MRC Global [MRC] Conference call transcript for 2023 q1
2023-05-12 14:29:07
Fiscal: 2023 q1
Operator: Greetings. Welcome to MRC Global's First Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I'll now turn the conference over to Monica Broughton, Vice President, Investor Relations and Treasury. Monica, you may now begin.
Monica Broughton: Thank you, and good morning. Welcome to the MRC Global first quarter 2023 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 May 23, 2023. 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, May 9, 2023, and therefore, you are advised that the 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. 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. And now I'd like to turn the call over to our CEO, Mr. Robert Saltiel.
Rob Saltiel: Thank you, Monica. Good morning, and welcome to everyone joining today's call. I will provide a high level review of our first quarter results and sector performance, followed by our 2023 outlook and conclude with comments related to our term loan refinancing. Kelly will provide a detailed review of the first quarter results and 2023 guidance before I end our prepared remarks with a brief recap. I will begin by discussing a change in our sector reporting effective this quarter. As we have highlighted frequently over the last few years, we continue to diversify our business where today, our traditional upstream and midstream sectors on a combined basis, represent about a third of our company's annual revenue. 5 years ago, these sectors comprised more than 50% of our sales. These businesses have similar drivers relating to general oil and gas production activity and commodity pricing, and they share common customers who participate in production gathering and processing activities. In addition, these sectors have been managed at MRC Global by common business leaders. As a result of these factors, we have combined the two businesses into a new sector called production and transmission infrastructure or PTI for short, which we will use for reporting going forward. Moving on to our financial results. I am very pleased with our strong performance in the first quarter as this provides us with increasing confidence in our full year outlook. Our top line was strong with revenue of $885 million, representing 2% sequential growth and a 19% year-over-year improvement. Compared to the same quarter last year, each of our three sectors experienced double-digit revenue increases with DIET and PTI leading the way. We realized EBITDA of $69 million, which was 44% higher than the first quarter of 2022 with EBITDA margins of 7.8%, a 130 basis point increase. This improvement is the direct result of our focus on cost discipline and higher adjusted gross margins, driven by product mix and improved pricing. Our revenue backlog was 14% higher at the end of the first quarter of 2023 versus the first quarter of last year and up 2% sequentially, signaling continued strength across our business. Our profitability improvement is translating into improved returns on invested capital or ROIC. After adjusting for the impact of LIFO, our ROIC was 11.5% on a trailing 12 month basis. We expect this metric to continue to increase throughout 2023 and in future years, and we see it as a key driver for value creation. Turning now to our sector performance. Our DIET sector stands out as the primary driver for our company's sequential and year-on-year growth as revenues expanded 12% sequentially versus fourth quarter 2022 and by 23% versus first quarter 2022 levels. In both comparisons, higher turnaround and maintenance spending by refiners and chemicals customers, along with increasing activity associated with LNG projects led the revenue increases. We've had tremendous success with LNG projects this year, driven by our expanded project planning and execution capabilities, our early engagement with end users and are deepening relationships with EPCs and OEMs. Our Project Center of Excellence maintains a growing backlog of LNG projects that underpin our expectations for strong revenue growth. Our PTI business continues to benefit from improving fundamentals and our increased focus on Permian Basin opportunities. This business experienced a 22% revenue improvement over the first quarter of 2022 as our customer base comprised primarily of IOCs and larger independent public companies continue to execute their plans. Despite the recent volatility in oil and gas prices, we continue to expect the PTI sector to have strong results this year. Our Gas Utilities business continues to perform well with 13% year-over-year sales growth as several customers implemented meter upgrade and pipeline integrity projects as well as other system reliability, environmental activities. This business has achieved a 12% compound annual revenue growth rate over the past 6 years, and it continues to be an exciting growth engine for our company. Given that our gas utilities performance is largely independent of oil and gas commodity prices, this sector is a highly resilient contributor to the MRC Global investment thesis. I want to now provide a few comments on our 2023 outlook. Our strong first quarter performance, our solid and growing backlog and our strong alignment with our customers' spending plans all provide us with increasing confidence in our 2023 outlook. We reiterate our previous guidance as we continue to expect double-digit sales growth and EBITDA margins exceeding 8%. We expect strong revenue improvement across all three business sectors and geographic segments, and we continue to target generating cash flow from operations of $120 million or more for the full year. Kelly will provide further details on our 2023 guidance in this section. Finally, I would like to address the postponement of our recent term loan refinancing. In April, we launched the refinancing of our $295 million Term Loan B. As a reminder, this loan does not mature until September of 2024, but we attempted to refinance the loan earlier to take advantage of improving debt market conditions. Shortly after the launch of the refinancing, our preferred stockholder initiated a court action to prevent the refinancing from closing. This action complicated the execution of the refinancing on favorable terms, so we elected to postpone the refinancing efforts before their conclusion. We are in discussions with our preferred stockholder regarding our capital structure and the disposition of the preferred shares, and we are hopeful that a resolution can be achieved. Any agreement we reach should be fair to all shareholders. I also want to remind our shareholders that we expect to continue to have ample liquidity under our global asset-based lending facility, which does not mature until September of 2026 to repay the term loan debt in full, should that be necessary. Our liquidity situation is solid and improving as we continue to focus on generating significant cash from our operations this year and into the future. And with that, I'll now turn the call over to Kelly.
