Monica Schafer Broughton - Vice President-Investor Relations Andrew R. Lane - Chairman, President & Chief Executive Officer James E. Braun - Chief Financial Officer & Executive Vice President.

Matt Duncan - Stephens, Inc. Sean C. Meakim - JPMorgan Securities LLC Ryan J. Merkel - William Blair & Co. LLC David J. Manthey - Robert W. Baird & Co., Inc. (Broker) Ryan Cieslak - KeyBanc Capital Markets, Inc. Brent Dwayne Rakers - Thompson Research Group LLC.

Greetings, and welcome to MRC Global's Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Monica Broughton, Investor Relations.

Thank you. You may begin..

Thank you, Christine, and good morning, everyone. Welcome to the MRC Global fourth quarter and year-end 2015 earnings conference call and webcast. We appreciate you joining us. On the call today, we have Andrew Lane, Chairman, President and CEO; and Jim Braun, Executive Vice President and CFO.

There will be a replay of today's call available by webcast on our website, mrcglobal.com as well as by phone until March 8, 2016. The dial-in information is in yesterday's release. We expect to file the 2015 Form 10-K this week and it will also be available on our website.

Please note that the information reported on this call speaks only as of today, February 23, 2016 and therefore you're advised that this information may no longer be accurate as of the time of replay.

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 at MRC Global.

However, MRC Global's actual results could differ materially from those expressed today. You are encouraged to read the company's SEC filings for a more in-depth review of the risks factors concerning these forward-looking statements. And now, I would like to turn the call over to our CEO, Mr. Andrew Lane..

upstream declined the most at 49%, midstream by 30%, and downstream by 17%. The gas utility space continues to be a bright spot in the midstream sector. It grew 10%, but not enough to offset the decline in revenue from the transmission and gathering customers. The decline in downstream was across all segments. The strength of the U.S.

dollar continued to impact both international and Canadian revenues in 2015. Currency negatively impacted sales $30 million in the fourth quarter and $162 million for the year, both versus a year ago.

As a result of current market conditions, we recorded a $462 million impairment charge for goodwill and intangibles in the fourth quarter with $237 million attributable to the U.S. and $225 million attributable to international.

This resulted in a net loss to common shareholders of $399 million or $3.92 per diluted share in the fourth quarter 2015 as compared to net income of $31 million or $0.30 per share in the same quarter a year ago.

Excluding the impairment and other items, including severance, litigation and a charge for the OCTG sale, net income available to common shareholders for the fourth quarter was $12 million or $0.12 per diluted share as compared to $34 million or $0.33 per diluted share last year.

Adjusted gross profit for the year was $813 million or 18% of total sales. Considering the current market, 18% gross margin was a good achievement. We recently announced the sale of our U.S. OCTG business to Sooner Pipe, LLC.

OCTG is the only product line we distributed that was directly tied to rig count and it had the lowest gross margin of all our products in the mid single-digit range.

Over the past several years, we have been reducing our exposure to OCTG and, with this sale, we have exited the business, which will have the effect of increasing our gross margin percentage by around 80 basis points and will reduce annual SG&A expenses by $3 million to $4 million.

While this business was profitable, the current poor outlook for drilling activity and excess steel mill capacity made this a good time to make a step-change by selling this product line and allows us to reinvest the proceeds in our ongoing business.

This sale also means that when a recovery begins, we can focus on investing our working capital in higher margin products. For context, a year ago in February 2015, we had $160 million of OCTG inventory. So when the recovery begins, we will have the working capital capacity to use for higher margin products.

The transaction closed February 16 and we expect a smooth transition of the business to Sooner and do not expect any impact to our existing customer relationships. As you may recall, last quarter the board authorized the $100 million share repurchase program. The authorization allows management to buy shares in the open market at their discretion.

And during the fourth quarter, the company repurchased $11.5 million of stock at an average price of $14.12 per share. This program allows the company to be opportunistic and we will continue to evaluate repurchasing our shares until the program is scheduled to expire at the end of December 2017.

Our focus remains on retaining our core customer contracts and gaining market share, consistent with our strategic focus. We recently signed a three-year renewal with Marathon Petroleum. Marathon Petroleum has been a customer for over 20 years and was one of our top 20 customers in 2015.

