MRC Global (MRC) Q3 2017 Results - Earnings Call Transcript

MRC Global, Inc. (NYSE:MRC) Q3 2017 Earnings Call November 3, 2017 10:00 AM ET

Executives

Monica Schafer Broughton - MRC Global, Inc.

Andrew R. Lane - MRC Global, Inc.

James E. Braun - MRC Global, Inc.

Analysts

Sean C. Meakim - JPMorgan Securities LLC

Matt Duncan - Stephens, Inc.

Vaibhav Vaishnav - Cowen & Co. LLC

Nathan Hardie Jones - Stifel, Nicolaus & Co., Inc.

Luke L. Junk - Robert W. Baird & Co., Inc.

Walter Scott Liptak - Seaport Global Securities LLC

Ryan Mills - KeyBanc Capital Markets, Inc.

Operator

Greetings and welcome to the MRC Global Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Monica Broughton, Investor Relations. Thank you. You may begin.

Monica Schafer Broughton - MRC Global, Inc.

Thank you and good morning, everyone. Welcome to the MRC Global third quarter 2017 earnings conference call webcast. We appreciate you joining us.

On the call today, we have Andrew Lane, President and CEO; and Jim Braun, Executive Vice President and CFO. There will be a replay of today's call available via webcast on our website, mrcglobal.com, as well as by phone until November 17, 2017. The dial-in information is in yesterday's release. We expect to file our third quarter Quarterly Reports on Form 10-Q later today, which will also be available on our website.

Please note that information reported on this call speaks only as of today, November 3, 2017, and therefore, you are advised that information may no longer be accurate as of the time of replay. In our remarks today, we will discuss adjusted gross profit, adjusted gross profit percentage, adjusted EBITDA and adjusted EBITDA margins. You are encouraged to read our earnings release and securities filings to learn more about our use of these non-GAAP measures and to see a reconciliation of these measures related to the GAAP item.

In addition, the comments made by the management of MRC Global during this call may contain forward-looking statements within the meaning of the United States Federal Securities Laws. These forward-looking statements reflect the current views of the management of MRC Global. However, MRC Global's actual results could differ materially from those expressed today. You are encouraged to read the company's SEC filings for a more in-depth review of their risk factors concerning these forward-looking statement.

And now, I'd like to turn the call over to our CEO, Mr. Andrew Lane.

Andrew R. Lane - MRC Global, Inc.

Thank you, Monica. Good morning and thank you for joining us today and for your interest in MRC Global. I will begin with a review of the company's performance highlights and then I'll turn over the call to our CFO, Jim Braun, for a more detailed review of the financial results. I'll finish with some directional commentary on our outlook.

Third quarter revenue was in line with our expectations as the business generated $959 million in sales, up 4% over the second quarter of 2017 and up 21% over the third quarter a year-ago. This puts the first nine months of the year up 18% over the prior year period. We outperformed expectations this quarter for both adjusted gross profit percentage at 19% and SG&A at $130 million, resulting in adjusted EBITDA of $56 million or 5.8% of revenue.

We have controlled costs this year as revenue increased, resulting in incremental adjusted EBITDA of 19.3% for the quarter and 18.5% for the year. As for the impact from the hurricane this quarter, the revenue from billing days lost as a result of the hurricanes, while customers were shut down was somewhat offset by sales from the additional delivery of mission-critical products, particularly in downstream, needed to repair, replace or refurbish our customers' facilities after the storms.

Based on recent EIA data, refinery runs increased following Hurricane Harvey in late September and early October with a brief interruption for Hurricane Nate before normalizing later in October. We participated in restoring this capacity as well as turnarounds that many customers brought forward while they were offline. We estimate that the result was a net negative impact of only about $8 million in lost revenue from the two storms Harvey and Irma.

This outcome highlights the strength of our diversified end-markets, the use of regional distribution centers, and most importantly, our dedicated workforce. I'm very proud of our employees who worked tirelessly before, during and after the storms to help get our customers running again; oftentimes, while they face daunting personal challenges, as 50 of our employees' homes were flooded. MRC Global has a great reputation for customer service and nowhere was this more evident than during these two hurricanes.

I can also report that we had no significant property or inventory damage from either storm. All our end-market sectors experienced growth in the third quarter over the same quarter a year-ago as well as sequentially. The midstream sector has had the strongest growth compared to the same quarter a year-ago. Midstream increased 34% third quarter over the prior year same quarter and was higher in both subsectors. The transmission and gathering subsector was benefited from the increase in upstream production and some longer-haul projects due to the approval of pipeline infrastructure projects.

Our gas utility subsector has benefited from new installations and integrity projects. Our upstream business increased 20% for the third quarter of 2017 over the same quarter in 2016. North America drove the increase with our U.S. and Canadian upstream businesses benefiting from increased customer spending due to higher oil prices versus a year-ago. Our downstream sector was up 5% this quarter as compared to the same quarter a year-ago, primarily due to the U.S. and recent market share gains such as ExxonMobil.

This quarter, we capitalized on favorable market conditions to complete a refinancing of both our senior secured term loan, as well as our asset-based lending facility. We extended the maturities, we lowered the interest rates and reduced the size of the ABL and obtained slightly better terms. Our balance sheet is well positioned for the future growth of our business. We have sufficient capacity for both organic and acquisition growth.

We continue to make progress on our new 410,000-square-foot regional distribution center or RDC in La Porte, Texas, which is in the Greater Houston Metropolitan area. This facility did not experience flooding during Hurricane Harvey and sustained no damage. We are on track to begin operating from the new RDC late this year.

We also completed the implementation of SAP in Norway this quarter, bringing all of our international operations under one ERP platform. This was a major milestone for us as we were operating on more than 10 different systems after various acquisitions we made over the years. Through our international implementations, we have learned a great deal about SAP, and we have a solid understanding of the capabilities and limitations of this ERP platform.

Our plan was also to review our international operations as a pilot to determine if we should implement SAP in our North American business. Part of our success in North America as a market leader over the years has been our ability to offer customers unique value-added business arrangements and services. Our current mainframe ERP system in North America has provided us with the flexibility to address these unique customer requirements.

