Edgen Group's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 9.13 | About: Edgen Group (EDG)

Call End 12:09

Edgen Group Inc. (NYSE:EDG)

Q2 2013 Earnings Call

August 9, 2013 11:00 AM ET

Executives

Erika Fortenberry – Director, IR

Dan O’Leary – Chairman and CEO

David Laxton – CFO

Analysts

Klayton Kovac – Tudor Pickering Holt & Co

Brett Levy – Jefferies

Robin Shoemaker – Citi

Matt Duncan – Stephens, Inc.

Scott Graham – Jefferies

Holden Lewis – BB&T

Gregg Brody – J.P. Morgan

Operator

Good morning and welcome to the Edgen Group’s Second Quarter 2013 Earnings 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 Ms. Erika Fortenberry, Director, Investor Relations please go ahead ma’am.

Erika Fortenberry

Good morning and welcome to Edgen Group’s second quarter 2013 earnings call and webcast. I’m Erika Fortenberry, Director of Investor Relations at Edgen Group. 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 have a few items to discuss. 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 and are the current view of management of Edgen Group. 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 by management. We encourage you to read the company’s annual report on Form 10-K and quarterly reports on Form 10-Q and current reports on Form 8-K filed with the SEC.

We undertake no obligation to review or update any forward-looking statements to reflect events or circumstances occurring after the date of this conference call and the related press release.

We may also make reference 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 operations or any other measure of financial performance calculated and presented in accordance with GAAP. Our non-GAAP financial measures may not be comparable to 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 GAAP financial measures can be located in our current and periodic 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 O’Leary

Thank you, Erika. Good morning, everyone, and thank you for joining our call today. We are encouraged by the improvement we are seeing in some areas during the second quarter over the first quarter of 2013 including sales, bookings and pricing enquiries across our end markets.

While the ultimate timing of product deliveries to customers is still a question, the sluggish pace of procurement we have seen over the last several quarters appears to be showing some signs of returning to more promising activity levels.

These developments reinforce the expectations we shared on the call last quarter, namely that the first half of 2013 would be slow and that the timing of improvements for the remainder of the year would be difficult to pinpoint. We still don’t see conclusive clarity for the back half of 2013, but you may remember two expectations we did share.

First, we expected our Oil Country Tubular Goods volumes to hold in spite of a flat or declining rig count and they have, second we expected that our backlog of project work for E&I segment would increase when customers confirm the timing of their expenditures and it has, albeit at a much slower pace than we originally anticipated.

I am pleased to say, during the second quarter of 2013, we were successful in improving our sales performance compared to the first quarter of 2013. This is a testament to the fact that we are investing in our own infrastructure, quality staff, process improvement and strategic facilities in order to broaden our base.

These investments allow us to leverage opportunities both from an in-market and a geographic standpoint, while we also work to improve the mix of products we sell, maintain sales and service with our existing Oil Country Tubular Goods customers and to secure new customers across both of our segments particularly in markets we believe will show improvement in 2014.

I feel that the year-over-year trending throughout our industry is very similar. So I am going to focus on sequential performance. If you have any questions in that regard, we’ll cover them at the end of the call during the Q&A.

I’ll start with our E&I segment. Sales for Q2 in E&I were $219 million, up from $201 million in Q1. We’ve seen our backlog grow to $274 million in June 30, which is an increase of 6% over our Q1 level of $259 million.

It is also significant to note that bookings in June are up almost 28% from March levels. A good portion of these new bookings can be characterized as day-to-day or more MRO like business with quick deliveries that cycle through our backlog on a shorter time scale.

In our offshore upstream market, our persistence and market presence has been rewarded. Subsequent to the end of the second quarter, some of the jack-up rig projects that we’ve tracking for almost a year have been secured.

These projects, some of the largest and most complex in the company’s history for more efficient new design rigs are so highly specialized that they are requiring additional infrastructure investments by the mills and fabricators to manufacture the materials needed.

We believe that our relationships with the manufacturers who are supporting these new rig designs put us in a solid position for future consideration as these higher performance jack-ups become the preferred standard for harsh offshore drilling environments on both surface and subsea wells.

Furthermore, the total international offshore rig continues to strengthen with a 5% increase over Q1 2013, this directly aligns with the consistent demand for our conductor pipe products around the world.

Additionally, the investment in our Norway facility has paid off with the establishment of strong subsea customers and consistent orders that we feel are a positive indicator for future opportunities in the growing global subsea market.

The US midstream market is still extremely competitive. However, toward the end of the second quarter, we began to see enquiries for pipelines, gathering systems, and infrastructure including compressor stations, gas plants and storage facilities. This suggests that new project activity may be forthcoming as existing projects cycle through completion and customers begin to complete their inventories of material purchased in late 2012.

However, the timing of those potential new orders is still unknown. We have made in-roads with refiners in North America with some specialized supply awards and are seeing activity on new refinery projects in Asia and the Middle East.

Announced petrochemical infrastructure projects in North America and European power projects continue to be impacted by numerous delays including the much publicized permitting issues and some concerns over long-term deals pricing. We expect the procurement and delivery cycle for these projects to move well into 2014.

