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Edgen Group Inc. (NYSE:EDG)

Q1 2013 Earnings Call

May 13, 2013 11:00 am ET

Executives

Collin McQuiddy – Director of Financial Reporting

Daniel J. O’Leary – Chairman and Chief Executive Officer

David L. Laxton III – Executive Vice President and Chief Financial Officer

Analysts

Matt Duncan – Stephens, Inc.

Igor Levi – Morgan Stanley

David Olkovetsky – Jefferies LLC

Bhupender Bohra – Jefferies

Gregg W. Brody – JPMorgan Securities LLC

Operator

Good morning and welcome to the Edgen Group First Quarter 2013 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Collin McQuiddy. Mr. McQuiddy, please go ahead.

Collin McQuiddy

Good morning and welcome to Edgen Group’s first quarter 2013 earnings call. I’m Collin McQuiddy, Edgen Group’s Director of Financial Reporting, filling in for Erika Fortenberry, our Director of Investor Relations, he is not able to be on the call with us today. Today’s conference call will be hosted by Dan O’Leary, Chairman and Chief Executive Officer, and David Laxton, the Chief Financial Officer.

Before we get started, I need to remind you that during today’s conference call we may make forward-looking statements within the meaning of federal securities laws. All statements other than the statements of historical fact are considered forward-looking statements. These forward-looking statements involve a number of risks, uncertainties, assumptions and other factors that could affect future results and cause actual results and events to differ materially from historical and expected results and those expressed or implied in the forward-looking statements.

Other important factors that could affect the outcome of the events set forth in these statements and that could affect our operating results and financial conditions, are discussed in our filings with the Security and Exchange Commission to the state. We undertake no obligation to review or update any forward-looking statements to reflect events or circumstances occurring after this date of this conference call and the related press release.

We may also refer to non-GAAP financial measures, our non-GAAP financial measures are not considered as alternatives to GAAP measures such as net income, operating income, net cash flows provided by operating activities or any other measure of financial performance calculated and presented in accordance with GAAP. Our non-GAAP financial measures may not be comparable to similarly-titled measures or other companies because they may not calculate such measures in the same manner as we do.

A reconciliation of non-GAAP financial measures to its most directly comparable financial measures calculated and presented in accordance with GAAP can be located on our current and period filings with the SEC and on our Investor Relations section of our edgengroup.com website.

Now, I’ll turn the call over to Dan O’Leary.

Daniel J. O’Leary

Thank you, Collin. Good morning, everyone, and thank you for joining our call today. In our last earnings call I stated that we expected the timing delays we experienced at the end of 2012 to continue into the beginning of 2013, and that statement has proven to be correct.

The project word delays are referenced in our E&I segment have resulted in a slower building of sales backlog beginning in the fourth quarter of 2012 and throughout the first quarter of 2013.

Ultimately, the timing issues around these awards had an impact on the first quarter 2013 financial results. I’m pleased to say that during the first quarter of 2013, our Oil Country Tubular Goods segment performed well with sales volume levels relatively in line with 2012 despite a declining rig count environment, we benefited from our longstanding relationships with our premier independent customer base, who have remained active in conjunction with their planned drilling programs and are actually responsible for our increasing share of the overall rig count.

From a segment perspective, we will start with our E&I segment. The slowdown we have referenced in the back half of 2012 meant that we started 2013 with an E&I sales backlog that was approximately 30% less than a year before. Consequently, we saw a 28% decline in E&I sales for the first quarter 2013, compared to a year ago. Our E&I sales backlog has essentially been maintained as we ended the first quarter of 2013 with a slightly higher sales backlog of $259 million at March 31, 2013.

Gross margins were slightly improved at 14.4% for the first quarter of 2013 as compared to 13.5% in the first quarter of 2012. In our Upstream segment, the delay in project awards for new generation jack-up rigs has resulted in excess capacity for the global fabricators who build these rig components from the materials we supply. This has allowed drillers to bid these fabricators against each other resulting in an unusually competitive environment, as these projects are now moving forward and capacity is returning to normal levels, our outlook on these projects improves.

Our European and Asian conductor pipe business continues to perform well and our new Norwegian installation has gained traction as a base for what we view as a very active global subsea development activity market. In the U.S., midstream market are gathering and transmission infrastructure customers have been focused on the completion of existing projects, they seem to be comfortable to move more slowly with some procurement activity for new 2013 projects because of the current environment, which is characterized by short mill lead times and depressed pricing for many of the products these customers will need.

The Midstream business was also impacted by weather delays in an exceptionally harsh spring season when there is normally a greater burst of activity. The much anticipated downstream and petrochemical building projects begin to materialize and we are seeing preliminary project awards in that space for boilers and other parts of these multi-phase installations that are our good indicator that procurement in construction will continue to move forward in the coming months.

We are optimistic about the long-term growth prospects for our company in this segment and recently made some changes in our E&I leadership team. These leaders were charged with the execution of focus, sales growth initiatives, and continuous improvement of operations across end markets around the world.

