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

I would now like to turn the conference over to your host, Monica Broughton, Investor Relations for MRC Global, also Saltiel. Please go ahead..

Thank you and good morning. Welcome to the MRC Global Fourth Quarter 2021 earnings conference call and webcast. We appreciate you joining us. On the call today, we have Rob Saltiel, 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 March 2nd, 2022. The dial-in information is in yesterday's release. We expect to file our annual report on Form 10-K 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, February 16, 2022. And therefore, you are advised that information may no longer be accurate as of the time of replay.

In our remarks today, we will discuss various non-GAAP measures, including net debt, adjusted gross profit, adjusted gross profit percentage, adjusted SG&A, adjusted EBITDA, adjusted EBITDA margin and adjusted net income. Unless we specifically state otherwise, references in this call to EBITDA refer to adjusted EBITDA.

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 these risk factors concerning these forward-looking statements. And now I would like to turn the call over to our President and CEO, Mr. Rob Saltiel..

Thank you, Monica. Good morning and welcome to everyone joining today's call. I will begin by discussing some of our notable achievements for 2021 review our fourth-quarter results at a high level, and discuss some of the key business drivers underpinning our optimistic outlook.

I will then turn over the call to Kelly for a detailed review of the quarter and our 2022 business plan before providing a brief recap. Our key financial achievement in 2021 was the significant improvement in our bottom line. We realized full-year EBITDA of a $146 million, 51% higher than 2020 and an EBITDA margin of 5.5%, a 170 basis point increase.

Our revenue grew approximately 4% in 2021. So our bottom-line performance clearly benefited from improved gross margins in a more streamlined cost structure that we implemented in 2020. We will continue to maintain control on our costs even as our markets recover in order to drive more of our incremental revenue to our profit line.

I also want to highlight the continued growth and success of our gas utilities business. We exceeded our $1 billion revenue target for this sector two years earlier than predicted as revenue grew 21% in 2021. Gas utilities accounted for 38% of our company-wide revenue last year, and it remains the largest of our four business lines.

We continue to be very optimistic that this sector has many years of strong profitable growth ahead. Our cash management and balance sheet efforts in 2021 have positioned us extremely well for the future. We generated $56 million of cash from operations in 2021, despite having increased our gross inventory levels to capitalize on the market recovery.

We continue to streamline our inventory to favor higher turning products and improve our overall working capital efficiency. We achieved a 15.6% net working capital to sales ratio significantly better than our historic rates in our 18% target.

And we reduced our debt by $86 million in 2021 to enter -- to end the year at a net debt to EBITDA leverage ratio of 1.7 times, a record low for our company since going public.

Turning now to the fourth quarter, our fourth-quarter 2021 EBITDA came in at 47 million, up 21% over the third quarter, and more than doubled the amount reported in the fourth quarter of 2020.

In fact, during the past three quarters, where revenue has been fairly constant, we have seen a sequential rise in EBITDA margin percentage from 5.2% to 5.7% to 6.9%. Our fourth-quarter EBITDA margin percentage was the highest for our company since 2018.

This exceptional figure was aided by increases in customer pricing to counter inflation, excellent work by our supply chain team in meeting customer demands, and some larger product orders at attractive margins.

On our last call, we guided the fourth-quarter revenue would buck our seasonal trend of being sequentially lower than the third quarter, and our team achieved this with a nearly identical $686 million revenue result. This was driven by 33% growth in our Canadian revenue as upstream activity picked up nicely. Our U.S.

business experienced only a modest 1% decline, we're typically down seasonally by 5% to 10%. International revenue was off 6%, but we experienced a strong increase in backlog. It sets the stage for a stronger 2022 and 2023.

Our upstream production business was up 6%, while our midstream pipeline sector and our downstream industrial and energy transition or DIET sector were each up 2%. Gas utilities took a breather in the fourth quarter, down 5% after outsized revenue increases in previous quarters of 2021.

Adjusted gross margins across all four business lines were higher in the fourth quarter due to improved pricing in our customer agreements to help counteract inflationary effects. Looking forward to 2022 and beyond, I want to discuss some of the key drivers for each of our four business lines.

