Nathan Jones: Great. That’s awesome. Thank you.
Operator: Next question comes from Ken Newman with KeyBanc Capital Markets. Please go ahead.
Ken Newman: Hey. Good morning, guys.
Rob Saltiel: Good morning, Ken.
Kelly Youngblood: Good morning.
Ken Newman: You know, the cash flow comments earlier were very helpful. Thought I’d maybe ask the working capital question a little differently. Obviously, working cap is going to benefit from the lower revenue in the next few quarters. But is there a way maybe to quantify what working cap as a percentage of revenue gets to longer term? Is there a target that you’d be willing to quantify?
Kelly Youngblood: Yes. So we finished last year at 15.5%, you know, net working capital as percent of revenue. As we mentioned, that’s a record. You know, it’s been trending lower for the last several years. We think we can continue to do even better on that metric. I’m hoping that we can get a 14 handle on that percent versus a 15. And it’s always a function. Inventory, we can — it’s a lot easier for us to control. We’ll be reducing inventory in 2024. The receivable side of it, getting the collection from customers, can vary quarter by quarter. I’ll say the fourth quarter of ’23, we had really strong collections coming in. We were able to do a lot of improvement on past due receivables, and we just got to stay on top of that, keep working it. But again, I think we’ll be in that 14% to 15%, you know, percentage range when you look at the net working capital as a percent of revenue.
Ken Newman: Got it. That’s very helpful. And then maybe just go a little bit more in depth on, you’ve got the ERP system that your initiative that you’re working on this year. But what else can you talk to that’s structurally giving you better line of sight on that working capital outlook?
Kelly Youngblood: Yes, I mean — I think, as I mentioned, the inventory management is something that we’re really extremely focused on, centralizing inventory where we can, reducing turn rates where we can. As I mentioned, I think the ERP — we made a ton of progress in that area. But I think the ERP system is going to take us even to the next level with improving analytics. You know, we’re going to have some AI functionality that’s going to be embedded, machine learning type functionality, but just the forecasting capability, better reporting and things like that. We think we can continue to improve on top of what we’ve done today. And that working capital metric as a percent of sales will just continue to improve.
Rob Saltiel: Yes, and if I could jump in. We’ve really spent a lot of time focusing on inventory efficiency. I mean, inventory is where the distributor puts his or her capital dollars and that has to be an efficient metric for us. In fairness, I don’t think we focused on that as much as maybe we could have or should have in previous years. And we’ve done a lot of centralization of the decision-making around inventory purchases and we’re making sure that any inventory that we add to our system will absolutely pay for itself and then some. And so, I think going forward, you’re just going to see the manifestation of that change in outlook and focus on inventory management to increase our turn rates and just make sure we have more productive, more profitable inventory, which again is a key driver of the working capital efficiency measure.
Ken Newman: Yes. Maybe another follow-on question to one that Nathan asked earlier. But in terms of, you know, you’re going to be close to, you know, zero net debt by the end of the year, you could argue that maybe that’s too low of a net leverage structurally longer term. So I guess how do you think about the capital structure once you pay that off? And I guess where on the priority list would a take out of the preferred land for capital deployment?
Rob Saltiel: Well, we think it’s a little premature on this call to talk about all the things that we’re going to be doing four quarters from now. But we did want to give you as investors some insight to how we’re thinking about the capital structure and the flexibility that we’re going to have that frankly, we’ve never had as a public company to really consider these things and not over-lever ourselves. But we’re — you know, we’re going to keep a really open mind about how that balance sheet is managed and what is the right level of leverage for us. You know, you asked the question about where’s the preferred. You know, currently, the interest or the dividend that we pay and the interest — the 6.5% coupon that’s on that preferred.
That’s a pretty attractive financing right now in today’s market, at least with where interest rates are today, and even accounting for the lack of a tax shield. Going forward, if interest rates get reduced, then maybe the dividend looks a little more expensive than it does today. But right now, we really haven’t made any decisions about how and whether the preferred needs to be taken out. Again, we’ve got a lot more flexibility than we’ve ever had before, and we’ll consider that as we go forward. Certainly, you know, one thing that we do want to give some shareholders some reassurance on is that we certainly would try to avoid any kind of a dilution event of conversion of the preferred into common stock. Obviously, the stock price has got to move a bit more from where it is today.
So that’s something that shareholders should have in their mind. But look, if we find ourselves in a position where we’ve got enough cash to fund growth, enough cash potentially to return to common, and additionally we see an attractive opportunity to take out the preferred, we’ll certainly look to do that.
Ken Newman: That’s helpful. If I could just squeeze one more in. I know that there’s a lot of moving pieces and parts here just on the macro outlook, but I’m curious if you’ve seen any impacts from the Administration’s halt on LNG permitting and just where does that fit into your DIET and PTI guidance for the year?
