MRC Global - Q4 2023
February 14, 2024
Transcript
Operator (participant)
Greetings, and welcome to the MRC Global's Fourth Quarter 2023 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Monica Broughton, VP, Investor Relations and Treasury. Please go ahead.
Monica Broughton (VP of Investor Relations and Treasury)
Thank you and good morning. Welcome to the MRC Global fourth quarter and full year 2023 earnings conference call and webcast. We appreciate you joining us. On the call today, we have Rob Saltiel, President and CEO, and Kelly Youngblood, Executive Vice President and CFO. There will be a replay of today's call available by webcast on our website, mrcglobal.com, as well as by phone until February 28, 2024. The dial-in information is in yesterday's release. We expect to file our annual report on Form 10-K later this week, and it will also be available on our website. Please note that the information reported on this call speaks only as of today, February 14, 2024, and therefore, you are advised that the information may no longer be accurate as of the time of the replay.
In our call today, we will discuss various non-GAAP measures. 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 to the related GAAP items, all of which can be found on our website. Unless we specifically say otherwise, references in this call to EBITDA refer to adjusted EBITDA. 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, 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 the risk factors concerning these forward-looking statements.
Now I'd like to turn the call over to our CEO, Mr. Rob Saltiel.
Rob Saltiel (President and CEO)
Thank you, Monica. Good morning, and welcome to everyone joining today's call. I will begin with a discussion of notable achievements in 2023, review our fourth quarter results at a high level, and address some of the key business drivers underpinning our 2024 outlook. I will then turn the call over to Kelly to provide a detailed review of the quarter and 2024 guidance before I deliver a brief recap. For the full year 2023, we had many accomplishments that I want to highlight, including setting several new MRC Global records for profit margins, balance sheet strength, and working capital efficiency. First, we generated $181 million in operating cash for the year, well above the $110 million that we previously expected. This translates to a robust 18% levered free cash flow yield for the year.
We are very bullish on the cash generation potential of the company going forward. We also set a company record for full-year adjusted gross margins at 21.5%, which is the second year in a row where we exceeded 21%. Some of our investors have expressed concerns that we might not be able to maintain margins at this level, but I am happy to report that we have now had 7 quarters in a row with 21%+ margins. This is a transformational change from the high teens level of margins throughout most of our company's history. Adjusted EBITDA margins were 7.3% for 2023, the second year in a row above 7%. This is a result of both higher adjusted gross margins along with our discipline on cost management.
We've been very focused on working capital efficiency over the last few years, as evidenced by another record set in 2023, with our net working capital as a percentage of sales coming in at 15.5%. Since 2018, we have improved this metric by 490 basis points, which is helping us to consistently generate positive cash flow, irrespective of the business cycle. Our balance sheet has never been stronger, with ample liquidity and the lowest leverage ratio in our public company history at 0.7x. We expect this metric to improve even further in 2024. Revenue grew for the third straight year in 2023 to $3.4 billion, with year-over-year growth in our PTI and DIET sectors, partially offset by a slowdown in our Gas Utility sector.
Our PTI sector grew by 6%, driven by increased activity and market share gains in the Permian Basin, partially offset by reduced sales in California and Canada. The DIET sector improved 5% in 2023, driven by various LNG, chemicals, and refining projects. Our international business grew 13% in 2023 and is poised for double-digit improvement in 2024, supported by a healthy backlog that was 55% higher at year-end compared to the beginning of 2023. I will now make a few comments about the fourth quarter results and then turn to our outlook. Despite a revenue pullback in the fourth quarter, we maintained strong profit margins and cash generation that exceeded our expectations. For the quarter, adjusted gross margins were 21.9%, and Adjusted EBITDA was $48 million, or 6.3% of sales.
In addition, we generated cash flow from operations of $89 million in the fourth quarter, aided by excellent stewardship of our working capital that allowed us to achieve $181 million for the full year. Turning to our outlook, I will now provide some early perspectives on 2024. First of all, we have seen a meaningful improvement in our backlog and our new orders over the first few weeks of 2024. This gives us optimism that our business is stabilizing, and we expect to return to growth in the coming quarters.... From a sector perspective, for our Gas Utility sector, we expect our customers to continue their destocking efforts in the near term, which could cause capital spending for the first half of the year to lag the levels we saw in the first half of 2023.