It should be focused to our resilient and reliable Oil Country Tubular Goods segment, the average U.S. drilling rig count decreased 12% for the first quarter according to Baker Hughes, here our OCTG volumes were only down 4%. This reflects our ability to gain share in a declining market with our strong OCTG model. There continues to be no clear trend and demand for steel on a global basis and despite announced steel price increases on many products from many of the major steel producers, overall pricing for raw materials and finished products has not stabilized and impact continues to decline.

Worldwide steel demand remains soft and there is an increase in market supply from imports and excess production capacity from the mills. These factors combined to create pricing pressure that has had a negative impact on our top line OCTG revenue, as well as our midstream line pipe with Q1 net sales at a lower point than a year ago despite similar overall tonnage.

We achieved gross margins up 10% in OCTG for the first quarter of 2013 and increased from 9.2% in the first quarter of 2012. We continued to manage OCTG inventory very affectively, staying short in our inventory position, but always looking for opportunities to make strategic buys that allow us to secure healthier gross margins on high demand products. We are focused on growing our share with our core customers and gaining share with new ones. We continue to believe our strong model allows to flexibly respond to turbulent market conditions and shifting customer needs.

I’ll turn it over to David Laxton, our Chief Financial Officer to fill you in on some of the more specific numbers and finer points. David?

David L. Laxton

Thank you, Dan. As Dan stated, the first quarter of 2013 was a challenge for us. We continued to see softness in product demand and very competitive commodity prices. The result was a quarter where our financial results declined from our quarter one 2012 results.

At a global level, we ended the first quarter of 2013 with net sales of $406 million, compared to a prior year of $506 million, a decline of 19.8%. Our gross profit was $50 million compared to $58 million in 2012, adjusted net loss of $2.5 million, which resulted in a $0.16 loss per share, and adjusted EBITDA of $23.9 million versus $36.4 million during 2012. We also finished as Dan mentioned, the quarter with a $259 million E&I backlog that increased slightly from December 31, 2012.

Although, quarterly sales and earnings were down compared to the quarter one year ago, our OCTG segment outperformed our expectations, while our E&I segments results were only slightly below our expectations based on quarter four 2012 conditions.

Our E&I segment ended the quarter with net sales of $201 million versus $278 million in the prior year, gross profit of $29 million versus $37 million in 2012, and income from operations of $6 million compared to $17 million in the same quarter a year ago.

The majority of the sales decline occurred in our upstream and U.S. midstream markets. In our upstream market, we experienced a decrease in our business associated with the construction of jack-up rigs as working expected to be awarded in the second half of 2012 and under construction in Q1 2013 was pushed back.

In our U.S. midstream market, the decrease was a result of reduced spending for oil and gas gathering systems as customers experienced weather delays and have sold material purchases during 2012, steel price declines also reduced revenues quarter-over-quarter. Despite lower sales volumes in pricing, we did see a favorable mix of product sold, which allowed us to improve our E&I gross margins from 2012 almost a 100 basis points to 14.4% for the quarter.

Additionally, during the quarter, SG&A at $19 million increased $4 million from 2012 as we have opened two new regional offices, a distribution center in South Texas, and incurred SG&A expenses associated with our two acquisitions that occurred during the second half of 2012 and are not reflected in Q1, 2012 results.

Our OCTG segment also faced several significant challenges during the quarter similar to our E&I segment. During the quarter, average U.S. drilling rig count decreased 12% from the same quarter in 2012 and OCTG prices declined approximately 9%.

However, despite the challenges in the quarter, our OCTG segment was able to achieve net sales of $205 million versus the prior quarter in 2012 of $228 million, gross profit of $21 million compared to a similar amount of $21 million in 2012, and income from operations of $13.4 million versus $13.5 million during the quarter a year ago.

Within our OCTG segment, we maintained our volumes by growing our market share in an overall declining market, closely managed our inventory levels, and saw purchasing opportunities, which allowed us to improve our margins by almost 1% to 10% from the prior year.

Included in our Group results during the quarter was $1.7 million charge associated with an early prepayment of debt and a $2.3 million charge associated with the triggering of one of our existing tax receivable agreements as B&L Supply completed a cash redemption of EMC’s investment in B&L Supply.

After adding back these charges, net of income taxes, the quarter’s adjusted net loss was $2.5 million resulting in an adjusted loss per share of $0.16. Additionally, our interest expense at $15 million significantly decreased from prior year due to the debt refinancing that we completed during the second half of 2012, as well as our continued efforts to reduce our total outstanding debt. At March 31, 2013, our outstanding debt balance showed at $57 million reduction as compared to March 31, 2012.

From an income tax expense perspective, we had a $2 million expense during the quarter with an effective tax rate of 77%. As we have mentioned in the past, our effective tax rate differs from the federal statutory rate of 35% principally because of differing foreign income tax rates.