Renewing this agreement positions us to grow our existing combined contracts with both Marathon Petroleum and MarkWest. Regarding the cost structure, as we discussed on previous calls, we have continually implemented cost-cutting measures that started in 2014 to improve profitability and size the business to the current environment.

This quarter, we closed or consolidated an additional 17 branches, generally in upstream areas where demand is weak. For the full year, we have closed or consolidated 36 branches globally. We will continue this practice of reviewing branch performance and making adjustments as needed.

Since the middle of 2014, we have reduced head count by approximately 965 or 19% and we have reduced total operating costs by over 20%. In January 2016, we reduced head count by an additional 50 positions and we expect to reduce head count by another 100 positions this quarter, including 11 that were directly related to the OCTG business.

We will continue to evaluate the cost structure to keep it in line with customer spending and activity levels. One of the benefits of our distribution business model, which is worth mentioning again, is its ability to generate cash from working capital reductions in a countercyclical fashion, providing downside protection.

In 2015, the business generated $690 million of cash flow from operations, which is the highest annual amount in the company history. We expect to generate more than $200 million in cash from operations in 2016, given the continued contraction in the business. We will continue to be opportunistic with regard to the allocation of capital.

We aggressively managed working capital last year. Since the end of 2014, we have reduced inventory by approximately $400 million or 34%, and we plan to continue to reduce inventory and improve turns in 2016 to optimize inventory to fit the business. In 2015, we reduced total debt to $524 million for a reduction of about $930 million.

This is the lowest debt level for the company since 2007. In addition, the terms of our credit facilities are favorable. We have no financial maintenance covenants. We have no near-term maturities and an average interest cost of 5%.

We have a strong balance sheet and this puts the company in a strong position to weather this market and take advantage of any potential opportunities that may arise, which brings me to M&A. M&A is one of the major tenants in our long-term growth strategy and we maintain an active list of potential targets. Since 2008, we've made 14 acquisitions.

We do expect opportunities in the future and we are positioning the company to have very strong liquidity to execute when those opportunities present themselves. No doubt we are in the midst of one of the most challenging two-year cycle in oil and gas history. However, we are well-positioned to succeed regardless of how the market develops.

We continue to stay the course by executing against our strategy, staying focused on areas of the business we can control.

We remain steadfast in our strategic objectives that are gaining and retaining market share by renewing and winning new customer contracts, sizing the business to current economic conditions, managing working capital and strengthening our balance sheet. So with that, let me now turn the call over to Jim to review our financial results..

Thanks, Andrew, and good morning, everyone. Total sales for the fourth quarter 2015 were $967 million, which were 36% lower than the fourth quarter of last year due to the continued challenges in oil and gas end markets, which has reduced customer spending across all geographies and all sectors.

Sequentially as expected, revenues declined 10% in total and across all geographic segments. U.S. revenues were $778 million in the quarter, down 33% from the fourth quarter of last year. Market activity as measured by the rig count decreased 61% over the same time period. All sectors and all product lines experienced contraction in the quarter.

The upstream sector decreased the most at 47%, the midstream by 31% and the downstream by 7%. Of the product lines, OCTG decreased the most at 53%, followed by line pipe at 49%. Sequentially, U.S. segment sales were down from the third quarter by 10% versus a 13% sequential decline in the U.S. rig count.

Canadian revenues were $66 million in the fourth quarter, down 57% from the fourth quarter of last year, due to the significant decline in customer spending. A decline in the Canadian dollar relative to the U.S. dollar reduced sales by $12 million, and sequentially the Canadian segment was down 5% from the third quarter.

In the International segment, fourth quarter revenues were $123 million, down $76 million, or 38% from a year ago. Sales were down due to lower activity, particularly in Norway, the UK, Australia and Singapore, as well as from a $19 million negative impact of a stronger U.S. dollar.

Sequentially, the International segment was down 10% from the third quarter. Now turning to our results based on end market sector. In the upstream sector, fourth quarter sales decreased 49% from the same quarter last year to $369 million. The decline in upstream sales was in line with reduced customer spending, and excluding U.S.

