MRC Global Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2024

There are 8 speakers on the call.

Operator

Greetings, and welcome to MRC Global's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Monica Broughton.

Operator

Thank you. You may begin.

Speaker 1

Thank you, and good morning. Welcome to the MRC Global Second Quarter 2024 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 August 21, 2024.

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 7, 2024, 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 the 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 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'd like to turn the call over to our CEO, Mr. Rob Saltiel.

Speaker 2

Thank you, Monica. Good morning, and welcome to everyone joining today's call. I will begin with a high level review of our Q2 results and then discuss 2 notable achievements, a promising macro trend and our sector highlights before concluding with our 2024 outlook. Kelly will provide a detailed review of the quarter 2024 guidance before I deliver a brief recap. Starting with our 2nd quarter highlights, we generated $63,000,000 in operating cash flow quarter and $101,000,000 for the first half of the year.

Speaker 2

It was a solid quarter with cash generation coming in stronger than expected due in large part to efficient working capital management. We are on track to meet or exceed our guidance of generating $200,000,000 of operating cash flow for the full year and we remain very optimistic on the cash generation potential of our company going forward. 2nd quarter revenue was $832,000,000 growing 3% over the Q1 with the increase driven by our gas utilities and PTI sectors. Gas Utilities revenue improved 8% sequentially driven by increased customer spending due to seasonal increases and normalizing buying patterns by most of our customers. Our PTI sector grew by 5% led by the international segment due to increased project activity in the North Sea.

Speaker 2

Our diet sector experienced a slight decline as the U. S. Segment experienced lower refinery turnaround and project activity than we had expected. Adjusted gross margins were a robust 22.1%. This is a record high quarterly result for MRC Global due to product mix and a strong international contribution, both of which were accretive to overall company margins.

Speaker 2

Adjusted EBITDA margins were 7.8% for the 2nd quarter, a 70 basis point improvement over the 1st quarter. This is the result of higher adjusted gross margins coupled with strong cost discipline. We remain on track to reduce absolute SG and A in 2024 versus 2023 levels. Our SG and A as a percentage of sales remains best in class compared to our energy and industrial distributor peers. Our balance sheet continues to improve and has never been stronger.

Speaker 2

During the Q2, we repaid our term loan early as we had previously signaled using a combination of cash and our ABL facility. We ended the quarter with $103,000,000 of net debt and with a leverage ratio of 0.4 times, a record low for our company. We expect these metrics to improve further in the coming quarters as we generate additional cash from operations. And finally, our international business continues to have an excellent year. 2nd quarter revenue grew 15% year over year and 11% sequentially, driven by growth in both the PTI and diet sectors.

Speaker 2

The international business is poised for double digit revenue improvement for the full year, supported by a backlog that is 32% higher than a year ago. Our growth has been enabled by multiple North Sea projects and MRO activity in the PTI sector and by multiple energy transition projects in the diet sector. I would now like to highlight a couple of noteworthy achievements and then comment on a positive macro trend. First, we were very pleased to have been recently chosen as the primary strategic supplier of PVF products and services to ExxonMobil in North America. We were selected for our breadth of product and service offerings, our technical expertise and our geographic footprint, all of which are industry leading.

Speaker 2

And our new agreement with ExxonMobil covers all upstream and downstream operations for both MRO and project activity. We've had a long standing productive relationship with ExxonMobil and this agreement allows us to grow with them as they expand their North America business. We are currently in the early stages of implementation and we expect activity levels to increase into next year, especially as ExxonMobil's recent acquisitions are fully integrated. We are now focused on delighting this important customer with outstanding service. I am proud of our MRC Global team for the hard work they are putting into this customer relationship and appreciative of ExxonMobil for entrusting us with their extensive North America PVF business.

Speaker 2

2nd, I want to highlight our excellent progress with our chemicals growth strategy. We began this initiative in 2021 by hiring subject matter experts and refocusing our sales and marketing efforts on this attractive subsector. Through the end of 2023, we had seen approximately 30% growth in our chemicals subsector revenue and we expect it to increase upper single digits this year. Much of our progress is due to our target growth accounts where we have seen more than a doubling in revenue comparing the first half of this year with the first half of twenty twenty three. We also see significant opportunity for further growth in 2025.