However, we expect to see an inflection point around midyear for Gas Utility spending to improve once the destocking targets have been met. In addition, we expect moderation of inflation and interest rates as we move through 2024, which should improve the overall investment climate for this sector. Despite the near-term headwinds, the long-term market fundamentals and growth potential of our Gas Utilities business remain very positive. We continue to expand our market share and wallet share with Gas Utilities, and we are competing for new utility contracts in 2024 that should expand our presence further. Most of the work we perform with our Gas Utilities customers is based on multiyear programs, where they evaluate and implement measures to improve their local distribution networks, and in some cases, their transmission pipelines, to ensure the safety and the integrity of these systems.
Since approximately 35% of the U.S. gas distribution network today is over 40 years old or of unknown origin, this creates a steady backlog of work due to the need to upgrade and maintain these networks as they age. Additionally, as new housing starts improve with lower interest rates, this should result in further growth opportunities for this sector. In the DIET sector, we are optimistic that we will experience modest revenue growth this year from a strong level of refinery and chemical plant maintenance activities, supplemented by a growing slate of projects. We remain excited about energy transition growth opportunities and expect that most of the revenue in 2024 for this subsector will occur in the renewable fuel space. We expect a lot of new project bidding activity this year, but we will likely see most of the benefits in 2025 and beyond.
Turning to our PTI business, recent industry reports have signaled some potential risk of declining oil prices and customer spending levels in 2024. However, larger public E&P companies are expected to drive a higher percentage of the activity in 2024 in the U.S. oil field, which bodes well for our company, as our revenue for this sector is driven primarily from this customer base. Recent announcements of consolidation by our PTI customers are expected to be beneficial to MRC Global once completed. We partner more extensively with the acquirers than we do the targets, and the value we bring is generally better recognized by the larger operators, who procure higher quality, longer life products for their oil and gas development projects.
Another positive for the PTI sector is our international oil and gas market is expected to expand, and we should benefit from our strong position in growth markets such as Norway, the U.K., and Middle East. For our international segment, we expect another strong year, aided by favorable fundamentals in both the PTI and DIET sectors, and a healthy revenue backlog that has grown each of the last five quarters. Our international backlog at the end of the fourth quarter increased 14% over the third quarter. We've lined up exciting projects in both PTI and in DIET, and we expect another year of double-digit growth for international in 2024. Given the slower business environment in the U.S. segment, we are laser-focused on improving the things we can control, such as our cost structure.
We are working to lower our absolute SG&A costs this year after experiencing an increase in 2023, which will support our ability to maintain healthy adjusted EBITDA margins. We are implementing a number of cost optimization initiatives, including slower wage growth and reductions in professional fees, overtime, travel and entertainment expenses, and logistics costs. We have made significant progress elevating our adjusted gross margins and EBITDA returns over the last few years, and we are committed to not losing this momentum in 2024. In summary, we expect 2024 to be a transitional year for the company in terms of revenue, but it is clear that we have never been a stronger company than we are today.
We remain optimistic about the fundamentals of all three business sectors and their long-term outlook, given our strong market position and the expectation of demand for our products and services for decades to come. With the recent improvements in our cost structure and our working capital efficiencies, we are well positioned to generate significant earnings and cash flow across the business cycle. We are targeting to generate approximately $200 million in operating cash flow in 2024, which will make us an even stronger company with minimal debt at the end of this year. This will provide us with a lot of flexibility to pursue a capital allocation strategy that is focused on the highest return opportunities for our shareholders, including investing in our growth drivers and distributing capital to our shareholders. I will now hand it over to Kelly.
Kelly Youngblood (EVP and CFO)
Thanks, Rob, and good morning, everyone. My comments today will primarily be focused on sequential results, comparing the fourth quarter of 2023 to the third quarter of 2023, unless otherwise stated. Total company sales for the fourth quarter were $768 million, a 14% sequential decline and 12% lower than the same quarter a year ago. From a sector perspective, Gas Utility sales were $253 million in the fourth quarter, a $61 million or 19% decline. As expected, we continued to see Gas Utility customers focused on reducing their product inventory levels due to more certainty in supply chain and associated lead times. End-of-year seasonality, along with higher interest rates and inflation in construction costs, also caused customers to delay project activity.