As I mentioned earlier, our gas utilities business is our largest sector by revenue, having achieved a compound annual growth rate over the last 10 years of 10%.

The future of this business is very bright and underpinned by longer-term drivers, such as gas distribution system integrity management, and utility hookups, and then infrastructure build-outs for new home construction. Aging pipeline infrastructure, and tighter safety regulations drive our customer's integrity management programs.

As an example, we're servicing many conversions of older steel or cast-iron lines to polyethylene pipe. In fact, the Pipeline and Hazardous Materials Safety Administration indicates that approximately 38% of U.S. gas distribution mains and service lines are over 40 years old.

Housing starts that drive gas infrastructure build-out are expected to remain strong, especially in the U.S. Southern and Western states where many of our customers operate. In addition, our customers are continuously improving the functionality of their systems, with, for example, the installation of smart meters to replace manual ones.

Recent analysts projections and company earnings indicate a double-digit increase in capital expenditures for our largest gas utility customers in 2022 over 2021 supporting our expectations. Our gas utilities business is less volatile than our traditional oilfield dependent businesses as activity is largely independent of commodity prices.

Our next largest sector, the Downstream Industrial and Energy Transition sector or DIET, now comprises 29% of our total revenue.

With the recent development of our downstream center of excellence, our focus on energy transition opportunities and the general increase we're seeing in our customers’ budgets, we're expecting strong growth in this sector in 2022 and beyond.

We began to see an increase in maintenance and turnaround spending for the petroleum refining and chemical industries in the fourth quarter of 2021, much of it previously delayed due to the pandemic. In 2022, we expect more significant improvement with our U.S. diet sector up double-digits.

In fact, industrial Information Resources or IIR, projects a double-digit increase in U.S. downstream turnaround maintenance and capital spending in 2022, we also expect that our international downstream business, will see a similar pickup in activity, but on a lagged basis relative to the U.S. market.

The rapidly growing energy transition space remains a key area of focus for MRC Global. In 2021, we supplied various green and decarbonization projects, including bio-fuel refinery conversions, hydrogen production, offshore wind and a hydroelectric facility.

Because energy transition work is longer dated due to its project nature, we currently have more energy transition backlog than the total revenue that we generated in 2021.

Although it is still early days for this sub-sector, we expect that energy transition revenue will grow from the tens of millions to the hundreds of millions over the next few years. MRC Global’s traditional energy-focused sectors, upstream production, and midstream pipeline collectively comprised 33% of our revenue in 2021.

Both sectors are poised for major growth with the anticipated multi-year upcycle that has only recently begun. Higher oil and natural gas prices are supportive of significant growth in the U.S., Canada and many of the International markets where we operate.

North America capital spending by energy producers is expected to increase on average in the mid 20% range this year according to industry analysts and company reports. And some analysts are even calling for 30 +% spending rises in the Permian Basin.

Expected production increases should drive our upstream revenue to increase by a strong double-digit percentage in 2022. Our midstream businesses expected to benefit primarily from spending on gathering and processing systems and rise by low double-digits this year.

As a company, we are targeting a minimum of $3 billion in revenue and a minimum of $190 million in EBITDA this year. These numbers reflect a 12.5% improvement in revenue and a 30% improvement in EBITDA over 2021 levels. We are hopeful that we can exceed these figures if our customers spending levels top our expectations.

I'll now turn the call over to Kelly to cover the financial highlights for the quarter and more details about our 2022 outlook..

Thanks, Rob and good morning everyone. My comments today will primarily be focused on sequential comparisons, comparing the fourth quarter of 2021 to the third quarter of 2021, unless otherwise stated, Total sales for the fourth quarter were $686 million, consistent with the previous quarter and our earlier guidance.

Typically, we experience a seasonal decline in the fourth quarter in the range of 5 to 10%, though, we experienced a sequential improvement in our Canadian business, which was up 33%, mostly offset by declines in our international and U.S. segments. Gas utility sales were $258 million in the fourth quarter, a 5% decline.

