Greetings, and welcome to MRC Global's Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It's now my pleasure to introduce your host, Monica Broughton, Investor Relations. Thank you. Ms. Broughton, you may begin..

Thank you, and good morning, everyone. Welcome to the MRC Global fourth quarter and year-end 2018 earnings conference call and webcast. We appreciate you joining us today. On the call, 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 via webcast on our website, mrcglobal.com, as well as by phone until March 1, 2019. The dial-in information is in yesterday's release. We expect to file our 2018 annual report on Form 10-K later today, and they will also be available on our website.

Please note that the information reported on this call speaks only as of today, February 15, 2019 and therefore, you are advised that information may no longer be accurate as of the time of replay. In our remarks today, we will discuss adjusted gross profit, adjusted gross profit percentage, adjusted EBITDA and adjusted EBITDA margin.

You are encouraged to read our earnings release and securities filings to learn more about the use of these non-GAAP measures and to see a reconciliation of these measures to the related GAAP items, all of which can be found on our website.

In addition, the comments made by the management of MRC Global during this call may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of the management of MRC Global.

However, MRC Global's actual results could differ materially from those expressed today. You are encouraged to read the company's SEC filings for a more in-depth review of 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 continued interest in MRC Global. Today, I will review the company's 2018 performance highlights and then I'll turn over the call to our CFO, Jim Braun, for a more detailed review of the financial results for the fourth quarter.

I'll finish with our current outlook for 2019. 2018 was a good year with solid revenue growth, excellent adjusted gross margins and strong incremental adjusted EBITDA. We ended 2018 with $4.17 billion of sales and 14% growth over the prior year. Since 2016, the bottom of the oil and gas cycle, revenue has gone 37%.

Net income attributable to common stockholders was $50 million in 2018 or $0.54 per diluted share, a doubling of earnings per share from 2017. In 2018, we achieved the return on average net capital employed of 6.2%, the best since 2014.

We also achieved adjusted gross margins of 19.6% for the year, which is the highest annual adjusted gross margin percent since 2008. Our 2018 adjusted EBITDA was $280 million or 6.7% of revenue, the best since the peak in 2014, and was driven by strong performance from our U.S. business, which achieved adjusted EBITDA margins of 7.6%.

Adjusted EBITDA improved $101 million or 56% over the last year. Incremental adjusted EBITDA for the year was 19.2%, which is considerably higher than our target of 15%. This is the second year in a row of outsized incremental adjusted EBITDA as we came out of the bottom of the cycle with strong topline growth and we controlled cost.

We ended 2018 with approximately 3,590 employees, adding approximately 150 people or 4% during the year. Our revenue per employee of $1.2 million was the highest since 2014. One of the factors driving our growth has been our strategic approach to market share by obtaining and expanding multiyear MRO contracts with customers.

In the U.S., downstream contracts we obtained in the last year or two, notably ExxonMobil, LyondellBasell, Endeavour, and Valero have contributed to the 26% increase in downstream revenue in 2018 over 2017.

Also, in the U.S., the upstream contracts we obtained over the last two years, along with increased spending, primarily in the Permian Basin, led to a 25% increase in upstream revenue in 2018 over 2017. Our Permian Basin upstream revenue in 2018 was up 62% over 2017.

We also ended 2018 in a strong balance sheet position, further reducing our leverage, defined as net debt to adjusted EBITDA to 2.3 times from 2.7 times at the end of 2017. Our working capital to sale metrics is also on target at 20.4% even after making additional opportunistic line pipe purchases early in the year ahead of government tariffs.

2018 was also a year of investments in our business to further position us for future growth and continued efficiencies. We officially opened our Houston operations complex in La Porte with the 415,000 square-foot distribution center and a 40,000 square-foot valve and engineering center.

This facility is situated in the heart of downstream activity on the Gulf Coast. We are also planning an expansion to add a 127,000 square-foot valve modification center, which should be finished in mid-2019. This will give us additional and more extensive capabilities, particularly for midstream customers.

The Houston operation complex fits squarely with our strategic objective to shift toward higher margin product offerings and make our valve product move at least 38% of our total revenue in 2019. Other investments in our U.S.

footprint include moving our Nitro West Virginia facility into expanded RDCs in Pittsburg, Pennsylvania, and Munster, Indiana, which was situated in prime locations for serving customers in the Marcellus Shale play as well as our Eastern U.S. Gas Utility business, which continues to grow.

We also expanded our Odessa, Texas RDC to better serve the prolific Permian basin as well as Odessa facility, which serves the Louisiana refining and petrochemical industries. We continue to make investments in technology to increase efficiency, improve service levels with customers, and tightened our customer relationships.

In 2018, we have generated over $900 million of revenue through e-commerce solutions. This includes our targeted online catalog sales to certain customers, which we continue to rollout. Over one-third of our top 36 customer's revenue is transacted online through some form of e-commerce and we expect it to continue to grow.

Since 2015, when we began our share repurchase programs through our most recent purchases in January 2019, we have returned $325 million to shareholders. In total, we have repurchased 21.1 million shares at an average price of $15.40 per share.

