MRC Global Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 7 speakers on the call.

Operator

Greetings, and welcome to the MRC Global Second Quarter 2023 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Monica Broughton, Vice President, Investor Relations and Treasury.

Operator

Please go ahead.

Speaker 1

Thank you, and good morning. Welcome to the MRC Global's Q2 2023 Earnings Conference Call and Webcast. We appreciate you joining us. On the call today, we have Rob Sautiel, 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 August 22, 2023.

Speaker 1

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, August 8, and therefore, you are advised that information may no longer be accurate as of the time of replay. In our call today, we will discuss various non GAAP measures. 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.

Speaker 1

Unless we specifically state otherwise, references in this call to EBITDA refer to adjusted EBITDA. 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, 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.

Speaker 1

And now, I would like to turn the call over to our CEO, Mr. Rob Sautil.

Speaker 2

Thank you, Monica. Good morning, and welcome to everyone joining today's call. I will begin with a high level overview of our 2nd quarter results and sector performance followed by our 2023 outlook. Kelly will provide a detailed review of the Q2 results and 2023 guidance before I end our prepared remarks with a brief recap. Moving on to our financial results, I am pleased with our performance in the first half of this year with overall revenue growing 10% over the first half of twenty twenty two.

Speaker 2

All three of our sectors demonstrated healthy year on year revenue growth over the 1st 6 months with production and transmission infrastructure or PTI up 16% and both gas utilities and our downstream industrial and energy transition sector or DIET each up approximately 8%. Our profitability in the first half of the year also improved over the same period last year with a 17% increase in EBITDA and a 40 basis point improvement in EBITDA margins. Clearly, our business is in great shape as we head into the second half of twenty twenty three as we continue to improve top and bottom line performance and execute our sector focused strategies. Specific to the Q2, our top line came in a little lighter than anticipated with revenue of $871,000,000 representing a 2% sequential decline versus the Q1, but an improvement of 3% over the Q2 of 2022. Both sequentially and compared to the same quarter last year, 2 of our 3 sectors, gas utilities and PTI experienced revenue growth with Diet taking a pause in project and turnaround activity this quarter.

Speaker 2

Other key highlights for the quarter are that we produced strong adjusted gross margins of 21.5%, grew our international segment backlog by 12% compared to the Q1 and generated positive cash flow from operations of $20,000,000 Our adjusted gross margins continue to be robust Even as the supply chain is normalized and inflation has stabilized, improving 30 basis points in the Q2 over the Q1, We benefited from updated contracts that have taken effect, which reflect current product cost levels. While gross margins are often sensitive to both geographic and product mix and project activity, we expect our average adjusted gross margins to remain at the 21% level, well above pre pandemic levels. As I mentioned earlier, we generated $20,000,000 in operating cash flow this quarter. And in the back half of the year, we expect cash flow generation will accelerate due to declines in inventory levels for the remainder of the year. Cash flow generation remains an important metric for this leadership team and we are focused on generating cash through the business cycle.

Speaker 2

We realized EBITDA of $63,000,000 with margins of 7.2%, lower than anticipated primarily due to the lower revenue for the quarter. Kelly will cover the details later. However, we expect our EBITDA margins to improve next quarter on higher revenue as we enter into what is typically our strongest quarter of the year. Our return on invested capital or ROIC was 11.3% after adjusting for the impact of LIFO on a trailing 12 months basis. We expect this metric to continue to increase in future years And we see it as a key driver for shareholder value creation.

Speaker 2

Turning now to our sector performance, our PTI business continues to benefit from improving fundamentals. This business experienced a 10% revenue improvement over the Q2 of 2022 as our customers expanded their production facilities and pipeline infrastructure across all three geographic segments. In particular, our Permian PTI business continues to thrive as we have solidified strong business relationships with the larger operators whose capital budgets are less sensitive to oil price moves than those of smaller players. On the flip side, Our California PTI business has been hampered by difficulties that our customers have had in securing drilling permits and a general regulatory climate that is not favorable to the oil and gas industry. While sequential growth for PTI in the second quarter was modest, We expect the PTI sector to strengthen in the second half of this year as we see our customers' CapEx budgets remaining healthy and oil prices remaining supportive.