OCTG, upstream sales would have been $307 million in the quarter, down 48% from a year ago. Midstream sector sales were $317 million in the fourth quarter 2015, a decrease of 30% from 2014. Among the subsectors, sales to our gas utilities were higher by 10%, and sales to transmission and gathering customers decreased 54%.

Gas utility sales were up due to favorable weather for utility work and the timing of customer projects. The decrease in sales to transmission and gathering customers was due to weakness in gathering line work, direct line pipe activity and line pipe deflation.

I'd like to spend a little time on the midstream given the mix among our end markets has shifted with the contraction in the upstream. Our midstream sector, which represented a third of revenue in the fourth quarter, is made up of two subsectors, transmission and gathering and gas utilities, each with different drivers.

The first subsector, transmission and gathering, includes customers who build and repair gathering systems and regulated and non-regulated pipelines. The transmission and gathering business is driven by new gathering systems of production in the field, new pipeline projects, both for those upstream takeaway or downstream intake.

The second subsector is our gas utility business, which is driven by pipeline integrity projects and new residential and commercial gas hookups and related infrastructure. The mix between our transmission and gathering customers and the gas utility customers has been changing over the last year, most noticeably in the fourth quarter.

Midstream was weighted about 60% transmission and gathering throughout 2014, and in 2015, that's been shifting, and in the fourth quarter, it was weighted about 40% transmission and gathering, and nearly 50%-50% for the year.

This is reflective of the contraction in transmission and gathering customer spending activity, as there is less need for gathering systems and less new non-regulated pipeline projects. From a product line perspective, midstream is about 30% line pipe, 30% gas products, 20% valves and 20% fittings and flanges and other.

And similar to the upstream business, our revenue opportunities should track the non-acquisition CapEx of our midstream customers. However, there could be differences due to timing or the types of projects. In the downstream sector, fourth quarter 2015 revenues were $282 million, a decrease of 17% as compared to the fourth quarter 2014.

The climb in downstream is across all geographies and all subsectors. Slower project activity and a weak turnaround for refining and chemicals contributed to the weakness in downstream. And turning to revenue by product class.

Our energy carbon steel tubular product sales were $224 million during the fourth quarter of 2015, with line pipe sales of $162 million, and OCTG sales of $62 million.

Overall, sales from this product class decreased 52% in the fourth quarter from the same quarter a year ago, including a decrease in line pipe of $159 million, or 50%, and a decrease in OCTG sales of $82 million, or 57%. In terms of pricing, line pipe prices have continued to decline throughout the year.

Based on the latest Pipe-Logix All Items Index, average line pipe spot prices in the fourth quarter 2015 were lower than the fourth quarter of 2014 by 21% and were down 12% for the year. We expect some deflation in certain types and sizes of line pipe to continue in 2016.

Sales of valves, fittings, flanges and other products were $743 million in the fourth quarter, a 29% decrease from the fourth quarter of 2014. Sales of valves were down 26%, fittings and flanges were down 37%, and oilfield, gas and related products were down 25% all from the same quarter in 2014.

And then turning to margins, gross profit percentage increased 170 basis points to 18.1% in the fourth quarter 2015 from 16.4% in the fourth quarter of 2014. The increase was primarily due to the impact from LIFO.

A LIFO benefit of $23 million was recorded in the fourth quarter 2015, as compared to a expense of $6 million in the fourth quarter of 2014.

The adjusted gross profit percentage, which is gross profit plus depreciation and amortization, the amortization of intangibles and plus or minus the impact of LIFO inventory costing was 17.7% in the fourth quarter of 2015, the same as the third quarter of 2015, and down from 18.1% in the fourth quarter of 2014.

In light of what is going on in the market, gross profit margins are holding up reasonably well. SG&A cost for the fourth quarter of 2015 were $146 million, a decrease of $28 million or 16% from $174 million a year ago, due primarily to the cost cutting measures.

Also included in the fourth quarter 2015 is severance of $5 million and an increase in auto, liability and workers' compensation claims of approximately $2 million, which we don't expect to be recurring. Adjusting for the other items, SG&A declined 20%.