We have returned cash to shareholders during the oil and gas downturn, as well as into recovery years of the cycle, balancing the return of capital with the future growth of our business. We still have $50 million remaining under our current authorization to execute and we plan to continue to be opportunistic during 2019 in our buying.

So with that, I'll now turn the call over to Jim..

Thanks, Andrew, and good morning, everyone. Total sales for the fourth quarter of 2018 were $1.009 billion, which were 12% higher than the fourth quarter of last year with all geographic segments reporting increases. Sequentially, revenue declined 6% as we expected. U.S.

revenue was $778 million in the fourth quarter of 2018, 9% higher than the fourth quarter of 2017, with increases in the upstream and downstream end market sectors. U.S. upstream sales were up 23% in the fourth quarter of 2018 over the same quarter in 2017, due to an increase in well completions, which were up 19% over the same period. U.S.

downstream revenue increased 17% in the fourth quarter of 2018 over the same quarter in 2017 due to deliveries from the Shell Framework project, as well as increased revenue from new customer contracts. The U.S.

midstream sector sales were down of slightly at 2% in the fourth quarter of 2018 over the same quarter of 2017, due primarily to non-recurring transmission projects work, offset by growth in gas utility revenue. Sequentially, fourth quarter of 2018 U.S.

segment sales were down from the third quarter by 9%, primarily due to a seasonal decline and a slowdown in customer spending in the fourth quarter. Canadian revenue was $79 million in the fourth quarter of 2018, up 11% from the fourth quarter of last year, driven by upstream market share gains and midstream pipeline work.

In the International segment, fourth quarter of 2018 revenue was $152 million, up 30% from the same quarter a year ago. Sales in upstream were higher due to future growth project deliveries for TCO in Kazakhstan and an increase in downstream due refinery turnaround activity.

Total sales in the fourth quarter of 2018 associated with the future growth project were $38 million. Turning to our results based on end market sectors. Upstream sector fourth quarter 2018 sales increased 22% from the same quarter last year to $339 million, with growth in all geographic segments as described earlier.

Midstream sector sales, which are primarily U.S. based, were $373 million in the fourth quarter of 2018, flat with the same quarter in the prior year.

Sales in our gas utility sub sector were up 26%, or $42 million and sales in our transmission and gathering sub sector were down 21%, or $44 million, in each case compared to fourth quarter 2018 to the same period in 2017.

The strong growth in our gas utility business is a result of ongoing integrity and upgrade work by natural gas utility companies across the U.S. On the transmission and gathering side of our midstream business, the decline is the result of the wrapping up of a large TransCanada transmission project in mid-2018.

For 2018, gas utility customers make up 51% of total midstream. The sub sectors see - continues to see nice growth with each drivers being unrelated to the underlying commodity price. And since 2012, the year we went public, the sub-sector has experienced a compound annual growth rate of 8.1%.

In the downstream sector, fourth quarter 2018 revenue was $297 million, an increase of 18% as compared to the fourth quarter of 2017, driven by the U.S. and International.

This growth in the U.S, like our gas utility business, is less impacted by oil price volatility and more so by GDP growth, and a secure and stable feedstock sources, as evidenced by the growth in both our refining and chemical sub-sectors.

Deliveries to the Shell Pennsylvania chemical facility, other small-cap projects and turnaround activity all contributed to the growth in downstream. And now turning to margins. Gross profit percent increased to 130 basis points to 16.9% in the fourth quarter of 2018, as compared to the fourth quarter of 2017.

This improvement reflects the benefits of inflation, particularly in carbon pipe and favorable product mix and comps despite higher LIFO expense in the quarter. LIFO expense of $14 million and $9 million was recorded in the fourth quarters of 2018 and 2017, respectively.

Adjusted gross profit for the fourth quarter of 2018 was $202 million, or 20% of revenue, as compared to $167 million and 18.5% for the same period in 2017. This is the second quarter in a row when we have achieved 20% or better adjusted gross margins and the only year where we have done that since 2010.

Line pipe prices increased in the first half of 2018 due to tariffs and quotas before leveling off and then declining slightly in the second half of the year.

Based on the latest Pipe Logix All Items Index, average line pipe's stock prices in the fourth quarter of 2018 were 24% higher than the fourth quarter of 2017 and 3% lower than the third quarter of 2018, and for the full year, line pipe prices were up 28% higher than 2017.

We believe line pipe prices will continue to moderate at current levels, and as such, we do not expect to see the same levels of inflation in 2019, barring some major move in the ongoing trade and tariff dialogue. As such, we expect our LIFO expense in 2019 to be between $25 million and $50 million, as compared to $62 million of LIFO expense in 2018.

SG&A cost for the fourth quarter of 2018 were $148 million or 14.7% of sales as compared to $148 million or 16.4% of sales in 2017. Both periods include severance and a restructuring cost of $4 million and $14 million, respectively.

Excluding the severance and restructuring charges of both periods, SG&A grew 7% as compared to the 12% revenue growth as we continue to control cost and leverage our fixed cost operating base for improved margin profitability.

SG&A in the fourth quarter of 2018 came in slightly higher than our expectations, due primarily to severance and restructuring costs and higher employee cost and related benefits expense.