The DIET sector fourth quarter revenue was $258 million, a decrease of $21 million or 8% due to the conclusion of various projects in the third quarter and lower year-end turnaround activity in the U.S. As we have mentioned before, this sector has a significant amount of project activity, which can create substantial variability between quarters. The PTI sector revenue for the fourth quarter was $257 million, a decrease of $38 million or 13% sequentially, primarily due to seasonality and lower year-end customer activity in the U.S.
From a geographic segment perspective, U.S. revenue was $633 million in the fourth quarter, a $112 million, or 15% decrease from the previous quarter, driven by the Gas Utility sector, which was down $59 million, followed by the PTI sector, which was down $34 million, and finally, the DIET sector, which was down $19 million. International revenue was $107 million in the fourth quarter, up $2 million or 2%, driven by improvement in both the PTI and DIET sectors. The PTI sector increase was driven by increased activity in Norway, the Middle East, and the U.K. The DIET sector increase was driven by energy transition activity as well as project activity in Europe.
We remain very optimistic about the outlook for our international segment, which has experienced a 55% increase in backlog since the beginning of 2023, with double-digit growth in both the PTI and DIET sectors. Canada revenue was $28 million in the fourth quarter, down $10 million compared to the prior quarter, due to year-end budget exhaustion and year-end curtailment in customer spending. Now turning to margins. Adjusted gross profit for the fourth quarter was $168 million, or 21.9%, a 60 basis point improvement over the third quarter.
Although we have experienced deflation in our line pipe business this year, along with inflation stabilization across most other product lines, we have been successful maintaining adjusted gross margins in excess of 21% of sales due to a higher margin product mix and a higher contribution of revenue from our international segment, which is accretive to overall company gross margins. This marks the seventh consecutive quarter with adjusted gross margins exceeding 21%. Reported SG&A for the fourth quarter was $125 million, or 16.3% of sales, as compared to $126 million, or 14.2% for the third quarter. This quarter includes $1 million of pre-tax charges related to activism response, legal, and consulting costs.
Excluding these costs from our SG&A, our adjusted SG&A for the fourth quarter of 2023 is $124 million. Adjusted EBITDA for the fourth quarter was $48 million, or 6.3% of sales, a 160 basis point decline from the third quarter due to the lower sales activity. Tax expense in the fourth quarter was $2 million, with an effective tax rate of 9%, as compared to $14 million of expense in the third quarter. The fourth quarter was favorably impacted by a net reduction in a foreign valuation allowance provision.
For the fourth quarter, we had net income attributable to common shareholders of $15 million, or $0.17 per diluted share, and our adjusted net income attributable to common share stockholders on an average cost basis, normalizing for LIFO adjustments and other items, was $20 million or $0.23 per diluted share. In the fourth quarter, we generated $89 million in cash from operations and a net $181 million for the full year. This is a 65% increase over our previous guidance, due to exceeding our year-end working capital targets, resulting in an 18% levered free cash flow yield for the year. And as Rob pointed out, we also achieved our best net working capital to sales ratio in our history at 15.5%, a significant improvement over our historical trend.
Turning to liquidity and capital structure, our current availability on the ABL is $610 million, and including cash, our total liquidity is $741 million. Our leverage ratio, based on net debt of $170 million, was 0.7x, a record low for the company. With the cash we expect to generate in 2024, we believe our liquidity and the leverage ratio will continue to show significant improvement. Based on our current projections, we believe we can comfortably pay off our Term Loan B on or before its maturity date in September 2024, with a combination of excess cash and our ABL facility. As such, we are now classifying our term loan as current debt. Also, this reduces our ongoing interest expense burden by 150 basis points for any balance that remains on our ABL.
I would also like to highlight an exciting initiative we are undertaking this year. We recently launched a project to replace and modernize our North America Enterprise Resource Planning, or ERP system. Currently, we are running on a mainframe system, which is at the end of its useful life. We will be moving to a modern cloud-based ERP system over the next two years. I am personally the executive sponsor of the project and have the utmost confidence that we will be successful in meeting our budget and timeline goals. We have spent the past year planning, evaluating software packages and implementation partners, and building a stellar blue-ribbon team of some of the company's best resources to implement this ERP system.
