Greetings and welcome to the MRC Global’s Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Monica Broughton, Investor Relations. Thank you. You may begin..

Thank you and good morning everyone. Welcome to the MRC Global fourth quarter 2020 earnings conference call and webcast. We appreciate you joining us on the call today. On the call, we have Andrew Lane, President and CEO and Kelly Youngblood, Executive Vice President and CFO.

There will be a replay of today’s call available by webcast on our website, mrcglobal.com, as well as by phone until February 26, 2021. The dial-in information is in yesterday’s release. We expect to file our 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 12, 2021 and therefore you are advised that this 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, adjusted EBITDA margin, adjusted SG&A, adjusted net income, adjusted diluted earnings per share, free cash flow and free cash flow after dividends.

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

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

to continue end market diversification in less commodity price dependent businesses such as gas utilities, chemicals and other industrial; to yield 20% plus adjusted gross margins consistently; to capitalize on structural cost reductions; to increase incremental margins and improve EBITDA margins to upper single-digit percentages; to achieve 45% of revenue from valves, consistent with our valve-centric strategy; to grow our gas utility business to $1 billion in revenue; to achieve 50% of global sales through our e-commerce platform; to continue debt reduction further strengthening our balance sheet; and to evaluate accretive M&A opportunities, while maintaining financial discipline and strong balance sheet metrics.

We believe these goals will position MRC Global for success and yield superior returns. Finally, next week, we celebrate our 100-year anniversary. This is an important milestone and we are proud to be among the few elite companies that can claim this milestone.

It is a testament to the generations of people who help build this company over the last 100 years. And with that, I will now turn the call over to Kelly to cover the financial highlights for the quarter and our 2021 outlook..

Thanks, Andrew and good morning everyone. I will start with an update on the financial targets we previously laid out and I am happy to report that across the board, we met or exceeded all commitments. And here is a brief recap of those items. Let’s start with revenue.

Sequentially, we guided fourth quarter revenue to be down in line with historical seasonal trends, which is typically a 5% to 10% reduction. However, our fourth quarter revenue came in much stronger and was nearly flat with the third quarter with only a 1% decline. And as a reminder, we had several full year targets as follows.

First, we expected to exit the year with a normalized SG&A run-rate of $100 million or less, which we exceeded in the third quarter and again in the fourth quarter at $96 million. Compared to 2019, we expected to end this year with at least $110 million in cost savings and we came in at $113 million, slightly exceeding our goal.

Second, our adjusted gross margins for the fourth quarter and full year came in at 19.7%, exceeding our mid-19% target. Third, we met our target to decrease inventory by at least $170 million coming in slightly higher at $173 million.

We also improved our working capital efficiency, beating our 19.5% to 19.9% targeted range for the net working capital to sales ratio, which actually came in at 17.5%.

Fourth, we raised our guidance last quarter with the expectation that operating cash flow would be greater than $220 million, which we significantly beat coming in at $261 million for the year. And finally, we committed to pay off our ABL this year and to reduce our net debt to less than $300 million.

We achieved both of those targets with net debt coming in at $264 million. We also committed to use all our excess cash this year to paying down debt, which we did and reduced our net debt balance by nearly half, resulting in a new leverage ratio of 2.7x. And our term loan does not mature until September of 2024.

We are proud of these achievements and believe our results are evidence of the proactive measures we took to reposition the company, which will benefit us going forward.

Now, moving on to the quarter’s results, as previously mentioned, fourth quarter revenue was essentially flat with the third quarter as the upstream and gas utility sectors experienced growth, while the midstream pipeline and downstream and industrial sectors contracted.

Sales in the upstream production sector improved driven primarily by higher year-end activity in our international segment. The gas utility sector also contributed to the increase, while the midstream pipeline sector continued to decline due to the further tapering off of pipeline projects.

And in the downstream and industrial sector, we experienced a more typical seasonal falloff in activity. In the U.S. segment, revenue was $448 million this quarter, 3% lower than third quarter of 2020.

The downstream and industrial and the midstream pipeline sectors both experienced a sequential decline as expected partially offset by an increase in each of the gas utilities and the upstream sectors. The U.S. gas utility sector revenue increased 5% sequentially. Seasonally, the fourth quarter tends to be the lowest of the year.

However, like many things in 2020, this year was unusual and that our customers actually increased spending in the fourth quarter.

This was a function of customers buying for large scale multiyear programs, including low-pressure service line replacements, cast iron pipe replacements and gas transmission modernization projects, all in various parts of the country.

Also driving the increase was catch-up work previously hindered by pandemic restrictions earlier in the year as well as new market share gains for CenterPoint as that contract continues to ramp up as we add locations. And we also gained new regions with Duke Energy. The U.S.

downstream and industrial sector revenue declined by 9% sequentially as customers completed critical maintenance and turnaround activity in the third quarter, and resumed capital spending discipline in the remainder of the year. The U.S. upstream production sales were up 3% sequentially due to additional customer spending on well completions.

