MRC Global Inc.

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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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. Please go ahead.

Thank you and good morning. Welcome to the MRC Global second quarter 2023 earnings conference call webcast. We appreciate you joining us. On the call today, we have Rob Sautile, 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. 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 8th, 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. 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 would like to turn the call over to our CEO, Mr. Rob Satil.

Thank you, Monica. Good morning, and welcome to everyone joining today's call. I will begin with a high-level overview of our second quarter results and sector performance, followed by our 2023 outlook. Kelly will provide a detailed review of the second quarter 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 2022. All three of our sectors demonstrated healthy year-on-year revenue growth over the first six 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 2023 as we continue to improve top and bottom line performance and execute our sector focused strategies. Specific to the second quarter, our top line came in a little lighter than anticipated with revenue of $871 million. representing a 2% sequential decline versus the first quarter, but an improvement of 3% over the second quarter of 2022. Both sequentially and compared to the same quarter last year, two of our three sectors, gas utilities and PTI, experienced revenue growth, with diet taking a pause in project and turnaround activity this quarter. Other key highlights for the quarter are that we produced strong adjusted gross margins of 21.5%, grew our international segment backlog by 12 percent compared to the first quarter and generated positive cash flow from operations of $20 million. 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 second quarter over the first quarter, 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 million 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. We realized EBITDA of 63 million 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. Turning now to our sector performance, our PTI business continues to benefit from improving fundamentals. This business experienced a 10% revenue improvement over the second quarter 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. 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 first quarter, followed by a similar decline in the second quarter. We expect that the second quarter 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 second quarter, and we are modeling strong double-digit revenue growth in the third quarter, followed by a seasonally strong fourth quarter as project activity resumes and we head into the fall and winter turnaround season. Many of the U.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 first quarter and 3% growth over the second quarter 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 and 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. 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 multi-year 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 two new gas utilities, and we expanded our product offerings with two other utility customers. We continue to gain both market share and wallet share in this sector. Despite this bump in the road, we believe our gas utilities business will return to more typical growth levels in 2024 and maintain its strong long-term growth trajectory. 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 2023 compared to the first half of 2022. 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 today and the majority of our backlog in this subsector. 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 longstanding 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. 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 multi-year outlook for our company and our many growth opportunities ahead. And with that, I'll now turn the call over to Kelly.