In sum, the objective of our E&I model is to have a broad but efficient reach. Our success is not tied to any single market or region as evidenced by the fact that our E&I segment sales outside of the US for a $108 million or 49% of total E&I segment sales in Q2, up from $74 million or 29% a year ago.

Our teams have continued to prove the resilience of our strategy and find niche opportunities wherever they exists.

Now on to our Oil Country Tubular Goods segment. Our sales increased to $213 million in Q2, compared to $205 million in Q1. Sequentially, we saw a 3% price reduction, but tonnage was up over 10%. This is a 10% volume increase and reflects a significant market share gain during the period.

I can also report that approximately 86% of our Q2 2013 sales were directly related to active drilling programs which is up from 79% in the first quarter. These Oil Country Tubular Goods drilling programs usually have scheduled delivery requirements for casing and tubing which we support on an ongoing basis, very similar to an MRO type of arrangement.

Our Oil Country Tubular Goods performance is reliable and solid. In the phase of a flat US onshore drilling rig count from the first quarter to the second quarter of 2013, and the aforementioned pricing pressure that still persists.

The sequential increase in volumes and the volume stability from a year ago is a direct result of our ability to provide exceptional service and renewed service agreements with our actively drilling customers. At the same time, we are focused on expanding our customer base with select customers that appreciate our service levels and have been successful in securing these new customers in the Permian, the Rockies and the Alabama shale.

It is important to note that subsequent to the quarter end, an anti-dumping trade suit was filed with the International Trade Commission where nine principal US manufacturers of Oil Country Tubular Goods are claiming they have been harmed by unfair trade practices as a result of product imports from nine foreign countries. These countries include India, South Korea, The Philippines, Saudi Arabia, Taiwan, Thailand, Turkey, The Ukraine and Vietnam.

The trade case as for anti-dumping penalties ranging from 6% up to 234% and if successful, as the trade case was against China in 2009 could have an impact on import volumes in the marketplace which would then be replaced primarily from domestically manufactured Oil Country Tubular Goods products.

However, the trade case process is time consuming and we do not expect an immediate impact on import levels or pricing until there is a rebalancing of supply with demand. We will continue to monitor the developments with this Oil Country Tubular Goods trade case.

We are maintaining a clear focus on our primary business strategies, namely, to achieve differentiation through our ability to meet specialized product requirements on a global scale, to grow organically by expanding our services to existing customers and gaining new ones.

Although 2013 is still unclear we are optimistic that the in-roads we have made with our core customers and in niche markets will keep us in a competitive position moving forward. Specifically, we believe our Oil Country Tubular Goods business will continue to be resilient and efficient. Our offshore upstream project awards are moving although in an unpredictable timing environment.

There is a renewed heartbeat in our Midstream business, although at a much slower pace than in 2012. Our downstream and petrochemical sectors are poised to respond to customer spending triggers once they occur. And we will continue to uncover emerging opportunities to the global energy infrastructure sector.

With that, 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 will then return it back to me and then we’ll take your questions at that time. David?

David Laxton

Thank you, Dan. Second quarter 2013 financial story of Edgen Group was one of improving sequential financial performance, but at levels below those of 2012. As a result of a declining price environment, capital spending by our large upstream and midstream customers and by generally sluggish global economic conditions.

Dan talked about the company’s sales performance, improving sales bookings in our E&I segment and our sales backlog increase. So I’ll have a few minutes – a few comments about the remainder of the quarter’s financial performance.

Our gross profit margins have held up fairly well given the weak business climate and falling steel prices during the first half of 2013 at 11.9% for quarter two 2013 compared to 11.8% in quarter two 2012 and 12.2% in quarter one of this year.

E&I gross margins in quarter two 2013 improved to 14.7% compared to 13.7% in the second quarter last year and up from 14.4% in the first quarter of this year. E&I gross margins were 14.6% and 13.5% for the six months ended June 30 2013 and 2012 respectively.

The gross margin increase for these periods was primarily the result of an improved product sales mix as low margin, high dollar, midstream line pipe sales were replaced by other higher margin products in the upstream and downstream markets.

OCTG segment margins declined quarter-on-quarter and sequentially and were flat year-to-date versus prior year-to-date. Gross margins for quarter two 2013 were 9.1% versus 9.8% for quarter two 2012 and 10% for quarter one 2013.

Year-to-date, OCTG gross margins were 9.5% for the first half of 2013 versus 9.5% for the same period a year ago. The sequential decline in gross margin is directly related to falling sales prices caused by declining US demand, the level of foreign imports and excess production capacity.

SG&A expenses for the second quarter were slightly down by 2.8% from quarter two 2012, however quarter two 2012 SG&A expenses included a $3 million expense related to the accelerated vesting of certain equity-based awards. Excluding the 2012 impact of the expensing of the awards, SG&A expenses increased $2.2 million or approximately 8.7%, primarily as a result of our 2012 acquisitions, the opening of new offices in Europe and a distribution center in South Texas and higher accounting legal and audit fees associated with being a public company.

Sequentially, SG&A expense increased 3% on a sales increase of 6.3% and resulted in quarter two 2013 SG&A expense as a percent of sales of 6.4%, an improvement from 6.6% in quarter one 2013 and demonstrating the operating leverage of our operations with modestly improving sales.