Speaker 2

Our diet sector experienced a 5% decline in revenue compared to the same quarter last year due to the timing of projects and turnaround activity. The larger projects in this sector can be lumpy between quarters as evidenced by the 12% sequential improvement we experienced in the Q1 followed by a similar decline in the Q2. We expect that the Q2 revenue for diet will be the low watermark for this year and for our diet business to improve significantly from here. Our diet backlog increased 12% sequentially in the 2nd quarter And we are modeling strong double digit revenue growth in the 3rd quarter followed by a seasonally strong 4th quarter as project activity resumes And we head into the fall and winter turnaround season. Many of the U.

Speaker 2

S. Biofuels projects are winding down, but several LNG projects are ramping up and will drive higher activity over the next several quarters. Our gas utilities business had 5% sales growth versus the 1st quarter and 3% growth over the Q2 of 2022 as customers implemented meter upgrade and pipeline integrity projects as well as other system reliability and environmental activities. As we move into the second half of the year, we expect our gas utilities revenue to moderate over the next couple of quarters. Several customers built large inventory balances over the last year and are now working to reduce their stock levels Given that we have a much more reliable supply chain and an associated reduction in product lead times, we need to keep in mind that our gas utilities revenue grew 21% in 2021 25% in 2022, phenomenal growth rates that were fueled in part by customer advanced purchases of critical products that were in high demand and short supply.

Speaker 2

Now some of these customers have too much product inventory in their systems. Due to this inventory rebalancing, we expect gas utilities revenue levels in the second half of the year to be about even with the first half of the year lower than originally anticipated. However, I want to be clear that this does not negatively impact the longer term Growth fundamentals of this business. Discussions with our key customers indicate that their anticipated multiyear CapEx budgets Averaging in the 5% to 7% annual growth range remain intact over the next few years. In the second quarter, We entered into contractual agreements with 2 new gas utilities and we expanded our product offerings with 2 other utility customers.

Speaker 2

We continue to gain both market share and wallet share in this sector. Despite this bump in the road, we believe our gas I want to make a few comments about our international segment, which has shown impressive performance this year, including 21% revenue growth for the first half of twenty twenty three compared to the first half of twenty twenty two with strong double digit improvement in both the PTI and diet sectors. Several countries are leading the uptick in customer activity, including the United Kingdom, the Netherlands, Singapore and Australia. International backlog has returned to pre pandemic levels positioning this segment well for double digit revenue growth in 2023 and a strong start going into 2024. International is also leading the way for our Energy Transition business this year with more than half of MRC Global's energy transition revenue to date and the majority of our backlog in this subsector.

Speaker 2

This activity has been led by renewable fuels and wind power projects, primarily in Europe. In fact, we recently won our first valve supply order for a green hydrogen plant in Europe with a long standing customer. I want to provide a few summary comments on our 2023 business outlook before turning it over to Kelly. Our revenue expectations for the full year 2023 are now calling for upper single digit growth over 2022 as we are seeing some softening around the timing of our customer spending in the back half of the year, primarily in the gas utility sector as I mentioned earlier. We continue to expect double digit growth in our PTI sector and high single digit growth in our diet sector for the full year.

Speaker 2

We expect to generate strong cash flow from operations this year, especially in the remaining two quarters and to deliver higher annual adjusted EBITDA than we did in 2022. Although this new guidance is lower than our previous expectations, We remain bullish on the multiyear outlook for our company and our many growth opportunities ahead. And with that, I'll now turn the call over to Kelly.

Speaker 3

Thanks, Rob, and good morning, everyone. My comments today will primarily be focused on sequential results comparing the Q2 of 2023 to the Q1 of 2023 unless otherwise stated. Total company sales for the Q2 were 871,000,000 a 2% sequential decrease, but a 3% year over year increase. From a sector perspective, Gas utility sales were $323,000,000 in the 2nd quarter, a $16,000,000 or 5% increase due to the typical seasonal increase related to the construction ramp up period for Integrity upgrade projects. Compared to the same quarter last year, the gas utility sector grew 3%, primarily driven by increased CapEx spending for modernization and replacement activity.

Speaker 3

As mentioned by Rob, as we move into the second half of the year, we expect our gas utilities revenue to moderate for the next couple of quarters, but then returned to more similar growth levels as we have experienced historically. The Diet Sector 2nd quarter revenue was 245 A decrease of $33,000,000 or 12% due to the timing of projects and turnaround activity. As a reminder, this sector had a very strong Q1, which contributed to the sequential decline seen this quarter. For the Q3, we expect a very strong rebound in activity with a robust double digit level of growth. Notably, this sector has a significant amount of project activity, which can create substantial variability between quarters.