Speaker 2

Finally, I want to highlight a macro trend that we expect to play out over the coming years, strong demand growth for natural gas. It is well understood that the U. S. Has an extensive supply of natural gas in the unconventional place. As a fuel, natural gas is clean, reliable and affordable.

Speaker 2

We expect demand for U. S. Natural gas to increase over the next decade driven by 4 factors: growth in LNG export volumes, increased needs for gas fired power stations, increasing exports to Mexico and growing industrial demand. Demand growth for natural gas is very good for MRC Global. Higher gas production and consumption means more gathering and processing facilities, more pipelines for transportation and more related infrastructure down the entire value chain to consumers.

Speaker 2

This megatrend will benefit all three of our sectors and create new opportunities for the growth of our business. Moving now to our sector discussions. In our Gas Utilities sector, we believe we are seeing stabilization compared to the sharp declines in revenue we experienced in the second half of last year. In fact, this was the 2nd quarter in a row of increased revenue. Most of our customers are returning to more normal purchasing patterns, while others continue to focus on destocking.

Speaker 2

Project related gas utilities work has slowed this year, but is expected to recover in 2025. Industry analysts and several of our largest customers have made public announcements regarding increasing their capital spending in 2025. In fact, the annual growth rates in capital expenditures for natural gas utilities that we serve are expected to range from 4% to 6% over the next 5 years. This is a healthy underlying growth rate for our gas utilities business. In the diet sector, our success with our chemical strategy has been accompanied by strong performance in our growing mining business.

Speaker 2

In fact, we are in the process of opening a new service center in Phoenix, Arizona designed to serve mining and gas utility customers. On the flip side, several U. S. Projects and refinery turnarounds that we are involved in have been delayed into 2025 and U. S.

Speaker 2

LNG related activity has been impacted by permitting delays for new projects. Our international business continues to do extremely well in the diet space, especially with refinery work and energy transition projects. Turning to our PTI business, we continue to see sluggish rig counts in the U. S. Oilfield due in part to the widespread consolidation of producers, particularly in the Permian Basin and also due to low natural gas prices.

Speaker 2

We continue to believe that the industry consolidation efforts by the larger oil and gas producers will have a net benefit for MRC Global. Most industry surveys expect U. S. Oilfield spending to be slower in the second half of this year before picking up in 2025. Our international oil and gas business continues to be strong led by our participation in several North Sea projects and our growing presence in the Middle East.

Speaker 2

In summary, we have had a very strong first half of the year with solid revenues, profitability and cash flow generation. That said, our outlook for revenue in the second half of this year is expected to be a little softer than the first half, primarily due to delays in diet projects and refinery turnarounds. We continue to believe that 2024 is a transitional year for MRC Global due to 3 issues we have discussed previously: gas utilities destocking, PTI activity inhibited by industry consolidation and low gas prices, and diet sector project and turnaround delays. Although it is too early to give guidance for next year, we do expect 2025 to see improvement in these fundamentals that will benefit our company. Importantly for our shareholders, our end market diversification, improved gross margins, lean cost structure and working capital efficiencies have positioned us to generate consistent cash flow across the business cycle.

Speaker 2

This year, we remain on track to generate $200,000,000 or more in operating cash flow. Going forward, this cash generation capability should allow us significant flexibility to consider various capital allocation strategies for the benefit of our shareholders.

Speaker 3

And with that, I will now hand it over to Kelly. Thanks, Rob, and good morning, everyone. My comments today will be primarily focused on sequential results comparing the Q2 of 2024 to the Q1 of 2024, unless otherwise stated. Total company sales for the 2nd quarter were $832,000,000 a 3% sequential increase and a 4% decline compared to the same quarter last year. From a sector perspective, gas utility sales were $287,000,000 in the 2nd quarter, a $21,000,000 or 8% increase.

Speaker 3

The growth was driven by increased customer spending due to seasonal increases in normalizing buying patterns. While some customers continue to focus on reducing their levels of safety stock, we have seen stabilization in new order intake and average daily sales, which is encouraging. We continue to expect 2024 to be a transition year for our gas utility customers due to lower project activity, but as mentioned by Rob, we are expecting increased spending as we move into next year. The dive sector's 2nd quarter revenue was $268,000,000 a decrease of $8,000,000 or 3% as a result of less turnaround activity in the U. S, partially offset by an increase in the international segment for North Sea Offshore Wind Project activity as well as refining and chemical plant turnarounds.