In 2019, we expect SG&A expenses will be approximately $555 million to $575 million, which is at the midpoint to Southwest and 2% over 2018, excluding the severance and restructuring cost. However, as is typical, there could be quarterly fluctuations in SG&A expense during the year.

Interest expense totaled $10 million in the fourth quarter of 2018, which was $3 million more than the fourth quarter of 2017, due to both higher average debt levels and higher interest rates. Despite the recent increase in interest rates, our weighted average interest cost at the end of 2018 was 5%.

Our effective tax rate for the quarter and the full year was 38% and 22%, respectively. The primary reason for the variation between our fourth quarter tax rate and the new U.S. statutory rate of 21% was an adjustment of $2 million expense or $0.02 per share reported in the fourth quarter of 2018.

This adjustment related to finalizing provisional tax benefit associated with the U.S. Tax Cuts and Jobs Act enacted in December 2017. Without this adjustment, our tax rate in the fourth quarter of 2018 would have been 25%. For 2019, we expect the effective tax rate to be 25% for the full year.

Our net income attributable to common shareholders in the fourth quarter of 2018 was $4 million or $0.04 per diluted share, including the after-tax severance and restructuring charges of $3 million or $0.03 per diluted share and this compares to net income attributable to common shareholders of $29 million or $0.30 per diluted share in the fourth quarter of 2017, which includes a $50 million provisional tax benefit or $0.53 related to the passage of the new tax law in December of last year.

Adjusted EBITDA in the fourth quarter of 2018 was $63 million versus $43 million a year ago, 47% increase. Adjusted EBITDA margins for the quarter were 6.2%, up from 4.8% a year ago, 140 basis point improvement.

Incremental adjusted EBITDA was 18.9% for the fourth quarter of 2018 over the same quarter a year ago, well above typical levels as sales and adjusted gross profit margin improved, outpacing operating expense growth. All three of our segments generated positive adjusted EBITDA this quarter and for the year.

Our working capital at year-end of 2018 was $896 million, $140 million higher than it was at the end of 2017. Our working capital, excluding cash as a percentage of sales, was 20.4% at the end of 2018, in line with our target. For 2019, we expect it to remain at this level.

Our operations generated $135 million in the fourth quarter of 2018 as we brought down accounts receivable and inventory levels as planned. For the full year, we used $11 million in cash from operations to support the 14% growth in sales during the year.

In 2019, we expect cash flow from operations to be approximately $150 million to $200 million and so revenue and related working capital growth moderate, and we maintain our 20% working capital to sales ratio.

We spent a $125 million for share repurchases in 2018, $75 million of which was spent in the fourth quarter, and we've repurchased an additional $25 million of share so far in the first quarter of 2019. The capital expenditures were $20 million in 2018, a third less than 2017 as we completed the international ERP implementation in 2017.

In 2019, we expect capital expenditures to be approximately $25 million, with the increase coming from additional investments in technology, e-commerce and expanded capabilities at the La Porte RDC. Our debt outstanding at year-end was $684 million compared to $526 million at the end of 2017.

And our leverage ratio, based on net debt of $641 million, decreased to 2.3 times from 2.7 times at the end of 2017. The availability on our ABL facility was $449 million and we had $43 million in cash at the end of the year. We have no financial maintenance covenants in our debt structure and our nearest maturity is September 2022.

To summarize, our balance sheet is in excellent condition and we're in a great position as we move into 2019. And now, I'll turn it back to Andrew for closing comments..

Thanks, Jim. I'll wrap up with our current outlook. 2019 marks what I believe will be the third year of the recovery in oil and gas markets, but not without some risk from the recent pullback in commodity prices.

We expect a slow start to the year as budgets ramp and customers are cautious about spending within their cash flow, which is commodity price dependent. 2019 WTI oil prices are generally predicted to be in a range of about $50 to $60 per barrel. And globally, the spending is expected to be up high single-digit based on $60 oil.

At $50 oil however, we would expect customers spending to be down from 2018. We also expect Henry Hub natural gas prices to be around $3 per million BTU. We have more exposures in some of the larger IOCs who's plans are more stable and who's spending is increasing are being focus in areas where we operate and are positioned to benefit.

We also have stability in our gas utility business, which is about 20% of total revenue now. That business is not subject to the same commodity price changes that the other sectors faced. Given these volatile oil and gas macro factors, we expect our 2019 revenue to be up about 2% at the midpoint, with the range of $4.07 billion to $4.47 billion.

As we have mentioned before, we have three large nonrecurring projects that were substantially complete in 2018. The 2018 to 2019 impact of the completion of these projects is a revenue decline of approximately $260 million.

So starting from this adjusted base business, reflecting this decline, our revenue is expected to grow 9% at the midpoint of our 2019 range. From a sector point of view, we expect the upstream business to drive the growth in 2019 and the each of the midstream and downstream sectors to be flat to slightly up due to the non-recurring projects.

By geography, we expect the U.S. to grow, while Canada and internationally both decline. The U.S. business is being driven by upstream growth in 2019 with the midstream and downstream showing little growth due to projects rolling over. Midstream Permian basin activity will be strong, offset by a slowdown in Northeast U.S.

gas transmission infrastructure spend. Our Canadian business is nearly 80% upstream and is being negatively impacted by the crude differentials and government impose production restrictions. Our International segment is being impacted by an $80 million decline from the ramping up of the TCO future growth project.