In addition, our new MRCGO catalogue, as well as other enhancements, are not dependent on a specific ERP system. After considering what we have learned from our international implementation, we have decided not to move forward with the implementation of SAP in North America. From a cost and functionality perspective, we believe that continuing to use and invest in our mainframe system is the best path forward.

I want to be clear, however, that the implementation of SAP and our international segment is important as we now have one scalable system facilitating our ability to effectively manage a business across 20 countries. While we will continue to invest in our two systems, this decision will reduce our overall capital expenditures in 2018 by approximately $20 million and remove any possible operation disruption in North America as activity continues to ramp up.

I have discussed our contract position over the last several quarters, as this is a core element of our growth strategy. We continue to be focused on driving market share gains through customer contracts. As you will recall, we executed the first global valve contract in the industry in 2012 with Shell. They recognized the value of a reliable global supplier.

Given the success of this first-of-its-kind agreement, we extended it for another five years in the third quarter. Shell is consistently one of our largest customers, and we are proud they rely on us for all their valve needs. This agreement covers valves for MRO and projects, as well as PFF for their North America operations. This major contract renewal comes in addition to various other wins and renewals this year, including ExxonMobil, LyondellBasell, Chevron and several others. These multiyear customer contracts represent an important element of our strategy to deliver long-term shareholder value.

Results for the first nine months of the year have largely tracked in line with expectations. The macroeconomic factors that drive our business haven't changed much since the last time we reported. In the U.S., drilled but uncompleted wells or DUCs, represent a backlog of completion activity, which supports our upstream growth. DUCs have been steadily increasing over the last 10 months and on a record high level. We expect these DUCs will get worked down over time, contributing to continued U.S. upstream revenue growth.

Midstream continues to be supported by new pipeline approvals and takeaway capacity needs as operators continue to increase production, particularly in the Permian for oil infrastructure and the Marcellus for gas infrastructure. Midstream is also supported by relatively steady growth from gas utility companies which is independent of current commodity prices.

Many of our customers continue to execute integrity and upgrade programs, which will also benefit our gas utility subsector. Downstream is supported by relatively steady recurring maintenance and turnarounds and is also enhanced by several upcoming petrochemical projects, including Shell's cracker in Franklin, Pennsylvania which we will continue to see the benefits in the fourth quarter of 2017 and more so in 2018 and 2019. Our new agreement with ExxonMobil has begun to produce results and will continue to grow in the U.S. Gulf Coast, Europe and Asia-Pacific as well.

At our board of directors meeting this week, the board authorized a new $100 million share repurchase program. The authorization allows management to buy shares in the open market at their discretion. And the program is scheduled to expire on December 31, 2018. This program allows the company to be opportunistic to enhance shareholder returns, while maintaining flexibility on the timing of such repurchases. Our strong balance sheet position allows us flexibility for this program, as well as organic growth. As is customary, we will report quarterly on share repurchase activity.

We are also proud to have recently added Deborah Adams to our board of directors. Ms. Adams has over 30 years of experience in the energy industry with a heavy focus on the midstream and downstream sectors, having spent her career at Phillips 66 and its predecessor companies. She served on the executive leadership team at Phillips 66, leading their procurement function. Ms. Adams brings a unique customer perspective as well as a global background in refining and midstream operations. We're very happy to have her join our board.

I'll now turn the call over to Jim.

James E. Braun - MRC Global, Inc.

Thanks, Andrew, and good morning, everyone. Total sales for the third quarter of 2017 were $959 million, which were 21% higher than the third quarter of last year, primarily due to double-digit growth in midstream and upstream activity and 5% growth in our downstream sector. Sequentially, revenue increased 4% as all sectors reported sales growth.

U.S. revenue was $759 million in the quarter, up 29% from the third quarter of last year with improvement across all sectors. The U.S. midstream sector increased $110 million or 37% from the third quarter of last year. The increase is due primarily to various ongoing transmission and gathering projects for a variety of customers.

The gas utility subsector also increased as one of our customers took delivery of large pipe orders for their integrity work. The U.S. upstream sector increased $48 million or 42% from the third quarter last year, driven by increased well completion activity. The U.S. downstream sector increased by 6% from the third quarter last year due to refining maintenance and turnaround work and the implementation of the new ExxonMobil contract.

Sequentially, U.S. segment sales were up from the second quarter by 5%, gains were across all sectors, but primarily due to an increase in midstream sales related to project deliveries for a gas utility customer, followed by downstream-related to increase maintenance and turnaround work for various refinery and industrial customers.

Canadian revenue was $77 million in the third quarter, up 10% from the third quarter of last year, driven primarily by upstream, as the rig count increased significantly, partially offset by a decline in midstream revenue due to non-repeating project sales in 2016. Sequentially, the Canadian segment was up 12% from the second quarter due to increased upstream activity and the end of spring break-up.

In the international segment, third quarter revenue was $123 million, down 8% from a year-ago. Sales were lower due to the conclusion of the Norwegian Johan Sverdrup project in upstream, partially offset by the final shipment of line pipe for a major pipeline project in Australia. Sequentially, the international segment was down 8%, primarily from this Australian pipeline project, which had sales of $25 million in the second quarter and $12 million in the third quarter, partially offset by improved downstream activity.

Beginning in 2015, the international segment has seen customer spending continue to decline even as the U.S. and Canadian segment sales have increased in 2017 from improved spending by our customer base. We took actions in 2016 to reduce our international footprint and cost structure, and yet we have been unable to return to profitability.

For the first nine months of 2017, our international segment is reporting an operating loss of $8 million. As such, we are in the process of further reducing our head count and cost structure in the international segment and expect to record a severance and restructuring charge in the fourth quarter of 2017.

Now, turning to our results based on end-market sector. In the upstream sector, third quarter sales increased 20% from the same quarter last year to $269 million from strong performance in the U.S. and Canada both driven by increased rig count and partially offset by the completion of the Norwegian project.