Edgen Murray Corporation is not a current tax payer as a result of tax loss carryforwards, which resulted in no income tax benefit or expense, and a portion of income generated by our OCTG segment is excluded from the calculation of taxable income. The actual income tax expense for the first quarter of 2013 reflects taxable income and an annualized tax rate of approximately 16%.

Finally, moving to cash, liquidity, and debt during the quarter; we generated $12.8 million in operating cash flow and ended the quarter with total unrestricted cash of $22 million and $213 million of availability under our global credit agreement. Additionally, we reduced our total debt position by $17.5 million primarily due to a $16.5 million principal payment made on our seller note.

This completes my presentation. Back to you, Dan?

Daniel J. O’Leary

Thank you, David. Although 2013 has started out slowly as we expected, we are confident in our medium and long-term prospects and believe that our business model can be affective in any type of market condition as we manage our working capital needs, focused on our customer and supplier relationships, and constantly look for ways to improve our margins.

Once we start to see the anticipated traction in our customers purchasing decisions and the resulting pricing and timing of shipments, we will update our guidance to reflect our expectations about full-year financial performance.

We will now open the conference call for questions. I’ll turn it back over to the operator.

Question-and-Answer Session

Operator

Thank you. Yes, we will now open the floor for questions. (Operator Instructions) And our first question comes from Matt Duncan with Stephens, Inc.

Matt Duncan – Stephens, Inc.

Good morning, guys.

Daniel J. O’Leary

Good morning, Matt.

David L. Laxton

Good morning, Matt.

Matt Duncan – Stephens, Inc.

The first question I’ve got really wanted to focus on the outlook a little bit here. I certainly understand the decision to pull guidance given the uncertainty on the project side of your business, which I know can obviously be lumpy in nature. Yeah, I’m wondering if maybe you can give us a little more detail around sort of where exactly the visibility is lacking. It seems to me is though, the OCTG business, you still have a pretty good feel for that market is heading. I know your guidance there had been $800 million to $900 million, and I guess I’m curious, is there any reason that would have changed, or is the pulling of your guidance more tied to the E&I segment?

Daniel J. O’Leary

Matt, good observation, good question. Let me elaborate a little bit and perhaps answer the follow-on question that I believe you probably have. Our outlook for Oil Country Tubular Goods is dependent on that onshore rig count as much as it always has been. It then follows on with a footage that is drilled. And our performance there for the balance of the year, we have no expectations for it to change depending on that where that rig count is.

So you can look at our performance in the first quarter and model how you believe the rig count and the footage and recall that our independent oil and gas customers are a larger percentage of the declining rig count, because they have defined drill programs, that are very well capitalized, and they will continue to drill through this period. So you are correct that the Oil Country business, we believe will sustain at levels around everyone’s rig count assumptions.

The E&I segment has been affected by the timing of the project awards and those – and that timing has been around customers able to take as much time as possible in those awards because of the shortening of the lead times from principal steel vendors. So they are in no hurry, because they know they can get their delivery, so you might conclude what you won’t get in this year, not necessarily the case, because the lead times have continued to shrink. There is capacity from fabricators, as well as suppliers and the customers are using that to their advantage in this cycle.

Additionally, those steel prices have not found a firm footing as we expected when we had our March call, because February price announcements had been engaged and we expected those price increases to stay. They’ve traded down as David reported, so if you think about our backlog that we finished the year at and that we entered into the first quarter with at E&I and that backlog was virtually the same, it can and will be a predictor going forward.

However, we have a number of quotations, a number of project awards that we are very close to, but we cannot get the client to simply add that – add the PO to it, and allow us to engage in the buying of the material and the queuing of the supply into their project. That’s why we chose to withdraw the current guidance as we don’t know the timing of when those rewards will actually take place.

Matt Duncan – Stephens, Inc.

Okay, that’s helpful. And so digging in maybe – into a little bit more of the detail though, it seems like the midstream market domestically was certainly negatively impacted by weather in the first quarter especially if you look year-over-year, and from what we’ve heard from some others that the timing of when the pick up and more CapEx driven stuff in that particular market occurred was probably more in the March timeframe when things begun to improve a little bit there. So seasonally should we still expect that E&I business to show improvement in the 2Q as it would in a normal year?

Daniel J. O’Leary

Our expect – you are correct that the March timeframe, it did not – we did not get a number of the materials into the field that we had purchase orders for. The client said, they were still using materials that they have procured in the fourth quarter much around the very unpleasant spring from a construction standpoint that we had, that had a heavy impact on what we realized in the midstream for the first quarter.

Additionally to that, the inventory position that many of our competitors had is not – has made that market extremely competitive and the short lead times from the mills have also allowed the customers to wait. Naturally, we would expect in this improved construction season that we would improve in the second quarter in the midstream. But again, we have work to do their math and that work is making sure that the customers deliver us the purchase orders that we expect, because we know we can get it from the mill.

So it’s the same scenario that except there is not – it is not weather related certainly in the second quarter. It is all about the work, the clear work that we expect to come from those midstream customers.

Matt Duncan – Stephens, Inc.