Regarding the pace of activity, we began to see a slowdown in the latter part of the fourth quarter with December being particularly slow, which continued into January of this year. We expect that the first quarter of 2019 will be down about 6% from the fourth quarter of 2018.

We expect customers will spend less in the first half of 2019 with a stronger second half plan as commodity prices are expected to improve through the year. Our backlog at the end of 2018 was $638 million, 23% lower than the end of 2017 due to the nonrecurring projects we discussed earlier.

However, excluding those projects, the backlog is up 7% in 2018 over 2017, primarily due to U.S. upstream and refining customers and new smaller international projects.

We have made this strategic decision to forego large lower margin project revenue opportunities and instead focus on higher margin, small-cap, fabrication opportunities and continue to shift our product mix to higher-margin product groups.

With that, we expect our 2019 adjusted gross profit percentage to be between 19.7% and 19.9%, above our 2018 results. Our gross margins are influenced by product mix as well as inflation, which is expected to be lower than last year.

As line pipe prices level off and that put some downward pressure on margins, our goal is to consistently perform at 20% or better, and we feel that is achievable in 2020 after all our initiatives will take time to take effect.

While we have historically provided detailed guidance each year, this year, we have decided to also provide our expectation for adjusted EBITDA and diluted earnings per share. In 2019, we expect adjusted EBITDA to be between $275 million and $315 million, and we expect diluted earnings per share to be between $0.80 and $1.10.

The outstanding share count as of January 31, 2019 was 83.9 million shares. In summary, we had a great 2018. I'm very proud what we've accomplished this past year and look forward to another successful year in 2019. We will be focused on continued revenue growth, gross margin and EBITDA improvement and free cash flow generation.

Looking at the last oil and gas up-cycle from 2012 to 2014 and the last down-cycle from 2015 to 2017, along with improvement in performance as well as the current macro oil and gas market dynamics, we expect to achieve mid cycle adjusted EBITDA in 2019 as shown in our guidance.

We are the market leader in PVF distribution to the energy industry and we're well positioned globally to continue to grow with the industry. So, with that, we will now take your questions.

Operator?.

Thank you [Operator Instructions] Our first question is from Sean Meakim with JPMorgan. Please proceed with your question..

Thank you. Hey, good morning..

Good morning, Sean..

So, Andy, you all been aggressively buying back stock here. I'm we're down almost 20% in the float, 7% in the last few months alone. It's obviously quite endorsement of the outlook and the value that you see in your stock trading, let's say, in the mid-teens.

I'm hoping you could maybe layout for us a bit your strategy, not just for uses of cash but also capital structure. I guess it's important to highlight that while you're buying back stock today, your cash flow is countercyclical. And so how you think about leverage is quite different from a typical oil service business.

So how should investors think about capital structure and cash through cycle for MRC? And I'm also thinking about the preferred, which is actually getting closer to being in the money on a conversion basis, how does that fit into your thoughts on a short-term and long-term basis?.

Yeah, Sean. Good. Let me address a couple of those points and Jim will address couple of them too. And you're exactly right, you know, as our revenue is a little bit muted growth this year from the previous two years, what that means to our business model is we generate a lot more cash, and because we're not building inventory to fuel the growth.

And so that will generate opportunities for us to either prioritize additional share repurchases or paying down debt. And as Jim said in his comments, we're forecasting $150 million to $200 million cash flow from ops or $125 million to $175 million free cash flow.

So it will be a strong cash flow generation year for us because of our common cyclical business model. But really we have not stepped back into the M&A arena since 2014. So we prioritized, in previous years, that investment and M&A.

Over the last three years, it's really been focused on investing in our facilities and invest in technology and the growth in the business organically, which has taken the priority. And in conjunction with that, also because of the pullback in the industry, the share repurchase program took the top priority.

And as we said, we continue to have $50 million left on the previous board authorization.

So, let me say, turn it over to Jim, maybe some comments on the preferred?.

Yeah. So Sean, today, we're very comfortable with our capital structure. It's well designed for our countercyclical business as you mentioned with the asset-based lending facility that are part of our debt turned up.

Our preferred stock provides a great flexibility and nationality in the sense that we don't have to pay it back at any given maturity date. Expectation is much like you described, at some point in time that issue will be deeper in the money and ultimately get converted into stock.

And it doesn't still provide a relatively inexpensive form of financing for us with very favorable terms. So we're very comfortable and happy where we are in terms of capital structure..

Got it. Thank you for that detail. That's helpful. I was assuming I'll also talk on SG& a little bit. SG&A is pretty tight both on a year-on-year basis as well as the range for the year, but then again the market's not really giving you a ton of revenue visibility.

So how do we think about current run rate of SG&A and your ability to drive volumes off that fixed cost base, including the impact of product inflation your top line and maybe less than last year, but still as a factor, so how do we think about, how much volume you can drive up off where you SG&A cost is today?.

Yeah. So we continue to manage that very effectively. We've got some growth built into next year. We're passing along additional wage increases to our employee workforce. But we'll continue to monitor that. We continue to believe we've got some of efficiencies.