This has a smaller decline relative to prior year averages due to typical seasonality from holidays and weather in the U.S. This was partially offset by an increase in Canadian activity.

In the DIET sector, fourth quarter revenue was $201 million, a sequential increase of $4 million or 2% driven by project deliveries in the international segment for MRO and facility upgrades for petrochemicals, refining and energy transition related projects.

The upstream production sector revenue for the fourth quarter was $140 million, an increase of $8 million or 6% sequentially. The increase was driven by the US and Canada, which were both up partially offset by international.

Higher commodity prices along with improved customer spending drove an increase in well completions and work-overs translating into higher activity levels. Canada’s upstream business benefited from an increase in deliveries of valves and line pipe for certain project orders.

And international upstream sales were lower due to delays in MRO and project activity from reinstated pandemic restrictions, however, backlog increased 20% during the quarter. Midstream pipeline sales, which were primarily U.S.

based, were $87 million in the fourth quarter, a 2% growth, as upstream activity continued to improve, driving an increase in gathering and processing work along with small projects. Now, I will move to sales performance by geographic segment. U.S.

revenue was $566 million in the fourth quarter, 1% lower, as our gas utility business experienced normal seasonal declines. This was partially offset by increases in our upstream production and midstream pipeline sectors while the DIET sector was unchanged.

Canada revenue was $40 million in the fourth quarter, up $10 million or 33%, driven primarily by the upstream and gas utility sectors. International revenue was $80 million in the fourth quarter, a 6% decline driven primarily by decrease in upstream production, partially offset by an increase in our DIET sector. Now turning to margins.

Adjusted gross margin for the fourth quarter was $148 million, 21.6% of revenue, and our annual adjusted gross profit percentage was 20.1%. Both of these metrics were new records for MRC Global since becoming a public company.

The improvement was related to the pricing-related benefits of inflation, our preferred supplier position, and proactive supply chain management.

Our preferential position and ability to navigate supply constraints allowed us to realize attractive margins during the quarter on several larger product orders, resulting in overall improved company profitability and related margins. We believe inflation will continue in the near-term, but possibly begin to stabilize in the latter part of the year.

Inflation generally benefits our business and we are experts at managing the supply chain for inflationary and deflationary pressures. Our gross profit percentage was 15.6 in the fourth quarter, up 170 basis points compared to the third quarter, due to the same drivers as previously mentioned.

LIFO expense in both quarters were similar at $30 million in the fourth quarter and $32 million in the third quarter. Reported SG&A costs for the fourth quarter were $106 million or 15.5% of sales as compared to $102 million or 14.9% of sales in the third quarter.

Adjusted SG&A after adjusting for severance and other charges in the fourth quarter was $105 million or 15.3% of sales as compared to a $102 million or 14.9% of sales in the third quarter.

The increase in costs was due primarily to headcount increases corresponding with higher activity levels and increased property tax assessments in the fourth quarter. EBITDA for the quarter was $47 million or 6.9% compared to the previous quarter, which was $39 million or 5.7%.

For the full year, our EBITDA was $146 million or 5.5%, a 51% increase year-over-year for the quarter. This was the highest EBITDA margin achieved since the third quarter of 2018.

For the last three quarters, we have improved EBITDA on an absolute and percentage basis, despite similar levels of revenue reflecting strong cost discipline and our ability to pass through higher prices. This resulted in incremental EBITDA of 46% for the year, another record in our public company history.

Interest expense totaled $23 million in 2021, $5 million less than 2020, as a result of lower average outstanding debt balances.

We experienced $1 million of tax expense in the fourth quarter on a $3 million pre-tax loss due primarily to tax expense in a foreign jurisdiction related to a provision for a valuation allowance on certain deferred tax assets. For the quarter, we had a net loss attributable to common shareholders of $10 million or the $0.12 loss per share.

However, normalizing for LIFO expense recorded in the quarter, our adjusted net income attributable to common stockholders was $14 million or $0.17 per share.