Speaker 3

The PTI sector revenue for the 2nd quarter was $303,000,000 an increase of $3,000,000 or 1% sequentially as we experienced an increase in gathering and processing projects this quarter. And compared to the same period last year, our PTI backlog has grown 20% for the company and 54% for our international segment. From a geographic segment perspective, U. S. Revenue was $727,000,000 in the second A $13,000,000 or 2 percent decline from the previous quarter due to the diet sector, which was down $31,000,000 or 15%, partially offset by growth in our gas utilities and PTI sectors, which were up $15,000,000 $3,000,000 respectively.

Speaker 3

Canada revenue was $38,000,000 in the 2nd quarter, sequentially down $4,000,000 or 10% due to non recurring project orders in the PTI sector. International revenue was $106,000,000 in the 2nd quarter, up $3,000,000 or 3% driven by the PTI sector. We remain very optimistic about the outlook for our international segment, which has seen a 30% increase in backlog since the beginning of the year, led by the PTI sector. Now turning to margins. Adjusted gross profit for the 2nd quarter was $187,000,000 or 21.5 percent, a 30 basis point improvement over the Q1.

Speaker 3

Although we have seen deflation in our line pipe business this year, along with inflation stabilization across most other product lines, We have been successful increasing margins due to a higher margin product mix, improved contract terms and a higher contribution of revenue from our international segment that is accretive to overall company gross margins. Reported SG and A for the 2nd quarter was $130,000,000 or 14.9 percent of sales as compared to $122,000,000 or 13.8 percent for the Q1. The primary driver of the increase relates to higher employee related costs, including hiring additional resources to support business growth along with associated benefit costs. The 2nd quarter results also include non recurring IT related professional fees. At normalizing for this expense, adjusted SG and A for the quarter was $129,000,000 We believe SG and A as a percent of revenue will average around 14% for the second half of the year, excluding any unusual items.

Speaker 3

EBITDA for the Q2 was $63,000,000 or 7.2 percent of sales, a 60 basis point decline from the Q1, primarily a result of the lower revenue this quarter. Tax expense in the Q2 was $10,000,000 with an effective tax rate of 29% as compared to $13,000,000 of expense in the Q1. The difference in the effective rate and the statutory rate is due to state income taxes, non deductible expenses and differing foreign income tax rates. For the Q2, we had net income attributable to common stockholders of $18,000,000 or $0.21 per diluted share At our adjusted net income attributable to common stockholders on an average cost basis, normalizing for LIFO expense and other items was 22,000,000 or $0.25 per diluted share. In the Q2, we generated $20,000,000 in cash from operations as inventory levels peaked during the quarter and we expect inventory levels to decline from 2nd quarter levels for the remainder of the year, resulting in strong cash flow generation in the second half of the year.

Speaker 3

Our revised target is to generate net cash flow from operations of approximately $90,000,000 for the full year. Turning to liquidity and capital structure, Our current availability on the ABL is $599,000,000 and including cash, our total liquidity is 630,000,000 Due to the anticipated cash generation in the second half of twenty twenty three and in twenty twenty four, we expect our available liquidity to continue to grow. And in the event that we do not refinance our Term Loan B that matures in September of 2024, we expect to have plenty of I'd also want to address the presentation of our term loan on the balance sheet at the end of next quarter when the term loan will technically mature within 1 year. Given our ability to repay the term loan using the ABL with no impact to current assets, we will continue to classify the term loan as long term debt. This designation on the balance sheet will continue throughout 2024 as long as the existing term loan remains outstanding.

Speaker 3

And to finish off our 2023 outlook, given our current outlook on the business, we expect 2023 revenue to increase in upper single digit percentage over 2022 with EBITDA margins in the mid 7% range. From a sector revenue perspective, we continue to expect the PTI sector to have the highest growth rate in the low double digit percentage range, followed by Diet with an upper single digit percentage and finally gas utilities that we now expect to be at approximately the same revenue level as last year. From a segment view, this translates to a mid teens percentage increase for international An upper single digit percentage increase for the U. S. And a mid single digit percentage decline for Canada.