The difference between recent well completion counts and our results were primarily due to customer mix as a large portion of the completions activity was driven by private operators outside of our core customer group. The U.S.

midstream pipeline sector revenue declined 23% sequentially as production levels have declined, customer spending has been reduced and projects continue to be delayed or canceled. Activity in the near-term is expected to be focused on maintenance and small upgrades to facilities.

Canada revenue was $23 million in the fourth quarter of 2020, down $4 million or 15%, driven primarily by the midstream pipeline sector as projects continue to taper off or they are canceled.

International revenue was $108 million in the fourth quarter of 2020, a sequential increase of 14% and across all sectors, driven primarily by projects in Australia and the UK, including a downstream turnaround project in the UK. Also, stronger foreign currencies relative to the U.S. dollar favorably impacted sales by approximately $2 million.

Now I will cover sales performance by sector. Beginning with the gas utility sector, sales were $217 million in the fourth quarter of 2020, which was a $9 million increase, 4% higher than the third quarter. It is our largest sector, making up 37% of our fourth quarter revenue and approximately one-third of total 2020 revenue. Given it is 99% U.S.

based, the sequential change was described in my earlier U.S. commentary. However, I would also like to note, we had a significant 21% increase in the fourth quarter of 2020 compared to the same quarter last year as many customers increased their spending in the fourth quarter of 2020 to catch up on work previously delayed from pandemic restrictions.

In the downstream and industrial sector, fourth quarter 2020 revenue was $174 million, a sequential decrease of 6%, driven by the U.S. segment, as described earlier. This sector now represents 30% of our total fourth quarter revenue. The upstream production sector fourth quarter 2020 revenue increased $8 million or 7% sequentially to $126 million.

The increase was led by international, which was up $6 million, primarily in Australia and the UK and this sector now represents 22% of our total fourth quarter revenue. Midstream pipeline sales, which were primarily U.S. based, were $62 million in the fourth quarter of 2020, a 16% sequential decline.

This sector represents 11% of our fourth quarter revenue and continues to be our most challenged sector and is expected to remain under pressure in the near term. Now turning to margins, our gross profit percent was 15.5% in the fourth quarter of 2020 as compared to 19.5% in the third quarter.

The decrease reflects the impact of $12 million of inventory related charges recorded in the fourth quarter of 2020 as well as LIFO expense of $1 million recorded during the quarter, as compared to LIFO income of $11 million in the third quarter of 2020.

Adjusted gross profit, which adjusts for the impact of inventory related adjustments and LIFO for the fourth quarter of 2020 was $114 million or 19.7% of revenue as compared to $115 million and 19.7% for the previous quarter, essentially flat.

Line pipe prices were higher in the fourth quarter of 2020 as compared to the third quarter due to an increase in hot-rolled coil prices. Based on the latest pipe logic index, average line pipe spot prices in the fourth quarter of 2020 were 3% higher than the previous quarter.

Line pipe prices are expected to continue to rise in the near-term as HRC prices are experiencing hyperinflation, putting upward pressure on line pipe prices. Pipe Logix shows line pipe prices have been steadily increasing since October, with the January 2021 price higher than any monthly price in 2020 and 8% higher than December.

Generally, inflation is a positive for our business, depending on the timing and duration of the inflationary event. Across our product line portfolio, line pipe historically has experienced the most volatility in pricing, while the others are relatively stable.

Reported SG&A costs for the fourth quarter of 2020 were $97 million or 16.8% of sales as compared to $100 million or 17.1% of sales in the third quarter. Normalized SG&A, after adjusting for severance and other charges in the fourth quarter was $96 million or 16.6% as compared to $97 million or 16.6% of sales in the third quarter.

I’ll address our 2021 expected run rate shortly. We have reduced operating costs by $113 million in 2020 as compared to the previous year on a normalized basis.

Approximately 2/3 of these savings are structural in nature, which not only makes us a more streamlined organization, but should also allow us to have stronger incremental margins once the recovery begins. We have taken many actions over 2020 to reduce these costs, including closing or consolidating 27 facilities.

Interest expense totaled $6 million in the fourth quarter of 2020, slightly lower than the third quarter on lower average outstanding debt balances. We expect to yield interest savings of approximately $3 million in 2021 on lower average balances from all of our debt reduction efforts in 2020.

Our effective tax rate for the fourth quarter was 29%, which is within the normal range for us, is higher than the U.S. statutory rate as a result of state income taxes and differing rates in our foreign operations.

Net loss attributable to common shareholders for the fourth quarter of 2020 was $11 million or $0.13 as compared to a loss of $3 million or $0.04 per diluted share in the third quarter.