We also continue to improve our capital efficiency as evidenced by our percentage of net working capital or sales which was 15.6% at the end of 2021, significantly better than our historical averages and a solid improvement compared to 17.5% in the same quarter a year ago.

We generated $40 million in cash from operations in the fourth quarter and $56 million for the year, driven by stronger earnings exceeding our previous guidance to remain cash neutral in the second half of the year.

Capital expenditures were $4 million in the fourth quarter and $10 million for the full year at the low end of our guidance and consistent with historical ranges. We expect our full-year 2022 capital spend to fall within a range of $10 million to $15 million as we continue to invest in e-commerce and system upgrades.

Our debt outstanding at the end of 2021 was $297 million, a reduction of $86 million from 2020, further strengthening our balance sheet. Our leverage ratio based on net debt of $249 million was 1.7 times, which is below our previously stated goal of 2 times.

We expect to make further progress on our leverage ratio as our EBITDA continues to grow with the expected market recovery and we continue to reduce net debt. We ended the year with availability under our ABL facility of $484 million and $48 million of cash for a total liquidity position of $532 million.

We were very pleased with our backlog position that continues to signal solid growth momentum as we transition into 2022. At the end of December, our backlog was $520 million, up 18% over the third quarter, and up over 50% compared to the fourth quarter of 2020.

Sequentially, we experienced a double-digit growth across all sectors and segments of our business. And as of today, our backlog is over $600 million up 17% compared to the end of the year.

Although the timing of when the backlog translates into revenue can fluctuate, the significant improvement gives us confidence of a meaningful improvement to both our revenue and profitability in 2022, which brings me to our outlook. As Rob outlined earlier, for the total company, we are targeting revenue in 2022 to come in at 3 billion or greater.

And a minimum of $190 million in EBITDA, depending on how a customer spending levels materialized throughout the year. From a total company perspective, this translates to a double-digit improvement in all sectors except for DIET, which is expected to be up upper-single-digits. From a geographic view, we expect the U.S.

and Canada to increase double-digits, and international to increase mid single-digits. We will continue to demonstrate strict cost controls, but expect our SG&A cost to increase modestly on an absolute basis as activity levels improved and we restore certain compensation related benefits that had been reduced during the pandemic.

But as a percentage of revenue, we anticipate our SG&A cost to continue to trend lower. Our normalized effective tax rate for the year is projected to be between 23% to 26%, but could fluctuate from quarter-to-quarter due to discreet items. As activity levels improved this year, we will increase our inventory levels.

But believe for the full year, we can generate higher cash flows in 2022 than we did in 2021. Excess cash will continue to be prioritized towards balance sheet strength and growth in the business. As we look at the cadence of revenue throughout the year, there is nothing to suggest that our quarterly revenue won't follow the typical seasonality.

We expect each quarter to improve upon the other with the exception of the typical seasonal fourth-quarter decline. Specific to the first quarter, we are currently projecting a low to mid-single-digit increase in revenue as customer budgets reset and the construction period and turnaround season begin to ramp up later in the quarter.

EBITDA margins in the first quarter are expected to moderate due to the non-repeatability of certain fourth quarter high-margin sales and an increase in compensation-related benefits, but will step higher throughout the year as activity levels improve.

In summary, our fourth quarter and full-year results reflect significantly improved profitability, strong cost discipline, aggressive supply chain management, and a solid balance sheet position. We set several records in 2021 due to the cost optimization initiatives taken in 2020, and we are optimistic about our 2022 market outlook.

Now, I will turn it back over to Rob for closing comments..

Thanks, Kelly. I want to recap a few highlights from our call today before opening for Q&A. 2021 EBITDA was a $146 million, a 51% increase over 2020. improving bottom-line performance remains the focus of our management team.

Our largest sector, gas utilities, is expected to remain a strong growth engine for us in 2022 and beyond due to compelling secular trends. While we are in the early stages of the energy transition, MRC Global’s customer base, geographic presence, and technical capabilities position us well for future success.

