Greetings, and welcome to the MRC Global’s First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce Monica Broughton, with Investor Relations. Thank you, Ms. Broughton. You may now begin..

Thank you and good morning. Welcome to the MRC Global first quarter 2021 earnings conference call and webcast. We appreciate you joining us. On the call today, we have Rob Saltiel, President and CEO; Kelly Youngblood, Executive Vice President and CFO.

There'll be a replay of today's call available by webcast on our website mrcglobal.com, as well as by phone until May 12, 2021. The dial in information is in yesterday's release. We expect to file our quarterly report on Form 10-Q later today and it will also be available on our website.

Please note that the information reported on this call speaks only as of today April 28, 2021 and therefore you're advised that information may no longer be accurate as of the time of the replay. In our remarks today, we will discuss various non-GAAP results.

Your are encouraged to read our earnings release and securities filings to learn more about our use of these non-GAAP measures and see the reconciliation of these measures to 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 today 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'd like to turn the call over to our CEO, Mr. Rob Saltiel..

Thank you, Monica. Good morning, and welcome to everyone joining today's call. This is my first earnings call as President and CEO of MRC Global and I want to begin the call by thanking our former president CEO Andrew Lane, who retired in March after more than 12 years of able leadership.

Andrew led our company through its formation, its public offering, and its establishment is the market leader in PVF distribution to the energy and industrial sectors. Andrew's commitment to our core values of operational excellence and customer satisfaction helps cement our reputation as a reliable service provider and a trusted partner.

All of us at MRC Global appreciate Andrew's years of service and contributions to our success, and we wish him all the best in his well deserved retirement. During my first six weeks at MRC Global, I've spent considerable time meeting with our employees, customers, and suppliers, and gaining understanding of the key drivers of our business.

I have visited multiple field locations where I witness firsthand the value added services we provide and observed the dedication of our employees to safety, quality, and customer service.

I've spoken with customers who have long standing relationships with MRC Global some going back more than 20 years and heard them speak of the outstanding support they received from our sales representatives and branch locations.

I've met with suppliers who value our global footprint and the validation that comes with being considered an approved manufacturer by MRC Global. It's clear to me that our company plays a vital role in our customers and suppliers businesses and that it is our employees who are the key to the success.

On today's call, I will begin with first quarter highlights and provide some color on some key initiatives and outlook for our company. I'll then turn the call over to Kelly for a detailed review of the financial results before wrapping up.

We achieved solid first quarter financial results that exceeded the guidance that we provided on our February earnings call. Total revenue increased 5% sequentially beating our expectations. After getting off to a slow start in January and February we finished with a very strong March.

Three of our four business sectors experienced sequential revenue growth as market conditions improved. The fourth sector, gas utilities had lower revenue sequentially due to an unusually strong fourth quarter, but was still higher on a year-over-year basis.

In short, we are seeing positive momentum across all our business sectors that gives us confidence that we've reached an inflection point in our transition to a market recovery. To this end, we expect that each of the remaining three quarters of 2021 will likely produce higher revenues than our first quarter.

First quarter adjusted EBITDA came in at $24 million or approximately 9% better than the fourth quarter of 2020. This also reflects increased business activity and our continued emphasis on cost control throughout the company. Adjusted SG&A came in at $98 million well within our previous guidance.

Due to the primarily structural nature of the extensive cost reduction efforts that we undertook last year, we expect incremental EBITDA margins to be above historical averages as we increase revenue in future quarters. We generated $24 million in cash from operations in the first quarter above our previous guidance.

We have continued to strengthen our balance sheet which now stands at a net debt balance of $250 million. Although, we believe we have ample liquidity we will continue to prioritize paying down debt as our primary allocation of capital during the early stages of this market recovery.

Although our company has well established processes and systems, I believe we still have several opportunities to optimize our current business. We will enhance our supply chain function to manage our inventory balances more efficiently through strategic procurement, increased centralization and improved inventory turns.

We will continue to expand the functionality and usage of digital channels to improve the customer purchase experience while at the same time reducing total transaction costs.

We will evaluate our pricing of products and services in order to receive proper returns for the value added functions that we are providing and we will continue to optimize our global footprint so that we are in the right markets with the right products and services for a changing energy and industrial landscape.