Speaker 3

The PTI sector revenue for the Q2 was 277,000,000 an increase of $13,000,000 or 5 percent with growth in all segments driven by North Sea project activity followed by an increase in North America for line pipe shipments and other project deliveries. While customer spending expectations in the U. S. For the back half of this year have softened, we continue to be bullish on the U. S.

Speaker 3

Oilfield longer term and expect activity next year to improve, which is consistent with recent analyst mid year spending projections. The recent E and P consolidation announcements are also expected to be positive for MRC Global as our customers finalize their integrations. From a geographic segment perspective, U. S. Revenue was $677,000,000 in the 2nd quarter, a $10,000,000 or 1 percent increase.

Speaker 3

Gas utilities led the growth with a $22,000,000 increase, followed by the PTI sector, which increased $2,000,000 partially offset by the diet sector, which was down 14,000,000 dollars International revenue was $122,000,000 in the 2nd quarter, up $12,000,000 or 11%, driven by improvement in the PTI sector related to projects in the North Sea, followed by growth in our European Diet Sector business. Our international business is having a phenomenal year and its outlook remains positive with expectations for double digit revenue growth due to improvements in both the PTI and diet sectors. Canada revenue was $33,000,000 in the second quarter, up $4,000,000 or 14% with increases in both the diet and PTI sectors. Now turning to margins. Adjusted gross profit for the 2nd quarter was 180 $4,000,000 or 22.1 percent, a new public company record and a 60 basis point improvement over the same quarter a year ago and a 50 basis point improvement sequentially.

Speaker 3

The elevated margin percentage this quarter was supported by product mix in the U. S. With margins accretive to our typical company averages. We expect margins in the second half of the year to revert to our usual 21% average levels. Reported SG and A for the 2nd quarter was $126,000,000 or 15.1 percent of sales as compared to $125,000,000 or 15.5 percent for the Q1.

Speaker 3

This quarter included $1,000,000 of pretax charges related to activism, response, legal and consulting costs as well as $1,000,000 of facility closure related costs for an international location. Excluding those costs, our adjusted SG and A for the Q2 of 2024 was $124,000,000 or 14.9 percent of sales. Adjusted EBITDA for the 2nd quarter was $65,000,000 or 7.8 percent of sales, a 70 basis point increase from the 1st quarter due to higher sales and higher gross margins. Tax expense in the 2nd quarter was $12,000,000 with an effective tax rate of 29% as compared to $8,000,000 of expense and a 30% effective tax rate in the Q1. The effective tax rates for both quarters were higher than the U.

Speaker 3

S. Statutory rate due to foreign losses with no tax benefit. For the Q2, we had net income attributable to common stockholders of $24,000,000 or $0.28 per diluted share. Our adjusted net income attributable to common shareholders on an average cost basis, normalizing for LIFO adjustments and other items was 27,000,000

Speaker 2

dollars or $0.31 per diluted share.

Speaker 3

In the 2nd quarter, we generated $63,000,000 in cash from operations, primarily from increased EBITDA supported by efficient working capital metrics. We generated $101,000,000 in the first half of the year, and we are on track to meet or exceed our operating cash flow target of $200,000,000 for the full year. We also expect to make more progress with our working Turning to liquidity and capital structure. We repaid our Term Loan B at the end of May with a combination of cash and the use of our ABL facility. At the end of the Q2, our total debt balance was $152,000,000 Our leverage ratio based on net debt of $103,000,000 was 0.4 times, a new record low for the company.

Speaker 3

And our current availability on the ABL is 488,000,000 dollars and including cash, our total liquidity is $537,000,000 The lower debt balance along with the lower interest rate on the ABL results in reduced interest expense burden. Interest expense was $7,000,000 in the Q2 of 2024 as compared to $10,000,000 in the same quarter a year ago. Now I'll cover our outlook for the second half of twenty twenty four. As mentioned by Rob, we continue to view 2024 as a transitional year with growth returning in 2025. The first half of twenty twenty four started off with stronger than expected financial performance.