On a normalized basis, removing severance and restructuring charges, LIFO, the gain on our facility sales and other charges during the quarter, our adjusted net loss attributable to common shareholders in the fourth quarter was $4 million or $0.05 per diluted share as compared to $8 million or $0.10 per diluted share in the third quarter of 2020.

Adjusted EBITDA in the fourth quarter of 2020 was $22 million or 3.8% compared to the previous quarter, which was $24 million or 4.1%, and year-to-date, our adjusted EBITDA was $97 million or 3.8%. Our net working capital at the end of the fourth quarter of 2020 was $448 million $89 million lower than the end of the third quarter.

On a trailing 12-month basis, our working capital, excluding cash, as a percent of sales was 17.5% at the end of the fourth quarter of 2020. This is below the low end of our targeted range for this year of 19.5% to 19.9%, a significant improvement. Going forward, we expect this metric to trend lower than historical averages.

We generated $83 million of cash from operations in the fourth quarter of 2020 and $261 million for the year. Our fourth quarter free cash flow was $80 million, and our free cash flow after the preferred stock dividend was $74 million.

For the full year 2020, our free cash flow was $250 million, and our free cash flow after the preferred stock dividend was $226 million. Capital expenditures were $3 million in the fourth quarter of 2020 and $11 million for the year at the low end of our guidance.

We will continue to invest in critical projects, such as our e-commerce initiative and system upgrades next year. And we expect our full year 2021 capital spend to fall within a range of $10 million to $15 million. During the quarter, we entered into agreements to sale and leaseback 4 properties.

This transaction generated net proceeds of $29 million in the fourth quarter and is reflected in investing activities in the cash flow statement. It resulted in a $5 million pretax gain, which we excluded from EBITDA. The proceeds were used to further reduce our net debt.

And as a result of this transaction, we will begin incurring an additional $680,000 in quarterly lease expense beginning in the fourth quarter. Our debt outstanding at the end of the fourth quarter was $383 million compared to $551 million at the end of 2019. We reduced total debt by $26 million in the fourth quarter and $168 million this year.

Our net debt is now half of what it was a year ago, significantly strengthening our balance sheet. And our leverage ratio, based on net debt of $264 million was 2.7x. The availability of our ABL facility is currently $432 million, and we had $119 million of cash at the end of fourth quarter. Now I would like to share our thoughts on the 2021 outlook.

We are more optimistic about the future due to recent constructive macro drivers, including oil prices recovering to pre-pandemic levels, continued OPEC+ discipline and the start of the global vaccine distribution, which will gradually lead to demand recovery.

However, the rate of recovery will be dependent on any further surges, pandemic infections and the pace of the global vaccine rollout. As oil demand recovers, we expect to see further economic improvement in the beginning of a multiyear energy up cycle.

However, we believe this recovery will look different than prior cycles with operators having a more disciplined approach to returns and growing production in the future. We also expect to see more consolidation take place within our customer base, which we believe will be positive for us due to the nature of our larger client portfolio.

We also believe that the structural cost reductions and actions taken to strengthen our balance sheet will position us well to take full advantage of the impending recovery.

For the full year, provided that the impact of the pandemic moderates and oil prices remain intact, we are optimistic that total company revenue will grow an upper single-digit percentage compared to the second half of 2020 run-rate.

From a sector perspective, this translates to a mid single-digit improvement in all sectors except for the upstream production sector, which is expected to be up double digits. From a geographic view, we expect the U.S.

to increase from current levels, upper single digits and Canada to increase double digits while international is expected to have a decline in the low single digits as non-repeating projects in 2020 were completed.

On a year-on-year basis for the total company, this translates to a flat to low single-digit decline, with all sectors decreasing except for gas utilities, which is expected to increase upper single digits. We expect to hold our adjusted gross margins consistent with 2020 levels at the mid-19% level.

And as previously guided, we expect to keep our quarterly SG&A cost at $100 million or less throughout 2021. This is higher than our second half 2020 run rate, primarily due to the decision to end our employee furlough program at the end of the year, which increased our quarterly run rate by over $3 million.

Our normalized effective tax rate remains in the 26% to 28% range. However, our quarterly tax rates may fluctuate as certain discrete items recorded against a low pretax income can give rise to large changes in the effective tax rate. Cash flow will be driven more this year from operating profits instead of working capital reductions.

We’re currently targeting cash flow from operations of $75 million to $100 million in 2021. We will continue to focus our excess cash on debt reduction, and we believe we will continue to make significant progress, lowering our leverage ratio as well. Now, let me provide some color on how we see the first quarter playing out.

We currently expect a modest sequential revenue decline of low to mid-single digits in the first quarter due to the typical seasonal delay related to customer budget resets, especially in our international segment, and the ongoing impact of the pandemic. All of our sectors are expected to experience low to mid single-digit declines.