They were building into our systems that are going to make our workforce more productive, so that we should continue to grow at the levels we've guide in the forecasts without having to add significant amounts of operating expenses..

Yeah. Sean, I would just add. In our guidance is embedded kind of a normal year for us the 15% to 16% level of incremental EBITDA. So, we'll manage cost tightly, improvement in adjusted gross profit percentage, Tight cost controls and that should give us still additional leverage on incremental EBITDA..

Okay. Great. Thank you..

Thank you, Sean..

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

Good morning, everyone..

Hi, Nathan..

Couple on gross margins here. I think you kind of addressed this a little bit in your prepared remarks. 19.6% adjusted gross margin in 2018, you're 19.8% at the midpoint of guidance.

Typically, you'd say in this kind of bit more deflation environment and pressure on gross margins, I think you mentioned maybe some of the absence of some of these large projects we're making sure gives you a bit of a tailwind on gross margins.

But maybe you could just discuss what the puts and takes are that gave you that 20 basis points of expansion in 2019, despite some of the commodity deflation we're seeing here?.

Yes. Nathan, let me make a couple of comments and then Jim can add to it. The big inflation item for us, of course, is our carbon line pipe that had the big run up and inflation in 2018. So when I look at that - and you look from the peak of July, it's come down 5% as all the tariffs and purchases have played out.

But I also look at it from a perspective. So down from the 26% up during the year, but we're still sitting at a line pipe price, that's 21% higher than when we started in 2018 at.

So still favorable for us from that perspective, but as Jim mentioned in his comments because of the little bit of deflation there in line pipe pricing, it leads to a lower LIFO for us.

But the big driver is the mix change as we focused our strategy for last five years now and moving more toward the valves and automated valves and more toward famous products and away - some of the lower end projects and lower - and OCTG and lower end line pipe pricing that we no longer do. So the mix change continues to improve.

As we said in our comments, we expect our valve business to be 38% of the mix of revenue in 2019 and we expect it to be growing in 2020. So that naturally has a positive impact on the margin overall. We did 20% adjusted gross margins in the second half of 2018.

We're guiding to the 19.7%, 19.9% is a good point even with little bit of deflation in line pipe as our guidance for this year..

Yes, Nathan. I would just add as we move into 2019, you have a little bit of competing forces. You got the positive impact of these projects rolling off which are low margins. That's going to be offset, but we think less inflation in 2019 than 2018. And that ultimately is going to have an impact on margins.

We still have some inventory or favorable cost position that will help buffer that. And then finally, I think - as Andy mentioned, we're going to continue to move to higher margin product lines there is going to be a tailwind and a support for them in margins..

Okay.

So maybe you'll say a little declining margins as we go through 2019, as you lose some of that benefit from the inflation that you have in the inventory at the moment?.

Yes, and that's certainly, directionally what we'll see probably be toward the middle or latter part of the year because a good position we have today. But that's going to be offset by the fact that these projects, the $260 million are rolling-off, which had margins considerably less than that 20% rough average..

Yes, Nathan, I wouldn't expect much of a change at that point that Jim's making, slight variation. One thing that's in our favor in the line pipe round, we buy a lot of pipe from South Korea. It was on a quota system not a tariff basis last year.

So for the back half of 2018, we were - they had meant the quota, we were not buying Korean pipe, which tends to be lower cost import than domestic. Now with a new year, new quota reset, we'll be buying additional lower-cost pipe to bring into the markets. So that'll offset some of that deflation on line pipes.

So I wouldn't expect much change through the year. But I - we would expect it to be in a good shape starting the first quarter..

Got it. Then a little bit more of a - what management is focused on question, if you look back over the last few years, you've had a 2015 revenue down into 20s; 2016 revenue down into 30s; 2017, up 20%; 2018, up 15%.

Generally, I find companies then can't focus on operational improvement and optimizing the business processes, you're - in the downturn you're focused on restructuring, in the uptown you're focused on inventory and customer service.

Does this 2019 area, where you're in a lower growth kind of environment, a more stable kind of environment, give you guys the opportunities to really get into the business here and focus on improving some of the processes and optimizing some of the businesses here that should potentially drive better margins?.

Yes. Nathan. I think the way you described it is exactly right. Early in the down cycle, 2015 and 2016, we spent a lot of time on cash flow generation and debt paydown. And then at the low - and of course, associated with that was a cost reductions and facility consolidation.

But we spent a lot of time in '17 and '18, investing in technology and investing in facilities, once we retracted into what was the smaller footprint. And so I think we're finishing up the final investments in facilities.

I expect when we do the final expansion at La Porte this year by mid-year that our facilities will be set for us for growth for the next three years at least. So we're in very good position because we invested in the downturn.

We still spend a lot of time on the optimization of operational excellence, because we also moved a lot of people around at the same time the most efficient footprint for our personnel to serve our customers in these new large expanded hubs.

So as we mentioned in our remarks, the $1.2 million revenue per employee is a high mark for us back to the 2014 peak. So I think we're in very good position to take advantage of the market. We continue to look at optimizing our inventory and the mix change.