Speaker 3

Our current expectations for the second half of twenty twenty four is for revenue to moderate compared to the first half, primarily a function of project work schedule shifting into next year. The primary driver of the reduction is delayed diet project activity and refining turnarounds in the U. S. We have also experienced what we believe is a temporary pullback in gas utilities project activity for the remainder of this year and PTI activity due to lower rig counts and E and P customer integrations that has impacted near term spending. However, we believe all three sectors will experience a rebound in activity and a resurgence of projects in 2025.

Speaker 3

As a result, we expect total company revenue for the back half of this year to be down low single digits compared to the first half of this year. Also for the total company, 3rd quarter revenue is expected to decline mid single digits, followed by the potential for a modest seasonal decline in the 4th quarter. We are also targeting the following key metrics for the remainder of 2024. First, we are reaffirming our previous guidance of operating cash flow generation for the full year of $200,000,000 or more. For adjusted gross margins, we anticipate the second half of the year to average 21%.

Speaker 3

SG and A expense for the last two quarters of the year is each expected to be at similar levels as experienced in the 2nd quarter, and capital expenditures are expected to be in the 36 $1,000,000 to $40,000,000 range in 2024, a little lower than last quarter's estimate as some costs for the implementation of our North America ERP have shifted into next year. As a reminder, our normal annual CapEx run rate is approximately 15,000,000 dollars but it is elevated this year and next due to our ERP implementation. Regarding our ERP, I'm pleased to report that we remain on budget and on schedule. We continue to make progress and we are excited about its potential to transform many aspects of our business. We expect to be fully implemented and running on the new system in the second half of twenty twenty five.

Speaker 3

We expect our effective tax rate in 2024 to be in the range of 26% to 28%. And finally, we expect to exit 2024 with minimal net debt, excluding our preferred stock, providing us with increased flexibility to pursue various strategic capital allocation options benefiting our shareholders. And with that, I'd like to turn it back to Rob for closing comments.

Speaker 2

Thanks, Kelly. The first half of the year has started off with solid performance and we are in a very strong financial position. We have transformed MRC Global into a more efficient and consistently profitable company with a strong balance sheet that is poised for future success. These are the highlights I want to summarize before opening for Q and A. We continue to target $200,000,000 of cash from operations this year and we are on track to meet or exceed this target.

Speaker 2

We also expect to consistently generate operating cash through the cycle. Our balance sheet has never been stronger as evidenced by our term loan B repayment in the Q2. We expect to exit 2024 with a minimal net debt position and to be in a positive net cash position in 2025. And while we expect a slightly weaker second half this year, we are optimistic based on analysis of the key drivers for each of our 3 sectors that 2025 will be a growth year for the company. And with that, we will now take your questions.

Speaker 2

Operator?

Operator

Thank you. At this time, we'll be conducting a question and answer session. Our first question comes from Nathan Jones with Stifel. Please proceed with your question.

Speaker 4

Good morning, everyone.

Speaker 2

Yes. Good morning, Nathan.

Speaker 4

Rob and Kelly, you both talked in your prepared comments about project pushouts on in the diet sector and in refinery turnarounds. Can you talk about the dynamics that are going on there, whether this is just a result of sustained higher interest rates, uncertainty around the election? Anything else that's contributing to those push outs that gives you confidence they'll actually be executed in 2025?

Speaker 2

Yes. Thanks, Nathan. Well, I think you've given a couple of reasons right there that others have cited for why project activity generally has been pushed to the right. Obviously, high interest rates are detrimental to project economics and we've been living with that really since middle part of last year and continue to live with that here in 2024. I think the general consensus now is pretty clear that interest rates are going to be headed down and absent any kind of major impact on the overall economy that's going to be bullish for project activity in 2025 beyond.

Speaker 2

I think the other thing that gives us confidence here, Nathan, is that we're tracking these specific projects. We're tracking refinery turnarounds. We're tracking chemical projects. We're talking to the companies themselves about their timing and they're in most cases assuring us that these are delays rather than cancellations. Sometimes projects do get canceled, but the vast majority of the things that we're tracking that we would have thought would have come to fruition in the second half of this year have been pushed to the right and we've got timelines that correspond with that, that indicate that the projects will go forward, but on a delayed basis.