Adjusted gross margins are expected to be flat to modestly lower, and we expect to have a temporary working capital increase in the first quarter due to the delivery of long lead time items for 2021 inventory that will result in a burn of cash. However, this is the only quarter this year that we anticipate not generating cash.

In summary, our fourth quarter and full year 2020 results reflect the proactive focus on the leverage that we can control. We have exercised strong cost controls and inventory management resulting in robust cash flow generation, aggressive debt reduction and solid margins in a very challenging market environment.

We remain committed to our strategy to deliver shareholder value regardless of where we are in the cycle. And our company is well positioned to take advantage of the eventual market recovery and our diversified business model helps to ensure that we will outperform our peer group. And with that, we will now take your questions.

Operator?.

Thank you. [Operator Instructions] Our first questions come from the line of Sean Meakim with JPMorgan. Please proceed with your questions..

Thank you. Good morning, guys..

Good morning, Sean..

So maybe – so first, thanks for all the feedback regarding the outlook.

In terms of the progression for top line in 2021, are you expecting a more – a return to a more traditional cadence in terms of second and third quarters being your best and perhaps a little bit slower, it seemed like in the first quarter and maybe a bit of a drop-off in the fourth quarter? So just thinking about the cadence through the year and maybe any additional comments within the segments would be helpful as well?.

Yes, Sean. Let me talk to the cadence and Kelly will address the segments. We very much think this is going to be a more typical normal year outlook for us. Sequentially, first quarter being the lowest quarter, which is normally the case as budgets get reset and you get some seasonal impact.

Improvement in the second quarter to third quarter, we expect to be our best quarter and then a falloff of some seasonality in the fourth quarter, but still stronger second half than the first half is a strong feeling for us. And we believe the vaccination and the COVID impact will go away.

It impacts us a lot with our customers, because we are an infrastructure company, we are a construction company as you know and so we require large crews to be working and doing improvements on whether it’s pipelines or tank batteries or refineries, we need construction to be going and we think we finally gotten to a point after last year of seeing that really impact us positively in the second half.

So, I think very typical for us, which is a back – return to our normal sequence and second and third quarter being the big construction with a tilt towards the second half just because of the COVID impact..

Yes. And Sean, maybe I add a little color on the individual sectors. If you look at upstream, one of the reasons that we are kind of guiding Q1 to be down maybe slightly here in the first quarter is Q4 was unusually strong.

We guided that in the last call, we talked about that typically, there is a 5% to 10% decline – seasonal decline in the fourth quarter. We actually saw in the U.S. upstream market, it’s a 3% improvement.

But then on top of that, we had, on the international side, a really big improvement on upstream, which we knew this was kind of coming all year, but that was about a 14% improvement from Q3 to Q4 on the international side that just won’t repeat in Q1, right.

You are going to – so you got the budgets resetting in Q1 for upstream, but then you have got the kind of fall off on the international side as well.

But as we talked about in the prepared comments, we do think on the upstream side that based on our current run-rate and I want to make sure that, that’s clear, right, there is the year-over-year change, but there is also the second half run-rate, which has been pretty consistent for us in Q3 and Q4.

For upstream, it’s a double-digit, pretty strong double-digit increase that we are expecting, but on a year-on-year basis it will be a decline. And then as Andy said, on the other one, midstream is going to be the one sector for us that’s going to continue, I think to have some headwinds here in the near term.

We are projecting that to be – well, based on the current run-rate, up single digits, but a pretty strong double-digit year-on-year decline. And then downstream, customers are getting back to work there. There is still some COVID impact that we are experiencing on the downstream side.

All of the activities really focus more on critical maintenance, more smaller critical turnaround projects. And you would think with lower refining utilization that usually would lead to more turnaround work that we would have more turnaround activity but we are really seeing customers focus more on COVID restrictions, budget cuts.

And even here in this year, I think in the first half of the year, we are not expecting a lot of big turnaround projects. We think there could be some materialized in the second half of the year, but if they are not critical, those would likely push into 2022. But time will tell on exactly how that works out..

Thanks for all that feedback. I think that’s really helpful. Then if we just work down the income statement a little bit thinking about gross margins and G&A.

So gross margins, it sounds like near-term, you think that you will be able to sustain recent levels, but it sounds like at least in the presentation there is longer term expectations of being able to continue to accrue to higher margins.

Can you just talk about the kind of near-term versus the long-term as you see, Andy? And then on G&A also little bit of a lift here in the first quarter, but is kind of $95 million to $100 million run-rate for ‘21 on a quarterly basis, is that the right way to think about your G&A spend?.