We expect the energy transition to become a significant driver of growth in the coming years. Improving fundamentals give us increasing confidence of a multi-year up-cycle for our upstream and midstream energy businesses. Our balance sheet is in excellent shape due to cost discipline and improving market fundamentals.

We maintain significant financial flexibility as a result. And finally, we expect that MRC Global will meet or exceed $3 billion in revenue and a $190 million in EBITDA in 2022. Based on our forward view, we believe that 2023 and 2024 will see meaningful improvements on these results. And with that, we will now take your questions.

Operator?.

At this time, we will be conducting a question-and-answer session. [Operator Instructions]. One moment, please while we pool for questions. Our first question is from Nathan Jones with Stifel. Please proceed with your question..

Good morning, everyone..

Morning, Nathan..

Morning..

I wanted to start off on gross margins. Nice progression on adjusted gross margins as we went through the year. First quarter about 19.5%, fourth quarter about 21.5%. You talked about an expectation for a bit more inflation as we start 2022, that maybe moderates in the back-half of the year.

If that happens, should we see a peak in gross margins and maybe somewhat of a decline as inflation flattens out? How does mix impact that? Just kind of what your expectations are for gross margins from here?.

Yes. Thank Nate -- thanks, Nathan. This is Rob. I think you make a good point around the fact that our gross margins have been really strong in 2021 and really hit a new -- really nice high level in the fourth quarter of last year. And you're also correct in saying that we do expect continued inflation as we work through the first half of this year.

Our outlook for 2022 does suggest that our gross margins may moderate slightly so that they'll continue to begin with a two handle. But as inflation moderates and our inventory levels get more reset to current pricing, there's certainly potential for that gross margin to come off a little bit from where it was last year.

Our team continues to do a very good job of getting our price updates into counter inflation. So, that's been one of the things that's certainly been helping our gross margins as well but we do think that gross margins in the 20% range are certainly realistic for the full year 2022 and they underpin our outlook..

Maybe just talking a little bit more about gross margins for the longer-term. Obviously there is a bit of volatility around depending on product mix and what the inflation level is and things like that. But the gross margins have expanded over the last several years.

Can you talk about the drivers of that gross margin expansion? Whether or not you think those gross margins can structurally continue to move higher overtime in kind of a more normalized operating environment. Thanks..

I think it's a good question. I think we're doing a lot of things in terms of maintaining real good discipline on what we buy and how we buy it. I think our supply chain team has done a great job of peaking around the corner and figuring out where prices are going to go on particular items that we purchased for our customers.

So I think that certainly gives us some strength in our gross margins going forward. Again, when we have these inflationary times, we've talked many times about the fact that inflation is typically good for our business. And so, to the extent that inflation moderates, that's probably a net negative for us rather than net positive.

But look, we're doing everything we can to maximize our bottom line focus. Obviously, that starts with having healthy gross margins and it's something that we spend a lot of time looking at it as a big driver of our ultimate profitability.

Kelly, you want to add to that?.

Nathan, I was just going to add another comment there that Rob kind of touched on. The product mix is very important. I think as we continue to grow our DIET sector, especially in the chemical space and the other industrial space. I think those will be accretive margins. We have a high valve content and the diet sector that is accretive to margins.

And then I would also say the geographical mix is very important as well. International typically lags improvement in North America by as much as about 9, 12 months. But the margins are better on the international side.

So as we continue to improve that business here, and we think this is a multi-year recovery, not just in ’22 that international will be better, but in ’23 and beyond as well. And that mix of higher international content is going to be very accretive to our overall margins as well..

Can you see a 20% gross margin business over the long term?.

Yes, we can..

Excellent. Thank you..

Our next question comes from Jon Hunter with Cowen. Please proceed with your question..

Hey, good morning, everyone..

Hey, Jon..

Morning..

So the first question I had is just on the top-line guidance, and I appreciate it's at least $3 billion for the year. I'll call it 12%, 12.5% growth year-over-year. That's kind of in line with what we were discussing at the time of the last call and since then, U.S. onshore activity has gone up quite a bit.