We're adding what comes with a higher margin also comes with higher technical content, more engineers and a more value-add technical support for our customers. So all that's part of our growth coming out of this cycle. And this will be a good consolidation year, and we'll finish up in our facility investments..

Our next question is from David Manthey with Robert W. Baird. Please proceed with your question..

Thank you. Good morning, everyone..

Good morning, Dave..

First off, when you look at the $260 million three projects that are winding down, could you help us in terms of layering those across midstream and downstream? And any help you can give us in terms of the timing of when those roll off would be helpful with modeling?.

Sure, Dave. So in the midstream, there is $100 million and then there is $80 million, each in the upstream and downstream. And in terms of timing and the rolling off of that, the midstream project completed in mid-2018. So we've seen a little benefit of that - or impact of that, I should say, in 2018.

The upstream and downstream projects have a little bit of carryover into the first quarter, but for the most part, they were done by the end of the year..

Okay. That's helpful..

And Dave, this is Andy. Let me add one comment to Jim on the midstream. As I think it's important because all that $100 million drop off was really gas infrastructure in the Northeast. So offsetting that in 2019 is real positive from the Permian basin.

We talked about it on a previous call that we expected $150 million to $200 million of revenue from the Permian basin debottlenecking, which is some oil, some gas and NGL pipeline infrastructure. At that time we were tracking 12 key projects, it's now grown to 17 Permian projects.

And so we - today, I would guide you to more of the $200 million in positive revenue growth that's going to come from the Permian, pipeline, our midstream business. To give you a little color on the timing, we recognized $15 million of that late in 2018.

And we're approximately $85 million in midstream growth will come in 2019 and another $100 million in 2020. So those new pipeline infrastructure spend will offset some of the gas infrastructure that's falling off. But that's the main reason that Jim mentioned, the $80 million in upstream that was our Kazakhstan project.

You look at our International results, we'll actually have 10% growth. If you take the 2018 results, back off the $80 million nonrecurring projects and then look at our guidance, we'll actually have a nice growth in there. But it will be coming from smaller projects off of that adjusted-revenue basis..

Okay. Thanks for that, Andy. That's helpful.

And Jim, could you talk about, given your expectation for stabilizing prices and slow growth here, would you expect the LIFO reserve to be closer to zero in 2019?.

As far as to stay close to zero, we were forecasting some LIFO expense. It's down considerably from last year. We have about $37 million, $38 million forecast in for LIFO. But we do think we'll see some inflation..

All right. Got you. Okay. All right. Thank you very much..

Thanks, David..

Our next question is from Marc Bianchi with Cowen and Company. Please proceed with your question..

Thank you. I wanted to start with the revenue projection. You guys are talking about 6% down in the first quarter. And Andy, I think you just mentioned, some of those projects rolling off.

Is that the biggest component of the revenue decline or is it coming from something else?.

Yes, Mark. It's a couple of things. First, I think, on the last call, we mentioned that we had some third quarter projects that rolled into the fourth quarter, which occurred. And so, that was part of the better performance in the fourth quarter was the projects that rolled into the fourth quarter.

There definitely was - with all the volatility in commodity pricing, there definitely was a slowdown or a pausing in spending, primarily in the U.S. upstream. Midstream and downstream held up nicely. But definitely, in December, we saw U.S. upstream sending just really slowed to significant amount. And that is carried into January.

But there's always this January, February, our major customer base, remember now, 55% of our revenues come from our top 25 customers as all the major players. They normally have a shorter ramp up of their new budget years at the board approvals and up capital spending levels.

So it's true that normally January, and part of February, is slow normally, but it has its carryover effect from 2019 slowdown. So, I mean, we're in the middle of the quarter right now. We know January. We have really good view of February.

So I think the down 6% is our best estimate right now for the quarter, and I think it's very difficult for other - both service and equipment suppliers seeing the same kind of spending. But we see it ramping up through the year. Of course, commodity pricing has improved from $48 and $50 barrel bound to $54, $55.

So I think that, of course, it generates more cash flow for our customers and we see it picking up for the year. So when you think about our guidance, I would say the lower end of our top revenue guidance is a scenario where oil prices, WTI averages $50, $52.

The midpoint of our guidance is right where we are today, and that's why we're guiding to the midpoint at around this $54, $55 barrel. If oil prices get to the $58, $60 realm later in the year, we expect to be at the high end of the range. So that's how we're thinking about it.

It's all driven by our customers spending related to those cash flows from the commodity side..

Okay. And is it - because most of this is coming from the upstream division for 2019. Is - for us on the outside, we try to put this into a spreadsheet.

Should we be thinking about the cadence of completion activity really being the most important factor as we think about the driver of those revenues? Or are there other components we should be looking to?.

Yeah. For us, it's - we're very balanced in - with the 40% midstream, if I can just walk through it really quickly, half of that is gas utility. We feel really good about that. That's going to be up in 2019 over 2018 as it has been for the past 10 years. The pipeline activity, we said to kind of offset.