Yes, Sean. So, let me do the G&A first. Yes, you are exactly right. And as Kelly mentioned in his comments, we had a 10% furlough for everybody in the company in 2020. So we ended at the end of the year, we’re getting back to more normal business. And so that has a $3 million impact.

But we also – we’ll get the full year benefit from the cost reductions we made and some of those were even in November, December. So I think that $95 million to $100 million is the right way to think about it.

And on margin, yes, we’re staying mid-19s as our kind of normal run rate, continue to target, and we continue to move towards a 20% adjusted gross profit margin as we continue to make changes in the company. The valve-centric strategy, just moving from our 40% to 45% will get us a big part of that way. Stainless business comes back.

And the chemical, petrochemical is very accretive on margin enhancement for us. An area of bright spot, which hasn’t been for over a year is line pipe pricing. Demand is still very weak, with new project demand being the most pessimistic outlook of any of our end markets.

But HRC, hot-rolled coal, cut pricing has significantly increased in the last 2 months. And line pipe is down 15% last year. It rebounded towards the end and finished around 6%, down. But in January, it spiked, and it’s at a higher price per ton across the board than all of 2020 back to 2019 levels, which are much better for us.

So we expect demand is still being weak, but costs going up, so pricing is improving. And so inflation in line pipe will help us. And then everything else will be kind of normal demands. But we’re very consistent in that area and with our decrease in weighting towards carbon pipe, we’re even more stable on our margins.

But I see – and the last thing I would say on margins, I see the efficiency coming into the business on e-commerce and more transactions directly with customers through that platform is adding both margin stability but also SG&A benefit..

Can I add to that a little bit?.

Got it. Very helpful..

The only thing I would add is – Sean, real quick on that. If you kind of look at near-term drivers on margins, I think as Andy well explained, there’s the line pipe pricing that is stabilizing, which is going to be very helpful. He talked about e-commerce.

I think just our valve-centric strategy and continuing to grow that part of our business, which is accretive to overall margins, is going to be helpful. And then, of course, just leveraging our buying power with suppliers globally, that’s something that we’re obviously focused on.

And then I think even longer term, if you look at the international business, which is accretive, if you look by geography, we get much better margins on the international side. And so we’ll have a bit of a transition year in ‘21 for international.

But as that business pops back up here in 2022 and 2023, the higher revenue and the higher margins there will help us make progress with that 20% sustainable level margins going forward. And then just our focus on the downstream and industrial side of the business, which that piece is also accretive to overall margins.

We’ve really got a lot of focus internally right now on growing even outside of the refinery side, which we are very strong in, but in the chem, petrochem and other industrial sectors and that’s accretive margins as well. And then on top of all that, just a better market, I think is going to help us as well..

Very good..

Thank you, Sean..

Thank you. Our next question comes from the line of Doug Becker with Northland Capital Markets. Please proceed with your questions..

Thanks. I’ll start off with a bigger picture question.

But as we see some of the major oil companies talking about their more definitive plans around emissions reductions and just increasing investment in clean energy, are you getting any more clarity on what the opportunity might be for MRC in those areas going forward?.

Yes, good morning, Doug. Yes, we see – of course, we’re very much in touch with their changes and I see it as limited impact in the coming year, even in the coming couple of years. They are shifting portions of the budget, maybe from 5% to 10% or 15% of their total spend into renewables. And we see that as an area we’ll watch very closely.

We’re largely an MRO type of business. So we’re going to be looking at those investments and what comes out of that as far as an MRO opportunity through distribution. I don’t see it playing out much as a change for us in the next couple of years.

But longer term, when you go out to the 5 to 10-year window, yes, I think it’ll be a very bigger portion of our business. We’re a pure industrial distributor business model.

So while, today, it may be focused more on upstream, it may, in future, be focused more on renewables, and our product mix will change, but structurally, we don’t need to change the company because it’s adaptable very much to just different product lines.

And we’ll also be looking at M&A when you think out a couple of years, Doug, as if there’s other distributors in the space that’s emerging. We certainly believe we’ll be in a much better, stronger balance sheet position, especially in ‘22, ‘23 that it’s most likely that we would be acquisitive to grow into that area at a faster pace..

That all makes sense. And then maybe just a little more color on how you expect the relationship between your revenue and the rig count plays out, and fully appreciate that you’re more levered to the majors and large E&Ps. And so much of the gain that we saw in the fourth quarter and probably in the first quarter is being driven by privates.

But just maybe some broad strokes about how you expect that relationship to be? And is there an opportunity to capture more of the activity from the privates given the digital platform rollout?.

Yes, Doug, that’s a good point. And while our – you think about our business, as you just described very well, 56% of our revenue comes from the majors. And so we are very much weighted to them on multiyear contracts.