We reduced our operating expenses throughout 2015 through a reduction in head count, hiring and salary freezes and other cost savings measures. We've eliminated over 800 positions since the end of 2014, and this represents a workforce reduction of approximately 17%.

We continue to look for cost reduction opportunities to size our business appropriately to fit the current customer activity levels. Given the sale of OCTG and the cost saving measures being undertaken, we expect SG&A expense will run a $130 million to a $132 million per quarter in 2016 with the current head count plan.

We will continue to evaluate the cost structure and make adjustments where needed. Interest expense totaled $9.2 million in the fourth quarter of 2015, which was lower than the $16.3 million in the fourth quarter of 2014, due to a $930 million reduction in debt. We recorded a small tax benefit in the fourth quarter against a large pre-tax loss.

The unusually low rate was due primarily to the impairment of goodwill and intangibles, the majority of which was not tax deductible. We expect the effective tax rate to be about 43% in 2016, based on our current geographic profit mix and it reflects losses in international operations without corresponding tax benefit.

Our fourth quarter 2015 net loss attributable to common shareholders was $399 million or $3.92 per diluted share compared to net income of $31 million or $0.30 per diluted share in the fourth quarter of 2014.

For the fourth quarter 2015, adjusted net income attributable to shareholders was $12 million or $0.12 per diluted share, and excludes after-tax charges related to the impairment of goodwill and other intangibles of $402 million, severance of $3.6 million, litigation of $2.2 million and the loss on the disposition of the OCTG product line of $3.2 million.

This is compared to adjusted net income attributable to common shareholders for the fourth quarter of 2014, a $34 million or $0.33 per diluted share. Looking ahead to 2016, the amortization expense related to the intangibles is expected to be lower by about $12 million per year, as a result of the 2015 impairment charge.

Adjusted EBITDA in the fourth quarter was $34 million versus $102 million a year ago, down 67%. Adjusted EBITDA margins for the quarter were 3.5% down from 6.7% a year ago due to lower revenues and margins as described above, partially offset by cost reductions.

Our operations generated cash of $209 million in the fourth quarter of 2015 and a total of $690 million for the year. Our working capital at yearend 2015 was $961 million, $543 million lower than it was at the end of 2014.

We improved the number of days sales outstanding by approximately nine days from the end of last year as we pursued collections and improved processes. Given the market conditions over the past year, we have been diligent about monitoring credit and reducing credit limits for customers we deem high risk.

Our debt outstanding at yearend was $524 million compared to a $1.454 billion at the end of 2014, and our leverage ratio at the end of 2015 was 1.9 times. We have no financial maintenance covenants in our debt structure and our nearest maturity is July 2019.

As our working capital requirements continue to go down with lower activity, we expect to generate cash that we can use to build cash reserves, repay debt, repurchase shares or invest in the business. In addition, the availability on our ABL facility was $672 million at the end of the year, which gives us ample flexibility.

In fact, at the end of the year, we had nothing drawn on the ABL and had $69 million in cash. Capital expenditures were $39 million in 2015. This is an increase of $19 million over 2014, primarily due to the implementation of a new ERP system to bring the international segment on to one system.

As a result of our various acquisitions, today we operate on several disparate systems internationally and the plan is to migrate the international business to one system to improve service to the customers and improve our operating effectiveness and profitability.

The first phase of this implementation is expected to go live in mid-2016 and the next phase incorporating Europe will begin in 2016 and is expected to go live in 2017.

The ERP's implementation is on schedule and on budget and including regular capital spending needs and plans, the total capital budget for 2016 is expected to be approximately $45 million, $6 million higher than 2015 levels due to a full year of ERP implementation.

And finally, as it relates to foreign exchange, the average currency exchange rates in 2015 were around 15% to 20% lower than 2014 for the Canadian and Australian dollar and the Norwegian kroner as compared to the U.S. dollar. In 2016, we also expect to have a negative impact related to currency of about $50 million on our top line as the U.S.

dollar has continued to strengthen against some of the major currencies where we operate, including Canada, Australia, Europe and Norway. And now, I'll turn it back to Andrew for closing comments..

Okay. Thanks, Jim. We recently announced that effective with our upcoming Annual Meeting of Stockholders in April, Rhys Best, our currently Lead Director, will serve as our Chairman of the Board. I will remain as a board member and my employment contract to serve as President and CEO has been extended until 2020.