Interest expense decreased $4.7 million in the second quarter 2013, compared to the same period in the prior year and decreased $11.8 million in the first half of 2013 compared to the first half of 2012. The decrease in interest expense is the result of debt repayments and a refinancing completed in the second half of 2012.

At June 30, 2013 our outstanding debt balance of $673 million consisted of our $536 million 2012 notes, $89 million on our revolving credit facility, $26 million in seller note and $25 million in other debt, primarily capital leases. The $10.5 million increase in total debt since December 31, 2012 is directly related to borrowings on our revolving credit facilities to support our sales and operating activities.

Now for the review of income tax expense, consolidated income tax expense was $2.8 million in quarter two 2013 and $5.2 million for the first half of 2013. The company’s consolidated income tax provision takes into consideration the distribution of taxable income across the various tax jurisdictions in which we operate at tax rates ranging from zero to 37%.

For the second quarter, and for the first half of 2013, our E&I segment generated income from operations in its Europe, Middle East and Asia entities. Additionally, our OCTG segment’s US entity also generated income from operations which is taxable to the extent of our ownership percentage.

Income generated from these operations was taxed as of the second quarter using an estimated annual effective tax rate of approximately 17% resulting in $2.8 million and $5.2 million of income tax for the second quarter and for the first half of 2013 respectively.

Furthermore, because of the current net operating loss position of our E&I segment’s US entity Edgen Murray Corp. we do not expect it to pay income taxes currently and have established a full valuation reserve against any tax benefits generated through the first half of the year. These factors combined to create income tax expense that exceeds pre-tax income on a consolidated basis.

When we compare the first quarter to the second quarter, we had a sequential improvement in net loss adjusted net loss, and adjusted EBITDA due to slightly improved market conditions and a better product mix. Net loss for quarter two 2013 was $300,000, $13.8 million for quarter two a year ago in the same quarter 2012 and $5.4 million loss for the first quarter of 2013.

The quarter two 2012 $13.8 million loss included charges of $15.1 million net of tax related to debt prepayment cost and $3 million related to the accelerated vesting of certain equity awards and the Q1, $5.4 million loss included $1.4 million net of tax loss on prepayment of debt and a $1.5 million net of tax charge associated with TRA obligations.

After adjusting for these charges, the company recorded adjusted net loss of $300,000 in Q2 2013, adjusted net income of $4.3 million in quarter two 2012 and adjusted net loss of $2.5 million in quarter one 2013. Year-to-date adjusted loss was $2.8 million, compared to an adjusted net income of $8.4 million for the first half of 2012.

Quarter two 2013 adjusted EBITDA was $24.7 million and was a sequential increase from quarter of $23.9 million, but the decline from $34.1 million for the quarter a year ago. The sequential improvement is due to slightly improved market conditions since the first quarter and a better product mix as previously mentioned. The decline in adjusted EBITDA of $34.1 million from a year ago is a direct result of pricing in both our E&I and OCTG segments and lower sales volumes in our E&I segment.

Year-to-date adjusted EBITDA was $48.6 million for the first half of 2013 and $70.5 million for the same period in 2012 and was also impacted by pricing and lower sales volumes in our E&I segment, particularly our larger customers in the upstream and midstream markets.

Focusing on liquidity, the company had $13.3 million in cash at June 30 which was down from $22.3 million at March $31 and $29.7 million at December 31, 2012. During the second quarter, we used $25 million in cash from operations to support working capital requirements, primarily due to increased accounts receivable as sales grew from quarter one 2013 and from a reduction in trade accounts payable.

As of June 30, 2013, we had $209 million of availability under our credit facilities. Given current market conditions, and expected cash flows, we expect to generate positive cash flow from operations in the second half of the year a similar pattern to what we experienced in the second half of 2012.

That completes my presentation. Back to you Dan.

Dan O’Leary

Thank you, David. On our last earnings call, we communicated that we would update our guidance to reflect our expectations about our full year financial performance when we had increased visibility. As we have discussed today, we are experiencing encouraging indicators in the marketplace.

Our backlog for our E&I segment is growing, giving us more confidence for 2014, we expect our Oil Country Tubular Goods customers to continue drill in their budgets through year end, unlike 2012, but given the continued uncertainty of the timing of our customers’ purchasing decisions for work in 2013, we are choosing not to provide guidance for the back half of 2013 at this time.

We will now open the conference call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Klayton Kovac from Tudor Pickering and Holt. Please go ahead sir.

Klayton Kovac – Tudor Pickering Holt & Co

Hey guys.

Dan O’Leary

Hey, good morning.

Klayton Kovac – Tudor Pickering Holt & Co

So you mentioned bookings for your E&I segment being up 28% in June relative to March. Do you see this continuing into Q3?

David Laxton

We have pockets, particularly in the offshore upstream segment that Klayton, we do see that and for competitive reasons because there are a number of projects we are still been, we are choosing not to disclose the amount, because they are around these large rig sets that we said we would be winning.

And there are number of others that are in the bid stage right now. But that segment has finally gotten active and these are all around rigs that have contracts to be drilling wells in 2015 and they are now in that stage and I think you are familiar with a number of them.