And as they pickup activity, we do very well and our target has not been on the kind of small private money, private equity back one and two rig operators. I do think the change in e-commerce platform opens up opportunity for us to kind of tap into that even more. That’s largely driven by the regional distributors, more so than the two major ones.

And so we’re going in that direction.

And we have an active program to look at the 3,000 smallest customers in our mix from a transactional base and making the change from them, not showing up in the branch to start an order, but order completely online through our platform and just have it delivered or picked up, completed and that brings – that opens up a lot of opportunity for us to tap into customers we haven’t targeted in the past and also brings us some good efficiency on that.

And then rig count, we really don’t track rig count very closely. We don’t have anything down the hole. We only start our work, as you know, from the wellhead. And but we do track well completions very closely.

There is given quarters like this last quarter, we had a big pickup in completion activity in the U.S., but it’s mostly benefit, the rig companies benefits, the frac companies, and it was small players and we had a 3% pickup in that. But when I look at the year, it tracks very much the rig count – I mean the completion count was down 57% U.S.

well completions for the year. And our revenue – our U.S. upstream was down 54%. And over many years, we track very closely that. Any given quarter, it can be variable. But at the end of the day, over a year period, we’ll track our upstream revenues, which are tie-ins and tank battery facility related very closely to the U.S. completion count..

Okay. And then just one housekeeping item.

Do you expect to have to pay any portion of the term loan, just given where the secured leverage ratio played out through the year?.

Yes, Doug, good – very good question. At the end of the year, I mean, you see our reported number on the leverage ratio of 2.7. And so that certainly implies that when we get above the 2.5 hurdle on our leverage ratio, there’s an excess cash flow provision there.

And so we’re – technically, that is something right now that we would expect to pay if you just look contractually at our credit agreement. But we’re having some discussions right now with the creditors. We’ll know more here in a couple of weeks about a possible amendment and not that we need to do that necessarily.

I think it’s just a kind of nice to have to hold on to some additional liquidity there. It doesn’t change your net debt position at all. It doesn’t change our leverage ratio. But if you pay down the term loan, it eats into your available liquidity somewhat.

And if we – just in the environment we’re in, although it’s a much better situation now than it was a few quarters ago, it’s always better as a finance person, I think you would agree, it’s always better to have more available liquidity than less. And so just stay tuned on that one, and we’ll have more information coming out soon..

Fair enough. Thank you..

Thank you, Doug..

Thank you. Our next questions come from the line of Jon Hunter with Cowen & Company. Please proceed with your questions. .

Hey, good morning. So just had a question on the margin outlook in 2021, you guided to the mid-19s. You did 19.7% in 3Q and 4Q and it seems like you’ve got a good number of tailwinds in the way of pricing and mix.

So is that guidance just a dose of conservatism? Or is there any reason we would think that margins could dip a little bit from where we were in the fourth quarter?.

Yes, Jon, I just think it’s a good reasonable guidance to the start the year. We do have some volume impacts from COVID that will impact us in the first half of the year. But the big one would be where we get pressure on margins is deflation in line pipe. We don’t have that. Large projects where the lower margins, we don’t have that.

And so the – I don’t see a lot of risk to the downside. We’re just not ready to forecast a big upside at this point. But it’s, in my view, it’s a very stable platform from a perspective on margin right now. We are bringing in gas products, stainless and valves, like we normally do at the beginning of the year.

So from a working capital perspective, as Kelly mentioned in his comments, we’ll have a build in those inventory, but those tend to be our high-margin activities going forward. So we’re building up the inventory in anticipation that there’ll be some inflationary impact later in the year. We already know there’s significant in line pipe.

We’re just waiting for the demand to pick up a little bit there. So I think there’s – definitely, as you mentioned, there’s more chances of a positive outlook there. But I think that’s a good place to start, mid-19s..

Thanks, thanks, Andy. And then just taking a step further, I guess, to look at the goal to get 20% plus margins.

Is that something you’re thinking could be achievable kind of towards the end of this year or early next year? And then a similar question on the goal to get to kind of high single-digit EBITDA margins, what’s the timeframe of getting there.

Is that something you think is achievable in 2022?.

Yes, Jon, it really depends on the pickup of the recovery. I feel much more confident if we talk about ‘22, ‘23. I think we can get there in those 2 years. Everything’s going as strategically in that direction.

Just if you look at the margins and the – 45% of our revenue coming from valves, and I didn’t talk about it yet today, but $100 million will come from our new valve complete assembly modification center. That is a lot of market share gains on the midstream valve assemblies, that we built that facility.

Got it running in ‘18, ‘19 and did $50 million in ‘20, and we’ll ramp up to $100 million. That’s a very high-margin activity for us because we’re doing – it’s more like manufacturing margins because we’re doing a lot of manufacturing, welding and the assembly and testing.