We have given careful consideration to separating these roles since our IPO. We have matured as a public company, and we have recently added additional public company board expertise.

We believe this is a good time to make this change in our governance structure, which many believe is the governance best practice and we believe fits our company at this time. This change allows management focus on customers, gaining market share, cost control, operational excellence and delivering shareholder value.

I'll now wrap up with our current outlook. This is markedly one of the worst oil and gas cycle downturns in history.

We haven't experienced the two-year sequential decline of this magnitude since the mid-1980s, and while there are many predictions on when a recovery could take place, we have yet to see any signs of one and commodity prices remain very volatile.

Some estimates are calling for a 40% to 50% reduction in upstream capital spending in 2016 based on the current $30 oil environment. Recent public announcements by operators are consistent with these estimates. The current uncertainty in the market permeates throughout the energy space and is as significant as any I can remember.

Such an environment results in a wider range of possible outcomes in 2016. As such, we currently estimate 2016 revenue to be down 20% to 30% from a 2015 base of approximately $4.2 billion, which excludes OCTG revenue.

Based on our customer mix and the mix between our geographies, we expect a better result than the 40% to 50% CapEx reduction in 2016 upstream capital spending as some predict. We have a strong MRO and contract position with the major IOCs, and we expect their spending to be down approximately 20%.

We also expect some of these lower spending trends to affect our non-gas utility midstream business as the persistent lower oil and gas prices are impacting the ability of midstream transmission companies to access capital to invest in new projects.

Midstream customer CapEx spending is an indicator of our revenue opportunities and some estimate capital expenditures by MLP or transmission midstream companies to be about 20% lower in 2016 compared to 2015. Our gas utility revenues are expected to be flat with 2015 or up slightly.

We also expect the downstream business to be negatively impacted as the refining spreads have come down and many integrated companies are pulling back spending across their organizations. However, we do expect to see improved turnaround activity in 2016 over 2015 due to turnarounds being delayed last year.

Geographically, we expect the biggest percentage decline to be in the United States, followed closely by Canada, with the least impact in international.

Our backlog, excluding OCTG, was $500 million at the end of the year, down 47% from a year ago, primarily due to decreases in project spend, which is indicative of the lower momentum we see going into 2016. In fact, 2016 has started off slowly. January revenue reflects the current $30 oil environment and a U.S. land rig count currently below 500.

We believe the first quarter revenue will be down about 15% to 20% from the fourth quarter 2015 adjusted for OCTG. We have managed through downturns in the energy cycle before.

And while we face a challenging 2016, MRC Global is well-positioned not only to manage through the toughest market downturn in history, but also to be in an even stronger position when we emerge.

We will continue to execute our strategy for market share gains and to deliver exceptional customer service, which is the foundation upon which we built this company. We will also continue to control cost and preserve financial flexibility to maximize returns. Our balance sheet is strong.

We have a low cost debt structure with favorable terms and no near term maturities, and we are positioned for maximum flexibility. We can take advantage of any opportunities that arise including repurchasing our stock, reinvesting in the business for organic growth, holding steady or making acquisitions, should we see a bottom in the cycle.

Through it all, MRC Global is focused on maintaining its position as the market leader. So, with that, we will now take your questions.

Operator?.

Thank you. Thank you. Our first question comes from the line of Matt Duncan with Stephens. Please proceed with your question..

Hey, good morning, guys..

Good morning, Matt..

So Andy, I want to dig in a little bit more on some of the outlook commentary you just gave. And I appreciate all the color, it certainly helps.

On the upstream side, when you say you've got CapEx budgets down 40% to 50%, is that – you are going to do a little better than that, I guess, based on some of the comments that you made? So are we talking – you guys are probably down somewhere in the 30% to 40% range excluding OCTG from both years?.

Yes, Matt. That'd be right in the ballpark of what we're thinking. We've seen a lot of the large independent customer base, especially in the U.S., have reductions in that 40% to 50%, even some up at 60%, and of course, we have a blend of our major IOC customers in upstream also.