Speaker 2

So, we continue to monitor these things very closely. Again, we've got a list of these that we track and that's overall the consistent message for what's going to be happening in 2025 and why we have confidence that the projects themselves will come to fruition, but just on a delayed basis.

Speaker 4

Thanks for that. I guess my follow-up question on gas utilities. You talked about some continued customer destocking, would have expected that to maybe kind of reach a bottom now. Also hearing talk about gas utilities reducing capital spending, but you guys are talking about increased capital spending specifically for your customers in 2025. Maybe a little bit more color around the kind of information you're getting that gives you confidence that you're going to see that market increase next year?

Speaker 2

Yes. Look, we think our gas utilities business has definitely come off the bottom and recovered from where it was in the, let's say, Q4 of last year. We're up 13% this quarter over the Q4 of 2023. In the same straits we were in, call it 6 months ago. But I think it's fair to say that the destocking is not complete and it varies by customer.

Speaker 2

So some of our customers are mostly through it and we have some other customers that are continuing to work through their destocking. And really, that's just something that we're going to have to continue to work through as we get through the end of this year. And as we start next year, we think we're largely through it. Now your question about why do we have confidence that spending will increase? Well, a number of our customers through the recent earnings calls, public announcements, analyst reports, they are indicating over significant time frame, sometimes 3 to 5 years, what the average increase is going to be and they're talking about 2025 in even more detail.

Speaker 2

And as we look at our customer base, we're seeing generally that CapEx is expected to increase in that kind of 4% to 6% range over the long term and call it mid single digits next year. Now again, each utility is going to be different. And obviously, this could be subject to some modification depending on what happens with interest rates and rate cases and those sorts of things. But across the board, we're seeing for our customers robust spending projections for next year and beyond. And clearly, that's more optimistic than the backdrop that we've been working ourselves through over the last 12 months.

Speaker 4

And do you still expect to be able to outgrow that market, outgrow your customer spending with market share gains?

Speaker 2

We do. I will continue to caution that gas utilities by their nature are conservative entities. They provide a public service. And in most cases, when we increase market share, we're displacing functions that they do themselves, that they in source, that they realize that we can do much more efficiently given our scale and our capabilities and so they outsource it to us. So that process by which we gain market share is by its nature a long process.

Speaker 2

And we are working on a number of opportunities to increase our market share with new utilities that we don't serve. We're also looking at service areas for utilities that we do serve. But in those service areas, we either have limited or no participation. So we have a number of utility targets that we're working on, so that we can increase our market share. And of course, with existing customers, we look to increase wallet share by taking on more of the products and services that they're currently providing themselves.

Speaker 2

So we still feel good about our ability to outgrow the market as you term it. And we just need to continue to focus those efforts and bring those to fruition.

Speaker 4

Great. Thanks very much for taking my questions.

Speaker 2

You're welcome. Thank you, Nathan.

Operator

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

Speaker 5

Hey, good morning guys.

Speaker 2

Good morning, Ken.

Speaker 6

Good morning. Maybe just to touch on Nathan's question on gas utilities a little bit. I am curious if you could just talk about which inning you think we're in from a destocking perspective. Is it fair to think that you think the Q2 is trough for destocking? Or is that more of a 3Q phenomenon?

Speaker 2

I would say you should ask what inning we're in. So I'd say we're in the 6th or 7th inning. We think most of it's behind us, but it's not over yet. And again, it really does vary by the utility. And what our team does is we continue to keep close tabs on the inventory that we have for our customers as well as the inventory that they have themselves.

Speaker 2

So we can get a better gauge about how long this destocking will endure. And again, for a number of our customers, I would say the majority of our customers, they're going to be through this over the next quarter, maybe into the Q4. But there are going to be some customers that are going to go into 2025 and still be facing some destocking issues. So again, 6th or 7th inning if I had to pick an inning.

Speaker 6

Okay. That's helpful. And I guess as a follow on to that, I know you don't give margins by product set in that business. But just thinking about whenever that recovery starts to occur from an inventories perspective, how do you view the recovery in the margin profile for that business? Because obviously that's typically been a margin accretive business.

Speaker 6

Would you start to see or expect a bit of more of a gradual type of improvement in gross margins for gas utility specifically? Or is there going to be a little bit of a time lag you think from a price cost perspective?