So you add that as a mix, you add our core valve business, you add that 50% will come through e-commerce, and we’ll continue to make structural changes on lowering SG&A in ‘22, ‘23.

So I see us getting back to that 7% to 8% EBITDA margins that we’ve had before, but this time it will be on much lower revenues than it took the last time to get to those levels. But it’s fundamentally a very sound platform. We’ve guided before for incremental EBITDA to be in the 10% to 15% range as the business picks up and volume picks up for us.

With all the changes structurally we’ve made that Kelly talked about, I feel confident we’ll be in the 15% to 20% incremental EBITDA margins in those years as the business volume picks back up. So I think those factors all together get us to the 20% margins and you get to the 12%, 13% SG&A and 7% to 8% EBITDA. That’s been our goals and targets.

That’s been mine for a while, and I think we’re tracking towards that..

Thank you. That’s helpful color. And then one more maybe for Kelly, just on the cash flow target for the year.

I know you talked about working cap being a consumption in 1Q, but how are you thinking of the working capital impact to your cash flow in 2021?.

Yes. Jon, it’s a really good question. And I kind of alluded to it slightly in the prepared comments that when you look at the cash flow generation we had in 2020, it was very rough percentages, kind of 80% driven by working capital releases and 20% by operational results, if you will. This year, it’s going to flip just the opposite of that.

We’ll be about 80% driven by operations and 20% from the working capital side. And we guided – we said it in the guidance commentary a $75 million to $100 million range. And so – and the working capital component of that, that 20% level, is largely going to be driven by further inventory reduction..

Yes, Jon, let me – I’ll just add a comment. Kelly covered it well. But if you as you realized, we were 7 – thinking about it, net working capital as a percent of sales, 17.5% in 2020, which was a record for us. We see it – we would guide, it wasn’t in our formal guidance. But I think a good way to think about it is, for 2021, 18% or less.

So we’ll maintain a very high level of efficiency in that net working capital as a percent of sales with some additional inventory reductions as we optimize the platform given the view of the business today. So I think it’s – and then Kelly mentioned $75 million to $100 million cash flow from ops is a good point for us to start with..

Great. Thanks, Andy and Kelly, I will turn it back..

Thanks, Jon..

Thank you. [Operator Instructions] Our next questions come from the line of Nathan Jones with Stifel. Please proceed with your questions..

Yes, good morning. This is Adam Farley on for Nathan..

Good morning, Adam..

Hey, good morning. In terms of the gas utility revenue, really strong 4Q year-over-year, you mentioned customers catching up on spending and some market share gains.

So I guess the question is how sustainable are our current spending levels? Do you think there is going to be further catch up in 2021?.

Yes, Adam. And let me take that one. We feel very positive on gas utilities. And we talked in the guidance of the increase over the second half. And just a year-on-year outlook, it’s going to be up high single digits, and two factors. A CenterPoint contract, which was a very large one for us, continues to ramp up, we’ll get a full year run rate on that.

We had other contracts, Duke, as a contract, picking up activity and PG&E, fully out of the bankruptcy now, major utility force on the West Coast, picking up in activity, so three big accounts.

The other big impact is we’re coming off a year of a full year of COVID impact, and this impacts the gas utility business as you can’t get the service personnel into people’s homes, and a lot of that got shut down during 2020 peak of the COVID. People are figuring out how to tolerate that and get some more work done. The customers are figuring it out.

We certainly believe we’ll have minimum impact from that kind of shutdown in the second half.

And so if you look at our customer contracts that are already in hand, and we still have others we’re targeting for growth that we hope to talk about during 2021, and then just the return to the spend and the catch-up from the spend that was – because these are – where utilities are regulated.

They have budgets, and they normally spend the budgets, except for the COVID impact. And so we see it back to growth for sure in 2021. And that’s a really solid part of our business..

Okay. That’s good to hear.

And then shifting over to the supply chain, are you guys seeing any constraints on your supply chain? Any extended lead times or maybe higher transportation costs?.

Well, higher transportation costs, yes, for sure, especially in the U.S. and trucking with all the e-commerce. As you know very well, the e-commerce volume across every industry has really driven up the trucking. So we’re seeing trucking costs in the U.S., especially increase, and we’re managing through that with our carriers.

From a supply chain standpoint, we manage with a very long window. So a lot of the long lead time valves that we would even use in ‘22, we’re planning for to make sure we have those deliveries in 2021. And so we take a very long window there. What we haven’t seen, a lot of shuttered mills in – especially in the U.S.

with a huge downturn in pipeline demand. Probably the most pessimistic outlook is in new construction of midstream pipelines. If you go back to kind of ‘17, ‘18, ‘19, we would normally track 40, 50 projects in the midstream area of new construction, and we’re tracking less than 10 today.