So that segment in particular is – has been very active. Our mining segment has been active as natural gas prices have supported renewed mining of phosphate, and we have a large market share of holding in that business. Again, that segment is predicting increased accumulation of backlog that goes into 2014. Our downstream sector is clearly waiting for the go to be turned on by our customers.

We have a number of projects and those aren’t just North American projects, but we have another number of projects in the Middle East and Asia that we are awaiting on. So, we don’t give interim backlog numbers and there a number of these awards that are very much in the competitive stages and that we are hopeful.

Klayton Kovac – Tudor Pickering Holt & Co

Okay, great. That was excellent color. And then kind of switching over to your OCTG segment I understand your gross margins tick down a little bit due to pricing quarter-over-quarter. But are you guys expecting pricing to further erode in the back half of 2013? Or do you feel that it’s stabilizing here?

Dan O’Leary

Klayton that’s one of the reasons we are really unable to take a step further on guidance. We will absolutely defend every one of our customer relationships and when you have the customers, we have people tend to try to pick you off and the way they pick you off is with price.

So we are not going to lose that business and they have confirmed to us that we will continue to participate. We know we have to be competitive. There are announced price increases in the market by our suppliers. We are hopeful that they hold, but that’s all really a function of general steel demand.

So we are cautious around that margin. And it’s impossible to predict right now. You saw the decrease at the gross margin level from the quarter one to quarter two, but you please also note that we increased our tonnage.

Klayton Kovac – Tudor Pickering Holt & Co

Yes sir.

Dan O’Leary

I am optimistic that we will keep all of our customers. I am convinced of that but at what price, with some of these contracts, they are firm at these current levels but I can assure you many of our competitors are trying to pick those customers off. So it’s a difficult one to forecast.

David Laxton

Dan, you may also, I want to mention that – and Dan mentioned that roughly 86% of our sales in our OCTG were program related in quarter two versus quarter one, the difference being in quarter one, we had additional spot sales and spot sales tend to have a lot – a higher margin than our programs. They are less predictable in terms of when they come, but that also affected the margin in the decline from quarter-to-quarter.

Klayton Kovac – Tudor Pickering Holt & Co

Okay, excellent. Thanks a lot for taking my questions.

Operator

Our next question comes is from Brett Levy from Jefferies Please go ahead sir.

Brett Levy – Jefferies

Hey Dan, hey Dave. Can you guys, I know this is maybe too granular and maybe you just don’t want to go there, but it sounds like third quarter should at least be up from second quarter. I know you don’t have great amounts of visibility, but based on sort of all other things you said relative to pricing and anti-dumping suits and pipe prices and some of the increased jack-up rig and rig count activity, I mean, is there any sign that that might be the case?

Dan O’Leary

Yeah, short of saying it’s too granular and we don’t want to go there because you allowed me to say that. But, Brett, it gives us more confidence, but clearly our customers are not signaling any speed of their work that is beyond what we are seeing today. But we are encouraged by the backlog.

We are encouraged where we are making in-roads in new places, but it is impossible to predict their activity. We are also encouraged that the portion – that a great deal of the backlog that we built in the second quarter was really very quick business and now that we are seeing some of those project orders come in for 2014, obviously it gives us more confidence. But to get anymore granular than what we’ve said, we are just not able to do that at this time.

Brett Levy – Jefferies

Any revisions in CapEx guidance given that things are a little bit slower these days?

David Laxton

No, as you know, Brett, we have very modest CapEx requirements and there would be no significant revisions at this point.

Brett Levy – Jefferies

All right and then in terms of the anti-dumping case, the case is when it’s finally settled maybe a year from now or something like that, it’s retroactive to the date of the filing, right, in terms of the penalties?

Dan O’Leary

Yeah, the determination is, it can be and there are certain surge protections that are built into that and if – I mean, Brett it’s very specific on how that would work, the industry would have to make additional petitions that there was a surge during that period and if that was part of the final determination, then yes it would be.

Brett Levy – Jefferies

And you guys procure pipe all the time, have you noticed any of those nine nations since the case has been filed curtailing their level of imports into the United States?

Dan O’Leary

Brett, we don’t buy any material from any of those – in very limited quantities from any of the countries that were filed against almost all of our business is exclusively domestic manufactured. But historically, what you would see is there is a lag in the numbers that are reported by the Department of Commerce.

So, it’s impossible just yet to tell whether there has been a curtailment of those imported levels, but probably in another 30 days because that probably that – in September, you would be seeing July numbers and that would give us a better indication of what – if there has been a curtailment.

Brett Levy – Jefferies

Got it.

Dan O’Leary

Everything now was either on water or was in process already at the docks or as finished goods right now.

Brett Levy – Jefferies

Got it, last question and I’ll get back in queue, David had mentioned that you guys see yourselves as being free cash flow positive in the back half of 2013, sort of the on the layered numbers, your bonds, the agency reported you are trading very closing to par without sort of blowing your cloud cover. Would you guys consider buying back either notes or paying down the $26 million seller note with some of that free cash flow as opposed to reducing the revolving credit borrowings?

David Laxton

Yes, as we’ve talked about in our call last quarter that one of the uses for our free cash flow in this year was going to be a payoff of that seller note and the expense associated with that note. But we don’t have any specific guidance at this point with regard to any of our other indebtedness.