So I'm curious if there's anything offsetting that incremental growth that might give you a bit of pause in your growth outlook or is it simply a healthy dose of conservatism?.

Well, a great question. We did say that we are targeting a minimum of $3 billion of revenue this year. And we think 12.5% growth on the top line is pretty healthy. That's underpinned, as we said in our prepared tax, by growing backlog.

So we've actually grown our backlog across all geographies, all sectors, and all product classes virtually by double-digits. And in addition to that, we continue to see really strong response in the marketplace.

And as you point out, some strengthening fundamentals in the upstream and midstream businesses which obviously will grow to an outsized proportion relative to our gas utilities and our DIET sector. So we're feeling quite good about the top-line growth for next year.

If we can come in ahead of $3 billion, exceed that number, that would be great but we think $3 billion is a good guidance for providing right now..

Thanks for that. And then turning to G&A. I mean, it's going to be up on an absolute basis if you just annualize the adjusted number from 4Q you have 420 for the year.

Is that kind of how you're thinking of things and how the guidance was put together for ’22?.

we are in inflationary times, and our employees are feeling that inflation. So we know that we've got to make sure that our wages are consistent with where the market has moved. We're looking at kind of low to middle single-digit adjustments in compensation for employees generally. That's going to be underpinning some growth in the G&A number.

In addition to that, certain benefits that were curtailed or reduced during the pandemic, we will be bringing those back on a phased basis throughout here in 2022. So look, we do see an increase in G&A this year versus last year.

But we're going to do in a very controlled fashion and make sure that as we look at any kind of metrics of G&A intensity, so G&A versus revenue versus profitability. We want that to continue to work its way down.

Kelly, you want to add?.

Yeah. The only other thing I would add is as a percentage of revenue, its certainly going to continue to trend lower as our revenue improves. In 2020, a normalized SG&A was 16.5%, this year -- 2021, I should say, we were at 15.3%. It's certainly going to have a 14 handle on it in 2022, I think.

For modeling purposes, for the full-year, I think if you're in that middle 14% range, 14.5% or so, give or take, that's probably where we're going to end up. So it'll continue to trend lower and ultimately we are open to get it down even to 13% or lower type level as business continues to improve but you've got to take steps to get there..

Got it. Understood. And then just last one for me is -- I noticed the cash from ops guidance to be a bit above the ’21 level of $56 million. So, how are you thinking about working capital in that environment? I mean, clearly, you're growing this year.

So, it's $50 million or so, a reasonable working cap consumption assumption there? And then what else do we need to be considering on the cash side in terms of cash taxes, interest and anything else..

Yeah, I'll offer some commentary and then turn it over to Kelly for more particulars. But look, we're trying to buck the trend of being in a growth phase of the market and consuming cash.

And we're really excited about the fact that our outlook for 2022 does show not just cash flow generation, but increased cash flow generation over what we did in 2021. And this is occurring even as we expect to increase our inventory levels to serve this growing market.

A lot of this has to do with the fact that we're continued to focus on capital efficiency. So we've increased our inventory turns from somewhere around three to trending toward five turns over just the last year.

A lot of that was facilitated, if you will, by the pandemic where we really reset our inventory levels by disposing of some older slower moving inventory and then really being disciplined about restocking inventory that moves it at higher turn levels.

So this capital efficiency certainly plays a big part of our confidence on cash generation and we think investors value that. We think that we need to be challenged not just during down-cycles, but obviously during an up-cycle to continue to generate cash. A lot of that's obviously coming from our EBITDA.

But we're maintaining working capital efficiency on our inventory and our accounts receivable and other uses of cash so that we can continue to deliver strong cash flow for our investors.

Kelly?.

Yeah. Jon, I would just add on it, just maybe get specific into the numbers. You're right. This year we consumed or had a change in working capital of close to $50 million, I'm thinking about $48 million or so. The cash generation before the working capital change was about $100 million or a little bit above that.

I think the way we're looking at ’22 right now and the way we're modeling it is that cash generation before the change in working capital is like a 40% to 50% improvement on that, so a significant improvement from just cash being generated from the business, closer to that 150 mark.

