Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- MRC Global Inc (MRC, Financial) generated $63 million in operating cash flow in Q2 2024 and $101 million for the first half of the year, exceeding expectations.
- Second-quarter revenue was $832 million, a 3% increase over the first quarter, driven by growth in the gas utilities and PTI sectors.
- Adjusted gross margins reached a record high of 22.1%, with adjusted EBITDA margins improving to 7.8% for the second quarter.
- The company's balance sheet is stronger than ever, with a leverage ratio of 0.4x and expectations for further improvement.
- MRC Global Inc (MRC) was chosen as the primary strategic supplier of PVF products and services to ExxonMobil in North America, a significant achievement.
Negative Points
- The DIET sector experienced a slight decline due to lower refinery turnaround and project activity in the US.
- Revenue in the second half of 2024 is expected to be softer than the first half, primarily due to delays in DIET projects and refinery turnarounds.
- Gas utilities project-related work has slowed this year and is expected to recover only in 2025.
- US oilfield spending is expected to be slower in the second half of 2024 before picking up in 2025.
- The company continues to face challenges with customer destocking in the gas utilities sector, which may extend into 2025 for some customers.
Q & A Highlights
Q: Rob and Kelly, you both talked in your prepared comments about project push-outs in the DIET sector and 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, and it gives you confidence they'll actually be executed in 2025?
A: (Robert Saltiel, CEO) High interest rates are detrimental to project economics, and we've been living with that since the middle part of last year. The general consensus is that interest rates are going to be headed down, which is bullish for project activity in 2025 and beyond. We're tracking these specific projects and talking to the companies themselves, and they assure us that these are delays rather than cancellations.
Q: 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. Can you provide 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?
A: (Robert Saltiel, CEO) We think our gas utilities business has definitely come off the bottom and recovered from where it was in the fourth quarter of last year. We are seeing stabilization in new order intake and average daily sales. A number of our customers, through recent earnings calls and public announcements, are indicating increased CapEx in the range of 4% to 6% over the long term and mid-single-digits next year.
Q: Do you still expect to be able to outgrow that market, outgrow your customer spending with market share gains?
A: (Robert Saltiel, CEO) We do. Gas utilities are conservative entities, and when we increase market share, we're displacing functions that they do themselves. We are working on a number of opportunities to increase our market share with new utilities and existing customers by taking on more of the products and services they currently provide themselves.
Q: Can you talk about which inning you think we're in from a destocking perspective in gas utilities? Is it fair to think that the second quarter is the trough for destocking, or is that more of a 3Q phenomenon?
A: (Robert Saltiel, CEO) I would say we're in the sixth or seventh inning. Most of the destocking is behind us, but it's not over yet. It varies by customer, and we think most of it will be through by the end of this year, with some customers continuing into 2025.
Q: How do you view the recovery in the margin profile for the gas utility business once the destocking is complete?
A: (Robert Saltiel, CEO) Generally speaking, gas utilities tend to be accretive on a net margin basis but slightly dilutive on a gross margin basis. This pattern isn't going to change. We do a lot of high-volume business in the gas utility space, 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.
Q: Is there any color on what you're planning to do or how to utilize the balance sheet here in coming quarters?
A: (Robert Saltiel, CEO) We are really excited about the fact that our balance sheet is stronger than ever. We have more flexibility than we've ever had, and this is something we will be spending a lot more time on over the next year. Any decisions we make will be done in concert with the Board of Directors and will benefit our common shareholders.
Q: Is M&A a more attractive use of capital today than it was six to nine months ago? Are there more opportunities you're seeing today?
A: (Robert Saltiel, CEO) We continue to scan the market for opportunities to grow inorganically if it makes sense for us. We are focused on making sure our balance sheet is in a really good position. We also believe that a simple capital structure makes sense for our shareholders, and we want to address the preferred shares at some point.
Q: Can you speak to your outlook for power generation demand and how MRC benefits from the increased need going forward?
A: (Robert Saltiel, CEO) We believe a lot of gas-fired power stations will be built, requiring infrastructure to gather, process, and transport gas. LNG exports, exports to Mexico, and growing industrial demand will also drive natural gas demand. This will benefit our PTI business, as we have an active business in the upstream and midstream sectors.
Q: Can you size the PVF win with ExxonMobil? Is this a nice incremental win or actually needle-moving for that business?
A: (Robert Saltiel, CEO) Once ExxonMobil's acquisitions are fully integrated, our business with them is likely to grow between 75% and 100% from where it is today. This is a really big opportunity for us, not just incremental.
Q: Is there an active conversation with the preferred shareholder in terms of what options are there, or is this more of a wait-and-see approach at the moment?
A: (Robert Saltiel, CEO) We have an active dialogue with the preferred shareholder, who occupies a seat on our Board. We want to do the right thing for our common shareholders and simplify our capital structure at the right time and in the right way.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