Brett Levy – Jefferies

Got it, thanks very much guys.

Operator

Our next question is from Robin Shoemaker from Citi Please go ahead sir.

Robin Shoemaker – Citi

Good morning Dan.

Dan O’Leary

Hey Robin.

Robin Shoemaker – Citi

So, just doing a little research here, we’ve seen 46 jack-ups ordered year-to-date according to ODS Petro data, 16 of those are harsh environment. In all of last year for comparison, 24 jack-ups total ordered in 2012. So were it double their pace and so we are just scratching our heads, who is procuring the steel for these jack-ups? When are we going to see that translating into potential very nice orders for Edgen Group?

Dan O’Leary

Robin, the order that I was referring to was, two of those and that will translate into 2014 event and it is significant to note because these are 150 meter plus depth harsh operating environment, primarily North Sea destined that it is taking the manufacturers an investment to make this rig set light material.

So the cycle will be well into next year that we see all that coming through us. But we have a number that we are bidding that we are active on, but it is a very complicated new design but takes in a number of new considerations, not just but also safety. So we are excited that we finally broke through and this – and I won’t disclose it because of the competitive situation.

But this procurement was expected in the back half of 2012 and now it’s happened in the back half of 2013. So if you use that logic all the way through, we have expectations that we will see that next year.

Robin Shoemaker – Citi

Okay, so just as follow-up on that, so you’ve got these companies that ordered jack-ups they’ve negotiated a fixed price for that jack-up with the shipyard is building them. And – I can see that, eight of the 16 harsh environment jack-ups were ordered by Seadrill.

So they’ve obviously got a fixed price deal worked out. And your procurement of steel is within that – the context of that fixed price arrangement. So are you – your customer is the shipyard that’s building that rig or is it the owner of the rig?

Dan O’Leary

It would be in two instances, it would not be the owner of the rig in any instance. There are two customers of ours and you see they are directly to the shipyard when we free issue the material and then they cut the gear and the core material that then is a simple for the leg set. In most instances, we provide a complete solution where they get cut gear rack and core material with a partner that we have in that business.

So that has been a fabricator that ultimately is selling to the shipyard and they are providing gear cutting to the design and we are supplying the steel in that situation and as I said before, Robin, these are cutting-edge depths as well as heavier and thicker material that is being casted and it’s been rolled into a slab, milled down to a certain level and very high yield and high tensile performance properties. So, in most instances, we are trying to provide a cut solution of great rack because we think that gives us a better competitive advantage than some of our competitors.

Robin Shoemaker – Citi

And so I assume there is just – there is just very limited sourcing for that type of high tensile steel in other words?

Dan O’Leary

You are correct and in this instance, every one appears that wants a harsh environment operative rig is either making modifications of this design I mean this is literally is purchase order 001 for this design. So we believe we are on the leading edge of that. And the other – a number of the other manufacturers are making design changes, so that they can be competitive in that market too.

Robin Shoemaker – Citi

Yeah, okay, well, thanks Dan. I appreciate the color.

Dan O’Leary

Hopefully Robin that, because you are correct in the volumes and we see a number of those opportunities. It will be a 2014 and beyond event for us.

Robin Shoemaker – Citi

Okay, thank you.

Operator

We have another from Matt Duncan from Stevens Incorporated. Please go ahead.

Matt Duncan – Stevens Inc.

Good morning everybody.

Dan O’Leary

Good morning, Matt.

Matt Duncan – Stevens Inc.

First on the trade case for a minute, what is the date that that preliminary ruling should come down from the hearing that occurred on the 23rd of July, Dan?

Dan O’Leary

That’s August 14 and if you want any color on that, the ITC at that point either affirms or denies, either it has an affirmation or has a negative conclusion. If it’s negative, the case is not taken any further, if it’s affirmative, then they have another 165 days depending on the complications to render the determination and there will be a number of hearings that the ITC will call to – and research that they will do with the industry to make that determination.

Matt Duncan – Stevens Inc.

So a positive determination essentially means there is validity to the case and now they have to determine what the level of damage really has been?

Dan O’Leary

That’s correct

Matt Duncan – Stevens Inc.

Okay. Assuming a positive determination there, is there any way for you to sort of guesstimate what the impact could be on both pricing and then volumes for you guys, given that you represent the domestic mill that in theory would replace the volume being imported. Is there any way to guess its level of impact this could have on you guys?

David Laxton

Well, I think that, you’ve seen the numbers the import figures have and they are well over half of the supply and if you determine that import levels can be at some range that is say half of that – the 20% to 25% and that resulting in left or historic opportunity from a share gain standpoint, it will be around that volume.

So, it is – the industry has petitioned that there is plenty of US supply. So we would have volume increases for 2014, we would expect – with our market share number historically of 8% to 11%. You just have to factor in what we believe would be the difference in the market that’s available to us. So…

Matt Duncan – Stevens Inc.

And then, to take a step further on OCTG and I guess this would – line pipe too however coal prices have been trying to go up a little bit if that continues, that would be another potential win that your sales on price for OCTG and then also line pipe, correct?

David Laxton

You are correct.

Matt Duncan – Stevens Inc.