So I think the 30% to 40% upstream decline ex-OCTG is a good place to start..

Okay. And then in the first quarter specifically, you said down 15% to 20% sequentially from the fourth quarter, excluding OCTG again. You obviously had, what, $62 million of OCTG revenue in the fourth quarter, and you've got about half a quarter of it in the 1Q.

So does that have much of an impact on what the total is going to look like? I guess, probably not.

But is the easiest way for us to do this just to take OCTG out completely? Is that how you're going to report it given that you sold that business?.

Yes, Matt, it was a very small impact in January. Of course, the year started off slow in upstream and OCTG was in that category.

So I would think about it just like you propose – you look at $967 million in the fourth quarter, take out the $62 million we did in the fourth quarter, and so start with a base around $900 million, $905 million and then less the 15% to 20% guidance gets you kind of in the range of $730 million to $770 million, and that's very in line with what we've seen in January and the first half of February..

Okay. And then last thing, and I'll hop back in the queue, just on the midstream side. I think this is probably the piece that people are grappling with the most. Remind me what you said on how much you think the transmission and gathering piece of that is going to be down this year. It was down, I guess, over 50% in the fourth quarter.

You've got MLPs – MLP customers, some of which I'm sure have funding constraints.

How is that going to translate into your transmission and gathering business this year?.

Hey, Matt, this is Jim. So as you look at that midstream business, the comment we made was that some of the CapEx spending was going to – could be down as much as 20%.

We tend to think that the limits or the ability for people to get debt financing is going to come under strain and we could see midstream down anywhere between 20% and 30% for the full year based on what's going to happen in that midstream MLP environment..

Okay. I'll hop back in the queue for other questions. Thanks..

Thanks, Matt..

Our next question comes from the line of Sean Meakim with JPMorgan. Please proceed with your question..

Hey. Good morning..

Good morning, Sean..

So, Andy, just thinking about how much working capital release you think is possible this year. And then, I guess, how do we think about your ranking priorities, given the ABL, there's nothing drawn today relative to share repurchases? Just kind of thinking about some of the puts and takes of sources versus uses of cash this year..

Yeah, Sean, I'll start and then if Jim wants to add anything. But as we said in our prepared remarks, we expect to generate another $200 million cash flow from operations.

Some of that – roughly half of that will come out of inventory, working capital reductions due to the slowness in the business overall, and some will come out of receivables, and then just a collection – the normal generation of cash flow from ops. So if you start with that $200 million, our priorities, first off, as Jim said, we're zero on the ABLs.

So we're building cash at this basis from a conservative standpoint. Of course, cash is king in a downturn. So, we have that – we have $89 million left on board authorization and the shares at our current price. That's a very attractive option for us from our capital allocation standpoint. And then third priority would be pay down some of the debt.

But we know with our leverage under 2.5 times, that debt is just below 5%. So I would say it's conservatively build some cash, buy back shares, and third will be pay down some debt and then fourth, most likely later in the year 2016 would be an M&A focus..

Got it. Okay. Thank you. And then I know it's obviously hard to think about getting anything done right now with budgets coming down like they are.

But as the IOCs continue to work towards lowering cost, both CapEx and OpEx, doesn't that provide an opportunity for an MRC to grow your share of the wallet as they are trying to lower procurement costs through this down cycle?.

Yeah. Sean, you're exactly right. There's two aspects going on there. One, we have a strong balance sheet. We have a leading position in our space. So our major customers don't want disruption in their business as they're managing a lot of their own challenges.

So it strengthens our position to put more work with us where they know we have the strong balance sheet to make it through any – this cycle and any challenges ahead. So that's a plus for us. Also, from an integrated supply standpoint, as they look to reduce costs, there is two aspects that we help them with that.

One is sourcing globally for a lower cost alternative for them and we're known very well with our customer base for helping them with that decision.

And also, as they potentially could cut some of their own fixed costs and procurement, supply chain management and outsourcing, some of those functions to us is another way that we can grow in this current environment, and we work on both of them..

Got it. Thank you for the feedback..

Thanks, Sean..

Our next question comes from the line of Ryan Merkel with William Blair. Please proceed with your question..

Hey, good morning, guys..

Good morning, Ryan..