Okay. And then last thing and I’ll hop back in the queue Dan. So putting all that together Dan, what level and just maybe bordering on guidance, but I’m hoping you can give us some help. What level of E&I revenue would you expect in sort of a normal year maybe not necessarily this year, but a normal year, if the jack-up market doesn’t come through, but you get the normal seasonality that you would see in that business, what type of revenue could you get at E&I and given that that would have a mix that would probably be somewhat margin negative relative to the first quarter, should we expect gross margins there to run a little bit lower the rest of the year assuming there is a bigger line pipe component to the revenue stream there?

Daniel J. O’Leary

Mattt, that’s a proper assumption. What we can’t do and assume though is, the backlog that we have does not have that the two market segments has reported out the Upstream and the Downstream segment. The Downstream segment for project awards is much improved and those are not reflected yet in our backlog. So let’s don’t forget that has some great opportunity for us the balance of the year on the downstream side. And our current backlog has no, or none of the upstream awards that we expect to get.

So if you think about this roughly $260 million backlog rotating through E&I during the year and that’s with no back to your point with no benefit of any upstream awards and no benefit yet of any downstream award. So that should help your modeling.

Matt Duncan – Stephens, Inc.

Okay, that helps. I’ll jump back in queue. Thanks.

Daniel J. O’Leary

Thank you.

Operator

Thank you. And the next question comes from Igor Levi from Morgan Stanley.

Igor Levi – Morgan Stanley

Hi, good morning

Daniel J. O’Leary

How are you, Igor?

Igor Levi – Morgan Stanley

So in the last quarter, we – so I think a record quarter of jack-up orders that yards around 21 jack-ups. So given that, I mean these rigs have been ordered and they will be delivered scheduled to be delivered within the next 18 to 24 months or so, given that there is no additional delays, when should we expect you guys to book these orders?

Daniel J. O’Leary

There are a number that we expect Igor, let me back up, we would have expected it by now. Clearly, we expected it by now. But as I said in my early comments, there is unprecedented lack of shipbuilding and heaving fabrication that normally takes up some of the capacity of these construction yards. So they are leading with the construction of these jack-ups and trying to fill their facilities in Korea, in Singapore, in China, where so much of this fabrication work is done.

And we have expectations, literally daily, Igor, when these orders are going to come to us. So I cannot give you an exact date. We have bids in. We have – our rig design has been improved – has been approved. Our partner that does the cutting for the rig sets has been approved. But we simply do not have the purchase orders yet and we choose not to enter them into backlog until we do.

Igor Levi – Morgan Stanley

Great. Well, then, what is the shortest amount of time before the actual delivery where you can get the orders and still them have – and still be able to deliver the jack-up on time?

Daniel J. O’Leary

Well, our expectations are by the end of the second quarter.

Igor Levi – Morgan Stanley

Okay, great. So it’s just a matter of timing, I mean the orders have been placed at the yards. The yards, they are planning to deliver and then they’ll have to get the components for new guys, and it’s just whether it’s 2Q or 3Q, and it’s just the exact timing that’s uncertain?

Daniel J. O’Leary

That’s correct, and let me make sure, Igor, that you understand. The orders have not necessarily been delivered to the yards yet. And when they do, when they are delivered to the yards, then we have an additional negotiation as they – as the yards come back to us for final finish on those, but we have expectations by the end of the quarter that there will be a significant change from where we are today. Again, we expect it to be able to announce a number of those awards during – between our last earnings call and this one and we’ve been unable to do so.

Igor Levi – Morgan Stanley

Great, and that’s very helpful. And second question I would like to ask is, it looks like you guys degenerated some free cash flow here and I think you’re now around $60 million and originally I know you guys have withdrawn the guidance, but in terms of free cash flow you are expecting I think about $65 million to $80 million. Should we continued to see free cash flow generation throughout the year? I mean we saw your inventories pick up despite the kind of weaker environment. So how should we think about that?

Daniel J. O’Leary

Igor, as you know, our cash flows historically, we use cash in the first half of the year and then typically the second half of the year we harvest that cash as we normally see fourth quarter is that kind of as part of our cycle. The – this year has been a little bit strange and that in the first quarter we generated positive cash flow. And as Dan mentioned with some of these projects getting pushed out, the timing of that may also affect our cash flows such that we may have build-in working capital later in the year than we normally do and it may cycle out later than we normally do.

So we’re going to update that as we – as appropriate when we have a little clear of picture here over the next couple of months. And – but for right now there could be some variance out there and we expect that our peak in working capital may push a little later in the year than it is normally is.

Igor Levi – Morgan Stanley

Great, that’s helpful. I will turn it back.

Operator

Thank you. And the next question comes from David Olkovetsky from Jefferies.

David Olkovetsky – Jefferies LLC

Hey, guys. Just a couple of quick housekeeping items; first, on that loss on the prepayment of debt, but there was $1.7 million, what line item is that in the income statement and then also the same question for the TRI obligation?

