MRC Global Inc.

Greetings. Welcome to MRC Global's third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Monica Broughton, Investor Relations. Thank you. You may begin.

Thank you and good morning. Welcome to the MRC Global Third Quarter 2022 Earnings Conference Call and Webcast. We appreciate you joining us. On the call today, we have Rob Saltil, 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 November 23, 2022. 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, November 9th, 2022, 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, including net debt, adjusted gross profit, adjusted gross profit percentage, adjusted SG&A, adjusted EBITDA, adjusted EBITDA margin, and adjusted net income. Unless we specifically state otherwise, references in this call to EBITDA refer to adjusted EBITDA. You are encouraged to read our earnings release and securities filings to learn more about our use of these non-GAAP measures and to see a reconciliation of these measures to the GAAP items, all of which can be found on our website. In addition, the comments made by the management of MRC Global during this call may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of the management of MRC Global. However, actual results could differ materially from those expressed today. You are encouraged to read the company's SEC filings for a more in-depth review of the risk factors concerning these forward-looking statements. And now, I'd like to turn the call over to our CEO, Mr. Rob Sawteel.

Thank you, Monica. Good morning, and welcome to everyone joining today's call. I'll begin with a few comments about MRC Global's revenue diversification progress over the past few years because we believe this is a relevant topic for our shareholders. I will then provide a high-level review of our third quarter results, our growth drivers, and our positive business outlook before handing off to Kelly for a detailed review of the quarter. I will close with a brief recap before our Q&A session. We have seen a remarkable transformation in our business in recent years as our revenue sources have shifted dramatically to become more diversified and stable. Historically, our company's revenue was derived primarily from traditional oil and gas activity. For example, in 2014, approximately two-thirds of our revenue was driven by our upstream production and midstream pipeline sectors. Today, these two sectors account for less than one-third of our revenue. Gas utility customers now drive the largest components of our revenue at 40%, with the remaining portion of 31% being from our diet sector, which itself is rapidly becoming more diverse. This means that more than 70% of our revenue today is derived independently of the traditional oil field and is therefore more resilient from swings in commodity prices that cause volatility in oil field activity and profitability. We believe this point is often overlooked by our traditional investor base, and perhaps we are not receiving full credit for the improvements in our revenue risk profile that this diversification brings. In addition, Our gas utilities business is primarily driven by safety and integrity projects that are clearly in the public's interest, along with enhancements and upgrades to aging infrastructure, such as smart meters, that improve utility efficiency. As a result, this sector is generally more resistant to economic downturns and has proven over the past decade to be our most stable source of revenue in addition to now being our largest. Clearly, MRC Global has a very different end market and revenue mix today and we believe this revenue diversification allows for meaningful growth across multiple less correlated pathways and that this transformation offers significant value creation potential for our shareholders. Even so, we have achieved this while retaining our position as the leading PVF distributor to upstream and midstream customers. We intend to maintain this leadership position. In fact, we will be in Midland, Texas later this week to celebrate the grand opening of our newest service center that will enhance our ability to serve energy producers operating in the all-important Permian Basin. Moving now to our third quarter results, I am very pleased with the sequential increase in revenue of 7% over the second quarter, while driving more of our revenue to the bottom line. We also set new margin percentage records this quarter for adjusted gross profit and adjusted EBITDA, which helped us to generate positive quarterly cash flow during a period of robust revenue growth, a major accomplishment. Generating cash throughout the cycle is one of our primary objectives that I will discuss in more detail later. Drilling down into each sector, the gas utilities business continues to hit new milestones with $359 million of revenue in the third quarter, its highest quarterly revenue to date, growing 14% sequentially. We are currently running 26% ahead of 2021 revenues for this sector and anticipate exceeding $1.2 billion in revenue for the full year. With a 7% sequential improvement, our diet sector is now expected to exceed $1 billion in revenue this year. This sector has benefited from numerous energy transition projects, our increasing focus on the chemical space, and increased maintenance and turnaround activity at petroleum refineries. This sector is