Kelly Youngblood: Thanks, Rob, and good morning, everyone. My comments today will primarily be focused on sequential results comparing the first quarter of 2023 to the fourth quarter of 2022, unless otherwise stated. Total sales for the first quarter were $885 million, a 2% sequential increase, outperforming our original expectations. From a sector perspective, I will begin with our gas utilities and diet sectors, which make up approximately two thirds of our revenue and represent our more resilient, less cyclical business lines. Gas utility sales were $307 million in the first quarter, a $12 million or 4% decrease due to the timing of deliveries and projects in the U.S. Compared to the same quarter last year, the gas utility sector grew 13% on strong activity levels associated with safety-related modernization, emission reduction programs and continued infrastructure improvement projects. The DIET sector first quarter revenue was $278 million, a sequential increase of $30 million or 12%, driven by LNG projects, along with increased turnaround and maintenance spending for refining, chemicals and mining customers. This sector delivered 23% growth in the first quarter of 2023 over the same quarter a year ago, again, on the strength of LNG project work along with refining and chemical customer turnaround and maintenance projects. The PTI sector revenue for the first quarter was $300 million, a modest decrease of $2 million or 1% sequentially. In the U.S., our customer base, which includes the larger public E&P operators, we're very active with completions activity in the Permian Basin, but offset by the timing of lower gathering and processing projects this quarter. We also saw the backlog for PTI, including gathering and processing projects increased by 10% since year-end. From a geographic segment perspective, U.S. revenue was $740 million in the first quarter, a $20 million increase from the previous quarter, driven by the DIET sector, which was up $28 million or 15%. Canada revenue was $42 million in the first quarter, sequentially down $4 million or 9% due to the timing of certain pipe orders. International revenue was $103 million in the first quarter, unchanged from the previous quarter. However, the international backlog is up 16% since year end. Now turning to margins. Adjusted gross profit for the first quarter was $188 million or 21.2% in line with the fourth quarter. Although we have seen deflation in our line pipe business, we have been successful offsetting this headwind with other products such as BAMI [ph] that are accretive to overall company margins. We continue to target average gross margins of 21% for 2023, a step change from our historical averages. Reported SG&A for the first quarter was $122 million or 13.8% of sales as compared to $123 million or 14.2% for the fourth quarter of 2022. The 40 basis point improvement this quarter was a function of our strong cost control initiatives and higher quarterly revenue. For the full year SG&A, we continue to expect the average percentage of sales to be in the mid 13% range. As our revenue trends higher throughout the year, we expect to see the cost as a percent of revenue gradually declining. EBITDA for the first quarter was $69 million or 7.8% of sales, a 20 basis point improvement over the fourth quarter of 2022 and a 130 basis point improvement over the same quarter a year ago, evidence of the improved efficiencies that we achieved over the last few years driving more incremental revenue to the bottom line. Tax expense in the first quarter was $13 million with an effective tax rate of 28% as compared to $12 million of expense in the fourth quarter 2022. 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 first quarter, we had net income attributable to common stockholders of $28 million or $0.33 per diluted share, and our adjusted net income attributable to common stockholders on an average cost basis, normalizing for LIFO income was $27 million or $0.32 per diluted share. In the first quarter, we consumed $30 million in cash from operations, which is normal course of business for us as we tend to ramp up our inventory purchases earlier in the year in preparation for the seasonal highs that we typically experience in the second and third quarters. We expect to generate cash in each of the remaining quarters of the year, ultimately achieving our 2023 goal to generate operating cash of $120 million or more. Additionally, we typically generate more cash in the second half of the year. And as we previously mentioned, generating cash consistently each year going forward in both years of growth and decline is a key initiative for the