Monica Broughton – Head Investor Relations Andrew Lane – President, Chief Executive Officer & Director James Braun – Chief Financial Officer & Executive Vice President.

Sean Meakim – JPMorgan Securities Matt Duncan – Stephens, Inc. William Bremer – Maxim Group Ryan Cieslak – KeyBanc Capital Markets, Inc. Walter Liptak – Seaport Global Securities.

Greetings and welcome to MRC Global's Second Quarter 2016 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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms.

Monica Broughton, Investor Relations for MRC Global. Thank you. You may begin..

Thank you, Melissa, and good morning, everyone. Welcome to the MRC Global second quarter 2016 earnings conference call and webcast. We appreciate you joining us. On the call today, we have Andrew Lane, 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 August 17, 2016. The dial-in information is in yesterday's release. We expect to file the 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, August 3, 2016, and therefore, you're advised that information may no longer be accurate as of the time of replay. In our remarks today, we will discuss adjusted gross profit percentage, adjusted EBITDA, and adjusted EBITDA margins.

You're encouraged to read our earnings release and security filings to learn more about our use of these non-GAAP measures and to see a reconciliation of these measures to related GAAP items. In addition, the comments made by the management of MRC Global during this call may contain forward-looking statements within the meaning of the U.S.

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 the risk factors concerning these forward-looking statements.

And now, I would like to turn the call over to our CEO, Mr. Andrew Lane..

Thank you, Monica. Good morning and thank you for joining us today and for your interest in MRC Global. I'll begin today with some highlights of the company's performance before turning the call over to our CFO, Jim Braun, for a more detailed review of the financial results; and then I'll finish with our current outlook.

In line with our expectations, our second quarter revenue was $746 million, which is 5% lower sequentially. The business generated $90 million in cash from operations this quarter, and $148 million in the first half of the year. We are on track to deliver more than $200 million in cash from operations in 2016.

Compared to the same quarter a year ago, revenue was down 38%, driven by reduced customer spending across all segments and sectors. Our upstream sector declined the most at 51%, midstream by 30%, and downstream by 30%, also as compared to the same period in 2015.

The decline in downstream was across all segments and reflected the completion of major projects, which offset an increase in turnaround activity.

Net loss attributable to common shareholders for the second quarter was $23 million, or $0.24 per diluted share, including an after-tax severance charge of $0.03, as compared to net income attributable to common shareholders of $15 million, or $0.15 per diluted share, including after-tax severance charge of $0.06 during the same period last year.

During the second quarter, the company repurchased $33 million of stock at an average price of $13.82 per share. We have now repurchased $83 million of stock and we will continue to be opportunistic about repurchasing our shares. At the end of the second quarter, we had approximately 96.4 million shares of common stock outstanding.

I'm pleased to report that we successfully completed in May the cutover to our new ERP system in the Asia Pacific region, within our International segment. It was completed on schedule, on budget, and with no disruptions in business.

We are now beginning another phase of the ERP project by adding the remaining regions in our International segment to that platform. We expect to complete this phase in 2017. Another event this quarter which garnered a lot of attention was the Brexit vote.

While there's a great deal of uncertainty around the impact of this vote, we expect a minimal impact to our business. The UK represents approximately 2% of our total revenue and the UK in addition to the Eurozone countries which for us includes the Netherlands, Belgium, France, and Germany, account for approximately 5% of our total revenue.

We have regional distribution centers in both Bradford, UK, and Rotterdam, Netherlands, position us well to serve our customers in the UK and the EU. Our primary customers in these areas are downstream refiners. We expect the pace of an oil and gas recovery to be measured with more meaningful improvements expected in the second half of 2017.

Given that outlook, we continue to reduce the cost structure of our business. This quarter we closed or consolidated additional branches, bringing the total number of branches we have closed or consolidated to 19 this year, 12 this quarter, and 63 branches since June 2014. We will continue reviewing branch performance and make adjustments as needed.

We reduced head count by another nearly 200 employees in the second quarter for a total of approximately 400 reductions this year. Since the end of June 2014, we have reduced head count by approximately 1,300, or 26%, and we have reduced total operating cost by 27%.