Okay. Moving on to the E&I business for a minute, I certainly appreciate that it is difficult to give guidance and at time where visibility is somewhat limited but also the timing of when these orders are going to be delivered, I guess is also part of the problem here.

Can you help us maybe at least think through where pricing is coming in on some of these awards that you are starting to see on the jack-up side? I know, historically, that would have been a gross margin tailwind, I gather it’s been a pretty competitive environment to get those awards.

So any help you could give us there and then I think last quarter Dan, you had indicated that based on the timeline and the volume that you guys saw in the market, in 2014 and even through 2015, that your E&I segment might get to $300 million to $315 million a quarter in revenues. Once you are starting to ship this material, is that still a valid number or has pricing changed to a level where it maybe something below that now?

David Laxton

I am not sure if I could answer it specific, so let me try to help and I do understand, Matt, how you are trying to build it. Obviously, we are in the middle of a number of competitive bids, particularly as it relates to the offshore segment. We will see selling values, significantly impacted by the steel prices and what has happened I think is all public knowledge from last year to this year, it’s depending on a product, it’s a 20% to 30% – in many instances, 20% to 30% reduction in those prices.

I think we believe that metric has finally floored, but we are still unsure that’s more about our suppliers and that’s more about how long it takes to customers to order this material. We are trying to make sure that we keep or don’t give away the gross margin that we’ve earned on that.

And that is back to Robin’s question the more we can do around supplying a complete set and the more value we can add on these complicated structures, the more opportunity we have to maintain the gross margins that we expect. It is not just the jack-ups, it is also the conductor pipe business that we have a significant position in and that category of customers are all those that apply their specialty threads into each offshore well that is drilled and that’s primarily for us a phenomena outside of the US.

So, that is a product line that we defend and that we work very closely with vendors supplying just in time arrival of the material, so that they can apply their thread on. That outlook is all around oil price and all around the offshore rig count globally.

So, that being said, Matt the real thing to watch is what are steel prices doing, because we are defending each one of our customers and working on that service offering. So whatever your view of steel prices, it really has an impact on the top line which to get to $350 million a quarter, you got to have steel prices that are not going to fall any further than they have.

Matt Duncan – Stevens Inc.

Okay, so putting all the pieces together, obviously you felt better sort of maybe predicting the big picture for next year than you do even for the back half of this year, if we assume that this trade case is going to stick at some level, and that these jack-up awards and other offshore awards are going to keep coming in, is there any reason you couldn’t be a double-digit top-line grower next year. It sounds like the environment is starting to come together will that’s a very doable thing for you?

Dan O’Leary

If we have success in the trade case, if we have no further erosion in steel price and what we are seeing today, continues at the level and begins to increase, because a number of these projects has to get to work to meet 2015 drilling contracts. And if GDP growth globally does not fall any further, it has some type of middle single-digit growth around the world and you are correct.

Matt Duncan – Stevens Inc.

Okay, and then last thing for me, I appreciate that you don’t probably want to give out a backlog number at the end of July for competitive reasons, but is it safe to say that it’s up again, given that the awards you would have gotten on the two rigs you referenced were probably fairly sizable.

Dan O’Leary

It is safe to say that.

Matt Duncan – Stevens Inc.

Okay, thanks Dan.

Dan O’Leary

You bet.

Operator

(Operator Instructions) Our next question is from Scott Graham from Jefferies. Please go ahead.

Scott Graham – Jefferies

Hey good morning.

Dan O’Leary

Good morning.

Scott Graham – Jefferies

So I was wondering, I am looking at some prior seasonal trends and try to factor how pricing works into all this, but essentially if we look back to 2010, seasonally both businesses sales improved sequentially, 3Q versus 2Q and one exception being last year’s OCTG. I am just wondering if there is any reason why on a volume basis, that we should not see that normal seasonality in the third quarter?

Dan O’Leary

Scott you are right, the third quarter of the year often is a good quarter for us because you get decent weather pretty much around the world for construction activity, in their ordering patterns they come back from holidays. At the end of the year, they start ordering in January and February and they get things online for that period of time.

And so historically, the third quarter has been a good quarter for us if you take 2010 or 2011, 2012. But we’ve also got the backlog is up a little bit as of the end of June, we normally have as of the end of the second quarter backlog builds and so all those things help in terms of giving some encouragement about where things are heading here in the back part of the year.

David Laxton

Yeah, Scott, though, I think you would need to get granular in looking where natural gas prices were during that period and where they are today which drove some of the CapEx in three years ago that is simply on hold or you have – the reason a number of these projects haven’t gone forward is you don’t have any producers of natural gas that are willing to sell gas at these prices. So, it’s – I believe it would incorrect to try to make that a complete.

Dan O’Leary

The other dynamic that’s working here Scott, that is different in – particularly from what we saw last year is that, that is the buying habits of our largest customers. If we look back and compare the first six months of this year, with the first six months of last year, our ten major customers during that first half of the year, last year are down about $90 million of revenues.

This is our E&I customers for the same period this year in terms of what they’ve spent with us. And that basically means if you look at that change from year-to-year in our revenues that’s almost all of the decline of our revenues in the E&I from 2012 to 2013. So, we still are – there is the absence of these big contractors that are in making these big purchases and that’s what – those also helped to drive those third quarters in previous years as we got large orders for them.