David L. Laxton

Yes. If you are looking at the income statement it’s down in the other income or loss after operating income, and it’s in the other income expense net right below income or loss from operations, and then you’ll see loss on repayment of debt and that’s $1.675 million.

David Olkovetsky – Jefferies LLC

Got it. Okay, great. All right. And then just maybe a simplifying question to the earlier responses, do you expect your backlog to improve in the second quarter relative to the first quarter at the end of the second quarter?

Daniel J. O’Leary

Yes, David again, as we pointed out, it is all predicated on the two segments in the E&I of upstream and downstream. And if we get the orders that we expect to get then we would – you can conclude that our backlog would be improved. If not you can – we did have the benefit of that in the first quarter, and you see how we transitioned from the fourth quarter in a very flat environment into the end of the first quarter with virtually the same amount of backlog.

So that’s a steady revenue stream that we are seeing out of this market without this big project awards. And also does not include a number of midstream and transmission projects that we are also working on.

David Olkovetsky – Jefferies LLC

So, maybe to ask it another way, if you don’t receive these awards in the upstream and downstream segments, would you anticipate a flat – approximately flat backlog?

Daniel J. O’Leary

Yeah, that’s what I tried to say, but yes, that’s correct.

David Olkovetsky – Jefferies LLC

Okay, great. Thanks very much.

Operator

Thank you. And the next question comes from Bhupender Bohra from Jefferies.

Bhupender Bohra – Jefferies

Hey. Good morning, guys. I’m sitting in for Scott Graham here. He is traveling today, so…

Daniel J. O’Leary

Great.

Bhupender Bohra – Jefferies

First question, we know that you actually withdrew the guidance, I just wanted to get a sense of that, in your withdraw basically, are you contemplating as that function downward adjustment or are you kind of determining if your current ranges kind of that’s reasonable?

Daniel J. O’Leary

Bhupender, we have not chosen to comment on that yet, and that’s simply because of the timing that we have in these awards. We normally at this period, you would conclude where you can’t get that delivered in this year. However, as we pointed out, steel deliveries are still very closed end. So we know we can still get them into this year’s performance, so we’re not ready to make the call yet on how it affects our guidance, that’s why it was important for us to withdraw it.

Additionally to that, the steel price environment that we forecasted in our call in March was one that was stable beyond the first quarter. And to our point about the instability in that – in the steel price environment, it has – those – when those awards do come, we then will have to translate that in the prices that we expected to get them at versus the prices they will be actually in our backlog at. So at that point, we will be able to give you the proper guidance and until then we cannot.

Bhupender Bohra – Jefferies

Okay. And just wanted to get a sense of, we are like in 2Q, this is May, mid-May, what are you hearing from your customers basically on the OCTG side as we, already you’re seeing like a ramping of their capital spending programs, or anything you can comment on?

Daniel J. O’Leary

We are not seeing a ramping of any spending, but as we pointed out the quality of our customer through – certainly through the first five months has us to continue to be optimistic about that market segment for us. As you’re aware, the percentage of the natural gas rig count is, of the overall rig count is at extremely low levels.

I think there is somewhat of a bounce to gas prices that we expected an improvement in that and we do not have that. So thankfully, our customer base is not geared towards the natural gas rig count, they are other than the knocking out liquids. So we believe we’re in really good shape with that phase of customers for certainly for the near-term and we believe for the balance of the year.

Bhupender Bohra – Jefferies

Okay. Thanks a lot.

Operator

Thank you. And next question does come from Scott Graham with Jefferies.

Daniel J. O’Leary

I think that was, Bhupender was…

Scott Graham – Jefferies

No, I made it on. I’m sorry.

Daniel J. O’Leary

Okay.

Scott Graham – Jefferies

Thank you. How are you guys doing?

Daniel J. O’Leary

Good, Scott.

Scott Graham – Jefferies

All right.

Daniel J. O’Leary

Thanks for calling in.

Scott Graham – Jefferies

Well, no problem, I am in a call in between things. Let me – David earlier you said that pricing in OCTG was down 9. Is that you or is that market?

David L. Laxton

That’s, in fact, market on average, looking year ago to now.

Bhupender Bohra – Jefferies

Would you guys be willing to tell us what percentage pricing was negative in each segment as a part of sales?

David L. Laxton

And that number was pretty consistent across the board.

Bhupender Bohra – Jefferies

Okay, that’s helpful, all right. I guess my last question because I think a lot of questions were asked is that, you indicated that you are, I was not much below your expectations, and I guess that comment surprised me a little bit, because pricing did weaken further and some of this stuff got published out. So what I am trying to understand is, could you maybe rank order jack-up versus midstream versus downstream in terms of where things came in on an absolute basis year-over-year decline wise, which was the worst and which was the least?

Daniel J. O’Leary

The upstream was the worst, the midstream and worse is relative, because they – those jobs are identified their bid, they are in negotiating stage, and they have been that way since late 2012. The customer environment is just such that there was no speed to market as we have pointed out Scott. The Midstream business was down around weather and pricing, so we experienced that in the first quarter, and if your business model as we look at a rig count that is relatively stable and this environment it can predict a certain amount of midstream hook up for the balance of the year and we would expect that to improve from the first quarter as weather improves, as customers let that work.