company. Working capital as a percent of sales was 17.9% in the first quarter, up from 16.2% in the fourth quarter of 2022, primarily due to the higher inventory build this quarter. This percentage is expected to gradually decline each quarter going forward due to a combination of reduced inventory and increased revenue. Our total debt outstanding at the end of the quarter was $390 million, and our leverage ratio based on net debt of $351 million was 1.2 times, which is in line with the record we set last quarter and a considerable improvement over the same quarter in the prior year when our leverage ratio was 1.6 times. Our availability under our ABL facility was $601 million, and we had $39 million of cash for a total liquidity position of $640 million at the end of the first quarter. This is nearly a $100 million increase in liquidity compared to first quarter of last year. And as Rob mentioned, we continue to expect to have plenty of capacity under our ABL for use, if needed, to address the upcoming maturity of our Term Loan B in 2024, if we are unable to come to a resolution with our preferred stockholder. To finish off our 2023 outlook, as Rob mentioned earlier, our solid first quarter results provide us with confidence in our 2023 outlook. We continue to target a double-digit percentage revenue increase and expect to surpass the 8% hurdle for EBITDA margins. From a sector revenue perspective, we expect the PTI segment to increase the most in the mid-teens percentage range, followed by DIET with an increase in the low double digits. And finally, gas utilities to increase in the high upper single digits. From a geographic view, this translates to a low double-digit percentage improvement in each of our segments. Our normalized effective tax rate for the year is projected to be 26% to 28%, but could fluctuate from quarter-to-quarter due to discrete items. And from a cash perspective, as activity levels continue to improve and our inventory levels decline from current levels, it is expected to translate into meaningful cash generation for the remainder of the year with $120 million or more in cash flow from operations. And as mentioned earlier, we expect a higher percentage of this cash flow to materialize in the second half of the year. Excess cash will continue to be prioritized in the near term towards further strengthening the balance sheet and growth of the business. Regarding our capital expenditures, we expect those to be in line with historical averages in the $10 million to $15 million range. And finally, as we look at the cadence of revenue throughout the year, we expect the second quarter to increase sequentially in the low single digits, driven by our gas utility business with continued growth in the third quarter before our normal seasonal decline in the fourth quarter. And with that, I would like to turn it back to Rob for closing comments.
Rob Saltiel: Thanks, Kelly. Our stronger-than-expected first quarter financial results reflect strength across all three business sectors and our continuing focus on profitability and capital efficiency. These are some of the highlights I want to summarize before opening for Q&A. Our impressive first quarter performance and the growing backlog of business have increased our confidence in our 2023 outlook. We expect double-digit revenue growth and EBITDA margins in excess of 8% for 2023. All three of our business sectors are expected to achieve solid growth rates. Cash generation from operations through the business cycle remains a priority, and we are targeting in excess of $120 million in operating cash flow in 2023, even with double-digit revenue growth. Our diversification strategy is paying off with approximately two thirds of our revenue generated outside the traditional oil field. 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. Operator?
Operator: Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question is from the line of Tommy Moll with Stephens. Please proceed with your question.
Operator: Our next question is from the line of Nathan Jones with Stifel. Please proceed with your questions.
Operator: [Operator Instructions] Our next question is from the line of Ken Newman with KeyBanc Capital Markets. Please proceed with your questions.
Operator: Thank you. At this time, we've ended our question-and-answer session. I'll hand the floor back to management for closing remarks.
Monica Broughton: Thank you for joining us today and for your interest in MRC Global. We look forward to having you join us on our second quarter conference call in August. Have a great day. Thank you.
Operator: Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.