Speaker 3

Our normalized effective tax rate for the year is projected to be between 27% 29%, but could fluctuate from quarter to quarter due to discrete items. Regarding our capital expenditures, there is no change to our previous guidance and expect to be expected to be in line with historical averages in the $10,000,000 to $15,000,000 range. And finally, as we look at the cadence of revenue the next two quarters, We expect the Q3 to increase sequentially in the upper single digits driven by our diet business before a seasonal decline in the 4th quarter. And with that,

Speaker 2

I would like to turn it back to Rob for closing comments. Thanks, Kelly. Our performance for the first half of the year continues to demonstrate progress toward our goals of revenue growth, improved profitability and cash flow generation. These are some of the key highlights I want to summarize before opening for Q and A. Revenue growth in 2023 is projected to be up over 2022 in the upper single digit range.

Speaker 2

Our international segment continues to outperform with multiple opportunities for growth. We expect adjusted gross margins to remain in the 21% range for the year, while adjusted EBITDA margins should be in the mid-seven percent range. We are targeting $90,000,000 in operating cash flow in 2023 as we reduce inventories over the next two quarters. And finally, our diversification strategy is paying off with approximately 2 thirds of our revenue generated outside the Our gas utilities and diet sectors thrive largely independent of commodity prices and they each offer attractive growth prospects over the longer term. And with that, we will now take your questions.

Speaker 2

Operator?

Operator

Thank you. We will now be conducting a question and answer Your first question comes from Tommy Moll with Stephens. Please go ahead.

Speaker 4

Good morning and thanks for taking my questions. Yes. Good morning, Tommy. Rob, I wanted to start on the revised revenue outlook. You mentioned for the gas utilities business, there's this customer destocking dynamic.

Speaker 4

But Anything you can give us on the visibility and when that changed would be helpful. And then similar question just around PTI and diet, Both guided to grow this year, but at lower rates than previous. So if you could just frame what's changed versus last quarter there, that'd be helpful too. Thank you. Sure.

Speaker 2

Thanks, Tommy. I think as everyone knows, we had a really strong Q1 pretty much across the board. And Typically what we see and we saw this certainly last year that when we go from the end of the Q1 to the end of the second quarter, We build backlog in that gas utility space and what happens is that really translates into really a Strong third quarter and kind of early Q4, which is really a peak of the construction season for the gas utility space. This year was different. We came out of a strong Q1 expecting this backlog to build and in fact the backlog basically was Reasonably flat, in fact declined just a little bit.

Speaker 2

And as we looked at those numbers, it was pretty clear to us that the gas utilities Then for the second half of the year wasn't going to be what we had forecasted at the beginning of the year. Our team obviously we had given our market share and our Coverage of all of the all if not most of the major utilities here in the U. S. We maintain a steady dialogue with our Customers and our customers were basically telling us that they were pulling back on some of the spending on our products because they had inventory in their systems, Either their own inventory or some of the fabricators that they work with that given the supply chain's orderly Operation now versus what we had as we were coming out of the pandemic that with lead time shorter, there was no need for The higher levels of inventory that were being held. So the customers are going to be working off this inventory.

Speaker 2

We think it's a 1 to 2 quarter Kind of thing, that temporal thing that we'll work through for the remainder of this year. But it really doesn't Impact what we see as the major fundamentals of the business. Our utilities continue to have strong CapEx budgets Over the multi year cycle, in fact, we've had major customers raise their CapEx recently. And we continue to increase our market share as I mentioned in the Your comments picking up a couple of new utilities, picking up some new products with existing utilities. So I know it's a stark contrast to the 20 plus percent growth we had in 2021 2022.

Speaker 2

It's not what we had forecast come into 2023, but really this gas utilities issue manifested itself Really clearly just in this past quarter. Commenting on your other question about PTI and diet, Look, both of these businesses are on really, really solid footing. Our PTI business has benefited significantly from our focus on the Permian Basin And the major players there, the IOCs and the large independents, these are the ones that continue to Drill and produce oil and gas through some vagaries in the price of oil And we're really well positioned with those customers. They all have multiyear investment programs and we've increased our market share significantly And our business as a whole in the Permian Basin, that's a big driver. And keep in mind, the kind of double digit growth we're projecting for PTI, that's even coming as we're seeing our California business suffer from some of the regulatory challenges that are being faced out there.