Rob Saltiel: Yes. I would say, it’s early days to really assess what’s happened on that yet. Clearly, it feels a little bit like an election year action, given the importance of LNG exports to many of our allies around the world, and the fact that the US still has abundant supplies of natural gas that is cheap and can be transported safely and reliably around the world. So we think LNG is going to continue to be a strong growth vehicle for the country and then, frankly, for our DIET sector. The projects that we’re already involved in that don’t involve shipping LNG to non-FTA members, those are obviously going forward. And then going on the projects that are under consideration, at this point, we really haven’t seen any direct effects of that on our business, but obviously, we’ll watch the space as we go forward. We hope this is a temporal issue that works itself out, because, again, we’re bullish on LNG, and this is a great growth opportunity for MRC Global.
Ken Newman: Very helpful, guys. Thank you.
Rob Saltiel: You’re welcome.
Operator: Next question, Chris Dankert with Loop Capital. Please go ahead.
Chris Dankert: Hey, morning, guys.
Rob Saltiel: Good morning.
Chris Dankert: Glad to hear about the kind of proactive efforts around SG&A, and thank you for kind of getting into the moving parts there. But maybe can you try and size what some of these proactive actions are for ’24 and maybe just even kind of level set us for what to expect going into the first quarter on SG&A?
Rob Saltiel: Yes, I mean, look, we’re — we recognize that as revenues stagnate or potentially even fall a little bit from ’23 to ’24, that we really need to make sure that our cost structure reflects that. And we’ve identified a number of initiatives, some of which I talked about generally in the prepared comments, for how we can reduce our SG&A this year. We’re really looking at kind of single-digit reduction. So this is not a massive reduction because we’re looking at 2024 as a transition year. We fully expect that we’re going to get back on a growth trajectory. So we’re not looking to take a — really a significant reduction in SG&A, which then would cause us to not be in position to capitalize on the growth we expect in 2025.
But as a practical matter, you know, we obviously are expecting slower wage growth this year. I think everybody is seeing that across industry and certainly here in the US. We’ve mentioned that professional fees, some of our travel and entertainment expenses, overtime, all those things potentially can come down with lower activity or flat activity relative to what we’d expected previously. Logistics costs we think we can reduce as well through some additional efficiencies in our regional distribution center network. So we’re going to be looking at a new RDC in the Atlanta area that’s going to give us some savings on freight costs. So we got a number of things identified which will take that number down. Again, I think you should really focus on kind of low single-digit reduction in the SG&A in aggregate.
But that’s the kind of reduction that given we’re going to be flat to slightly down on revenue, at least we anticipate that, that will allow us to maintain that 7% EBITDA margin. And we think that’s really important for shareholders and something that we want to make sure that we preserve as we move through this transition year.
Kelly Youngblood: And Chris, I would just add. You asked about Q1. I would keep Q1 SG&A pretty consistent to where we were in Q4, but then it’ll be stepping down each quarter through the year as we progress. And then, as we said in our guidance, we think we can keep that as a percent of revenue below 15%. In 2023, we were 14.7%. So still keeping it — that percentage in that same range.
Chris Dankert: Got it. That’s all. Extremely helpful. Thank you for the color there, guys. And then I guess just with the Trans Mountain Pipeline nearing completion, how do we think about opportunities in Canada, perhaps more broadly? I mean, do we see more refining opportunity? Are things, you know, tapering off, now that’s done? How do we think about Canada overall?
Rob Saltiel: Well, Canada, to be fair, has been a bit of a challenge for us in terms of the revenue profile and for a couple of reasons. I think you see that a lot of the larger players in Canada that we typically serve are not as active in that market as they are in, let’s say, some other upstream markets like the Permian Basin. So that’s been the challenge for us. And, you know, it’s a very competitive market as well. And so, you know, we are seeing the start to the year, as Kelly mentioned, you know, increasing in backlog and we say across all segments. So that includes Canada. So we are seeing some really nice stuff up there to start the year. We’re also seeing some attractive projects, some of which fall in the energy transition space up there as well.
So there are some good things happening in Canada. But before we get too excited about the Canadian market, we just need to make sure that we can consistently generate revenue and profitable revenue up there. And what has been historically or recently historically for us has been a pretty tough market.
Chris Dankert: Yes, makes sense. If I could sneak just one last one in. Again, like I say, net cash position in ’25, more optionality than recent years here. Where would you see kind of any potential M&A opportunities? Obviously, excluding the destocking, gas utility has been a great kind of organic story, but where maybe are some of the gaps that M&A could kind of help bolster growth here, if any?