Speaker 2

Yes. We don't give the breakdown specific to each of the sectors that we're in. But generally speaking, what we said is that gas utilities tends to be accretive on a net margin basis, but slightly dilutive on a gross margin basis. And that really that pattern isn't going to change. We do a lot of high volume business in the gas utility space.

Speaker 2

We purchase very efficiently as well. And typically, we're able to drop more to the bottom line because of how we're dedicating our resources to serve these gas utilities. We have entire service centers dedicated to particular gas utilities, which can be really efficient in terms of cost to serve. So more drops to the bottom line. But that pattern is not really going to change.

Speaker 2

Again, the gross margin aspects of the gas utility business are slightly dilutive, but you'll see the net margins improve as we do more Gas Utilities business.

Speaker 6

Understood. If I could just squeeze one more in.

Speaker 5

Sure.

Speaker 6

Look, I know you've got a very strong balance sheet right now. Obviously, you feel very good about the free cash flow profile here for this year and next year. Is there any color on what you're planning to do or how to utilize the balance sheet here in coming quarters? Anything you kind of share with all the ongoing stuff that's kind of maybe behind the curtain, whether it's from consolidation or the portfolio review, anything there?

Speaker 2

Yes, good question. Look, let me just start by saying we are really excited about the fact that our balance sheet is stronger than ever. If you go back historically, this company has certainly been highly levered. Many would say we were over levered. And I think it was a disadvantage for the company in the public markets as well as in the flexibility that we had previously for pursuit of either various aspects of capital allocation.

Speaker 2

And so where we are today with this 0.4 times leverage ratio and then really a robust confident outlook on our ability to generate significant amounts of cash over the business cycle. It's a we're in a really unusual and exciting place for MRC Global. Obviously, I can't share what's behind the curtain as you term it, because any decisions we make that will be bold on capital allocation are going to have to be done in concert with the Board of Directors. And obviously, we want to make sure that whatever we do is to the benefit of our common shareholders. So we do have more flexibility than we've ever had.

Speaker 2

This is going to be something that we're going to be spending a lot more time on over the next year. And we're just really happy to be in the position we are to consider these opportunities and our shareholders should be excited as well.

Speaker 6

Very helpful. Thanks.

Speaker 2

You're welcome.

Operator

Our next question comes from Sean Mitchell with Daniel Energy Partners. Please proceed with your question.

Speaker 5

Hey, guys. Thanks for taking the question. Maybe a follow on to kind of the last question on the balance sheet. You guys have done an excellent job deleveraging here and understand you're going to be focused on shareholder returns going forward. But we've also hit kind of a soft patch in North America.

Speaker 5

I'm just curious if M and A is more attractive use of capital today than it was 6 to 9 months ago? And are there more opportunities you're seeing today? Yes.

Speaker 2

Look, we're going to we continue to scan the market for opportunities to grow inorganically, if that makes sense for us. And as a practical matter, I'm not sure that we're seeing things too much differently than we saw previously. We are focused right now on making sure that we've got the balance sheet in a really good position. I will also mention that when we talk about capital structure, we believe that a simple capital structure makes sense for our shareholders. And we still do have our preferred shares out there.

Speaker 2

So at some point, we want to address the preferred shares and likely that's going to be potentially a source of capital that we would use. So, we want to factor all those things together, M and A, return to common shareholders and simplifying our capital structure. And all those things really are part of the calculus that we do when we think about what we're going to do going forward. But specific to M and A, I wouldn't say there's anything radically different in terms of what we're seeing now in terms of opportunities than what we were seeing 6 months ago.

Speaker 5

Okay. That's helpful. And then maybe one more, Just a lot of what we are focused on today is how the energy industry is trying to plan for the demand increases coming from power, not only in West Texas, but really across the country. Can you speak to kind of your outlook for power gen demand and how MRC benefits kind of from the increased need going forward for this kind of build out we're seeing everyone talk about?

Speaker 2

Yes. We talked about a bit of this in our prepared comments and there's been a lot written about the need for the many, many gigawatts of power that's going to be required to service demand growth in electricity, a lot of that demand coming through data centers. And of course, the vast majority of the power generation that you can really count on whether the sun is out or not or whether the wind is blowing is gas turbine combined cycle technology. So we're going to see, we believe, a lot of gas fired power stations get built. That's going to require infrastructure to gather process and transport that gas.