So just going back to price for a second. Thanks for the information on line pipe pricing.

Can you give us an estimate for how much you think that will be down in 2016?.

Yeah. Ryan, the good news, we don't have any OCTG pricing to talk about this year, and that's been the most volatile. But in line pipe pricing, roughly half the deflation would be my estimate for you now that we saw in 2015.

When you look at seamless pricing today, we are at a level back not to 2009, 2010, but we're already at a level that we sold seamless line pipe at in 2003 and 2004. So, yes, there is a lot of supply, but we see roughly half that type of deflation, less than 10% on seamless in 2016.

Now we see 5% to 10% on domestic ERW as the deflation guidance for you to think about, but still some deflation, but a lot less than we saw in 2015. So that would be our guidance on pricing, especially on line pipe..

Okay. That's helpful. And then, gross margins continue to surprise me positively.

I may have missed it, but did you give us some sense of how you think gross margins could track in 2016?.

Yeah. Ryan, we didn't specifically. I mean, we commented that we've got the benefit of OCTG coming out, which adds about an 80 basis point tailwind, and that's going to be offset by some of the things that Andy mentioned and some competitive pressures.

But with those two factors, we believe that margins are going to hold up well and we should be in that high 17%, 18% range looking forward into 2016 on an adjusted basis..

Great. I'll jump back in queue. Thanks..

Thanks, Ryan..

Our next question comes from the line of David Manthey with Robert W. Baird. Please proceed with your question..

Hi, good morning, guys..

Good morning, Dave..

First off, to understand the sale of this OCTG business.

So, I guess it was around $300 million in revs and based on the gross margin impact, it was at about 6% GP business then?.

Yeah. Dave, I would estimate it, at last year it was $300 million, around 5%, and then take off $3 million to $4 million of direct SG&A costs with that business..

Yeah. In that....

And Dave....

... I'm sorry..

I'll just add a comment to that, and the way we were looking at it going into 2016, roughly half. We would estimate $100 million to $150 million business with a 3% margin given the dynamics of the drill and rig count drop and the current level at 500 rigs.

So, when you think about the business and EBITDA impact in 2016, I would use $100 million, 3% gross margin and $3 million to $4 million SG&A cost that's been eliminated..

In that $3 million to $4 million, just so I'm clear on that, is that a quarterly number?.

Annual..

That's annual, okay. Well, then beyond that, that's not a very big number and I understand that that's a direct cost. But are there any stranded costs? I mean this was at 1.7% or 1.8% of your business that's going away.

Are there stranded costs you think you can harvest in the future?.

Yes. I mean there's always associated costs that of running our kind of hub and spoke model, and that's part of what we've already reduced.

So, the guidance we gave, we've had head-count reductions of 50 in January, and then in February with the sale of OCTG, middle of February, additional direct 11, and then not only just for OCTG, but for the overall upstream slowness we'll have a total of 100 additional reductions.

So some portion of those hundreds are related to associated cost with the OCTG, so those are still to come out in the first quarter..

Okay. All right. Then just to trace that SG&A down here.

If your starting point is $141 million in the fourth quarter, and I assume you'll get maybe $1.5 million or $2 million benefit from the fourth quarter reduction that carries over, then you get another maybe $2 million from the first quarter actions less the impact from this OCTG sale, maybe another $1 million will get you to the mid $130s million.

And if I heard you right, Jim, I think you were talking $130 million to $132 million.

The rest of that, I guess, what, are you anticipating additional cuts in the future or some variable cost that flex down I guess, but anything else that we should think about in that calculus?.

Yeah.

Dave, there's a little bit of a variable cost that flexes down in that and as well as a lot of the reductions in the cost savings that we saw in the fourth quarter – let's say the reductions really occurred at the end of the quarter, so we haven't got a full quarter's benefit of that that you will get in the first quarter in addition to those additional reductions that we'd talked about..

Okay..

And, Dave, I would just add to Jim that we also lower incentive cost planned for in 2016 with the lower results from the business. So, you put all those together and we feel confident that that's going to be a run rate..

Great. All right. Thank you very much, guys..

Thank you, Dave..