Speaker 2

So The PTI business is in really good position. It's also benefiting from some overseas investments in the North Sea in particular. And then on the downstream industrial and energy transition or diet space, as Kelly said, we're seeing high Single digit growth in that business for this year, that's aided a lot by a turnaround and project activity. Keep in mind That can be lumpy, right? So we had a really good Q1, Q2 was light as especially the refineries were running for gasoline production and jet fuel during the travel season, but we're seeing a really strong third and fourth quarter Pickup in orders for the Q4 and Q1 turnaround season.

Speaker 2

And that's why we're bullish on diet between now and the end of the year. So hopefully that gives you a sense. Kelly, you want to add to that?

Speaker 3

Yes. Tommy, I was just going to add a little more color. We said some of this in the script. We talked about robust or very strong growth for diet In the Q3, just to maybe give you a little more color around that, when we say robust, that's like a 20% or more type growth that we think we're going to get here in the Q3. And as Rob said, Q4 should be very solid as well, maybe not that kind of growth, but still a very solid 4th quarter.

Speaker 3

And on the guidance, I think coming into the year when we did our initial call giving guidance coming into the year, We said diet double digit growth I'm sorry, high single digit level growth. Last quarter, we said low double digit growth. But let me tell you, even though we're saying now high single, we're really pushing up on that kind of 9% to 10% range For the full year, and as Rob said, it really just depends on the timing and the lumpiness of some of that work. But it's either going to be high single or Very close to that double or a low double digit number as we complete the year.

Speaker 4

Thank you both. That's helpful. I wanted to follow-up with a capital structure question. I believe it was Kelly who mentioned that Given the cash flow generation you expect plus your capacity on the ABL that potentially you could retire the term loan without the need to refinance. But what's the preferred outcome here?

Speaker 4

What is the preferred path forward, no pun intended here, with the preferred shareholder? Is there a scenario where Some or all of that ends up being converted into common. Is there something else? Certainly, we appreciate the art of the possible to address the term loan, but what do you hope to achieve?

Speaker 2

Well, it's a great question, Tommy. I think what we would hope to achieve would be an amicable settlement Of what I described and will continue to describe as a business disagreement with our preferred shareholder. Look, we feel really good about Our balance sheet and our potential for the ABL to be used in the event that we don't Refinance the term loan. As Kelly said, we have $630,000,000 of current liquidity. A year from now, that number could easily be over $700,000,000 And keep in mind that the term loan comes due in September of 2024.

Speaker 2

So and the amount on that is under $300,000,000 So you're talking about $350,000,000 to $400,000,000 potential cushion A year from now that the ABL would provide. Again, that's not typically what ABLs are for. We take that point. But we've got to be really focused here on making sure we make the right call for our shareholders. First of all, our shareholders don't want a lot of dilution.

Speaker 2

And secondly, our shareholders don't want to see us over lever this company. We've spent a lot of time over the past few years getting our leverage position where it is today. And we think that gives us financial flexibility And certainly gives us a lot more comfort as business as you go through a business cycle That we're not getting over our skis. So again, we would hope to resolve this in an amicable way over the next few quarters. And I think the shareholder base will just have to stay tuned and trust that this management team isn't going to do anything That impairs this company's long term prospects.

Speaker 4

I appreciate the answers and I'll turn it back. Thanks, Tommy.

Operator

Next question, Mason Jones with Stifel. Please go ahead.

Speaker 5

Good morning, everyone. Good

Speaker 3

morning. Good

Speaker 4

morning. Just

Speaker 5

want to start off, and maybe I missed it in the prepared comments on the cash flow from operations guidance, down from $120,000,000 plus To $90,000,000 typically in lower revenue scenarios where you're bringing down your own inventories, You would typically see that move up rather than down. So just any color on the shortfall there on CFO for the year?

Speaker 2

Yes. I'll offer comments here and let Kelly jump in. But the biggest part of that is just The decline in the top line at 20 percent adjusted gross margin, so we're going to lose about $20,000,000 that would flow through just On that basis. And then the other part of it is given the slower growth in the gas utility space than we would have forecasted Some of our inventory projections for reduction are not going to be met. We're going to be running with a little more inventory than we had anticipated and that's probably about a third of the difference.

Speaker 3

Yes. Yes.

Speaker 5

Nathan, not

Speaker 3

a lot to add. I mean, if this was a more Kind of longer term decline in the business, we would certainly be pulling back hard on inventory and generating more cash. But as Rob said, this is A temporary blip in our mind, just kind of a speed bump. So no reason to do that.