Each of these initiatives are underway and we expect to see the benefits over the next four to six quarters. I do want to comment further on the expansion of our digital transactions and the growth of our digital marketplace MRC Go. We continue to migrate customers to MRC Go to improve our service and reduce our cost to serve.

We continue to enhance the functionality of our MRC Go e-commerce platform and I've seen an increase in customer adoption of these digital tools over the past year. The share of digital revenue in the first quarter of 2021 was 41%, a 1,000 basis point increase over the same quarter a year ago.

Our managed account customers are the biggest user of digital tools with 74% of those customers having some aspect of digital integration. We continue to see opportunity with deeper usage and by continuing to migrate transactional customers to digital. I would now like to provide some insight as to our strategic vision for MRC Global.

As the leading PVF distributor to the energy and industrial sectors we have many strengths to leverage. These strengths include our deeper relationships with customers and suppliers, our extensive product technical expertise, our well-developed supply chain, our global presence that currently spans 17 countries, and our expanding digital platform.

Each of these attributes is market leading for our space. We intend to find the best intersection of these strengths with value creation opportunities so that we can grow our revenues and our bottom line while achieving a healthy return on our investment. This is what our shareholders expect and our team needs to deliver on this.

We are currently pursuing several growth opportunities that I would like to discuss in more detail. The first is the recent establishment of a downstream valve center of excellence to expand MRC Global's market position in the downstream sector and in particular, the chemical and petrochemical market.

We have assembled an experienced team of valves subject matter experts who possess both project and industry expertise.

The center of excellence is headquartered at our world-class La Porte, Texas facility and provides valve related project management, technical sales, and technical support services for Greenfield projects, plant turnarounds, and general MRO applications.

This group will be complemented by our experienced technical sales teams that specialized in carbon, stainless and metal alloys to offer our customers the best in class, complete pipe valves, fittings and flanges solutions.

We believe that the chemical and petrochemical market is currently underserved and MRC Global has significant room to expand our sales to customers in this space. This growth initiative leverages our successful valve center strategy and our intent to diversify away from commodity price dependent markets.

Since our valve business continues to be among our best performing on a gross profit margin basis we expect this growth to be accretive to our company wide margins. Our gas utilities business continues to be a bright spot for our company and is expected to remain an engine of growth over the coming quarters.

We have seen significant improvement in this sector starting in the fourth quarter of 2020 that we believe will accelerate in the coming quarters. I've already met with four of our largest gas utility customers, and each of them is anticipating growth in their business over the next two to three years.

Much of this work is centered on system integrity and reliability improvements as older equipment is upgraded to meet stricter safety and environmental guidelines. Housing starts in fast growing utility areas that we serve will be sources of additional demand.

We have established a goal for our gas utilities business to exceed a billion dollars in revenue by 2023. But we are working hard to achieve this target a year earlier by 2022. As part of our longer term growth story, MRC Global intends to play a significant role in the global transition to green energy and the advancements in decarbonisation.

Many of our current customers who are traditional energy providers are leading the development of these industries, and our working relationships will be very useful as we adapt to our customers changing business portfolios.

We believe that the success factors for a value added distributor to these new and fast growing industries are similar to strengths that we currently possess.

These include the ability to handle, store and transport large equipment, a well-developed international supply chain, a vast domestic and international presence, and of course, technical expertise on the PVF products which are required for these industries.

Interestingly, we are already involved in many of these industries today and a few examples may be helpful. We supplied approximately $15 million in material to a biodiesel conversion project in 2019 and 2020. We recently supplied multiple valve types to a major utility that was overhauling its hydroelectric facility.

We are currently a key supplier of PVF products to a global geothermal operator who has been a customer for decades. We recently provided the Greenfield and MRO materials for a major hydrogen production facility.

We are supplying PVF equipment for construction of an offshore wind farm in Europe with MRO work expected to follow and we have been supplying MRO supplies to a carbon capture facility for more than a decade.

Although it is early days for our green energy and decarbonisation efforts to be significant to our overall financial story, we believe we are well-positioned to capture a significant portion of the opportunity as these markets develop. I'll now turn the call over to Kelly to cover the financial highlights for the quarter..