Additionally, the Downstream business as we have discussed all of last year has finally materialized into a number of awards. The customers are starting with boilers, they will get – they move beyond their feed work, and we’re working very closely with a number of accounts, and we have great expectations for that segment for certainly – for the balance of the year.

And Scott, that is clearly the reason that we withdrew the guidance because of all those mitigating factors did not give us the amount of clarity that we felt investors needed.

David L. Laxton

Scott, almost all of the decline that took place in the E&I revenues was around two markets and one product in each of those markets. It was in the upstream around the place that we supply to the construction of the jack-up rigs and it was around the gathering types that we supply to the midstream primarily in the U.S., those two markets and products basically were almost all of the decline in revenue.

Daniel J. O’Leary

Our Upstream business in Asia and in Europe and West Africa held up very well. We saw great opportunities in certain of our subsea market, so it was primarily a Americas phenomenon.

Bhupender Bohra – Jefferies

Okay. Here’s my last one and that was very comprehensive. Thank you. My last one is this, the pricing environment is really a pretty big issue right now. And I’m wondering do you think that the current pricing conditions are contributing to the delays in the volume conditions? Obviously, in other words, our customers kind of maybe waiting for a better price and if so, if steel turns about the other way, would you expect to see a full reverse?

Daniel J. O’Leary

Yes, and yes, and I’m not being flipper with you, Scott, but we haven’t talked about that since 7:30 this morning and prior to that, the 4:30 on Friday afternoon, is exactly the issue. Customers understand this phenomenon, they are getting as much squeeze as they possibly can. There is not enough tension if you will between the delivery and where prices could be and your assumption is exactly what we discuss literally everyday.

Bhupender Bohra – Jefferies

Thank you.

Operator

Thank you. And the next question comes from (inaudible) of BB&T Capital Markets.

Unidentified Analyst

Hey, guys. How are you?

Daniel J. O’Leary

Fine.

David L. Laxton

Fine.

Unidentified Analyst

Just two quick questions; the first is kind of housekeeping, could you just kind of go through the specific items within the other expense line?

David L. Laxton

Yes, we can do that. There were, flip over to there real quickly. There were two items in the other income and expense, one of them was about $2.1 million that related to a charge that we took in conjunction with the redemption of the shares of B&L Supply that were held by Edgen Murray Corp. and that redemption resulted in a triggering of the tax receivable agreements that exists between the former partnerships that owned the company and EDG, the new public company, and that amount represents the estimated tax liabilities that will be due under that agreement.

Now, that payout is contingent on the Edgen Group having taxable income and also that is also contingent on Edgen Group being able to take the deduction for amortization for the step-up in basis of the assets that occurred in this exchange. So it is a long-term payout, if you will, over that amortization period, but we have accrued the complete liability, total estimated liability for 85% of the estimated tax savings that will occur.

So as a long way around to say that only occurs as a result of a transaction like we had between our two companies on their company basis, which will not occur, and the other time that it will occur is it at some point in the future there is an exchange of the B shares for A shares.

Unidentified Analyst

Okay. Fair enough, and then, I guess, taking a step back and kind of looking at some pricing drivers, I think you mentioned within upstream, there’s unusually competitive pricing environment because of excess capacity, you went out to say that you kind of saw some reversion to kind of more normal capacity. Can you kind of just touch on the drivers of that?

Unidentified Company Representative

The drivers are the awards that the fabricators are expecting to get. So if you think about it from a perspective that all the fabricators were available to build and construct these high performance jack-ups, because they don’t have any other business. Their other business would be the construction of ships, L&G ships, cruise line ships, bulk carriers are most of that construction is in Asian shipyards. They have very little of that activity currently.

So their capacity is available. And now as they anticipate certain awards, they have to bid longer and they are still fabricating the yards that have immediate availability, which we expect and that’s the tension that is starting to be created and thus the reason we have more confidence now that awards could be made to these fabricators and then therefore their material supplied that would come from us would begin rather quickly.

So that that was – that is what is happening in that market. The reason that that is different than usual is there has always been heavy steel fabrication up to this last year in a number of these yards. And that goes back to Scott’s point earlier is with steel capacity where it is, with fabrication capacity where it is, the customers have been able to wait and squeeze as good returns as possible as they could both on steel supply, as well as fabricating supply.

Unidentified Analyst

Okay. And then, I guess, just based off of that, so there is a chance that you can kind of see that capacity reverting to the mean, I guess, as early as the end of Q2 beginning of Q3 or is that two things?

Unidentified Company Representative

No, that’s correct.

Unidentified Analyst

Okay, all right. Well, thank you, guys.

Operator

Thank you. The next question comes from Gregg Brody from JPMorgan.

Gregg W. Brody – JPMorgan Securities LLC

Hey. Good morning, guys.

Unidentified Company Representative

Hey, Gregg.