The gas infrastructure is being offset by oil and NGL pipelines in Permian. So that tends to be up just slightly. But midstream as a whole will be up slightly for us as a mix. Now on our upstream business, yes, the completion cadence is the biggest driver, and we - our U.S.

upstream revenues track very closely to the completion cadence and revenue stream from that. And then in downstream, chemical and refining, it's largely an MRO year for us. Without the big Shell polymer project, you're really seeing about 90%, 95% of our downstream this year will be based on MRO contracts. So we want some nice contracts.

Their spending will be up slightly on that, so we expect slight growth in downstream as a whole, but it won't come from large project. It'll come from smaller cap projects, and we're forecasting slightly up turnaround season for our downstream business..

Got it. Okay. Well, just one more, if I could.

In terms of the profitability for first quarter, and Jim, you had kind of talk about some of the puts and takes with the margin guidance, should we be thinking about the first quarter gross margin within that range that you guided for the year? Or does that kind of take over the course of the year to wind down to get to that average, so we're still sort of running at this 20-type-percent level here in the first quarter?.

I think you would expect to be in that range, may be toward the higher end. But certainly, we're very close to that range..

The range for the year, just to clarify, yeah?.

Yes, correct. Sorry..

Got it. Okay..

Yeah. Marc, I would just say, as Jim said, toward the high end in the first quarter..

Super. Thanks very much..

Our next question is from Ryan Cieslak with Northcoast Research. Please proceed with your question..

Hey, good morning everyone..

Good morning, Ryan..

So Andy, I just wanted to go back to the first quarter guidance and then relative to the full year guidance and it seems like there's a pretty significant ramp later in the year following the decline that you expect in the first quarter.

And if I hear you right, you're mentioning some of the pipeline projects in the midstream in the Permian that seems like it's giving you some visibility as the year progresses.

Is there anything else outside of that, that give you some confidence or visibility of that ramp as the year progresses? Or is there a level of just confidence you're baking in that commodity prices actually continue to move higher?.

Well, Ryan, I would say, it's based on our forecast and estimation that, yes, the commodity prices will improve through the year. So that's fundamentally. If that doesn't happen, we'd be in the mid or low end of our range. But we expect that to happen. The pipeline we have really good visibility on those projects.

The upstream spend, the drilled uncompleted backlog and our position with upstream tank batteries gives us good visibility on the spend, and our downstream is mostly driven by our contract position. So we do very detailed reviews on top 35, 36 customers. They make up almost 60% of our business. So we understand what they're going to spend this year.

They announced CapEx, now they could change their CapEx, which is always a variable for us. But we expect our guidance to be right based on what they've published they'll spend and what we know from talking to them on their spending plans.

And then if commodity prices improve, this will probably be a year where they increase their CapEx spend at midyear. And so we've factored in some of that in our back half. So definitely, a stronger second half than the first, just because of the January, February whole we're starting in..

Okay. Thanks for that color.

And then my follow-up is just, maybe if you could give us some additional color around the lead times that you're seeing across your product portfolio right now? I know, 2018 seem like it was a year we saw supply chain tightened pretty significantly and lead times extend for a variety of reasons, but how does that look right now entering 2019? Thanks..

Yeah, they flattened out and come in some, especially in the steel mills, as everyone's adjusted to this new tariff environment. So lead times in the mills, and part of that's related to the slowdown in demand as the mills caught up in the fourth quarter.

So I would say lead times definitely came in on the line pipe side, still strong demands on the valve side. Well, the lead times are a little bit shorter than 2018, still a long lead time item for us. And then carbon fittings and flanges and stainless steel, and general product for us are all about where we expected 2018 ended up.

So it's not a big change except for the big swing would be shorter lead times in the carbon pipe - line pipe area..

Our next question is from Walter Liptak with Seaport Global Securities. Please proceed with your question..

Okay, thanks. Good morning, guys..

Good morning, Walt..

Wanted to ask you a couple of valve questions. You're targeting the 38% for valve.

What was it in 2018?.

It was - we've ratcheted up, it was 37% of total revenue. And so - and 36% in 2017. So we - as the overall business has grown considerably, we still ratcheted up that percentage. We're talking in there as we said 38% for 2019 and we're going to be at 40% for 2020.

And the step up in 2020 is related to our investment that we talked about in La Porte and adding the brand new to ability to do the complete assemblies in midstream valves that facility be completed in mid-2019. That's a very large market that we expect to play a bigger percentage in. So our goal is to get to that 20% in 2020 - 40% in 2020..

Okay. Great.

Can you break that down into more of a growth rate that you saw in 2018 and what you're expecting in 2019 for the valves?.

Well, in the way we look at it is the manual valve business, the actuation and measurement and instrumentation. So, our highest growth will be in automated valves. There's a lot of demand for valves in well completions for us and tank batteries, that's the upstream confident.

Midstream would have the highest growth for us in automotive valves packages in 2019 and 2020. And then we have a real steady automated valves business in downstream. It attracts really our revenue growth there. Is that - Jim you have anything to add. Okay..

Okay.

And then if you could just talk a bit about pricing on valves? Any inflationary pressure you're able to pass through the price increases?.

Yes, it's been a challenge in 2018. It was with the tariffs, the 10% tariff on Chinese valves component was an issue all year long that we work - had to pass on to our customers. We're planning on that at the 10% level. We would have to go through if the tariff goes up to 25%. After March 1st, we'd have to work through that issue with our customers.