Thanks Rob and good morning everyone. My comments today will be focused on sequential comparisons so unless stated otherwise, we are comparing the first quarter of 2021 to the fourth quarter of 2020. Total sales for the first quarter were $609 million, a 5% increase with U.S. and Canada driving the increase in all sectors except for gas utilities.

The gas utility sector declined sequentially as the fourth quarter was unseasonably higher than historical averages and we typically see reduced activity in the first quarter as our customers finalize their plans for the remaining quarters of the year.

As mentioned by Rob, the quarter got off to a slow start due to customer budget resets in January and the winter freeze experienced in February that had a significant impact to the Gulf coast states. However, March rebounded strongly and was the strongest revenue month we've had since the pandemic began March of last year.

From a sector perspective, gas utility sales, which are primarily U.S. based were 210 million in the first quarter of 2021, 3% lower as the fourth quarter experienced unseasonably higher than average sales due to customers catching up on activity related to pandemic related delays.

Many customers got off to a slow start this year due to weather that ramped up later in the quarter preparing for the construction season.

However, as compared to the first quarter of 2020, gas utility sales were up $8 million or 4% and this sector now represents 34% of our total revenue for the quarter and as mentioned earlier we were targeting to grow this sector into a billion dollar plus business in the coming year.

Downstream and industrial sales were $194 million in the first quarter of 2021, 11% higher driven by the U.S. segment and now represents 32% of our total revenue. Upstream production sales for the first quarter of 2021 were $127 million modestly higher by 1%.

This increase was driven by strong sequential improvement in Canada in the U.S., but mostly offset by international. This sector now is 21% of our total revenue. Midstream pipeline sales, which are primarily us focused, were $78 million in the first quarter of 2021, a 26% increase. This sector is now our smallest sector making up 13% of total revenue.

Now let me summarize the sales performance by geographic segment. U.S. revenue was $484 million in the first quarter of 2021, up 8% with increases in the downstream and industrial and the midstream pipeline sectors, followed by the upstream production sector as client budgets reset and activity levels improved. The U.S.

downstream and industrial sector revenue increased $19 million or 16% due to increased turnaround and maintenance activity previously delayed due to the pandemic as well as repair work related to the winter freeze and February particularly in the Gulf coast region. The U.S.

midstream pipeline sector revenues increased $19 million or 38% as customers pivoted to small projects and increased maintenance programs. Increased purchases of valves pump and compressor stations also contributed to the increase. U.S.

upstream production sales were up $5 million or 8% as customers began completing more wells and constructing more facilities. This compares favorably to U.S. well completions which declined about 3% over the same period.

Canada revenue was $32 million for the first quarter of 2021 up 39% due to the upstream production sector as customers began to complete wells in response to higher commodity prices. A stronger Canadian dollar also contributed $2 million to the increase.

International revenue was $93 million in the first quarter of 2021, a decline of 14%, primarily due to the strong upstream production sales experienced in the fourth quarter as projects were completed. Stronger foreign currencies relative to the U.S. dollar favorably impacted sales by approximately $8 million. Now turning to margins.

Our gross profit percent was 16.9% in the first quarter of 2021, as compared to 15.5% in the fourth quarter of 2020. The fourth quarter was negatively impacted by a $12 million charge related to a non-cash write-off of excess and obsolete inventory.

Additionally, LIFO expense was $4 million in the first quarter as compared to $1 million of expense in the fourth quarter. Adjusted gross profit for the first quarter was $118 million or 19.4% of revenue as compared to $114 million or 19.7% for the fourth quarter.

The decline in margin can be largely attributed to geographic mix as international which generates accretive margins to the company average experienced a 14% sequential decline in revenue and slightly lower margins in the U.S. due to product mix. Line pipe which was 11% of total first quarter revenue is experiencing inflation.

Line pipe prices were higher in the first quarter of 2021, due to higher hot rolled coil or HRC costs. Based on the latest pipe logics index average line pipe spot prices in the first quarter of 2021 were 10% higher than the first quarter of 2020.