The U.S. upstream sales increased 42%, tracking average well completions of 47% in the third quarter of 2017 over the same quarter in 2016 based on EIA data from major basins. Canadian upstream revenue increased 55% quarter-over-quarter. Midstream sector sales were $437 million in the third quarter of 2017, an increase of 34% from the same quarter in 2016.

Among the subsectors, sales to our transmission and gathering customers increased 41% and sales to our gas utilities increased by 27%. The mix between transmission and gathering customers and gas utility customers was weighted 48% for transmission and gathering and 52% for gas utilities in the third quarter.

In the downstream sector, third quarter 2017 revenue was $253 million, up 5% from the same quarter in 2016 across all segments, but primarily due to growth in the U.S.

Turning to margins, gross profit was 15.8% in the third quarter of 2017 and 11.1% in the third quarter of 2016. If you recall, we recorded a $45 million non-cash inventory charge in the third quarter of 2016. Excluding this charge, gross profit percent would have been 16.8% in the third quarter of 2016. The 100-basis-point decline was due primarily to the impact from LIFO. A LIFO expense of $13 million reflective of the product cost inflation we're experiencing was recorded in the third quarter of 2017 as compared to a benefit of $3 million in the third quarter of 2016. The third quarter 2017 LIFO expense impacted earnings per share by $0.09.

Adjusted gross profit for the third quarter of 2017 was $182 million or 19% of revenue as compared to $103 million or 13% for the same period of 2016. Excluding the $45 million of inventory charges in 2016, adjusted gross profit for the third quarter of 2016 would have been $148 million and 18.7%. Third quarter 2017 adjusted gross profit was also up sequentially from 18.5% in the second quarter. This is consistent with our previous annual adjusted gross margin percentage guidance as we continue to experience favorable line pipe inflation and our mix of lower-margin project work ends, both of which provide an uplift to our adjusted gross profit percentage.

Regarding product inflation, line pipe prices have continued to steadily increase since last October. Based on the latest Pipe Logix, all items index, average of line pipe spot prices in the third quarter of 2017 were 35% higher than the third quarter of 2016 and 4% higher sequentially. We should continue to experience line pipe inflation, but there is the potential to see it flatten out over the remainder of the year.

We've seen an impact from this inflation with an increase in our gross margin percentage for stock sales as is typical for our business model. SG&A cost for the third quarter of 2017 were $130 million, an increase of $6 million or 5% due to increased activity levels. Third quarter 2016 includes severance and restructuring charges of $3 million. There were no such charges in the third quarter of 2017. As a percentage of sales, SG&A was 13.6% in the third quarter of 2017 compared to 15.6% in the same quarter a year-ago.

Interest expense totaled $9 million in the third quarter of 2017, which was the same as the third quarter a year-ago. As Andrew mentioned, we refinanced our debt during the quarter. Given the recent favorable financial debt markets, we took the opportunity to refinance both our senior secured term loan and our ABL this quarter, which extended the terms to 2024 and 2022 respectively.

We've also lowered the interest rate of the term loan by 50 basis points, reduced the maximum capacity of the ABL to $800 million to better fit the business to the cycle and obtain slightly better terms. We still have no financial maintenance covenants in our debt structure. And with the refinancing and the growth in the business, we now have a $50 million balance on the ABL as we reduced the term loan to $400 million by paying down $14 million, and we incurred $7 million of issuance cost.

Our debt outstanding at the end of the third quarter was $447 million compared to $414 million at the end of 2016. The term loan will amortize at 1% per year on the new $400 million balance, and in conjunction with the refinancing, we wrote off $8 million pre-tax in existing debt issuance cost. Going forward, our annual pre-tax interest expense savings will be approximately $5 million per year.

Our leverage ratio based on our net debt of $407 million decreased to 2.7 times as adjusted EBITDA continued to grow. The availability on our ABL facility was $489 million at the end of the third quarter, which gives us ample financial flexibility and will continue to grow as working capital grows.

We recorded a tax expense of $2 million in the third quarter of 2017 for an effective tax rate of 40% in line with our previous estimates. However, at relatively low pre-tax operating levels, the effective tax rate is subject to being volatile on a quarter-to-quarter basis and for the full-year.

Our third quarter 2017 net loss attributable to common stockholders was $3 million or $0.03 loss per diluted share as compared to a loss of $46 million or $0.48 loss per diluted share in the third quarter of 2016. The net loss attributable to common shareholders for the third quarter of 2017 includes after-tax charges of $5 million or $0.05 per diluted share for the write-off of debt issuance cost. And the third quarter of 2016 includes non-cash after-tax inventory charges of $38 million or $0.40 per diluted share, as well as severance and restructuring after-tax charges of $2 million or $0.02 per diluted share.

Adjusted EBITDA in the third quarter was $56 million versus $24 million a year-ago. Adjusted EBITDA margins for the quarter were 5.8%, up from 3% a year-ago, due to higher revenue and lower cost structure. Third quarter 2017 cash used in operations was $13 million, commensurate with our revenue growth and the related increase in working capital.

Also included in operating cash flow for the quarter was $11 million of deferred income tax payments. At the end of the third quarter 2017, our working capital, excluding cash, as a percent of trailing 12 months sales was 20%, which is in line with our stated goal.

Capital expenditures were $9 million in the third quarter of 2017 and $23 million for the first nine months of the year. We expect to see an increase in Q4 CapEx as we finish build-out of our RDC in La Porte.

And now, I'll turn it back over to Andrew for his closing comments.

Andrew R. Lane - MRC Global, Inc.

Thanks, Jim. Now, let me wrap up with our current outlook. The third quarter is typically the strongest quarter for our business, with a great deal of construction project activity, and we expect that to be the case in 2017 with normal seasonal declines in the fourth quarter as pipeline and gas utility worked slow.