rapidly returning to revenue levels not seen since 2019. Our two traditional energy sectors, upstream production and midstream pipeline, each declined slightly in the quarter as several large customer opportunities slipped into the fourth quarter. The exciting news is that our U.S. upstream backlog improved 38% sequentially on strong demand, supporting our expectation of an unseasonably good fourth quarter. We are also anticipating improving prospects for our midstream pipeline sector starting in the first half of 2023. This business typically lags growth in the upstream sector by a few quarters as gathering and processing assets are required after well completions activity. Our international business grew sequentially by 9% despite the unfavorable impact of weaker foreign currencies that shaved 500 basis points off the increase for the quarter. Our underlying international business is solid, as evidenced by a growing backlog in spite of foreign currency headwinds. As a company, we continue to focus on improved efficiency and profitability, and I am delighted with our team for delivering adjusted EBITDA margins of 9.1% in the third quarter. This is the highest EBITDA margin ever achieved by MRC Global, and it reflects our commitment to deliver improved bottom line results for our shareholders. This outcome was enabled by higher gross margins and continued cost discipline. Our adjusted gross margin of 21.9% in the third quarter was also a company record and an outstanding achievement. Structurally, we are a much leaner organization than we've ever been, and we anticipate that our cost control and increasing operating leverage will continue to benefit our financial results in future quarters. Kelly will provide further detail about the drivers of the higher quarterly margins in his remarks. As we look to 2023 and beyond, we believe each of our sectors is underpinned by a compelling growth story, both in the near term and longer term. I want to take a moment to highlight the specific drivers for our future growth. I'll start with our gas utilities business. It's our largest sector, has long-term durable growth, and is a clear differentiator for us. Over the past five years, we have achieved an impressive 10% compound annual growth rate in our revenue. Going forward, we anticipate utility customer budgets to remain healthy and to be largely driven by safety and integrity projects. Because of our strong market position, we are able to deliver purchasing benefits to our customers while establishing preferential, longstanding relationships with our key suppliers. During the pandemic, we were able to access scarce gas product supplies when others, including some gas utilities themselves, could not. As experts in this space, we were able to offer product alternatives to our customers that were technically equivalent when the preferred brand or product could not be accessed. This kind of performance builds trust. We believe there is ample room to grow this business, whether it be through expanding our product mix with existing customers or by adding new customers and utility service areas to our existing network. Gas utilities should be a major growth engine for years to come. The second growth area I would like to highlight is the upstream production and midstream pipeline sectors. We believe we are in a multi-year upcycle for our traditional oil field business, driven by growing energy demand, years of underinvestment in production capacity, and the rebalancing of energy flows stemming from the Russia-Ukraine war that will increase the call on North America and European energy production. Our international upstream business has picked up in response with expanded work opportunities in both the UK North Sea and offshore Norway. Upstream production is on track to achieve approximately 30% revenue growth this year. Looking forward, we anticipate that U.S. well completion spending will be increasingly weighted toward the IOCs and larger independent producers. We are highly levered to these customers, setting up for strong performance in the future. A growing upstream business means a growing midstream business, as the fundamentals are linked. As production continues to grow, the need for gathering and processing infrastructure and new intrastate takeaway capacity increases, which benefits our midstream business. The five-year outlook for both our traditional energy sectors is very strong. Our energy transition business, which comprises the fastest growing part of our diet business sector, continues to shine. Increasing levels of investment are supported by a global focus on climate initiatives expansion of related government stimulus and regulatory enactments, and advances in technology that improve the affordability of clean energy alternatives. The recent passage of the Inflation Reduction Act provides U.S. players an opportunity to access attractive investment and production tax credits that persist through 2035. The energy transition begins as a project business, whether it be a greenfield development or a brownfield conversion. we have developed a very strong project execution team that is well-versed in the energy transition technologies being utilized and the specific products required for the application. This makes MRC Global the logical partner not only for our end customers, but also