We will continue to evaluate the cost structure and expect to have additional cost-reduction measures in the third quarter to keep expenses in line with customer spending and activity levels.

As part of our focus on optimizing operations, we have reduced working capital, net of cash, by $798 million since the peak in 2014, by $175 million in the first half of the year, and by $92 million in the second quarter.

During the second quarter this year, we grew our cash balance by $46 million, ending the quarter with $167 million in cash and resulting in a net debt balance of $349 million, which is the lowest level since 2007. We have no financial maintenance covenants, no near-term maturities, and an average interest cost of 5.4%.

Our availability on our asset base revolver is $478 million at the end of June 2016. We continue to have substantial financial flexibility and are well-positioned for eventual recovery. Regarding acquisitions, we have an attractive list of potential targets.

We continue to believe there will be opportunities in the future for our strong liquidity position, allowing us to execute when those opportunities present themselves. We remain cautious regarding the recovery in oil and gas markets, as we are yet to see meaningful changes in our customers' capital spending programs.

We also remain steadfast in executing against our strategy and expect that when customers increase spending, they will look to us for their solutions and spend more of their budgets with us, as we have gained market share with current and new customers.

While some of the cost-saving measures we have taken are temporary, there are others that are more permanent, and we should see a benefit from those structural changes. 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 second quarter 2016 were $746 million which were 38% lower than the second quarter of last year, and were lower across all segments and all sectors. Sequentially, quarterly revenue declined 5%, as expected. U.S.

revenue was $551 million in the quarter, down 42% from the second quarter of last year. Excluding $78 million of quarterly OCTG revenue from a year ago, U.S. revenue was down 34%. As you may recall, we sold our U.S. OCTG product line earlier this year. All sectors in all product lines declined in the quarter as compared to the second quarter of 2015.

The upstream sector decreased the most at 66% in total, or 40% excluding OCTG revenue, from the second quarter of last year. Upstream market activity, as measured by the rig count decreased 53% over the same time period. The U.S. midstream sector declined by 32% and the downstream sector declined by 31%.

Of the product lines, line pipe decreased the most at 63%. Sales were down in midstream due to lower project activity and deflation in line pipe prices. Sales in downstream decreased primarily due to lower project activity and some deferrals of MRO expenditures. Sequentially, quarterly U.S. segment revenue was down 5% driven by upstream and downstream.

Midstream increased 5% sequentially. Canadian revenue was $54 million in the second quarter, down 31% from the second quarter of last year due to a decline in upstream activity levels driven by a lower oil price. The decline in the Canadian dollar relative to the U.S. dollar reduced sales by $3 million.

Canadian revenue was down 16% sequentially, reflecting the seasonal break-up period in Canada. In the International segment, second quarter revenue was $141 million, down 14% from the same period a year ago.

Sales were down due to lower project activity and deferral of MRO expenditures particularly in Norway and Australia, as well as from a $4 million negative impact of a stronger U.S. dollar.

Sequentially, International segment revenue was up 25% due to a pick-up in some project activity including the first deliveries on the Johan Sverdrup project in Norway. Now, turning to the results based on our end market sector. In the upstream sector, second quarter sales decreased 51% from the same quarter last year to $211 million.

Excluding OCTG revenue, upstream sales declined 33% from the second quarter last year. The decline in upstream sales reflects the continued weakness in the oil and gas market and continued reductions in customer spending in 2016. The midstream sector was again our largest sector in the quarter at 39% of total sales and is over 90% U.S.-based.

Midstream sector sales were $292 million in the second quarter of 2016, a decrease of 30% over the same period in 2015. Among the midstream subsectors, sales to our gas utilities were lower by 15%, as 2015 was a strong second quarter due to higher line pipe sales which did not repeat in 2016. Sequentially, gas utility sales were higher by 13%.

Sales to our transmission and gathering customers decreased 44% from the same period a year ago reflecting continued reductions in gathering line work, direct line pipe activity, and line pipe deflation in the quarter. The mix between transmission and gathering customers and gas utility customers was split 44% and 56%, respectively, for the quarter.

In the downstream sector, second quarter 2016 revenue was $243 million, a decrease of 30% as compared to the second quarter of 2015. The decline in downstream is across all geographies.