Speaker 2

In addition, we know that LNG exports are going to continue to increase and that's going to be a source of demand. And then we've also talked about exports to Mexico and growing industrial demand as being other sources of demand for natural gas. And obviously, when you have demand for the commodity, you've got to have demand for the infrastructure that moves that commodity around, processes that commodity, makes it available for consumption or for export. And we have an active business in the upstream and the midstream and that's going to benefit from that additional growth in natural gas. So we're really excited about natural gas growth in this country.

Speaker 2

People are projecting that even by 2,030, it could grow 15% to 20%. And that's going to be a nice catalyst for our PTI business going forward.

Speaker 5

Great color. Thank you.

Speaker 2

You're welcome.

Operator

Our next question comes from Chris Dankert with Loop Capital Markets. Please

Speaker 7

I guess congrats on the PVF win with Exxon. Obviously, maybe it's bigger than a bread box. Can you kind of size, is this a nice incremental win or actually needle moving for that business? If you can give any color there would be great.

Speaker 2

Yes, great question. First of all, let me just reiterate how excited we are to have landed this opportunity with ExxonMobil. I think everybody on the call understands what a commitment ExxonMobil has made to the North American oilfield and how they continue to grow both organically and through acquisitions, their presence here. And the fact that we are aligned with an industry leader like ExxonMobil knowing their long term growth prospects is extremely positive for MRC Global. We're not going to disclose specific numbers in terms of how we look at revenue with individual customers.

Speaker 2

But I will tell you that once the acquisitions that ExxonMobil has announced are fully integrated, Our business with them is likely to grow between 75% and 100% from where it is today. So this is a really big opportunity for us. It's not just an incremental opportunity. It's a really big opportunity. And again, we're really excited to be aligned with ExxonMobil.

Speaker 7

That's phenomenal news and congrats again there. I guess just as a follow-up, obviously there's no rush or need to move on to preferred shares now, but I'm just curious is there an active conversation with preferred share shareholder in terms of what options are there? Or is this more kind of a wait and see approach at the moment?

Speaker 2

Well, keep in mind, the preferred shareholder occupies a seat on our Board. And so we have an active dialogue. And look, what we want to do is we want to do the right thing for our common shareholders. That's been our message throughout any dialogue relating to the preferred. There's obviously going to be a time when, 1st of all, we can afford to take it out and secondly, we think it will make sense for our common shareholders.

Speaker 2

We obviously haven't reached that point yet. But look, we recognize that it is a complication to our capital structure. And for those reasons, we want to make sure that we take it out at the right time and in the right way. And ideally, you take it out when it's accretive to our shareholders and we can do everything we can to minimize any dilution through share count. So we have some basic principles that we're thinking about.

Speaker 2

And I would just say stay tuned, know that there's an active dialogue going on, but that we are thinking 1st and foremost about the common shareholders when we strike an agreement to do something with the preferred.

Speaker 7

Great color. Thanks so much for that and best of luck in the back half here guys.

Speaker 2

Yes, appreciate it. Thank you.

Operator

We have reached the end of the question and answer session. I would now like to turn the call back over to Monica Broughton for closing comments.

Speaker 1

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

Operator

day. This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.

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Key Takeaways

  • Generated $63 million in Q2 operating cash flow (H1: $101 million) and repaid the term loan early, ending the quarter with $103 million of net debt and a record-low 0.4× leverage ratio.
  • Reported Q2 revenue of $832 million, up 3% sequentially on strength in gas utilities (+8%) and PTI (+5%), with a record-high adjusted gross margin of 22.1% and adjusted EBITDA margin of 7.8%.
  • International business delivered 15% year-over-year and 11% sequential revenue growth, with a backlog 32% higher than a year ago and on track for double-digit full-year growth.
  • Secured a new strategic agreement as ExxonMobil’s primary PVF supplier in North America, a relationship expected to boost volumes by 75–100% once recent acquisitions are integrated.
  • Maintained full-year 2024 guidance for $200 million+ operating cash flow, anticipating a modest H2 revenue decline as project delays normalize, with a rebound across all sectors in 2025.
AI Generated. May Contain Errors.
Earnings Conference Call
MRC Global Q2 2024
00:00 / 00:00