They were doing a lot of construction in that period of time. What we are doing right now is hitting a lot singles and doubles. There are just not a lot of triples and home runs and so, to jump right out and say that third quarter will have a pattern that looks like the other three there is the different change out there. So there is a lot of dynamics in there, but certainly, the business is better as we got out of the second quarter than it was in the first half of the year.

Scott Graham – Jefferies

Right but do not assume such a seasonal build would suggest, let’s just say and these are my words, flat sales sequentially, which would be a larger year-over-year decline in the third quarter than in the second quarter which is also now what you are saying I think.

Dan O’Leary

Well, I think, again, we are not giving specific guidance, Scott, but we are certainly saying that – given all of the factors that we’ve seen, given the buildup in our backlog even to understand if some of that backlog is moving too late in the year and into 2014, the business conditions that we are seeing are improved and should be helpful in terms of helping us to build our business.

Now whether that all comes in and makes the third quarter function, whether that becomes the fourth quarter, a lot of that depends on when these deliveries when the customers take them and do they get push – there is just no tension in the market, there is nobody in a hurry and that’s why we are careful in terms of how we are looking at this.

Scott Graham – Jefferies

Fair enough. You indicated that, OCTG prices declined sequentially by about three points. Could you tell us what they get in E&I?

Dan O’Leary

Our pricing and – are you talking about sequentially or are you talking about year-over-year?

Scott Graham – Jefferies

However you want to tell us.

Dan O’Leary

Well, year-over-year, our pricing in our E&I segment and again it’s the average, but it’s down and it’s down not unlike what we’ve seen in our OCTG business you would probably – it would average somewhere in this 9% to 10% although some products are down significantly more and some are down less. But generally, on a year-over-year basis in our E&I, about 10% of round numbers in terms of the decline in pricing.

Scott Graham – Jefferies

Right, so that’s a deterioration from the first quarter right?

Dan O’Leary

Slight.

Scott Graham – Jefferies

Okay, that’s really all I had. Thanks.

Operator

Our next question is from Holden Lewis from BBT. Please go ahead.

Holden Lewis – BB&T

Great, thank you very much. Just wanted to make clear, on the downstream activity, a lot of good focus on your upstream, on downstream, I think that in the past, you’ve kind of been fostering that, we were sort of expecting orders maybe to come in towards the back half of this year, maybe that these are more work in the 2014 period on the downstream.

It kind of sounds like maybe we are punching that to the right here and now maybe we are hoping that orders come in 2014 and maybe you back half of 2014, 2015 when we start to recognize revenue. Is that an accurate characterization of how you are feeling about downstream at this point?

Dan O’Leary

Holden, the only exception I would take to that is that we have an expectation that a number of those orders could get placed this year, but the balance of your conjuncture is correct, based on the complexity of these projects, there is a great deal of volume. We are unsure if all of these projects will get built, but we have a number of relationships with the EPCs and they are looking at major construction work beginning next year.

And I think you’ve seen all the issues around labor, around materials et cetera, that could be impacted. But it really is a function of the ability for natural gas producers to sign long term contracts. And these projects will not go forward unless the price of natural gas which is the feedstock in virtually every instance of these builds are met in the middle by the producers and these plant builders and that’s just not happened yet. So,

Holden Lewis – BB&T

Okay, so at this point, we would say that those issues are not being resolved, it’s kind of pushing out the time that we start recognizing revenue maybe up to the right a little bit?

Dan O’Leary

That is correct. What we saw at the end of June was natural gas prices of $4 and we though we’re there, because we have customers that we know their executives that will begin to sell their natural gas in a price slightly north of that. The natural gas prices tick down $0.70 since then.

And they are not going to go along at those prices which those plants require their feedstock be contracted at a price where they can then get their – calculate their rate of return.

Holden Lewis – BB&T

Okay, got it. And then can you comment about what impact – there might be lingering impacts in sort of this Canadian situation with the flooding and sort of the deferrals of activity as a result of that either on. Are you seeing more volumes and inventories availability, does that have any impact on you at all that might be?

Dan O’Leary

We are – it’s a good point, we are bidding a number of unconventional projects in Canada and whether it’s around that – around some of the flooding that has been experienced there. We expected a number of those orders to be placed this month. They have asked for us to – can we hold our bid and Holden, I don’t know if it’s related to that flooding, but we are going to find out, because those are some significant projects that we are involved in. So,

Holden Lewis – BB&T

Okay and in terms of the impact on pricing in the market, do you feel that it’s resulted in more inventory out there and therefore exacerbating the issue on price and so if that market starts picking up again maybe that also sort of alleviates the price situation? Do you think there is not much impact in US?

Dan O’Leary

I don’t think there is that much impact. I do, Dan you are talking about pricing for…

Holden Lewis – BB&T

Yeah, to the extent that things cross borders in either of your businesses do you feel like there has been much impact on – as a result of maybe less demand up there at the time being?

Dan O’Leary

I don’t think it’s been an impact. And the reason it is, there is – in certain products there is some finished goods, but the industry has done a good job of not overreacting and putting finished goods in. However what that brings into play is very – the mills have gotten has efficient as they could possibly be.