The roll-off and delay of large and small projects, together with a general reduction spending in line with lower commodity prices, have contributed to the decline in the downstream. While we did see an improvement in turnaround activity this quarter, it was not enough to offset the decline in projects.

We do expect to see elevated turnaround activity in the fall turnaround season later this year, as well as the strongest turnaround season in years in the spring of 2017. We also expect to see an increase in downstream project activity in 2017 once [indiscernible] and other project deliveries begin. And now turning to the revenue by product class.

And as we go through our sales by product class, you'll notice we've changed the split out of our products with the sale of the OCTG business. Our energy carbon steel tubular products sales were $96 million during the second of 2016, which now only consists of line pipe sales. Sales of line pipe declined 60% from the second quarter of 2015.

Line pipe prices have continued to decline in the quarter. Based on the latest Pipe-Logix All Items index, average line pipes spot prices in the second quarter of 2016 were lower in the second quarter of 2015 by 20%.

While some mills have published price increases, the lack of demand for pipe is not a lot on these actions to have a major impact on the market. Sales of valves, valve actuation, and instrumentation were $299 million in the second quarter of 2016 as compared to $396 million in the same quarter a year ago, for a decline of 24%.

Revenue from fitting and flanges and related products is $163 million in the second quarter of 2016 as compared to $250 million in the same quarter a year ago, representing a decline of 35%.

Our sales of gas products were $108 million in the second quarter of 2016 as compared to $121 million in the same quarter a year ago, representing a decline of 11%.

And all remaining products including oilfield supplies were $80 million in the second quarter of 2016 as compared to $111 million in the same quarter a year ago, representing a 28% decline. Turning to margins. The gross profit percentage was 16.8% in the second quarter of 2016 and 17.2% in the second quarter of 2015.

A LIFO benefit of $1 million was recorded in the second quarter of 2016 as compared to a $15 million benefit in the second quarter of 2015.

The adjusted gross profit percentage, which is gross profit plus depreciation and amortization, amortization of intangibles and plus or minus the impact of LIFO inventory costing divided by revenue, was 18.8% in the second quarter of 2016, up from the 17.6% in the second quarter of 2015.

Despite customer pricing pressures, adjusted gross profit margins improved due to mix changes and product substitutions. Margins benefited from a lower mix of low-margin project and carbon pipe sales in the current quarter.

SG&A cost for the second quarter of 2016 were $135 million, a decrease of $24 million, or 15%, from $159 million a year ago due primarily to the cost-reduction measures. Included in the second quarter of 2016 is severance of $4 million and ERP-related cost of $8 million.

The second quarter of 2015 includes $7 million of severance and $3 million of the ERP cost. The ERP expenses, which were reflected in our U.S. operating segment, were elevated as a result of the roll-out, training, and support activities in our Asia Pacific business when the system went live in May.

On a sequential basis, foreign exchange rates unfavorably contributed approximately $2 million in expenses. In the second quarter, we continued to reduce our operating expenses through a reduction in head count of nearly 200 positions. We've eliminated approximately 1,300 positions since June of 2014.

This represents a workforce reduction of approximately 26% and a decline in our SG&A expenses of 27% over the same period. Going forward, we expect SG&A expense, excluding severance, will run approximately $126 million to $128 million per quarter in 2016 due to additional cost reductions and lower ERP expenses.

We continue to take cost-reduction measures to size the business to current customer activity levels. Interest expense totaled $9 million in the second quarter of 2016, which was lower than the $13 million in the second quarter of 2015 due to lower average debt.

The effective tax rate for the second quarter was 11%, and we now expect the full-year effective tax rate to be 22%.

The reduction in the effective tax rate from 43% to 22% is due to the lower forecast of pre-tax income across all of our segments, combined with an increase of the relative significance of pre-tax losses in certain foreign jurisdictions where the losses have no corresponding tax benefit.

This change in the expected rate had an effect of lowering net income available to common stockholders by $0.06 per diluted share in the quarter.

Our second quarter 2016 net loss attributable to common shareholders was $23 million, or $0.24 per diluted share, compared to net income of $15 million, or $0.15 per diluted share, in the second quarter of 2015.