Relative to the fourth quarter of 2020, average line pipe prices were 20% higher in the first quarter of 2021. Prices are expected to continue increasing throughout the year due to rising HRC prices, which will likely result in further LIFO expense in 2021.

Generally, inflation is a positive for our business depending on the timing and duration of the inflationary event. SG&A costs for the first quarter of 2021 were $100 million or 16.4% of sales as compared to $126 million or 15.9% of sales in the same period of 2020.

On a normalized basis SG&A was $98 million for the first quarter of this year and the $28 million reduction is a result of cost reduction actions taken last year that are now fully embedded in our run rate in 2021. This lower cost base positions us for higher incremental EBITDA margins as our revenue base continues to improve.

Our effective tax rate for the quarter was zero due to tax expense on foreign income, offsetting U.S. tax benefits on pre-tax losses. Adjusted EBITDA in the first quarter of 2021 was $24 million versus $22 million in the fourth quarter.

Adjusted EBITDA margins for the fourth quarter were 3.9% versus 3.8% in the fourth quarter driven by the higher revenue. At the end of the first quarter of 2021, our percentage of networking capital to sales was 14.1% much better than our historical target.

However, this includes a $105 million current liability related to an excess cash flow payment that will be paid in the second quarter. Normalizing for this amount, the percentage is 18.5%.

We generated $24 million of cash from operations in the first quarter of 2021 and coming into the quarter we expected to burn cash due to the receipt of long lead time inventory items but the stronger than anticipated sales during the quarter supported positive cash generation.

Due to an improved market outlook, we intend to increase our near term inventory purchases, which may result in the use of cash in the second quarter. Our debt outstanding at the end of the first quarter of 2021 was $382 million and net debt was $250 million, a 49% reduction from the first quarter of 2020.

Our leverage ratio was 2.9 times, but this ratio is expected to trend lower for the remainder of the year approaching the two times range by year end. The availability on our ABL facility is currently $395 million and we had $132 million in cash at the end of the first quarter.

As previously mentioned per our credit agreement we will be making $105 million excess cash flow payments in the second quarter and this will have no effect on net debt but will reduce total long term debt and liquidity once the payment has been made. It will also result in interest savings of about $5 million on an annualized basis going forward.

Debt reduction remains a top priority and where we will continue to focus our excess cash flows in the near term. Now I would like to give you an update on our 2021 outlook. We are more optimistic about the future as macroeconomic indicators improve including wider distribution of the vaccine, OPEC plus discipline and increased oil demand.

Our improved first quarter results, higher backlog and encouraging customer conversations all contribute to an improved outlook and raising our guidance.

For the full year provided that the impact of the pandemic continues to moderate and oil prices remain intact we are optimistic that total company revenue will grow low single digits in 2021 compared to 2020.

From a sector perspective this translates to a low double digit increase for gas utilities and a modest increase for downstream and industrials. Partially offsetting these improvements or mid single digit percentage declines in both upstream production and the midstream pipeline sectors. From a geographic view, we expect the U.S.

and Canada to increase mid single digits and international to decline mid single digits. U.S.

and Canada are significant improvements from last quarter when we expected both to be lower year-on-year and although our international business is expected to decline slightly this year, the anticipated ramp up and international activity should be supportive for our growth in 2022 as we typically experienced a lag between an improvement in drilling and completion activity and our business which is longer lead time and project oriented.

Sequentially, we expect the second quarter to be up high in single digits with all sectors showing improvement. The gas utility sector is expected to have the most robust improvement with strong double digit growth and the upstream is expected to improve high single digits.

Downstream and industrial and midstream pipeline are both expected to increase low single digits. We expect to keep our quarterly SG&A cost at $100 million or less throughout 2021. No change from our previous guidance. We expect for our normalized effective tax rate to remain in the 26% to 28% range.

However, our quarterly tax rates may fluctuate as certain discrete items recorded against a low pre-tax income, can give rise to large swings in the rate. And finally, we continue to target an annual cash flow from operations projection of $75 million to $100 million in 2021.

We plan to continue to focus our excess cash on debt reduction and continue to make significant progress towards lowering our leverage ratio. Now, I will turn it back over to you, Rob..