Gregg W. Brody – JPMorgan Securities LLC

I appreciate all the color. I guess, just sort of thinking about how you are going to manage your guidance going forward, I appreciate you’re taking the – reducing or getting rid of your forward guidance, but I guess, why not just provide a lower range and just to give us a sense of where things can be, I think from a call a little bit, sense is that, but I am just trying to get a sense of how you’re going to treat guidance going forward?

Unidentified Company Representative

Well, Gregg, it might have been the easier thing to do, but genuinely because of the deliveries that we are capable of making in the back half of the year and our year was always back half loaded, as we pointed out in 2000 in our first call, that phenomena still exists.

Now, the window starts to close, obviously, with some of this order entry that we expect in the next 45 days, but the other piece of that is we may get all the volume we expect, and to Scott’s earlier point about pricing, our pricing estimates from what we believe in March and what we believe now have changed, and until the orders get in, we’re – we don’t know exactly what they are going to be because the mills with these short leads times have been very aggressive in their pricing.

So that’s why we said look, we cannot give our investors a clear picture, the volumes might be the same, the pricing is obviously going to be different. That continues to exists with Oil Country Tubular Goods. As we pointed out in March, our volumes were exactly where we expected, but as we point out, the pricing is 9% or 10% below and we expected pricing to firm for the balance of the year.

Gregg W. Brody – JPMorgan Securities LLC

Yeah. I appreciate that, all that was more just a – just sort of a policy question.

Daniel J. O’Leary

Yeah.

Gregg W. Brody – JPMorgan Securities LLC

And then just a little forward on that, so the $259 million backlog for E&I as of the end of this quarter versus 4Q, and maybe going forward, does anything come out of that going from 4Q to 1Q? And then, are you suggesting maybe some of that may have come out of that as well, because there is a question, at least, going forward in the sort of the month you are in right now because of this 45-day period you are talking about that’s sort of a key driver of the year?

Daniel J. O’Leary

Well, some of the weather impacted midstream material was in our backlog that we expected in the first quarter. That will obviously get delivered in the second quarter and we have expectations based on our inquiry rates and what we believe order entry will be that that backlog gets – that gets replaced. It’s still does not take into account all the large orders that we expect from the principal segments in E&I, upstream, and now downstream. So there was – the leakage really was around what happens from the first quarter into the second quarter, and currently, Gregg.

Gregg W. Brody – JPMorgan Securities LLC

And then as you mentioned the mills are being aggressive with pricing, do you think the volumes are the same, but you’re not quite sure what the – what basically the margin is going to be on the business is that fair to say?

Unidentified Company Representative

And it’s the margin dollars, so we’ve done a good job identifying that and working on that percentage, but as we have always pointed out, in a pricing environment that has retrenching steel pricing, our ability to maintain our gross margin percentage is we work very hard on, however, it’s a percentage of a lower number.

Gregg W. Brody – JPMorgan Securities LLC

So then, how should we really think about how many orders there are out there that you can see, as we – obviously, a lot of people are going to come up with a low number today, and I appreciate what you are saying, there is an upside number. And you can’t give it all away to you competitors and obviously your customers, but how many large projects are there and just a general sense of size that we can think about to sort of build an upside number is when we think about it?

Unidentified Company Representative

Let me just – let me take it, again, we don’t give any backlog in our OCTG segment, but we have defined drilling programs that we are required to ship pipe against those drilling programs. So that segment then identifies with what’s your view of the rig count is and we’ve given you a view of what our pricing is. Our downstream team has more packages than they have had in probably 18 months. So we’ve got a great visibility there for what that market could yield for us.

We also had as Igor pointed out, there is a very robust high-performance jack-up built and I have talked about it for the last 12 months, and the order entry has to come at some point, and we believe we’re much, much closer, and it just gets around to that point of delivery, and unfortunately, and price. So we’re actually very excited about the number of awards that we’re competing for right now, and – but we’re just unable to provide that timing, and in addition, provide the pricing where we believe that we – where it will yield out.

Gregg W. Brody – JPMorgan Securities LLC

You can’t blame me for trying.

Unidentified Company Representative

No, I understand, I mean, Gregg, look, we understand and that’s why we’ve simply said unfortunately, it’s still delayed and yet we’ve never been more excited about that medium and long-term prospects for our business.

Gregg W. Brody – JPMorgan Securities LLC

Then let me just ask one more follow-up question on that and I appreciate you’ve been beat up on this today. Just you mentioned the petchem orders and sort of the refining side, you are starting to see boiler orders, that obviously, how big of a business can that be this year?

Unidentified Company Representative

As we said with my comment that it’s been – we’ve been without that for 18 months to two years, we’ve never seen bigger packages than we currently have in our office. So it could be a substantially larger than it historically has been. So I’m not ready to put a number on that, because again, it’s a very competitive environment.

Gregg W. Brody – JPMorgan Securities LLC

Great. I’ll yield to the next person on line. Thanks.

Unidentified Company Representative

Sure. Thanks, Gregg.