The second quarter of 2016 and 2015 include severance and restructuring after-tax charges of $3 million, or $0.03 per diluted share, and $6 million, or $0.06 per diluted share, respectively. Adjusted EBITDA in the second quarter was $15 million versus $63 million a year ago, down 76%.

Adjusted EBITDA margins for the second quarter were 2%, down from 5.3% a year ago due to the lower revenue and margin dollars, as described above, partially offset by the cost reduction measures.

Looking toward an eventual recovery, we would expect to see incremental EBITDA margins above our historical experience of 15% at least during the early parts of a recovery. The business generated cash from operations of $90 million in the second quarter of 2016 and $148 million for the first half of the year.

We continue to expect that we would generate in excess of $200 million of operating cash flow this year. Our working capital, excluding cash, at the end of the second quarter was $716 million, $92 million lower than it was at the end of the first quarter.

We improved the number of days payable outstanding by approximately four days from the end of last quarter and we improved days sales outstanding in the second quarter from the first quarter by two days.

And as compared to the same quarter a year ago, days payable outstanding and days sales outstanding are improved by eight and five days, respectively. We continue to optimize working capital and drive efficiencies. Our debt outstanding at quarter-end was $516 million comparable to the balance at the end of March.

As we have built cash, our net debt position is $349 million at the end of the second quarter, down $48 million from $397 million at the end of the first quarter. Our leverage ratio has increased as adjusted EBITDA has declined, and we are now at 2.95 times as compared to 2.4 times at the end of the first quarter.

While this ratio is expected to increase over the balance of the year, we have favorable terms in our debt structure including no financial maintenance covenants and our nearest maturity is July 2019. In addition, the availability on our ABL facility was $478 million at the end of the second quarter with nothing drawn.

And we had $167 million in cash providing ample liquidity. As the market grows and the customers spend more, our ABL gives us the flexibility to comfortably grow our working capital. Our balance sheet is strong with a debt structure that is flexible and conducive to future growth. Capital expenditures were $4 million in the second quarter.

This is a decrease of $5 million over the second quarter of 2015 primarily due to the timing of our ERP implementation. We went live successfully in Asia Pacific in May, and the related [indiscernible] rather than being capitalized. We have started the next phase of our ERP project, bringing Europe and the Middle East onto the system.

We expect that implementation to go live in 2017. Our total capital expenditures for 2016 are now expected to be approximately $35 million to $40 million, $5 million to $10 million lower than previously estimated as we manage capital expenditures closely in the current environment.

Our backlog was $657 million at the end of the second quarter, down 6% from a year ago excluding OCTG backlog in the second quarter 2015 of $70 million. Since December 2015, backlog has increased $157 million, or 31%, excluding OCTG backlog in December 2015 of $42 million.

We saw a 53% increase in our International backlog due primarily to specific projects in Australia and Norway which are expected to be delivered in late 2016 and 2017. And we've also seen a 23% increase in our U.S. backlog primarily for midstream projects expected to deliver over the next 12 to 24 months.

Our backlog, excluding these two items, is relatively static, reinforcing our view that any recovery over the balance of the year will be modest. And now, I'll turn it back to Andrew for closing comments..

upstream, midstream, and downstream. We believe this balance in our business model is advantageous, and as activity increases, we will see the benefits. We expect upstream, excluding OCTG, to be lower by 35% to 40% year-over-year; and we expect the midstream business to be 23% to 28% lower in 2016 compared to 2015.

Finally, we expect the downstream business to be lower by 20% to 25% year-over-year as some large project activity rolls off and integrated customers cut back spending across their organization but somewhat offset by an expected increase in U.S. refining turnaround activity.

Given our current mix of products and projects, we expect adjusted gross profit percentage in the mid- to high-18% for the year. We also expect a LIFO benefit of $8 million for the full year. We will continue to focus on controlling costs and optimizing working capital in this market.

We have financial flexibility including a low-cost debt structure with favorable terms and no near-term maturities.

We will continue to take advantage of any opportunities that arise including repurchasing our stock, paying down debt further, reinvesting in the business for organic growth, or holding steady, or making acquisition should we see an attractive opportunity. MRC Global is positioned to take advantage of the impending upturn.