As is our customary practice, we are not providing updated annual guidance for 2017 in this quarter. Regarding 2018, we expect to provide our 2018 annual guidance with our year-end call in February of next year. Results for the first nine months of the year have been indicative of a first year recovery and largely in line with our expectations. We have had strong incrementals of 18.5% so far this year with adjusted EBITDA of $136 million, which is more than double where we were at this time last year.

Adjusted gross margin this quarter was 19%, which is an improvement over the previous quarter and in line with our expectations of improved margins in the second half of 2017 due to higher line pipe pricing and general inflation. Growth in midstream and upstream has been notable as completion activity, production facility or tank battery expansions, as well as pipeline project approvals have all increased this year over last.

We continue to execute framework agreements taking and maintaining market share. The benefits of these agreements are evidenced by the increase in our revenues as our customers rely on us to service their projects and maintenance activities. Our agreement with ExxonMobil for the downstream valves is a great example of this and we're beginning to see the benefit of this in our earnings.

Shell is another great example and we expect the Franklin project deliveries will increase next quarter along with stronger Chevron project deliveries for TCO in Kazakhstan. The number of drilled but uncompleted wells has continued to rise to historic levels with the latest count from the EIA at 7,300. These continued to be a source of future revenue for us and we expect to benefit as these inventories work down.

Higher production levels are positive for our midstream business and the transmission and gathering side which is highly correlated. The more positive regulatory environment continues to support the need for this critical infrastructure. Our recent research report tracking U.S. pipeline projects shows that pipeline projects are expected to be very strong in 2018 with over $30 billion in spending proposed or 30% growth on a probability weighted basis.

Gas utility customers continue to make progress on their multiyear integrity and infrastructure upgrade programs. We have the largest PVF distribution position among a broad set of gas utilities across the country. This continues to be a relatively stable source of continued growth with drivers unrelated to energy commodity pricing.

Downstream continues to be a key focus for us and we expect to be able to expand in this area over time. Continued market share gains and expanded product offerings, including the additional inventory investments in stainless and alloy PFF, support our growth strategy in this end-market sector.

Our backlog was $802 million at the end of the third quarter 2017, up $143 million or 22% from a year-ago and up 7% from the end of 2016. At the end of the third quarter, 20% of the backlog was attributable to a midstream transmission customer building out gas infrastructure in the U.S. Northeast.

We are pleased by the performance so far this year having performed in line with or better than expectations. We expect macro market conditions and market share gains to support growth in our business next year.

With that, we will now take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question comes from the line of Sean Meakim with JPMorgan. Please proceed with your question.

Sean C. Meakim - JPMorgan Securities LLC

Thanks. Good morning.

Andrew R. Lane - MRC Global, Inc.

Good morning, Sean.

Sean C. Meakim - JPMorgan Securities LLC

So, Andy, thanks for the detail on the outlook and understand you're not ready to give 2018 more detailed guidance yet, but just thinking about what we've learned this quarter. So, our numbers is driven by that 19% gross margin, good cost control on SG&A, holding that flat sequentially, even if the volumes came in a bit lighter than what we are modeling.

So, you mentioned line pipe pricing helps quarter-over-quarter, just general inflation has been helpful. But I guess any reason why MRC can't sustain those 19% type of gross margins into next year. And then, just thinking about how SG&A growth – how you expect that to correlate with volume growth over the next several quarters.

Andrew R. Lane - MRC Global, Inc.

Yeah. Sean, thanks. And let me address first the lower volumes, because I think that's an issue with a lot of attention on it in the third quarter. So, let me just expand if I can on the comments we made on the hurricane impact.

So, as you know, this was the first time we've ever had two cat 3-plus hurricanes hit the Continental U.S. in the same period, and Harvey and Irma had a big impact on our business, as well as the whole industry. We had 26 branches impacted by the hurricanes in the quarter, and also three line pipe coating suppliers and one line pipe mill impacted. So – and half of the Gulf Coast refineries shut down.

So, we had 6 South Texas branches that impacted our upstream business. We had 12 Gulf Coast and East Texas and Southwest Louisiana impact our downstream business related to Harvey. And we had 8 branches in Florida and Alabama, Mississippi and the Carolinas that impacted by Irma, that impacted our midstream and gas utility business. And then, of course, our line pipe business was impacted from a product line standpoint.

So, we tracked the run rate for all 26 branches in mid-August, going in – before the hurricanes, we saw a definite drop in billing days and revenues during both hurricanes. And then we tracked the recovery revenues in all 26 branches. And when you look at that, we, of course, had the drop in revenues and then we had the pick-up at the end of September. The difficulty in estimating is how much of that pick-up is recovery from the interrupted billing that we – just getting back to where we would have been and how much of it was planned work, especially in downstream turnarounds, that we would have received on top, if we didn't have the billing inquiries.

So, doing that analysis, we came up with $8 million to $12 million of revenue impact in the third quarter and our scripted comments we use the low-end of that range for an $8 million impact. But there's no question that it was a very disruptive period for us. We have a big footprint in Houston, we have 50 employees with flooded homes, and they really responded tremendously. We had skeleton crews in the first four or five days, get our business back up and running.

And some of our employees that had several foot of water in their homes showed up on the week after the hurricane hit. Then we shipped 12 truckloads of equipment to ExxonMobil to help get their refining business back up and running. So, it had a major impact. Our best estimate, we put out there, but it's very difficult to estimate the true impact. It was significant for us. So, I think we were well above consensus topline without those hurricane impacts.

So, now on margins, there's no reason. As we've talked about, and Jim and I have talked about through this year, we expect that our margins improve throughout the year and they have. We expected the line pipe margins to improve in the second half of the year and they have. And we've also been continuing to work on our mix of higher profit margin business, that's been a focus for us for a couple of years. And so, there's no reason you shouldn't expect a sustained area of margins around 19%.

The other thing on SG&A, we've done a really good job on keeping the head count low and we've ramped 18% top line revenue growth this year. And we have essentially the same head count in the third quarter of 2017 that we had in the third quarter of 2016. So, you should see that.

And also as Jim mentioned in his comments, we will have a restructuring charge in the fourth quarter related to getting international costs in line where we think the spending there has finally bottomed. So, you should expect approximately 200 head count reduction related to our international business.