Speaker 5

Got it. And then I just wanted to follow-up on the destocking in the gas utility business and if there's any destocking in any other parts of the business. This is not an uncommon theme, right? I mean, we've seen across a lot of businesses, customers and Distributors and manufacturers stocking up on inventory, ordering a lot in 2022 because supply chains were extremely Reliable and now that lead times have gone back to normal people getting it out of the system. I just wanted to get your degree of confidence Given how rapidly the outlook has changed for the gas utility business, your degree of confidence that the gas utility inventories are going to be right sized By the end of the year and we can return to a more normal outlook.

Speaker 5

And then what the kind of right base level of Gas utility revenue to grow that 5 to 7 plus share gain from going forward is?

Speaker 2

Yes. Well, I think we all understand the gas utilities by their nature are conservative in the sense that they serve a public service and They've got to make sure that they've got their equipment when they need it for these projects. And obviously, being conservative with the concerns that we had A year or so ago around supply chains, there was a natural tendency to over order. And I think that we're just seeing That in this space even more than our other 2 sectors. In fact, we really don't anticipate that the diet sector Or PTI really has the same inventory issues that we're seeing in the gas utility space.

Speaker 2

But I think going forward, your question about What's our confidence level that the destocking is 1 or 2 quarters? Basically, that's what we're hearing from our customers today that this is not a long term A long term trend that this is a temporal thing that will work itself off. Again, the fact that The budgets themselves are so intact, is really supportive. If the gas utilities were cutting budgets and saying, hey, we're not going to spend money in this environment, I'd be much more concerned. But what we're being told and what we believe is, as we say, is a couple of quarters of taking a pause.

Speaker 2

And then going forward, we really think that this business grows in that 6% to 10% range Going forward with the kind of CapEx growth that's being anticipated coupled with the gains in our market share and product reach, That's typically what we've been averaging over the last decade and there's no reason to believe we won't get back to those levels in 2024.

Speaker 5

And should we use 23 as the base level? I mean, in 2023, you're seeing some inventory destocking by utilities, which would imply The run rate level of installations and work that they're doing is a little bit higher than that. So I mean, is 23 the right base To grow that 6% to 10% off or is the write base really a little bit higher than where it is in 2023?

Speaker 2

Well, I'm not sure we can be any more precise than what we've been. We do think that this is a it's clearly an anomalous year for our gas The release space again coming off 2 really monster years, right? I mean, the business grew almost 50% over the last 2 years. If you look at the 21% to 25% compound rate, so it's natural that it was going to take a pause. We had forecasted Single digit growth, obviously, we're forecasting flattish growth.

Speaker 2

But I think the important thing is that we're going to get on a more normal cadence In 2024 and we'll look back at 2023 and say it was an anomaly.

Speaker 5

Great. Thanks very much for taking my question.

Speaker 4

You're welcome.

Operator

Next question, Ken Newman with KeyBanc Capital Markets. Please go ahead.

Speaker 4

Hey, good morning guys. Hey, good morning, Ken. Good morning.

Speaker 6

So Rob, with the shift back on the revenue growth this year, I know you maintained the gross margin guidance at current levels. Just curious, can you walk us through that? What's the biggest contributor to gross margins in the back half, whether that's price cost or mix?

Speaker 2

Well, it's a bit of both as it always is. I think our team has done an excellent job of implementing price updates to reflect the cost inflation that we've seen over, call it, the last year or 2. And of course, we've said There's always a lag between when the prices go up and then we get those into our contracts with our key customers. So I think our team has done a great job of that. So that's certainly supportive of healthy adjusted gross margins.

Speaker 2

But I think we should talk about the mix As well, both geographic and product. First of all, geographically, we talked about our international business being on a higher growth trajectory really than the other two segments. And our international business is heavily valve based and that tends to be accretive to our margins. And when we look at the second half of the year, we're expecting significant growth in our VAMI business, which is our valve actuation measurement instrumentation Business, we're expecting double digit growth in that and we're actually looking at declines in our line pipe business of almost a similar nature. The line pipe business has gotten very competitive.