We have gained valuable market share that we will see the benefits of when customers increase spending.

We deliver exceptional best-in-class customer service and offer our customers value-added service along with our products, which has provided us opportunities to get closer to our customers during this downturn, We also have a lower overall cost structure with a permanent streamlined management structure, and we've optimized our regional distribution and branch system coming out of this downturn, which positioned us to maximize profitability as we enter the up-cycle.

We are the world's leading valve supplier to the energy business and it is now our largest product line. We plan to continue to grow this product to be 40% of our total annual sales. As energy companies begin to grow again and with the market share gains we have acquired during the downturn, we are well-positioned for the upturn.

Operator, so we now turn it open for questions..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Sean Meakim with JPMorgan. Please proceed with your question..

Gentlemen, good morning..

Good morning, Sean..

Andy, I was hoping to start, talking about the margins a little bit and you highlighted you're expecting strong incrementals in a recovery.

Maybe another way to think about that, given how much of the cost you've taken out, some of which should be structural, how much revenue do you think you need to achieve to get the 8% peak margins you've gotten in the past? Right now, you're at a $3 billion run rate, I imagine; what it would take to get back there would be something meaningfully lower than the $6 billion you got in 2014, especially when you factor in OCTG.

How do you think about what that revenue run rate is to get back to 8%?.

Yeah, Sean. The way I think about it, we've made several changes. We've made structural cost changes in the management structure. We've optimized the branch management and cost structure primarily in the U.S. and Canada, and we've just streamlined the whole business, and then with the divestiture of OCTG.

Those are the big things we've done during this downturn. So, you can see our margins even at this kind of bottom of activity here at 18.8%. So, I think fundamentally we will move up from that. We've had a lot of pricing concessions, as all companies have, with our customers during this downturn, so we will in the upturn see prices improve.

We'll have a lower operating cost structure and you'll see the mix change. And with valves being 40%-plus of our overall product mix, you're going to see good enhancement in the overall profitability from that. So I think, as we stated, our target would be coming out of this downturn towards the 20% peak adjusted gross margins we had last time.

And so, it's uncertain exactly when that spending increase will leach those higher levels of revenue, but I think we've done all the right things to get that incremental profitability.

Jim, do you want to add anything?.

That's right. I think you're looking in on the $5 billion to $5.5 billion range to get to your 8% peak margins that you talked about earlier..

Okay. Yeah. That makes sense. Thank you for all that detail. And then, just thinking about downstream, you talked about potential lift in the fall and then again in the spring from more turnaround activity. Given where product inventories are, it seems like run cuts are maybe underway in some markets, more coming in others.

Could you maybe give us a little more scenario analysis of how to think about the magnitude or the impact to your business the next couple of seasons depending on what we see in the downstream?.

Yeah, Sean, it's a little bit masked. The downstream refining is actually a bright spot for us. It's masked somewhat by the roll-off of some of the chemical industry projects that were active in 2014 and even carried into 2015. So, we have peak level of gasoline inventories in the U.S. You're going to see a good turnaround season for us in the fall.

And then also, we've seen the deferrals that have happened through this whole downturn as people managed their costs pretty tight. So, two things that are coming. We have excess inventory of gasoline, so no need to run at peak utilization on refining.

Normally, the second and fourth quarter are the peak refinery utilizations, and first and third are more maintenance-driven. I think you'll see less utilization on the refineries in the fourth quarter than historically. There's no reason really to run it at 92%, 93% utilization level. I think that will spur some early turnaround activity.

We're seeing some orders from the first quarter. But we're the closest to any company that understands the turnaround refining. We know every refinery in the United States and what their plans are.

And we do – if they all continue through with what their plans are for the first quarter of 2017, we'll probably see the largest turnaround season we've ever had since 2012. So, that's good news for us. There are still offset – offsetting that though is projects that have moved to the right.

So, we're in a lull with some projects Jim mentioned in his comments. We're very pleased that Shell sanctioned the cracker in Pennsylvania, the first major, I think, cracker outside the Gulf Coast to be built, and we have that contract for PVF. So, we're already seeing long lead time valve orders for that. So, that'll be a nice project for us.