for the engineering, procurement, and construction companies who are typically responsible for specifying and purchasing the materials and products required for these projects. In 2022, the reconfiguration of petroleum refineries to process organic and waste feedstocks to produce renewable fuels has comprised the bulk of our energy transition revenue. Our energy transition backlog includes a wide variety of projects, including the previously announced offshore wind farm in New York. In the medium term, carbon capture is expected to grow in importance, with the addressable market reaching $55 billion by 2030, according to Rystad Energy. In addition, an increasing number of hydrogen projects, are expected to be approved and funded. We expect to generate approximately $100 million of energy transition revenue this year, and we look for this to expand significantly in the coming years. The fourth area that I'd like to discuss is the chemical subsector, also within our diet sector. The chemical subsector is a large market with approximately $2.5 billion of annual PVF opportunity. We have a relatively small position in this sector, but we are poised for expansion. About a year ago, we assembled a team with unrivaled chemicals expertise, tasked with identifying opportunities and growing our market share. We are in the beginning stages of market penetration, yet we have seen meaningful traction with new customers. Our chemical subsector revenue has grown 24% versus the third quarter of 2021, and the outlook remains positive, especially in the North America market, which benefits from low feedstock costs. There is significant opportunity for MRC Global to deliver strong growth in the chemical space as this market expands and we gain market share. And finally, I'd like to discuss the global LNG market, also part of our diet sector. Natural gas is a logical transition fuel to a lower carbon future, and the U.S. has abundant supplies that can be exported economically and reliably to world markets as LNG. The increased focus on energy security and the displacement of Russian gas will help facilitate growth of LNG production infrastructure in the U.S., and parallel regasification and transmission facilities in consuming markets. Here in the U.S., we are already active in supplying large quantities of PVF to approved LNG projects with orders in our backlog that are expected to deliver next year. We expect multiple LNG projects to gain approval in the U.S. this decade as the U.S. is poised to remain the world's leading LNG producer. Reflecting on my tenure at MRC Global, I believe we have made significant progress in many areas that make us a stronger and more investable company. First, we are driving more of our revenue to the bottom line. We do this by being smart about the markets we pursue and the products and services we provide and by closely managing our costs. Second, we have expanded our project focus and capabilities to complement our traditional MRO strength. This allows us to play a first mover role in the energy transition and to position our company for bigger ticket orders in other areas such as the chemical space. And third, we are expecting to generate positive cash flow from operations this year, even as we have grown our revenues by approximately 26 percent and our gross inventories by $197 million. Improving the efficiency of our working capital allows us to consistently generate cash flow across the cycle, a goal that we have for 2023 and beyond. Generating cash consistently is a prerequisite for a versatile and flexible capital allocation program that allows for greater growth and shareholder returns. We are committed to this, and Kelly will cover it further in his prepared remarks. Turning to our outlook for next year, while still preliminary, early indicators are positive and supported by conversations with customers, our solid and growing backlog, and our previously discussed growth drivers and business fundamentals. While we plan to provide additional clarity on our fourth quarter earnings call, today we expect 2023 revenue to increase by a double-digit percentage for another year of strong revenue growth. We also are targeting 2023 full-year EBITDA margins to exceed 8%, another significant step forward in margin expansion and bottom-line profitability for the company. Operating cash flow in 2023 is expected to be substantial, as we continue to improve working capital efficiency and convert more EBITDA to cash. Currently, we are targeting over $100 million in operating cash flow in 2023. In summary, we are very optimistic about next year's outlook for MRC Global. Lastly, I want to commend our people who have done such a great job in advancing our business in 2022. Like many companies, at times we have been challenged to attract the necessary personnel to support our growth in such a strong and competitive job market. In response, we have developed new channels of recruiting, improved our onboarding and training processes, and shared our most highly skilled resources over more locations and geographies. Relentless commitment to customer service is in our DNA, and our employees have stepped up to the challenge as they always do. As a result, we continue to retain the trust of our existing customers while cultivating new ones. And with that, I'll now turn the call over to Kelly.