The new ERP is expected to provide leading-edge functionality, including AI capabilities, allowing us to automate and streamline our processes and systems to improve reporting, forecasting, and controls. It will also reduce IT maintenance costs by approximately $2 million a year. The CapEx investment is expected to be approximately $50 million spent over the next two years, and we expect to be fully implemented and running on the new system in the second half of 2025. We are excited about the multitude of opportunities this new cloud-based system will provide to our organization. Now I'll cover our outlook for the first quarter and full year 2024.
For the first quarter, we expect sequential revenue to be flat to modestly lower for the total company, with PTI and Gas Utility revenue flattish with the fourth quarter and DIET declining modestly due to the timing of various project deliveries. We expect 2024 to be a transitional year and currently believe total company revenue will come in flat to a potentially modest decline of low to mid-single digits compared to 2023 levels. From a sector perspective, we expect DIET to be modestly higher for the year, PTI to be modestly lower, and Gas Utilities to also be down for the full year, but showing recovery in the second half of 2024. It's noteworthy and encouraging that recent trends in our 2024 year-to-date sales, new order intake, and backlog are providing optimism that we are seeing stabilization in the business.
For example, the backlog at the end of January is up $47 million, or 6.8%, since December 31st, with gains across all sectors and all segments. Also, January sales have improved by about 1% over December. Finally, January's new order intake is up over 30% compared to December, a significant improvement. In 2024, we will also target the following key metrics: average adjusted gross margins of 21% or better, average Adjusted EBITDA margins of 7%, average SG&A cost as a percent of revenue below 15%, and for cash flow from operations, we expect to exceed the cash we generated in 2023, targeting to hit $200 million in operational cash generation. Capital expenditures are expected to be elevated this year due to our ERP initiative.
We estimate total capital spend in the $40 million-$45 million range in 2024, higher than our normal run rate of approximately $15 million. And finally, we expect our effective tax rate in 2024 to be in the range of 26%-28%. And with that, I would like to turn it back to Rob for closing comments.
Rob Saltiel (President and CEO)
Thanks, Kelly. It bears repeating that our company is in a very strong position, and despite the pullback in activity in the second half of 2023, we achieved key milestones in profit margins, working capital efficiency, and balance sheet strength, setting us up for future success. As we continue to execute our strategy and generate consistently strong levels of free cash flow, we will have ample financial flexibility to deliver shareholder value through an opportunistic, shareholder returns-focused capital allocation strategy. These are the highlights I want to summarize before opening for Q&A. We are targeting $200 million of cash from operations in 2024. With the working capital efficiencies we have achieved, we are well positioned to consistently generate cash regardless of the business cycle, which is a transformational change.
We expect average adjusted gross profit to remain in the 21% range in 2024 and are targeting average EBITDA margins of 7% for the full year. We intended to pay off our Term Loan B on or before its maturity date in September 2024, without requiring any additional financing. We expect to exit 2024 with a minimal net debt position and be in a positive net cash position in 2025. And lastly, before we open the call for Q&A, similar to last quarter, I want to acknowledge the rumors and speculation about one of our shareholders. As I'm sure you can appreciate, we don't discuss the specifics of our interaction with any of our existing or potential shareholders, and we won't be able to comment. As such, we kindly ask that you keep your questions in the Q&A session focused on our results.
With that, we will now take your questions. Operator?
Operator (participant)
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. First question comes from Nathan Jones with Stifel. Please go ahead.
Nathan Jones (Managing Director and Senior Equity Analyst)
Good morning, everyone.
Rob Saltiel (President and CEO)
Yeah. Good morning, Nathan.
Kelly Youngblood (EVP and CFO)
Good morning, Nathan.
Nathan Jones (Managing Director and Senior Equity Analyst)
I just wanted to start off with cash flow, given, you know, I'm sure you guys had trouble getting out of your offices, crawling over it all this morning. There's been a significant reduction in receivables, inventories, and offset a little bit by reduction in payables. I think the cash flow guidance for 2024 would imply, you know, pretty significant further reduction in working capital and receivables, inventories, payables. Can you talk about, you know, kind of what you're expecting there? I would say, you know, probably you would acknowledge that $200 million of [audio distortion] might not be sustainable over the long run at these levels of revenue. So any color you can give us on what you think the sustainable cash flow level of the business is?