So their deliveries are relatively short because there is lack of a steel demand in other markets. So they can quickly make materials that are tested for the energy sector. So there is – the pricing has really been more about the manufacturer’s ability to make material very quickly.

Holden Lewis – BB&T

Okay, and then this last thing I have, in the past you have given sort of the percentage of your revenue that have fallen into sort of upstream, midstream, downstream and other, I may have missed it, but can you give those if you have it already?

Dan O’Leary

We didn’t give that earlier, you are correct, give us just a minute, we’ll speak to it.

Holden Lewis – BB&T

And maybe what you are hoping for that so one more in there, but you talked about defending volumes, using price, you talked about how price was down but market share was up, are you guys defending or are you actually using price to gather up more business in sort of the OCTG business where you saw that dynamic?

Dan O’Leary

Well, that given away that secret sauce it’s all of those things.

David Laxton

We are very discerning about our customers in that business. Our service profile is done in the field. We work very closely to make sure that those people that use that material demand our brand on their location, so that, we are doing all of those things, Holden.

Dan O’Leary

We are very effective in doing that, because of the staff that we have.

Holden Lewis – BB&T

I think, Dave has got…

David Laxton

Yeah, Holden, for Q2 2013, our percentage of sales that came from E&I the percentage of sales that came from the midstream was 32.5%, from the upstream was 45.5%, from the downstream was 7%, from mining and other was 15%.

Holden Lewis – BB&T

Great, thanks guys.

Operator

And our final question is from Gregg Brody from J.P. Morgan. Please go ahead.

Gregg Brody – J.P. Morgan

Hey guys. On the two jack-up orders that you mentioned that are kind of in the backlog now, and it seems like you are adjusting that for 2014 event. How should we think about potential variability there with that happening? At this point these jack-ups are being constructed. Should there be much variability?

Dan O’Leary

I am not sure Gregg, it’s going to happen.

Gregg Brody – J.P. Morgan

Yeah, it’s there. Right.

Dan O’Leary

Steels on order, the drawings are made and any –

David Laxton

And you have the appropriate owners behind these rigs that it’s not you’ve got great shipyards that are doing. That is doing the work, first-class.

Gregg Brody – J.P. Morgan

If we go back to 4Q, there was a pretty sizable order that came out of the backlog. I thought that was something to do with jack-up business or was it more to do with some wins, or something else, because I am just trying to understand that I hear you are there in there, but what happened in 4Q last year that came out?

Dan O’Leary

Gregg, I would not have been a single order, there were a number of orders in Asia that came up, but there was not a specific upstream jack-up order during that I recall, if it’s important to you, we can – but I think the important question is are we worried that, that this is we are trying to research it.

Right now, Gregg, but this order is in place and for – we don’t want to disclose anymore, because there is a number of them behind it that and the difference now is that they have to get to wells in 2015.

Last year, they were apparently still redesigning some of the opportunities for the rig and there was plenty of fabricating capacity. So, I just, I don’t recall that specific Q4 order. There were a number of them, particularly some of our Asian business, but they weren’t all offshore jack-up rigs. David, I don’t know if you…

David Laxton

There was an order that came out and it was a cancellation but it was one other thing that was cancellation fees and the other thing that came with it in the project, but we rarely, very rarely have a project that comes out of that gets cancelled on a backlog.

Gregg Brody – J.P. Morgan

So it is fair to say, there is actually indemnified drilling location that that rig is going to and it’s contracted at this point?

David Laxton

That is correct.

Dan O’Leary

That’s correct. It’s going to the North Sea and the owner of the rig – excuse me the eventual user of the rig who owns the oil has been instrumental in its design.

Gregg Brody – J.P. Morgan

All right and just – on that OCTG and it looks like you said, I think that the volumes are holding in and you are winning some share away and prices were little lower. But it sounds that you are not competing on prices, is that fair to say, or is there….

Dan O’Leary

What we do is we defend, when we need to defend on price we are going to do it because we value and we know these customers have ongoing drilling programs and the only way for our competitors to win away that business, it’s not on their servers, and it’s not on any product quality, because we have better service we believe and the product quality being equal. So all they can leave with on their front foot is price. So, when we must depend on that we do.

Gregg Brody – J.P. Morgan

Okay and just, on cash flow, working capital how should we see that trending in the rest of the year and are there any other sort of any tasks which we then get out anything like that?

David Laxton

No I think – from a tax standpoint, we talked about the effective tax rate and how we think about that, we talked about that we got a net operating loss carry forward that’s in our Edgen Murray business and all of that will carry throughout the year. So, no big changes from that standpoint.

From a working capital standpoint, we would – we have talked about that we try to target our working capital that’s in the range of 20% or so of our sales. So again we would – again move in terms of trying to target towards that. So, no big changes from what you are seeing Gregg.

Gregg Brody – J.P. Morgan

All right guys. I appreciate it. Hopefully you have a good launch.

David Laxton

Okay.

Operator

I am showing no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Dan O’Leary

Thank you Denise. As we’ve explained, we’ve got better signs. We continue to appreciate your interest in the company, in the model that we have invested in. Thank you for your participation today.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.

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