Thanks Kelly. I want to add a few thoughts before opening up for Q&A. Although we are pleased with our financial results from the past quarter, we still have much work to do to deliver on our own high expectations.

As the market improves, we fully expect to transition to a consistent positive net income and we will work to make this a meaningful financial metric in subsequent quarters. We intend to increase our returns on invested capital beyond compensatory rates.

We aim to increase our EBITDA margin percentages into the upper single digits as our revenues increase and we achieve higher flow through rates to the bottom line and we certainly are committed to achieving a share price that reflects our improving outlook and our ability to generate more consistent financial results.

As a wholesale distributor, one of our key functions is to hold the right inventory for our customers so that it is available to them when they need it. Given our more optimistic outlook, we are anticipating a modest inventory build in the coming quarters to meet our growing backlog and expectations of increasing activity from our customer base.

However, we are committed to doing so in measured steps so that we are not exposed if business conditions change. And finally, we recognize that we operate in a changing world where stakeholders expect more of us as corporate citizens.

We are committed to ensuring that our environmental, social, and governance initiatives are well aligned with society's rising expectations. We're reducing our impact on the environment both in the products and services that we provide and in the conduct of our business.

We believe that diversity and inclusion are strengths for us as a multinational and multicultural company and we are committed to be a leader in this area. We value our employees’ professional development, their safety and their enjoyment of their workplace. We are expanding our ESG disclosures and clarifying our improvement plans.

These will be outlined in our fourth annual ESG and corporate governance report which will be available to our stakeholders in May. And with that, we will now take your questions.

Operator?.

Thank you. We'll now be conducting the question and answer session. [Operator Instructions] And our first question is coming from Nathan Jones with Stifel. Please proceed with your questions. .

Good morning. This is Adam Farley on for Nathan..

Hi, Adam..

First of all, gross margins MRC has done a really good job over the last 12 months keeping them above 90%.

Could you talk about the competitive pricing environment and if there's any compression in product margins specifically?.

Yes, Adam. So yes, this is Kelly. Let me first explain, we kind of touched on it in the prepared remarks about our gross margins. We did have a bit of a decline here in the first quarter about a 30 bips decline and it's really due to kind of a mix issue that we experienced during the quarter both geographic and from a product perspective.

Our international revenues declined 14% in Q1 because of the spike that we had in Q4 and the international margins are accretive to the overall company averages and so that had a bit of an impact. And then on the U.S.

side the kind of I mentioned product mix in the prepared remarks, but that was really specifically related to our midstream business and some sales that we had during the quarter that were kind of below our normal margins for some of the products that we sold. But these were really more of kind of a one off during the quarter.

Our April margins, for example, are really tracking more in line with say Q4 levels of the company. So that's I just wanted to kind of explain what happened during the quarter as we'll see in a few notes come out with that decline.

But to answer your question more specifically, I think on the pricing side we mentioned inflation in the prepared remarks that we're starting to see that. We have been seeing that for sure in the line pipe part of the business, but we're actually starting to see that in other products as well.

And our contracts in most cases allow us to go back to customers and raise prices due to those the inflation that we're seeing in the items that we're buying. And so we're working that through the system right now. There's always a lag effect that we see when we start to reach out to get pricing increases.

But that's kind of where we see things right now. I don't know, Rob, if you have anything to add..

Yes. Just to add to that as Kelly mentioned in his prepared comments, we are guiding improvement in all sectors going forward in the second quarter versus the first quarter. So we're really not seeing any competitive compression of margins. As Kelly said, its more mix related to the first quarter.

We are encouraged about margin accretion here for MRC Global as we really hit a kind of a critical threshold on our revenue. We've exceeded $200 million, sorry, $600 million in revenue per quarter starting this quarter and as I mentioned we expect that to increase throughout the year.

And once we get to those levels and we've covered our fixed costs incremental revenues tend to fall to the bottom line at higher margin levels. So we're actually encouraged about margin accretion going forward, as we see an improving revenue environment across our sectors as we move through 2021..

It makes a lot of sense. And then just following up on that on the supply chain can you talk about how your team is managing the supply chain? There is a lot of talk this quarter around extended lead times and product availability issues. So maybe we can just talk about supply chain and how you're managing inventory levels and things like that.