Our next question comes from the line of Ryan Cieslak with KeyBanc. Please proceed with your question..

Hey, good morning, guys..

Morning, Ryan..

Good morning..

I just – first I wanted to see maybe what your expectations are for the LIFO impact in 2016 relative to 2015 given what you're seeing in the current business..

Yeah. That – it'll be muted, because we don't have the OCTG, which was a heavy part, but we're probably looking something in the $10 million to $20 million range for 2016 and of course in 2015, it was a total of $53 million for the full year..

Okay.

And then, the additional 100 head-count reduction that you called out there for the first quarter -- does that include the 50 head count in January or is that separate from the 50 in January?.

It's in addition to the 50 head count..

Okay. Got you. And then, the last question I had just was maybe – you talk a little about the price environment outside of line pipe, maybe on the valve and in fitting side. What you're seeing there as we've gotten into the early part of 2016? And maybe, what your expectations are from a deflationary standpoint this year. Thanks, guys..

Yes. I would just characterize those as – of course, there's cost pressures from our customers. They are looking for ways to save on their purchases. We address most of that through sourcing of alternative supply. So I would put the deflation aspects in the low-single digits across our other product lines..

Our next question comes from the line of Brent Rakers with Thompson Research Group. Please proceed with your question..

Yes. Good morning. I just wanted to make sure I get a little bit clarification on a couple of earlier comments. First, if you could maybe revisit your companywide revenue outlook for the year. I know you were talking in terms of ex-OCTG last year. If you could just refresh me as to what you said earlier, Andrew..

Yes. So if you start with the $4.5 billion, I'll use broad numbers here, Brent, if it's okay. $4.5 billion, take off the $300 million OCTG revenue, so if you start with the $4.2 billion and we gave guidance that we would be down 20% to 30% from that, so you get to around $2.95 billion or $3 billion to $3.4 billion.

So, midpoint of our guidance will be around $3.1 billion, $3.2 billion, and that's what we're guiding to. And then, Jim talked to the upstream and the midstream. I don't believe we've talked to the downstream, but we see the downstream in addition to what Jim has already talked about, being down in the 10% to 20% range.

So, I think when you put all that together and you look at the way we're looking at the year now with a very slow start to the year, kind of in that $750 million range in the first quarter run rate we talked about in the guidance there, a small amount of ramp-up in the later half of the year as we think rig count bottoming in the second quarter is the most likely scenario and not a steep pickup, but somewhat of a pickup in the back half you get through that kind of midpoint of our guidance..

Great. Okay. Now that's great clarification. And then, I guess, one other one as well. Jim, I think when you were responding to a question about adjusted gross margin views for next year, I think you said 17% to 18% range for next year.

Is that correct?.

Yeah. I said high 17s% and into the 18% range..

Okay.

And, Jim, I guess my follow-up to that is, with this stability that you've seen with adjusted gross margins the last several quarters already being high 17%s and now with the mix benefit of the removal of the OCT – the lower margin OCTG business, shouldn't – wouldn't that be more in kind of the mid 18%s? Are you anticipating some additional gross margin pressures going into 2016?.

No, you're exactly right, Brent. I mean you get to 18.5% if you take into – consider the OCTG. But we do think there is going to be market pressures that are going to be a headwind to that 18.5%. So, that's why we're calling what we were..

Okay. And then maybe just last question on SG&A. You have had some history of being a bit, let's say conservative if you will with regard to operating cost outlook.

When you look at the severity of kind of Q4 to next year run rate about $180 million drop per quarter, you're talking about, kind of maybe an $8 million-ish drop when you throw out all the unusuals Q4 to next year.

Do you think there is a possibility that there will be further cuts based on your revenue outlook for next year to SG&A?.

No. I think that's fair and again, I would characterize it as, we're very quick to respond to the market and reduce cost as quickly as we can. So, we certainly think if the market gets worse and it's at the high end of that decrease, we'll be more active in managing the cost like we did in 2015..

All right. Great. Thanks a lot, guys..

Thanks, Brent..

Ms. Broughton, it appears we have no further questions at this time. I would now like to turn the floor back over to you for closing comments..

This concludes our call today. Thank you for joining and for your interest in MRC Global. Have a great day..

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