Speaker 2

The margins have been compressed. As you've seen less demand for OCTG products, A lot of that pipe is now finding its way into industrial applications and folks are competing for that business more vigorously. So we're going to see less line pipe sales, lower line pipe sales in the second half, Primarily than we had in the first half. And we think that that's going to be that's obviously supportive of adjusted gross margin Being high because that tends to be dilutive. So increase in VAMI, decrease in line pipe, increase in international, and then the price updates, those are all supportive of adjusted gross margins at the 21% or better level.

Speaker 6

Is there a risk that As the supply chain continues to improve, that there is an increased level of price pressure into the back half? Or do you think that's Adequately reflected in the updated guide.

Speaker 2

We're not expecting that. We think it's reflected in the guidance.

Speaker 6

Okay. And then obviously, we've talked a little bit about customer inventories within the gas Utility sector a decent bit here. But I'm curious if you could just talk about what customer inventories or what your view of customer inventories outside of that business, whether it's in Traditional oil and gas markets and the diode sector, what they look like and what your confidence level that there's not going to be a similar response Going into the 3rd and 4th quarters?

Speaker 2

Well, when we look at our PTI space, the activity Is increasing pretty strongly and so is the backlog. So we're really not expecting See any of that there. And of course, the diet space covers a lot of different things. It's refining chemicals and of course, the energy transition. LNG is in there as well.

Speaker 2

So we really don't see in any of those areas opportunities for what we would call an extraordinary build of inventory that we've got to work off. I just want to continue to remind that the gas utility space is really conservative. And these folks were very concerned about their ability to have supplies for products for their key projects. And frankly, they probably got a bit over their skis and they over ordered, and now they're working their way through that inventory. And it's fully logical, you certainly want to have too much inventory rather than too little inventory when you're in a public service business.

Speaker 2

But we're going to work our way through that as we say over the next couple of quarters. We don't think any of our other businesses are going to be impacted by this. And as I say, it's a speed bump in the road on our way to a good 2024.

Speaker 3

And Ken, just to put some data Ken, just to put some data behind that. If you look at our backlog year to date, PTI is up 9% and diet is up 11%. The only decline we've really had is in the gas utilities space, which we're talking about. So we're not seeing any of this in the other two sectors.

Speaker 2

Yes. And if you really think about it, we're much more in much more competitive markets, frankly, in PTI and diet. And those businesses are doing extremely well. We have a very, very solid franchise in gas utilities. And this is a pause for us, Obviously, that we didn't see coming, but as a practical matter, this business is on very solid foundations And we will continue to see the benefits of spending from our customers and return to a normal more normal cadence As we round the corner into 2024.

Speaker 6

All right. If I could just squeeze one more in. Kelly, I'm sorry if I missed this. Did you give any color on what you expect for the LIFO expense for the full year this year?

Speaker 3

Yes. With the inflation stabilizing, Ken, I think for the full year, it's not going to be a material number. We're modeling it just kind of 0 at this point. Q1 and Q2 were very small numbers. So for the full year, very minimal impact to the overall GAAP financial statements.

Speaker 6

Very helpful. Thanks. You bet.

Operator

Next question is from Doug Becker with Capital One. Please go ahead.

Speaker 3

Thank you. You're projecting some sequential robust sequential growth in the Q3. Could you provide a little more color on how the July things looked?

Speaker 2

Yes. July is typically not that representative of the Q3. It tends to be Fewer billing days in the holiday season with the 4th July starting on Tuesday. So look, I would say that the quarter really gets down to August September for us And we're seeing August stronger than July as you would expect coming into here. So I don't want to make any predictions at this point, Doug.

Speaker 2

We're seeing kind of normal seasonal patterns and our guidance is consistent with that.

Speaker 3

Okay. That's encouraging. And then the full year guidance seems to imply that 4Q seasonal revenue decline, we toward the mild side, say closer to 5% decline than say 10%. Is that a reasonable assumption right now based on what you're seeing? It is Doug.

Speaker 3

Yes, I think we've seen the last couple of years be pretty mild. And so we've kind of built that into our modeling right now. And so you're exactly right. It will be closer to that 5% level than that higher end level. Okay.

Speaker 3

Thank you.

Operator

Thank you. There are no further questions. I would like to turn the floor over to Monica for closing remarks.

Speaker 1

Thank you for joining us today for your interest in MRC Global. We look forward to having you join us on our Q3 conference call in November. Have a great day.

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Earnings Conference Call
MRC Global Q2 2023
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