on the backlog again and also supply chain really strong backlog numbers.

But were there any impacts from supply chain disruptions.

Any products that customers want it to be delivered in the third quarter that.

Couldn't because of disruptions to supply or freight and logistics.

Yeah. Adam This is Rob we are we've really seen.

A.

Tailing off of the supply chain issues that we saw earlier this year that really went across multiple product groups. The only area now where we've had some supply chain challenges is really in the.

The gas products area Theyre, just a limited number of manufacturers.

Manufacturers of certain of the equipment relating to let's say meters and risers and that sort of thing, but absent that supply chain issues really haven't been a factor for us and even within the gas utility space, we can't really identify specific projects that were postponed or delayed.

Significant to the performance of MRC global due to supply chain issues.

We continue to watch this space because there are again, a limited number of suppliers in that particular area, but really nothing to report of any note on third quarter results related to supply chain challenges.

Okay, that's good to hear.

Did want to ask you about your E Commerce strategy presentation highlighted about 50% of total orders are now digital.

So maybe you could could you provide some color on how your digital strategy is progressing.

And would you expect further digital penetration to.

Drive support for margins and maybe better working capital management going forward.

Yeah, we continue to invest significantly in our digital strategy.

We're moving more of our commerce to the digital realm, and you can see an increasing number of digital orders.

Quarter over quarter year over year in terms of what we're providing and keep in mind.

This isn't just a more efficient way for our customers to buy from us or for us to serve those customers, but we also have an opportunity to engage with our customers in a more meaningful way when they get on the.

The MRC go website, and theyre, making purchases through either through the site itself or through the punch out through their own ERP system, we have an opportunity to really engage with the customer around the products and services they're purchasing.

The status of those orders.

And even look more predictably to what they may need going forward and be ahead of that in addition, as you referenced.

Some of our digital our digital benefits include the opportunity to centralize inventory.

So you have fewer piles of inventory you can.

You can work from and obviously that reduces working capital.

Cost increases working capital efficiency. So the digital strategy is really one that continues to advance both here in the U S and internationally, we've actually added some international sites and we'll continue to add those as we move through the year. So we feel very good about it and it's certainly another benefit of working with MRC global.

Okay. Thank you for taking my questions.

Youre welcome. Thank you Adam.

We have reached the end of our question and answer session I would like to turn the conference back over to Monica for closing remarks.

Thank you for joining us today and for your interest in MRC Global and we look forward to having you join us for our fourth fourth quarter conference call in February have a great day. Thank you.

Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

Okay.

Okay.

Yeah.

[music].

Yes.

Okay.

[music].

Okay.

Okay.

Yeah.

[music].