So, Jim, do you have anything to add on the SG&A?

James E. Braun - MRC Global, Inc.

No. Yeah. I think, Sean, your question, we talked about in terms of how it might respond to the growth in revenue volume. And again, we have a business model that's highly leveraged to the fixed cost. And while they'll go up in absolute terms, we think as revenue grows, we'll see revenue growth higher than the operating expense growth.

Sean C. Meakim - JPMorgan Securities LLC

Sure. Okay. No, that all makes sense. Andy, thank you for all that detail. The other kind of major development out of the quarter I think was the new buyback from the board with an expiration at the end of next year. Sounds like a pretty firm endorsement in terms of the working capital metrics you've been putting up and your ability to continue that. Is that a fair assessment? Do we think we can sustain sub-20% type of working capital levels relative to sales?

And then, I guess just going in the fourth quarter, anything else you want to highlight with respect to inventory restocking, where DSOs can go, just a little bit more detail on working capital would also be helpful.

Andrew R. Lane - MRC Global, Inc.

Yes. Let me start, Sean, and Jim will address the inventory and the DSOs and the working capital. But, no, I will say when we look at our capital allocations, first, I can commit that we, yes, we believe, we can sustain the 20% working capital as a percent of revenue. We made a lot of fundamental changes in the model during 2015 and 2016 and it shows now in 2017 up even from our 18% or 19%. That was at the low point. But now as we ramp inventories back up for the revenue growth, the 20% target for working capital is something you should count on from us.

On the board authorization or the share buybacks, we've looked at a lot of acquisitions here coming out of the downturn in 2015 and 2016. We've looked at performance have allowed the small bolt-on acquisitions that we normally wouldn't do. They're recovering, but recovering very slowly. And from a capital allocation standpoint, we have working capital covered. Our refinancing extended all the dates to 2000 – term loan to 2024 and ABL 2022. We feel good we've got plenty of capacity to fund our working capital needs as we continue to grow.

And when we look at what's the best investment and what's the best return for our shareholders compared to M&A bolt-ons at this point, we see the best return for our shareholders as buying our own shares. And at today's pricing, we're certainly buyers. Jim, (38:12).

Sean C. Meakim - JPMorgan Securities LLC

Understood. That's very helpful.

Operator

Our next question comes from the line of Matt Duncan with Stephens. Please proceed with your question.

Matt Duncan - Stephens, Inc.

Hey. Good morning, guys.

Andrew R. Lane - MRC Global, Inc.

Good morning, Matt.

Matt Duncan - Stephens, Inc.

So, Andy, definitely appreciate all the comments, sort of helping with the outlook for the business. I was hoping maybe we could get a tiny bit more specific on the change from 3Q to 4Q. If I look back in the past and sort of a relatively normal operating environment, the sequential drop is anywhere from, call it, 5% to 10%. Is that a reasonable range to think that you would be in this year as well?

Andrew R. Lane - MRC Global, Inc.

Yeah. Matt, it is and just to give you a little color on the quarter, you're right. That's a historical seasonal decline. I don't believe we'll be at the high end of that. And we had a good October. We just finished October. We had a good October, which followed pretty much at the same level as August and September. So, like usual, we usually start off the fourth quarter with a strong quarter – a strong month that carries over from the third quarter and then the season of the clients late in November and December, usually when gas utilities and pipelines slow as we mentioned. So, I think, we'll track, I think consensus already understands the tracking of our seasonal decline and it's in the ballpark.

Matt Duncan - Stephens, Inc.

Okay. And then next question I had is looking out to 2018. And, look, I get that it's too early to be giving a hard and fast guide. But maybe if we can think about what you see sort of happening in each of the three energy streams next year. Rig counts down a little, but DUC counts up and oil prices are now back up some, so you would think that's going to lead to more completion activity which tends to be a better read for your upstream business than rig count does.

Midstream seems like it's a pretty strong end market. I don't see why you can't grow that double-digits next year; and at some point, the downstream environment you would think is going to start spending again. So, if you can maybe talk about each of those three energy streams, how you're thinking about the opportunity set next year. And then aggregating it all together, is a double-digit revenue growth rate possible? Is that too aggressive? Just sort of how are you thinking about the year at a high level at this point?

Andrew R. Lane - MRC Global, Inc.

Yeah, Matt. Let me go through each stream. So, as you know and we've talked about for a while now, the best indicator for our upstream business is not the rig count because we have no revenues from the drilling rigs. We have no revenues from down-hole drilling and completion.

So, EIA, of course is publishing much better completion information. So, if you really – to best track our revenues, you track the change in completions, especially the U.S. business tracks very well. So, if you look at the Q3 2017 compared to the Q3 2016, the number of completions in the U.S. was up 47%, and our U.S. upstream revenue was up 42%. And so, that gives you a very good indication of what our upstream – if you get the model our upstream revenues.

If you look at year-to-date, completions in the U.S. are up 36%, and our U.S. upstream revenues year-to-date are up 34%. So, we track that very well. The DUCs are at a record level, 7,300, just above 7,300 right now. So, even in the first half of 2018, if you see some tail-off on drill and rig count with today's higher commodity prices, we believe this leads to more pulling down of the DUC count.

I think some of the bottlenecks that have been the main cause for the increase in DUCs has been in the pressure pumping side of the business. And as they ramp up capacity and personnel, I think you see the motivation there for our customers to complete more of those DUCs, which will drive our upstream revenues.

So, it really comes down to the drilling and completion budgets and amount spent on upstream towards – targeted towards completions will drive our business. But, we certainly believe it'll be up in 2018. On midstream, there's no question. Our revenues will be up in 2018. The deregulation that's occurred in the industry is driving our business. We've had an excellent year in midstream, as you know, both on the gas utility side and the pipeline and infrastructure side.

Just to give you a little color, we're currently working on 13 midstream pipeline projects on the transmission side of the business, and we're tracking 48 projects going into 2018. So, the timing of those always is a little bit uncertain, but directionally, we certainly see a better midstream year going into 2018.