And then -- but we will be consuming more in working capital because if the business is getting better, we do intend to grow our inventory position. And just a data point on that because as sometimes with LIFO, our inventory gets a little bit confusing when you look at our balance sheet.

If you just look at our gross inventory where we finished 2021, we were roughly $630 million. We intend to grow that inventory position in 2022, I think it will be north of $700 million. We're going to grow it by that kind of number, we're not going to get more specific than that.

But still, even with that fairly significant increase in inventory, we still think we'll generate more cash overall than we did in 2021..

Very helpful. Thank you..

You're welcome..

Our next question comes from Doug Becker with Benchmark Research. Please proceed with your question.

Thanks. You've done a really good job reducing net leverage in 2021.

Is it reasonable to think about net leverage going below one times by the end of 2022 [Indiscernible]? And then, just what's kind of the optimal long-term capital structure in well, COVID new normal on the de -carbonizing world?.

Yeah, great question. Well, first of all, you make a really good point that we've done an excellent job and some of this certainly had occurred before I arrived here of really getting our balance sheet in great shape.

We've reduced our cost structure but really importantly for investors, we've reduced our net debt and we've reduced our leverage ratio down towards stands now around 1.7. It maybe a little ambitious to say that we're going to get under one but we're certainly going to approach one as we move through this year.

We've already given you the $190 million EBITDA numbers, so you can do the math and figure out it's going to be in the low ones, one point something this year. And look, we think our investors value that.

I think MRC Global has potentially been penalized in the market because we had a balance sheet that certainly during challenging times was looked to be a bit stretched. And we think that it may have also be limiting to our financial flexibility as we look for potentially inorganic ways to grow this company.

So we're really focused on maintaining a solid balance sheet. We're not quite there yet, I think as we move through this year with our optimistic outlook and the cash that we're going to generate, we should have a really excellent balance sheet at the end of 2022.

And that will certainly set the stage for us to do hopefully greater things in the future. That's how we look at it today..

Makes sense. Maybe jumping to the gas utilities revenue guidance; that segment grew over 20% last year. A double-digit revenue growth.

Is that kind of a low double-digit, or could it be a little bit higher given what we saw last year?.

Yeah. It's in the lower double-digit. I mean, when you grow 21% in 2021 like we did, we felt that it will be a little too bold to predict that kind of growth this year. We do think that double-digit growth is very achievable for the gas utility space for all the reasons that we talked about in our prepared notes.

System integrity projects are continuing up around the U.S. And then we're really encouraged by what we're seeing in terms of housing starts, which is a big driver of infrastructure build-out, new utility hookups, and the like. So we love this gas utilities business.

It has been a business that we built a 100% organically and it has continued to grow as we said, annual growth rates exceeding 10% over more than a decade. So we think we're getting more back to kind of the average annual growth rate in 2022. It could surprise to the upside, but that's what's underpinning our outlook..

The market for MRC?.

Look, we think it's a significant opportunity for us as a driver of our DIET sector. One of the things that has really hampered the industry and the downstream has been delay in a lot of projects due to the pandemic. We're starting to see a much greater backlog of turnaround and upgrade projects developing for 2022 and beyond.

So without quantifying specifically how much we might get this year, we are certainly projecting the chemical subsector of the DIET sector to grow this year and to continue to grow further as we move through time.

But a lot of what we've done in the downstream had been hampered in ’21 and it's because of the pandemic and it's really picking up just now..

Got it. Thank you..

You're welcome..

Our next question is from Ken Newman with KeyBanc Capital Markets. Please proceed with your question..

Hey, good morning, guys..

Good morning..

I do want to go back to that comment on the energy transition. I think you said going from tens of millions of dollars to hundreds of millions in opportunity over a couple of years.

I know you're not trying to quantify how much will monetize this year, but maybe give us a little bit more directional color in terms of the visibility for the projects you're bidding for.

And just how do you view the cadence of those wins kind of coming through as we go through ’22?.