Most of the billing will be in 2017 and 2018..

Okay. Very good. Thank you for all the detail, Andy. I appreciate it..

Thanks, Sean..

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

Hey. Good morning, guys..

Good morning, Matt..

So, Andy, just to start, we saw oil prices recover some during the quarter and you had a little bit of a rig count increase.

How did that impact your business? Did you see any measurable impact from that as the quarter went on?.

Yeah, Matt, I would just say, we saw the bottom and our business mix is pretty diverse, but definitely the bottom for us on a monthly basis was May. It was the slowest month in my eight years with the company. It was a very slow activity month. Coming to the quarter, we saw a nice bounce back in June's activity, ending the quarter at a high note.

We've seen that same level of daily billing as it goes into July, even though July was a 20-day billing month. So, that's encouraging. Certainly, the pull-back in the last week or 10 days mute some of that.

But I still think we're near bottom and that's why we say, when I look out the next three or four months, our activity should be just fine in the summer months.

And with what we have in backlog beyond uncertainty for us, Matt, would be kind of what is this, how long does this $39, $40 barrel oil environment stay; how does this impact the cash flow of our customers here in the second quarter.

And so, our uncertainty of not being more optimistic about the back half of the year is really the impact of this last leg of pull back in oil and gas pricing. And what impact they'll have? None in the next couple of months but more on November, December timeframe.

Will it be, for our customers that pulled back in spending, to wind down in 2016 or will it be a slight ramp up on spending getting ready for a higher spend in 2017? That's really the uncertainty of why we're now a little more bullish on the year, but I certainly think we'll be – this little downside, so where we are right now, it's just whether we stay at this level of activity for a quarter or two before we think we'd see the pick-up in 2017..

Okay. That helps. And then just a few questions on cash flow and the balance sheet. So, your guidance seems to imply a much lower level of working capital release here in the back half of the year.

Is that really just because you feel like the business is nearing a bottom, is there much inventory left that you can maybe take out? And then in addition, your debt balance was pretty steady with the first quarter, looks like that's just your term loan is sort of staying where it was.

When might we see you use this cash balance that you're building up to either pay down that term loan or maybe even start looking at some acquisitions?.

Yeah, Matt. And there will be some planning. We've done a significant amount of working capital optimization. I think we're best-in-class at 20% of revenue. We've spent a lot of time trying to optimize our inventory and the placement of the inventory between the hubs and the branch operations. So, we still will be cash flow positive in the back half.

We still will be above the $200 million guidance we provided, but a little bit less than the first half just because we've done a lot of work already on the inventory levels. On the second question, related to cash, we continue to look at that. We have $17 million remaining on our board authorization on share repurchase.

That's certainly a high priority for us. We're buyers at today's price. And as Jim mentioned, we're investing in the ERP system. We're still investing in some facilities to optimize our footprint for the up-cycle. Those take a priority.

And then we have the option to either pay down some more debt or – and as we always are, we're looking at bolt-on acquisitions. I think those tend to be more of a 2017 event for us as we get even more confidence on the up-cycle and outlook for the business. That's probably when we're going to lean in much more heavy on bolt-on acquisitions..

Yeah, Matt. I would just add that the term loan is outstanding. It's a very attractive instrument. It has a 5% interest rate which is below market for us today. So, use of cash to pay down that facility would absorb some of our liquidity, and we like the prospect of having that liquidity for the various options that Andy described a minute ago.

So, we're very comfortable building cash and having a 5% carry on it..

Yeah. Makes sense. All right. Thanks, guys..

Thanks, Matt..

Thank you. Our next question comes from the line of William Bremer with Maxim Group. Please proceed with your question..

Good morning, Andy and Jim..

Good morning, Bill..

Hey, Bill..

Can you just give us an update of – let's talk International, what you're seeing there from those customers, and specifically, I guess, some of the offshore activity as well..

Yeah. Bill, we're seeing a slowdown as we are across all the U.S. and Canada business. We're mostly, as far as offshore, that's North Sea, a little bit out of the UK, but more out of the Norwegian Continental Shelf side. We're more of an MRO production facility business model. We're not a drilling rig, offshore rig, or exploration type of company.