2018 for downstream, this year, we had a big run off of a project for CP Chem that impacted lower revenues this year. It wasn't repeating. That occurred in 2016. So, we see a lot of project "activity" for downstream, and we'll see how much of that materializes into new projects. But the big driver for our sequential into 2018 revenues for downstream will be the new contracts that we won. We had a partial year of ExxonMobil. We had a partial year of BASF, partial year of LyondellBasell this year, and we'll have a full-year run rates in next year all downstream, especially with ExxonMobil pick-up in the Gulf Coast, Europe and Asia.

So, I think those will be the main drivers for us, and we'll see how many downstream projects gets sanctioned. We certainly feel in downstream we'll have an active first quarter turnaround. We had some increase in turnarounds in late in the third quarter as some of the refineries were down and they accelerate some turnaround activity. But many of them just wanted to get back up and running. And they push what normally would have been the fall turnaround into the first quarter. So, we think first quarter turnaround also will be strong to start-off our year for downstream.

Matt Duncan - Stephens, Inc.

Okay. So, aggregating all of that together then, I hear strong year in midstream which is your biggest revenue stream at this point by a good growth in upstream and downstream both. So, I guess what we're all I think trying to figure out is, is a double-digit revenue growth rate doable next year or is it just too early to know? And do you need more data on what's happening in upstream before you can commit to that because it seems like midstream grows well into the double-digits next year based on a number of projects you're seeing?

Andrew R. Lane - MRC Global, Inc.

Yeah. Matt, I mean, it's a little early. We rely heavily on our customers' E&P budgets and our drill – especially their drilling and completion CapEx budgets, and we rely a lot on that information. And it usually comes out November, December for the magnitude of the increase. That's the best indicator, and our revenues historically have tracked very close to those changes.

We think, directionally, U.S. and Canada will be strong and international will be flat to slightly up in spending levels. So, 2018, our feeling, we'll be up in revenue, we'll be up on EBITDA. And then, now, the point is just how much will that be. I think you can count on midstream being up double digits. That's the one, there's so much visibility on projects and our gas utility business that – and then we'll just see on downstream and upstream, the other 2 pieces. But, we certainly feel it's going to be another year of recovery. 2018 will be better than 2017. And we'll just see when we get more information late this year, and then we'll give, like we do, pretty detailed annual guidance going into, when our February end-of-year call is.

Matt Duncan - Stephens, Inc.

Got it. Okay. Thanks, guys.

Andrew R. Lane - MRC Global, Inc.

Thanks, Matt.

Operator

Our next question comes from line of Vaibhav Vaishnav with Cowen. Please proceed with your question.

Vaibhav Vaishnav - Cowen & Co. LLC

Hey. Good morning, Andy, Jim, Monica, and thanks for taking my question.

Andrew R. Lane - MRC Global, Inc.

You bet. Good morning, Vaib.

Vaibhav Vaishnav - Cowen & Co. LLC

Starting with the fourth quarter, I guess, I understand the typical seasonality, but I guess I would say some of the tailwinds that you don't usually see in the fourth quarter are – you possibly could have some of the Harvey or some of the Irma revenue is climbing back in the fourth quarter. You have Exxon projects, Shell Franklin project ramping up. Could it be a lower than typical seasonal decline in fourth quarter? And you also have the U.S. completions tailwind because you still lag the building activity?

Andrew R. Lane - MRC Global, Inc.

Yeah. Vaib, all those things are exactly right. And I would say, it leads to – we still probably have some seasonal decline, it has been historical, but I think that would lead you to the low-end of the historical part because we do have those factors working for us.

James E. Braun - MRC Global, Inc.

Yeah. Vaib, I think for the fact that the midstream is the largest sector today and it's the one that typically experiences the most seasonal decline, given – or adding onto what Andy said about the upstream and the downstream. I think, yeah, it's accurate in terms of where we might be in that range.

Vaibhav Vaishnav - Cowen & Co. LLC

Got it. Got it. Thinking about the 2018 upstream up, who knows? Because the spending service are still out there. You guys talked about midstream could be up double-digits. If I just think about like the Exxon and the Shell Franklin and Kazakhstan project, I can get to a double-digit – at least a double-digit growth in downstream. And then you guys talked about 19% margins. Am I encapsulating that properly so far, how to think about 2018?

Andrew R. Lane - MRC Global, Inc.

Vaib, I think all of that sounds right. I mean, I think, downstream, we'd like to see some spending data. We'd like to – of course, we have the ExxonMobil and the BASF and LyondellBasell contracts that we feel very confident we have a good handle on the delta on full-year revenue there and they're all very positive for us.

And the Shell Franklin will have a better fourth quarter than the third quarter and a full-year of that project in both 2018 and 2019 being one of our mega projects. So, those are all positive, but we need to see the general spending E&P CapEx and especially the amount targeted towards downstream to feel more confident before we would commit to the double-digits in downstream.

James E. Braun - MRC Global, Inc.

And Vaib, I would also – just we need to remind ourselves that large projects by their nature are very difficult for companies, our customers to execute on and project delays, and the timing can also move quarter-to-quarter, flip year-to-year.

Vaibhav Vaishnav - Cowen & Co. LLC

Fair point. Fair point. Look, I guess other way of asking it, are there any project – big project headwinds in downstream you guys see that we don't see from outside?

James E. Braun - MRC Global, Inc.

No. I don't believe so.

Andrew R. Lane - MRC Global, Inc.

I would just add, that we have a very large book of bid work here from the summer and the fall of this year for downstream projects. It's really dependent on which of those customers pull the trigger around and go forward with. But we certainly have a much higher backlog in our bidding for downstream than we've had for the past two years, but we really don't control which ones they go forward with.

Vaibhav Vaishnav - Cowen & Co. LLC

Got it. And last question if I may, I'll ask on SG&A. So, it seems like you guys are not going through the SAP in North America. So, it's like the typical increase in 2Q, 3Q because of the implementation we saw in 2017 should be a tailwind going into 2018 that it won't be there, plus the international restructuring of 200 people coming out seems like SG&A could be lower year-over-year.