Thanks..

Yes. As we've talked about, on the call here we're seeing an improving environment across the sectors in which we operate and as such we're getting more optimistic about the future and our need for maintaining an increasing inventory to support our customers’ activities.

So that's really a big focus for us now making sure we've got the right inventory at the right locations for our customers. We really haven't had major delays or instances of supply chain interruptions that have impacted our business that really hasn't been a significant factor for us. I think we've been managing that quite well.

So we don't really see that as an issue in terms of hampering our growth or our outlook for improving revenue and margin development throughout the year..

Thanks for taking my questions..

You're welcome..

Thank you. [Operator Instructions] Our next question is coming from Jon Hunter with Cowen & Company. Please proceed with your questions..

Hi, good morning..

Morning John..

So I wanted to ask on your revenue progression so far through April versus the high single digits that you've got.

Excuse me?.

Yes.

So John just how we're seeing April progress? Is that is that the question?.

Correct. .

Yes. No. Listen based on the guidance that we provided the sequential improvement that we're expecting in the second quarter everything's tracking very well according to plan. Usually the last month or I'd call it the second half of the quarter is the strongest part of the quarter for us.

But no, what we saw in March we described in the script that got off to a slow start in January and February. March, we were hitting on all cylinders and there's nothing that's giving us any concern in the month of April that was a fluke or just a one off.

Everything's really pointing the right direction and I think the other thing to kind of support that is our backlog has really increased significantly. I think it was a 14% improvement from where we were at 12.31. And so that backlog continues to creep up higher and gives us confidence that our near term outlook is definitely intact..

Got it.

And then just to take it, I guess another step further into your full year guidance for down or I'm sorry to upload single digits for the year, how does it progress after the second quarter here? Are you expecting kind of another bit of increase in the third quarter and then a seasonal drop off in 4Q or is it a kind of more level set in terms of smaller incremental growth in 3Q and 4Q?.

Yes. No. We talked about Q2 being in the upper single digit range, feel good about that for the total company. And as we talked about in the prepared remarks that is largely going to be driven by the gas utility space. That's going to be a very, very strong double digit type improvement sequentially.

And then we get into the third quarter I think, again, we're looking at a upper single digit type improvement just the way things are kind of modeling out right now and then Q4, as you know John, we typically always have a seasonal gap because of weather and holidays and things like that in the fourth quarter.

Historically, when you look at it, there's always a few exceptions in different years, but historically, that's a kind of a 5% to 10% decline that we see in the fourth quarter.

And I would just recommend for modeling purposes, you keep it at that range if just, we always kind of pick the higher end of that range, just to be conservative, but usually, it does fall into that 5% to 10% decline..

Thanks. I appreciate that Kelly and then the last one for me is curious on framing the chemical and petrochemical market. It's an area that's clearly a focus of growth for MRC. So do you care to offer a goal similar to what you've provided on the gas utility side in terms of the $1 billion target revenues you have there.

Any kind of detail around what you're seeing for the chemical and petrochemical market would be helpful?.

Yes I'll take that. Look, we're not ready at this point to give a hard goal on how much that'll add to revenue and margins. But your points right that we are excited about this growth opportunity for us.

There's a lot of valve business there that we feel that we can capture and as you know, the valve business for us tends to be accretive to our company wide margin. So we're excited about that. There's also a lot of stainless opportunity there as well which is currently a smaller business for us.

But it's also typically been accretive to company wide margins. So we're excited about the opportunity.

One of the key things you've got to do and in that space is you've got to identify these projects early and really be out in front of what is needed by the customer, working with them to make sure that you can procure the right materials and provide the right value added services.

And I think in the past as a company we're probably a bit more reactive than we could have been to addressing those opportunities with the formation of this experienced team.

based out of La Porte we can really look ahead and see the projects well before they go to sort of the RFQ stage and really plan with the customer, the scope of the projects and how we can participate in that so that when we do get to the pricing part of it we're ready to go and we can be competitive. So again no firm target. Stay tuned on that.

But we're really excited about the potential..

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

Thanks. Rob, I appreciate you've only been there a few weeks but was hoping to get a little more high level thoughts on where you see the opportunities to move MRC forward.