So, we're still seeing – while we're seeing pull-back in spending and management of their spending from an OpEx standpoint, we're still seeing our steady workload from the production facility. So, that's the offshore look. We are seeing some pickup in project activities that Jim mentioned. We have a large midstream project in Australia.

We have a big win, as you know, in the Johan Sverdrup in Norway. So, we've added Solberg & Andersen, we've added automated valves and control valves to our previous wins there and carbon pipe with Energy Piping and our instrumentation.

So, all win on that project, which is a new construction, offshore Norway, we have a planned $80 million in revenue over the next couple of years in awards already received from that. So, that's one bright spot on projects, but there certainly are many projects being pushed to the right.

We're seeing the general – mostly, we're a valve business internationally which has been pretty steady from a margin standpoint, and most of it is refining, and we're working on growing our global chemical business. So, I would say it's under the same kind of pressures, a little less muted pull-back.

We have less upstream exposure internationally than we do in the U.S., so it tends to be more balanced with the downstream end..

Great, Andy. Thank you..

Thank you..

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

Hey. Good morning, everyone..

Good morning, Ryan..

Yeah. First, I just wanted to get a sense of the commentary around potential higher turnaround activity. You sound like there's some more confidence there than what you had in the past.

I'd just be curious to know what gives you sort of the confidence behind that as you go into the back half of this year from a fall turnaround standpoint and also, obviously, going into spring of next year?.

Yeah, Ryan. What gives us confidence is – and as we came into 2015, we expected people to push some of the turnarounds into later in the year, which they did, and eventually pushed some of it into 2016. They did the minimum amount in the early 2016. Remember, end of 2015, refining spreads were really at a great level form.

A lot of the profits for our integrated customer base were coming from the refining and chemical side. So, they're certainly were motivated to push that into 2016. In 2016 with the second leg of the downturn, they did the very minimum required. I think the dynamics have changed.

First off, it's really a year-and-a-half of delayed maintenance and turnaround spending, And you can only go so long on that. I think that's a big part of – eventually, we've hit the wall and you have to get it done here in the spring of 2017.

I think the other dynamic is, of course, as you know, the spreads are less – the profitability is less right now from refining. The inventory levels of refined products is at a high level. So, really, there's not a motivation to keep running refining at the peak level.

So, if you're in that position from our customer base, it certainly looks and I think this what give us confidence that they will do the spend plan especially in the spring and some will went through our books in the fall.

They'll do – and given that backdrop, lower profitability, lower needs to run high utilization, and a year-and-a-half of delayed spending, I think that all comes together, give us the confidence that it will happen here in the spring of 2017 and some in the fall of this year..

Okay. Thanks, Andy. That's really good color. I appreciate it. And then my follow-up question is on the gross margins. Very nice trends here this quarter and you're taking up the sort of the outlook on gross margins for the full year.

Maybe just talk a little bit about what's the drivers behind maybe better than expected gross margin trends here year-to-date. And then maybe some puts and takes into the back half of the year, if anything, in regard to what can maybe get you to the high end or the low end of that range..

Yeah. Let me start and I'm sure, Jim, he will add some to it. I would say, we're pleased. We've worked very hard in the first half of the year to deliver the kind of high 18% margins. A lot of work has been done there to optimize the mix we're doing.

Certainly, the sale of OCTG from an overall profit mix increased our overall percentage, so that was, from a mix standpoint, helpful. Line pipe activity is down, that being our lowest-margin business after divesting OCTG. That's still under deflationary pricing pressures. So, that activity down, from a mix standpoint, also helps us.

And then our – just really our strategy to grow our valve business and our automation business and our instrumentation and control business is really paying dividends now. Our expansion in International, while we still are streamlining structure there, that's our highest-margin business from a geographic standpoint.

So, those things coming together, we've done a lot of work to find project and product substitution for our customers, trying to deliver a lower cost product to them. So, a lot of global sourcing work has been done, so our customers can see the cost decreases, but we've been able to maintain some margin there. I think we're continuing on that trend.