So the pricing is coming up on the – on line pipe, but the demand is still very weak. So and a lot of mills are still shut down. So we will – if demand picks back up, we will see some of our core mills pick back – go back to activity.

And I think it’ll have a bigger impact more in ‘22, ‘23 but it will mostly be a pricing impact instead of a ton – increased tons this year..

Okay. Thanks for taking my questions..

Thank you, Adam..

Thank you. Our next question is come from the line of Ken Newman with KeyBanc Capital Markets. Please proceed with your questions..

Hey, good morning guys. Nice quarter..

Thank you. Good morning..

Thank you. Good morning. .

I just wanted to circle back – good morning. I just wanted to circle back to the higher line pipe price you just mentioned.

Just trying to think about the relationship between higher prices and maybe some of the volume expectations that are embedded into the full year revenue outlook, can you just help us quantify what’s embedded from higher material costs into the revenue? And then just how do we think about the lag from higher price inventory until it gets delivered and flows through on the margins?.

Yes, Ken. So we’re – although activity is going to pick up from the low point of the third and fourth quarter as we guided but year-on-year, it’s down double digits. And so I think it’s – pricing will impact the first half of the year, but there won’t be a lot of volume driving that.

Pricing will still be good in the second half and we will see some volume pick back up. But on a yearly basis, we see this as, out of all our end markets, the most pessimistic. We just don’t see with production coming down, a lot of activity in new build and that normally drives most of the volume from a tons basis.

We are going to see the integrity work getting done, especially in the second half, mid to summer months and the second half. Valve replacements in the integrity projects will be done, which we have a good visibility on that will exceed the $50 million we did last year.

And so it will be replacement line pipe and new valve automated valves and shutdown valves for midstream will be the driver, but – and so we’ll – I don’t think you’re going to have a lot of increase in that outlook.

Kelly, you have anything to add to that?.

The only other thing I would add, Ken, is when you look at line pipe as a percent of our total revenue it’s only about 11%, 12%. So it’s a – it’s not one of the biggest drivers out there, just wanted to point that out..

Right. No, that makes sense. Okay. And then as a follow-up, I think last quarter, we talked a little bit about some potential share gain opportunities given some of the customer consolidations that we saw.

Just curious, any update to share gains in the quarter or the opportunity to gain share as the year progresses, with some of the – some of these other companies getting acquired by your larger customers?.

Yes, Ken. As we said last quarter and you referred to, it’s a big positive for us. We do very well with the larger customers. So consolidation on the midsized customers or acquisition by large customers of a smaller player has always turned out to be a positive for us.

Many of those are going through the early stages still, the ones that’s been announced. And, of course, they’re more focused right now on the synergy savings and the combination and the consolidation between companies that occurs.

So I see it as a much bigger impact in the summer months and the second half of the year because they’ll go through that first. There’ll be some contract rationalization as there always is between – in the procurement groups, the contracting philosophy, they had different companies. So we’ll work through that and have new contracts put in place.

But definitely, we see it as a positive for us, second half of this year and into next year. And a lot of those that have been announced run managed competitions and we do very well in that managed competition environment. So I think there’s more upside than any downside to what’s been announced so far.

And probably, we’re not done with the consolidation from that customer group..

Right. Just one more, if I could just squeeze it in, you obviously did a lot of work to take out some structural costs last year. I think you’re going to get a lot of those benefits expected in ‘21.

Do you feel like the footprint is at a reasonable level given some of your improving optimism or are there still more roofs to take out? Is there still more structural work that you think you can do in ‘21?.

Yes, Ken. I – we are really at a very stable platform now. We’re going to focus more on positioning the company, further improve market coming. We’re going to watch it. If there’s any area, it’d be a little bit in – if the upstream, I don’t think the upstream will disappoint us.

I think it’ll improve some in the overall market, especially by the second half of the year. Midstream will walk – look at our dedicated personnel in midstream. Canada would be the only one.

If Canada disappoints from what our current outlook is, it’s structurally challenged, as you know, with the pipeline not going forward, the heavy oil coming in by rail, no pipelines to either coast up there, no need for the gas in the U.S.

So we – it’s an area where we continue to monitor and may have some – we made a major structural footprint from a branch footprint change in 2020. So we don’t see that. We’re just looking at the personnel needed up there. But that’s a relatively small $130 million business for us, roughly. So I think we don’t have an active program.

We don’t have an active retirement program or an active significant personnel reduction program at all, starting out in 2021. We think we’ve got the cost and the platform in a good place, and we want to be building momentum in the second half as we go into what we think is 2 better years coming..

Very good color. Thanks..

Thank you, Ken..

Thank you. I would now like to turn the floor back over to management for any closing comments..

Thank you for joining us today and for your interest in MRC Global. We look forward to having you on our next first quarter conference call in April. So have a great day and goodbye..

Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines at this time. Have a wonderful day..