Yes, it's a good question. The first thing I would say is that we are tracking dozens of projects that are being contemplated or in the process of getting approved in total for the U.S. and international markets. Interestingly, we had -- we generated more revenue from the energy transition outside the U.S. than we did inside the U.S. in 2021.

And we're really excited about the growth opportunities of the entire energy transition space. But the fact that we are a global company with large positions in Europe and Asia-Pacific really gives us confidence that we can take full advantage of this energy transition wherever it develops.

It's a business that today is in sort of the $20 million range that we would like to grow to $40 million or $50 million this year, to give you some rough numbers. You can see that a $100 million a year is really hopefully not that far off in terms of what we generate. But we're really excited about the opportunities we're seeing.

It's fair to say that a half to two-thirds of the opportunities are really in the biodiesel realm. There is a lot of renewable diesel, a lot of conversions of refineries to go from a Petroleum Feedstock to something more organic. And so those kinds of opportunities really are kind of front and center for us.

But as we said in our prepared comments, we're seeing opportunities in hydrogen, hydroelectric, wind power, carbon capture. These opportunities really span the gamut of all the things around green energy and decarbonization. So, very early days for this sub-sector to be a significant contributor to our overall revenue story.

That's why we haven't broken it out as a separate sector. But we're very excited about the future of this business, and we will continue to provide color on this as we move through the year..

That's good. Switching over, it sounds like you are looking for some solid volume growth in ’22 and I'm sorry if I missed this, but I'm curious if you could talk a little bit about what's expected from higher prices.

And then maybe help us understand how much of the growth reflects some carryover effects from pricing actions taken in ’21?.

Yeah. So Ken, I think you may have missed the comments earlier in the call on the inflation. We -- I think we said in our prepared remarks that certainly the last couple of quarters we've benefited from inflation.

We think the next couple of quarters, Q1 and Q2, at least the way we're modeling it, that we'll continue to have inflation, we'll continue to push through some price increases with our customers to offset that inflation. We are thinking though we start to see some stability or flattening if you will in the second half of the year.

And especially in things like line pipe, which we've really had some good incremental margins on line pipe sales here over the last quarter or two. But we know at some point that tailwind is going to turn into a headwind. But the beauty is it's only a roughly 15% or so of our revenues, so we will have an impact.

But we'll have pricing improvements coming through with other product lines that we offer. They have been a little bit slower to take off with customers. And so net-net, you put all that together, Rob said it, I think in an earlier question, that we still feel very good about a 20 +% margin.

Is it going to be the 21.6% we had in Q4? Probably not, but certainly a 20-type handle on it for full year..

Yes. I will ask one more if you don't mind, and then I'll get back in queue. But I just wanted to talk a little bit more about the M&A pipeline. Obviously, the leverage looks like it's in a really good position. You talked about approaching one times going through the year.

Can you just talk about what you're seeing from an M&A perspective and what the targets are looking like in terms of size and opportunity?.

Yes. Look, we continually survey the market for opportunities to grow inorganically even as we pursue aggressively our organic growth strategy. As you know, this company was really put together through M&A consolidation of the players into -- in what has become MRC Global.

We've obviously been somewhat hampered in terms of our flexibility given that the challenges of the pandemic and some of the strains that were created, I think just having a stretched balance sheet. So a lot of those issues are really moving into the rear-view mirror.

And as we look forward, we certainly want to consider ways to grow organically and having a balance sheet that's in the shape that it is in now and will likely be in even better shape at the end of this year, certainly gives us those opportunities. We are looking for meaningful ways to create significant value for our shareholders.

And if we can find opportunities to do that through the M&A realm, we will certainly pursue those..

Thanks..

You're welcome..

As a reminder. [Operator Instructions]. One moment please as we pull for questions. It appears that there are no further questions at this time. I would now like to turn the floor back over to Monica Broughton for concluding comments..

Thank you all for joining us today and for your interest in MRC Global. We look forward to having you on our first-quarter conference call in May. Have a good day, and talk to you later. Thanks, goodbye..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..