We've put some conservativeness in the projection of mid- to high-18%s. Business being – staying as it is here at this current level, I would expect it to be at the high end of that range. If we have a pick-up in some project work or we have a pick-up in line pipe sales in the back half of 2016, that would tend to drive the mix down to mid-18%s.

Otherwise, I'd expect it to be at the high end..

Yeah. And, Ryan, just to add, I mean, as you know, we're reducing overall inventory levels. But as we sell inventory, we buy at a reduced pace, we're still – we're lowering the overall average cost of our inventory.

So, that help – gives us a little bit of a tailwind as we go into the back half of the year and that should continue as we continue buying at lower prices..

Okay. Great. Thanks, guys. Appreciate it..

Thanks, Ryan..

Thank you. Our next question comes from the line of Walter Liptak with Seaport Global. Please proceed with your question..

Hi. Thanks. Good morning..

Good morning, Walter..

Wanted to ask about just pricing by product. I know you went through line pipe and we know that's bad but – and valves, it sounds like pricing is at least stable. But I wonder if you can comment a little bit more on valves because it's an important product and then flanges and other. Just what you're seeing on pricing..

Yeah, Walter, I mean let's start with valves. We feel very good about our position and our strategy change. As you know, a couple of years ago, we were largely a carbon pipe business. Today, we're by far the largest valve business. We have strategic agreements.

We're very pleased with the recent one signed with Cameron as we get access to more product lines. Cameron, historically in some markets, we're going direct. We're working very closely with them. And then we also have agreements with Flowserve. So, I would – historically, going back a couple of years, you would think of us as a Tenaris, U.S.

Steel type of carbon pipe company. Today, our top two supplier partners are Cameron and Flowserve. So, we really have dramatically changed the profile of our company over the last couple of years. So, valves, still long lead times, still a more engineered product.

We do a very good job of matching up manual valves with automation and providing that service for our customers. And then we've also, in the recent years, since the Stream acquisition, moved into controlled valves and instrumentation and more gauging. So, I like that.

I like that business and continues to be a very large global industrial valve market that is front and center for us. In the – in fittings and flange, as you'd expect, pricing pressures there.

What we've done through this downturn is weight more of our buy towards international sourcing, less domestic supply, of course, at a lower cost but longer lead time, and we have to manage that supply chain. But definitely a shift towards import in that area. And that's been the big swing and, of course, line pipe pricing is at a depressed level.

It flattened out a little bit in the quarter but still down, I would say, roughly overall 4%. In the last few months, we have seen a slight pick-up around $50 a ton on ERW imports. And most of that is related to trade cases and pending tariffs. But still, from a historical standpoint, a very low level.

And as Jim mentioned in his comments, some mills are trying to move the price up but demand just doesn't support it at this point..

Okay. Great. And then just switching over to that Shell cracker project.

I wonder if you could talk to us again about just the revenue you're expecting from that and the timing for it and then maybe the kind of product, and so we can have an idea about margin as that business starts to ship?.

Yeah. I would say we probably have about $5 million or $6 million orders already in-house. It's for long lead time valves. So, we have the contract, of course, with Shell globally for valves, and we also have the PFF in the U.S. So, that's a full PVF contract for us.

It's a really big project, more than $100 million, $150 million over a couple of years, and maybe greater than that, but over two- to three-year period. So, it's a mix of all of our product lines, fittings and line pipe and valves.

But very good project for us and we've done many big projects like that like we've done recently with Phillips 66 and with CP Chem. Of course, with Chevron many projects. So, this is a good one for us and we're very pleased to see it get final investment sanctioning..

Oh, great. Okay.

When do you expect the bulk of the shipments?.

Yeah. So, we'll see maybe a small amount in the fourth quarter and maybe equally spread on that project between 2017 and 2018. Constructions – so we'll see some orders with a longer lead time, and 2017 we'll book more of that revenue.

Construction is scheduled now for January 2018, so we'll see continued billings in 2018 and maybe even some in the early 2019..

Okay. Great. Thank you for that color..

Thank you..

Thank you. That concludes our question-and-answer session. I would now like to turn the floor back to Monica Broughton for closing comments..

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

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect your line and have a wonderful day..