Operator

Thank you. (Operator Instructions) And we have a follow-up question from Matt Duncan with Stephens, Inc.

Matt Duncan – Stephens, Inc.

Hey, Dan. Let me maybe try and oversimplify a little bit just to make sure I’m reading what you are saying correctly. It sounds like the timing of the actual delivery of material that you expect to the jack-up market has not changed. However, the timing of when the orders have to come in for you to then get that material with the customer is what’s changed, because the lead times of those are different. And the volume of material that you expect to sell in that market hasn’t changed, but the price at which you sell it probably has come down, is that basically where we are at?

Daniel J. O’Leary

You are correct.

Matt Duncan – Stephens, Inc.

So your prior guidance, you would have needed probably $350 million to $400 million a quarter in E&I in the back half of the year to get to that guidance? I think really what we’re all trying to get at is if these orders do come in when you expect them now to by the end of the second quarter, how much has the price maybe changed to dampen that view a bit? I’m assuming it’s changed some, but not significantly and your gross margin percentage is probably hold, so it’s the same percentage, but a little bit lower revenue dollars, is that the right way to think about this?

Daniel J. O’Leary

Matt, it is. The caveat I will give you though is this is reported out with a previous question is all of our general steel prices are at 10% below what we had previously seen. And instead of that market firming as we told you the prospects appear to be happening in our March call, it has gravitated down additionally and that’s all around and you see that in the steel company earnings, you see that in their activity.

And that is why, you are correct, in your previous assumption or where those volumes would be, but and we have the opportunity to maintain those volumes, but it will be at a 10% or lower differential based on what we see now. If there is a dramatic change in the steel market, which we’re not forecasting then you will have a change the other way. But your assumptions, the way you are looking at it is correct. It is an issue at this point of price delivery still can be made in this timeframe.

Matt Duncan – Stephens, Inc.

But Dan, the margin percentage that you would earn on that material hasn’t changed, because I’m assuming you’ve got agreements with the mills that provide that material to you that you are then passing through the end market, or locking in essentially those gross margin percentage is just a lower price?

Daniel J. O’Leary

That’s our expectation, Matt.

Matt Duncan – Stephens, Inc.

That you’ve got a little bit. So at the end of the day that $350 million or $400 million maybe if we take 10% to 15% half of that, but if the volumes, unless the order start to push to the right 10% to 15% less per quarter than that is probably where the business can come in assuming you start to get these orders. And as a follow up to that, you sound fairly confident that the timing of delivery is not going to change. I’m assuming that is tied conversions that you have, I know everyday with your customers in that market. So is their expectation of when they are going to need the material change based on what you know today?

Daniel J. O’Leary

The reason isn’t and it goes back to a previous point that Igor made is all of these rigs have contracts on the other side. And so we are, we know there is a hard stop and we also know that the mill deliveries are not going to be the issue, but they’re all trying to get their rigs that’s built to the substantially lower price and they built the original AFE for.

Matt Duncan – Stephens, Inc.

All right, sounds like you’ve got an anxious 45 days in front of you. Good luck.

Daniel J. O’Leary

Thank you.

David L. Laxton

Can we have one more question please?

Operator

Yes, and it comes from David Olkovetsky from Jefferies

David Olkovetsky – Jefferies LLC

I’m glad as well, guys, so in terms of the, OCTG segment, I just want to drill down a little bit more into this. So year-over-year, your revenues were down about 10%; quarter-over-quarter, down 7%, but EBITDA is actually holding in quite nicely. So in fact, I think the margin improved over both period, I just want to sort of understand a little bit better what’s going on there, I am assuming it’s a shift in mix, but I want to get a better understanding of exactly what’s happening there if you can give me some color there?

Unidentified Company Representative

David, it is a small shift in mix, but we are strategic buyer of material and one of the advantages we have in our OCTG business is that we have such good customers, they have such defined drilling programs, and we’re able to go to the mills with volumes that rarely are they seeing from others in this kind of a market environment, and our personnel do an outstanding job there of managing that inventory and the supply side. So that’s the phenomena that you see there.

Unidentified Company Representative

However, we are seeing as a result of longer strands of material, there is more sophisticated material. We’re seeing a greater portion of our business be around the seamless product as apposed to welded and moving up in the material composition to more alloy-based products.

Daniel J. O’Leary

And David there is improved threat profiles that our users are requiring for many of these longer laterals and that adds not only margin, but selling price opportunities too.

David Olkovetsky – Jefferies LLC

Gotcha. Okay, that’s very helpful. Thank you.

Operator

Thank you. At this time I will turn call back over to management for any closing remarks.

Daniel J. O’Leary

Thank you all for your support. Thank you, I mean hopefully we’ve given you an understanding of where we believe we will – we are not only at this time, but what our expectations are as soon as we’re in a position to update that guidance, we will do that. Thank you for your support.

Operator

Thank you. The conference has now concluded. Thank you for joining us today’s presentation. You may now disconnect your phone line.

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