James E. Braun - MRC Global, Inc.

That's definitely the case as we execute on the restructuring plans in the international. And going into 2018, we shouldn't see some of the quarter volatility and operating expenses that we saw due to the ERP implementation.

Operator

Our next question comes from the line of Nathan Jones with Stifel. Please proceed with your question.

Nathan Hardie Jones - Stifel, Nicolaus & Co., Inc.

Morning, everyone.

James E. Braun - MRC Global, Inc.

Morning, Nathan.

Andrew R. Lane - MRC Global, Inc.

Good morning, Nathan.

Nathan Hardie Jones - Stifel, Nicolaus & Co., Inc.

I'll start with a follow-up on that SG&A question. You're looking at taking out a couple of hundred heads and clearly reducing some expenses there. You're going to grow next year whether it's double-digit or not. I think we (51:52) today. How do you look at the level of SG&A in 2018, given that you're going to have to add some costs back as revenue grows, but you're taking some costs out internationally? How should we be thinking about that on a quarterly basis as we move into 2018?

James E. Braun - MRC Global, Inc.

Yeah. We're in the process of, as we said, looking at the restructuring, seeing the exact numbers of salaries that are coming out, that will certainly provide some tailwind going into next year. We'll see some wage inflation going into next year, trying to restore people to where we were. I think as a percentage of sales, you'll continue to see that fall down or come down, I should say. But in terms of absolute dollars, we're not ready to lay that out on a quarterly basis just yet.

Nathan Hardie Jones - Stifel, Nicolaus & Co., Inc.

Fair enough. We see seasonal decline in revenues in the fourth quarter. Should we be looking at some positive cash flow coming out of the fourth quarter? Are you still building inventory looking at growth next year? How should we be thinking about that?

James E. Braun - MRC Global, Inc.

Yes. I think it's going to be two offsetting factors. You're certainly going to see some benefits from a receivable side as revenues fall and we move on collections. We're still building some inventory growth for next year, so you ought to see those two factors or those two balance sheet items offset each other.

Nathan Hardie Jones - Stifel, Nicolaus & Co., Inc.

So, working capital should maybe be neutral in the fourth quarter?

James E. Braun - MRC Global, Inc.

No, I think it will still stay around that 20% level so, yes.

Nathan Hardie Jones - Stifel, Nicolaus & Co., Inc.

Okay. On the buyback, you noted that it has an expiration at the end of next year. Would it be your intention, aside from this stock going to $30 or something, to fully exercise that during the rest of this year and 2018?

Andrew R. Lane - MRC Global, Inc.

Yes, Nathan. It is our intent to fully exercise that starting some this fall after this open period starts and into next year. But yes, it's our intent to exercise it by the end of 2018, exercise all of it.

Nathan Hardie Jones - Stifel, Nicolaus & Co., Inc.

Okay, okay. And then just a question on pricing and I'm thinking more specifically about some of the value-added areas, valve actuation that kind of stuff, where you're saying lead times being very long and extended. Do you see any opportunity, given those supply chain constraints to push pricing through on those kind of products to potentially even enhance gross margins further?

Andrew R. Lane - MRC Global, Inc.

Yes, Nathan. I mean, that's been a core strategy for us is to re-weight the company and more towards the valves and valve – automated valves especially. And also, the comments we made about stainless and alloys. We're ramping up our inventory investment there. So, our higher margin businesses were in a very strong inventory position going into 2018.

You're exactly right on extended lead times, we have some lead times going on valve and automated valve packages going into 2018 and some very recently going into 2019 already. So, yes, when lead times extend like they have with a lot of the manufacturers ramping up production levels, pricing definitely moves up as supply gets more tough to get your hands on.

So, yes, we see that being a positive as going into 2018. We're making a big investment on our automation center at La Porte. So, from a central standpoint in the U.S., we certainly will respond to the market both in midstream and downstream automated valves primarily.

But we feel really good about our position there. We had guided to $125 million to $150 million of incremental revenue from both our valve – Cameron valve agreements and our Cameron measurement agreements. And we'll be at the high end of that in 2017, and it builds a lot of momentum going into 2018 for us as we expanded both of those into international.

Operator

Our next question comes from the line of Luke Junk with Baird. Please proceed with your question.

Luke L. Junk - Robert W. Baird & Co., Inc.

Thank you. Good morning.

Andrew R. Lane - MRC Global, Inc.

Good morning, Luke.

James E. Braun - MRC Global, Inc.

Good morning, Luke.

Luke L. Junk - Robert W. Baird & Co., Inc.

Andy, just wondering, first, if you could just unpack a little bit more what you're seeing in terms of M&A. I know you cited slower growth at some of the bolt-ons you typically look at. Just curious what you're seeing in terms of seller expectations, as well as the quality of assets that are coming to market right now and how that really impacts your thinking on capital allocation altogether.

Andrew R. Lane - MRC Global, Inc.

Yeah. Luke, we've stayed very active as far as reviewing opportunities. We really didn't put a lot of effort into it in 2015 and 2016, because the results were really bad on some of these negative EBITDAs on some of these small bolt-ons. We picked up our interest in 2017 as the market started to get better. We've got – just in this last quarter, we looked at four deals. You got some private equity backed deals and some other private companies. But they're still very much in the recovery mode, slower growth, and really the ones we've looked at in oil and gas negative EBITDAs and some outside of oil and gas, more positive.

But we just don't see a compelling bolt-on in the short-term that we have to have. We spent a lot of time these last few years building our global platform. So, we're going to continue to look at them, but nothing compelling as far as them wanting mid-cycle EBITDA multiples and still below mid-cycle, and we're not going to pay for mid-cycle to any of these bolt-ons at this point. So, that's why we see our share repurchase as a better alternative for us.

Luke L. Junk - Robert W. Baird & Co., Inc.