It sounds like inventory management; digital expansion and just green energy are some of those areas but just a little more expansion on your high level thoughts just a few weeks in?.

Yes. Look, we as a company have been in business for over 100 years. So we've obviously been doing some things right over that time. And I think my first few weeks here have been confirmatory of the strengths that this company has.

And as I mentioned a number of times in the prepared comments, the relationships we have with our customers and our suppliers is really a great place to start because these are the folks that are key to our success and will be pivotal to how we grow our business going forward. We obviously feel very good about the gas utility space.

There's a lot of optimism by these customers and I've met with five or six of them already virtually or in person and to a customer they're talking about increasing growth in their business. A lot of that is based on integrity and safety improvements. But some of it, of course is due to housing start. So gas utilities are a bright spot for us.

And then of course, the downstream piece we're very excited about as well which I just commented on. But in addition to that given the strengths that we have as a company, we are going to cast a wider net in terms of looking at opportunities where our strengths can be applied.

We've already done some work in the green energy and in the decarbonisation space but obviously there is tremendous amount of dollars and stimulus going toward aiding the growth of those industries.

A lot of the customers that we serve are going to be leading the charge into that space whether they're IOCs or major independents, but obviously there are some new customers as well that will play a role there. But we feel that given our strengths and capabilities and our track record we should get a more than a fair share of that pie going forward.

Its early days on being able to quantify that and make it significant for us. As I said we've already done some of that work but going forward we believe that it can be a significant a driver of growth for this company in the days ahead..

Sounds good. Maybe a little more context on the trajectory of international revenues over the course of the year. Certainly seems like all the indicators from upstream company budgets as well as large oil field service company commentary that there is increasing optimism there.

I understand your business can be a little bit lumpy on specific projects but just a little more color on the trajectory as we go through the course of the year and the exit rate?.

Yes Doug I'll take that one. Yes, as we had a dip here in Q1 after a really strong Q4 just and that's just kind of the way the timeline was fell out with the delivery of sales last year.

This year in Q2, we do expect to see kind of a mid to maybe upper single digit improvement in the international side, but as we got into on the call year-on-year we do think it's going to be modestly down in 2021 for international versus 2020.

But as we and you're hitting on a really good point that you hear some of the OFS companies talking about strong growth on the international side in the second half of the year.

I think I've heard some double-digit growth being talked about but with us there is always a bit just the nature of the work that we do with a lot of it being kind of post well ahead there's always a lag effect of a couple of quarters before you start to see it kick in for us on the international side.

So because of that that's why we're guiding that 2021 will be down modestly but 2022 and even 2023, the next couple of years out, we're pretty optimistic; not ready to put a number out there yet but we definitely think it's going to be a growth market for us on the international side in the coming years..

And then just a quick one on working capital.

Is that expected to be a use of cash now just given the growth outlook that's expected the rest of the year?.

Yes, we'll definitely hear I would say kind of in the near term like say I think we touched on it in the prepared remarks Doug that in Q2 we're going to be building inventory levels a little bit and that's going to, that'll be a use of working capital or a burn of cash and but I think as we moderate here over Q3 and Q4, we'll see where the inventory, where the market's going and how much more inventory build we need to do but I think you're thinking about it the right way when you look at the full year and the cash guidance that we provided of $75 million to $100 million that's really going to be driven predominantly by just call it EBITDA or the operating profit of the company, not so much from the working capital side.

We could end up having, to your point, a little bit of a working capital burn throughout the rest of the year if we continue to build up inventories but we're monitoring this very-very closely, I would say week to week definitely month to month and we'll provide more guidance on that going forward but the way we're modeling the cash generation right now is again virtually all coming from true operating profit..

Thank you. .

Thanks Doug. .

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

Hi good morning, everybody. Rob welcome on board..

Thank you. Good morning..

Morning. So it sounds like net leverage is expected to trend closer to two times by the end of the year.

I hear you on wanting to drive organic growth this year, but with the leverage profile improving, I am curious just talk about your preference or opportunities for acquisitions especially as you start to think about the growth target for the gas utilities business?.