But otherwise, it's more tied to the overall demand and the lead time factor. But we've done that for a long time and we know how to manage those cost changes. But we also have a very strong valves position and stock to buffer us from any increases in cost.

And we do that usually ramping up valves as we will in 2019, ramping up the longer lead-time to arrive early in the year. So, you'll see our stock increase in valves in the first quarter as we plan each year for getting that in place prior to the activity pickup. Lots of our valve work is done in construction cycle in the second and third quarters.

So, we normally have a pickup in valve inventory in the first quarter ahead of that..

Okay, great. Okay. And if I could just switch gears a little bit, the slide on Page 12 with the end market opportunity. And you've got the step up in downstream in 2020.

And I wonder if you could just talk about what you're seeing with the flag year this year and then the step-up?.

Yes. I think what - we're using industry sources there. But I think it's - the 10% growth in downstream is really kicking our petrochemical projects and the Gulf Coast is the main driver there for that growth. There's a lot of projects for three of our major customers, Philip 66, CP Chem, and ExxonMobil, and also lined up the Basell.

So a lot of Motiva also. I could mention for there that - we expect some approval of projects going forward in that timeframe. And so we expect 2020 and 2021 to be very good, Gulf Coast, both petrochemical and refining the years for us..

Our next question is from Blake Hirschman with Stephens. Please proceed with your question..

Yes, good morning. Thanks for taking my question here. Just one quick one on e-commerce, it looks like it was almost $930 million of sales in 2018. I think that was over $1 billion on a trailing basis last quarter. And so that trailing - the figures fell some from 3Q to 4Q versus overall sales that increased.

So, I was just kind of curious with the 5% or so growth in 2018 versus the overall business up mid-teens.

If there was any update on there, if that's just kind of normal ebb and flow of the business?.

Yes, Blake, that's - you noticed that and it's tied to one customer, the big swing. So when we had the third quarter deck trailing 12 months, it picked up a very large quarter for TransCanada when they were very active. And they do a lot with us through e-commerce and through the catalog.

So at the peak of those projects that we kind of talked about that $100 million of revenue, bulk of that was run through the catalog and through e-commerce. So when we moved it to the end of 2018, that quarter fell off. And you see the growth from the rest of the customer base.

But we still feel very good, $928 million in 2018, it's a nice baseline of e-commerce. And I see that continue to grow in these years forward as we are investing in even more technology to make that catalog even more useful for our customers..

Make sense. Thanks for the color. I'll turn it over..

Thanks, Blake..

Our next question is from Steve Barger with KeyBanc Capital Markets. Please proceed with your question..

Hi, good morning. Thanks for extending the call..

You bet, Steve. Good morning..

Yeah. Thank you. Going back to your goals increasing adjusted gross margin in 2019, just given all the puts and takes we've talked about, I'm curious about the contribution from higher margin product in your plan.

Just trying to get a better understanding of the size of the mix opportunity that you see this year?.

Yes, I think that's going to be - because that's such a gradual change to move up to those higher margin projects and it takes time. It'll contribute in 2019, but it may be more of a smaller contributing factors during the course of the year.

The real benefit of that comes over longer period of time is you're able to grow as we said the valves and instrumentation back up toward the 40% of the total revenue..

Right. Okay. And then just a quick follow up on the e-commerce.

Just broadly, can you talk about what that does for you in terms of differentiation and your own cost to serve? Or can you quantify any benefits that you get from e-com?.

Yes. I'd say, Steve, going forward, as we move even more of the revenue base on that, it definitely is a lower cost to serve. It's a natural for us where we have over half of our revenues with major customers that understand the efficiency of e-commerce. So we have multiyear MRO contracts with them. They have cross-referenced parts.

We have pricing established. The terms and condition all established. So it really lends itself to the ease for them to order in their system, cross-referenced to our catalog and places order into our system very seamlessly. So it's part of our model.

We'll deal with them all of our customers at a transactional basis and the branches if that's the preferred, we'll do the multi-year contracts and large purchases forms. And we'll also offer with the items, we have in stock for them and for their contract, really easy way for them to do business with us through the catalog.

So I think is the trend that's going to continue and we are investing even enhance that better as I mentioned. So I think that is a growing part of our business mix..

When you think about the reduction in SG&A that you saw on 2018, is there any way to quantify, how much of that could have come from running a quarter of your revenue through e-commerce?.

Yeah, I would say, Steve, the way to think about is going forward, you'd see more efficiency in kind of the 2019, 2020, 2021 timeframe as we put even more in centralized locations in technical support centers to support customers. We haven't reached that critical mass yet. I would say to see a significant change in SG&A.

But it certainly is a tailwind for us in the direction, we're going through. And we've mentioned in 2019, 2020, as we go on to 2020 and 2021, we expect to get back to our 12% SG&A model that we had previous cycle..

All right. Okay. Appreciate it. Thank you..

This concludes the question-and-answer portion of our call. I would now like to pass it back to management for final comments..

Thank you, for joining us today and for your interest in MRC Global. We look forward to having you join us on our first quarter conference call in May. Have a good day, and good bye..

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day..