Okay. Helpful. And then just a, maybe clarification. I think you mentioned in the gas utility business in your prepared remarks that there was one particular customer that had a pretty big project going on right now. Just curious as we look into next year, is this some kind of a tough comp that we should be taking in account relative to the gas utility growth overall, or is that not going to be a major factor to say?

Andrew R. Lane - MRC Global, Inc.

Yeah. I think when you look at our gas utility business is very broad. It's one of the real strengths of the company. The major customer is TransCanada that had a big oil infrastructure business and bought Columbia Pipeline Group, which was a big gas infrastructure group. Those two together are that customer we're talking about very active. And really when you look at it today the bulk of that activity is around the Marcellus, and Pennsylvania, West Virginia, lots of pipeline infrastructure and we have a nice backlog with that customer going into next year also.

So, we see still gas utility as being a good end market for us. You still have the fundamental gas meters being replaced by smart gas meters, and we're the leading provider in that area. So, we still feel really good about our gas utility business overall.

Luke L. Junk - Robert W. Baird & Co., Inc.

Okay. Thank you.

Andrew R. Lane - MRC Global, Inc.

Thank you.

Operator

Our next question comes from the line of Walter Liptak with Seaport Global. Please proceed with your question.

Walter Scott Liptak - Seaport Global Securities LLC

Hi. Thanks for taking my question. Good morning, guys.

Andrew R. Lane - MRC Global, Inc.

Good morning, Walt.

James E. Braun - MRC Global, Inc.

Good morning, Walt.

Walter Scott Liptak - Seaport Global Securities LLC

Wanted to see if we could drill a little bit further into the comments that you made and answer about lots of bidding work in downstream and wondered about timing on projects. Kind of all things considered, we've talked in the past, upstream goes first and midstream starts picking up and then downstreams lagged. How long do you think the lag is from now before some of these projects start letting loose? Is it first half next year or second half? What are you hearing about timing?

Andrew R. Lane - MRC Global, Inc.

Yeah. Walt, it's good question. And as we've talked about in 2016 and 2017, we really had a whole of downstream – from downstream projects as people, and that was a result of things not getting sanctioned in 2015. And so, it lags a couple of years on the big mega projects. We have multiple major customers that are doing – have Phase 2 primarily petrochemical projects in the Gulf Coast that we think they will go forward with them. It's just a matter of when.

But it's a significantly higher percentage of quotes are outstanding. We think the decision on those are really related to customers establishing their CapEx for 2018, and then a number of these projects we think will get sanctioned. But you're right. We play a much bigger role, not in the first year, but in the second and third year of those projects as they order more of our products. But we have the big Shell Franklin one, where it's been ramping up in the fourth quarter, it will be our best billing and then we have full two years of billing in 2018 and 2019. So, our big downstream projects follow that, a lot of engineering, a lot of upfront work in the first year of a sanctioned project and more billing and revenue for us in the second and third years.

So, I think it will follow that. We're very – very backlog – nice backlog with midstream projects going into next year in the U.S. and then we also have the future growth project in Kazakhstan, that's very strong backlog for us. And then the Gulf Coast refinery and chemical projects will be a nice add if we get some more of those sanctioned in this year's budget cycle.

Walter Scott Liptak - Seaport Global Securities LLC

Okay. And given the downstream lead times and pricing, how are you guys – are these bids, are you finding them to be more competitive just because we're early on in the downstream cycle or how are you approaching pricing?

Andrew R. Lane - MRC Global, Inc.

Yeah. No, more historical. I mean, these are mega projects, big petrochemical, chemical facilities refining. They're following our tradition on pricing. Early 2015 and 2016, there was a tremendous focus on lower pricing then, but now we've returned to a more normal mode. So, no, it'd be historical pricing for downstream projects from us now.

Walter Scott Liptak - Seaport Global Securities LLC

Okay. Great. All right. Thank you.

Andrew R. Lane - MRC Global, Inc.

Thank you.

Operator

Our final question comes from the line of Steve Barger with KeyBanc. Please proceed with your question.

Ryan Mills - KeyBanc Capital Markets, Inc.

Good morning, guys. This is Ryan on for Steve.

James E. Braun - MRC Global, Inc.

Hey, Ryan.

Andrew R. Lane - MRC Global, Inc.

Good morning, Ryan.

Ryan Mills - KeyBanc Capital Markets, Inc.

Good morning. Yeah. Just wanted to go back to the 2017 guidance. I think you guys guided sales growth to 18% to 24% and year-to-date, you're around 18%, I mean, with the normal seasonality in 4Q, do you still feel like that guidance is attainable?

James E. Braun - MRC Global, Inc.

Well again, we're not updating our full guidance for the year. But if you look at the 18%, what we've achieved for the year and you consider the fourth quarter of last year, which was the low mark, that math can be pretty straightforward.

Ryan Mills - KeyBanc Capital Markets, Inc.

Okay. And then, Andy, you said you expect that backlog to get work down over time. Can you maybe build out a little bit more on that comment and then why you're confident? And any anecdotal commentary you're hearing on well completions would be really helpful.

Andrew R. Lane - MRC Global, Inc.

Yeah. I think, first, on well completions. I think there, at today's commodity pricing, of course, $54, $53 WTI pricing much stronger than we were at the start of last year. With some bottlenecks still on pressure pumping, I think our customers will make decision to work down more of this DUC inventory as a preferred basis. Maybe they hedge some more in 2018, which gives a motivation to pull some more of that down.

But we feel good because that is a backlog of upstream revenues, that's the way we think about that number. So, historically high numbers. So, they're not going to sit down to that level of 2018. So, we see that being a positive. And on our backlog in midstream, we'll see most of that work out, if not, all in 2018. But we'll continue to build new projects. And downstream, we have the backlog really goes from even 2018 and some into 2019 already.

Operator

Thank you. We have reached the end of the question-and-answer session. Ms. Broughton, I would now like to turn the floor back over to you for closing comments.

Monica Schafer Broughton - MRC Global, Inc.

Thank you for joining and for your interest at MRC Global. This concludes our call today.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.