Yes. We appreciate the fact that our balance sheet is improving and it's been a long process. A lot of heavy lifting was done in 2020 and we are certainly encouraged about the improvement in our leverage ratios that we certainly anticipate as we move through this year with an improving market.

Look we are certainly going to be open to looking at acquisitions that make sense for this company, but we wanted to prioritize making sure that our balance sheet was in good shape. I mean this company was formed through acquisitions and mergers in the 2014 and 2015 time frame.

So we really need to make sure that the kind of opportunities that we look at that could be inorganic line up well with our strengths and capabilities and obviously that they're fair priced. So we are keeping our eyes open on that and inorganic growth will certainly be one of the tools we will look at to grow this company going forward..

Got it. And then for my follow-up I think the sequential revenue increase you mentioned in 2Q that implies like a low double-digit year-over-year revenue increase.

With the volumes expected to ramp this coming quarter can you just help us frame how we should think about the operating leverage potential just given all the costs that are being taken out over the last year particularly whether it's on a year-over-year or sequential EBITDA basis?.

Yes. Ken I'll take that one. Just as you as you kind of alluded we took a lot of cost out of the business last year and we've talked about in previous calls that we think two-thirds of that or more will be structural in nature which we believe will certainly help with our incremental margins as the business continues to improve.

Historically if you look at previous cycles as the business improves from kind of a downturn we've had incremental margins around the mid teens level but because again of the structural nature of the cost reductions that we took out and just a reminder we closed 27 branch locations last year, reduced head count by almost 600 people.

So very deep cuts and as the business improves we don't see bringing back those branches. They've been consolidated into other branches or RDCs and so it really, we really feel like we're well-positioned that as the business improves the incremental margins are going to be I would say I think on the last call we said definitely in the upper teens.

I will be surprised if they're not better than that just the way we're kind of modeling the business right now and keeping the SG&A cost relatively flat and don't get me wrong you will start to see over time as the business improves we'll add more head count back and things like that but as a percentage of revenue maybe we were hovering around the mid teens or kind of slightly below that in really good years.

I think kind of a low double-digit percentage of revenue is something that we're targeting as we kind of get the business back to a more normalized level. So hopefully that answers your question..

Yes. If I could just add to that we anticipate approaching mid to high single digit EBITDA margins because of this leverage that we're going to get from sort of hitting a threshold revenue level and as Kelly says having taken structural costs out of our system.

So we're very excited about the opportunity to really get back to historically high EBITDA margins. Obviously we got some work to do to get there between now and then but that is certainly something this management team is targeting..

And just to clarify is that high single-digit EBITDA target is that something you think is achievable by your end or is that do you really need to get back to like 2019 or type of revenue levels to get to that to that target?.

Yes. I think have to define kind of high. If we're talking about getting past the 5% mark, 5%, 6%, I think that's something we could certainly do this year getting past that midpoint but to get up into the kind of the upper single digits that's more of a 22, 23 type time frame..

Got it. And then just one more for me if I could just squeeze it in. It was encouraging to hear about the growth in the digital channel. Obviously it's been a big driver and focus for you guys.

Can you give us any thoughts and help us quantify where you think the ultimate mix for digital could be over the longer term and how do you see this being a driver of value add over the up cycle as we kind of start to look towards the inflection?.

Well, you make a great point. I mean we've made a lot of progress already in growing digital and I think as we all see in our personal lives as well digital continues to become a bigger part of that. So it's a little hard for us to handicap a cap on that.

I will say that a lot of our digital growth is through our major accounts and they continue to have a great uptake of that and then our smaller accounts we find it's a much more efficient channel to create a cost to serve for that group.

So I think there is upside in terms of the opportunity it creates for additional revenue with our bigger and more stable accounts and then with smaller accounts it's really more of a cost to serve us.

Difficult again to quantify how far this will go but it is a real focus of this management team to ensure that digital adoption increases with really all of our customers and both on the, as I say it will help both top line and bottom line as we move through that migration..

Great. Thanks for the color..

You're welcome..

Thank you. At this time I'd like to turn the floor back over to Monica Broughton for closing comments..

Thank you everyone for joining us today and for your interest in MRC Global. We look forward to having you join us for our second quarter conference call in July. Have a great day..

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