Kelly Youngblood (EVP and CFO)
Yeah, Nathan, this is Kelly. I'll, I'll start off, and, and Rob can jump in if he likes. But no, listen, you know, we've been consistent here over the last couple of years, you know, saying to the market that with our working capital efficiency that we've maintained or we've improved over the last couple of years, that we think we can consistently generate cash, you know, irregardless of what the market conditions are. And so I think this year is a very good example of that. You know, that it, you know, up slightly, you know, not, not huge improvement, but up slightly on revenue, but having $181 million of cash generation, we're very proud of that.
You know, working capital efficiency, we've, I think we, you know, we put in our press release, it's a new record of 15.5%. You know, if you go back to 2018, that was around a 20% number, so we've made drastic improvement there. To answer your question, though, the sustainability, you know, we think, you know, as we've guided to $200 million in 2024, you know, we're gonna have some working capital influence there. You know, we think we have room to improve our turn rates on inventory, and we've made a lot of progress on our receivables, past due receivables, and things like that, but we think we can maintain and even continue to improve that in 2024.
You know, the majority of the cash flow generation, I would say, you know, two-thirds to three-quarters of it, is still gonna be, you know, cash flow from operations before working capital changes. But we'll still get the benefit, you know, from working capital changes to get us up, you know, make up that other one-third to 25% to get us up to the $200 million number. And then I think in, you know, going forward, Nathan, you know, we're not guiding anything right now, but we think, you know, easily we can have $100+, maybe even $150+ million of cash generation per year in a, you know, call it a single-digit type growth market.
You know, if you get into, like we were in 2022, where we had 26% revenue growth, it's harder to achieve that kind of, you know, cash flow number. But with moderate growth, whether we're up or down, we think, you know, easily $100 million-$150+ million is very achievable.
Nathan Jones (Managing Director and Senior Equity Analyst)
Thanks. I'll follow up with, I guess, cash priorities. You obviously have this timeline that you have to deal with in September. It seems counterproductive for your preferred shareholder to be blocking refinancing of that. Is there any update you can give us on, you know, any of the negotiations you've had there that might allow you to refinance that, rather than have to use cash plus the ABL to pay it off? Which would clearly give you guys some more financial flexibility to do some M&A or to do some share repurchase in the nearer term, rather than have to wait a little bit longer for that. So if there's any commentary you can make on that, or how you're thinking about deploying capital once we've resolved this issue.
Rob Saltiel (President and CEO)
Yeah, Nathan, I'll jump in here. Look, we've talked about this before, that we've had the disagreement previously on the previous attempt to refinance the term loan, and we continue to remain in discussions about the opportunities to get through that, if in fact, we decide to go to the market for a refinancing. I think one of the things that we've been pleasantly surprised with is how much cash generation we've actually been able to deliver. As Kelly said, we've talked about this for quite some time, that we need to be able to demonstrate we can generate cash across the cycle, and to do so in, I would say, pretty large amounts, given the comment you made when we opened the call.
I, I'm really proud of the fact that our team's been able to do that. It's obviously a combination of profitability of the business. Our team has done a great job on collections and reducing our day sales outstanding, and making sure as well that we're more efficient with our inventory, that we can generate more revenue and more profitability with less inventory, which is a key metric when you're in the distribution business. So all those things lining up have really demonstrated we can generate a lot of cash, and in fact, we're generating so much cash that, you know, we can basically pay off the term loan with a combination of cash and pulling on the ABL without any necessity of refinancing.
Now, opportunistically, to the extent that we have a resolution with the disagreement with the preferred shareholder, we could consider doing exactly what you say, which is, you know, taking out an additional financing vehicle to do some other things, potentially with returning cash to shareholders. But at this point in time, the base case is we use a combination of the ABL and cash to retire the term loan B in September.
Nathan Jones (Managing Director and Senior Equity Analyst)
Thanks. Last one for me on the ERP. Go ahead, Kelly.
Kelly Youngblood (EVP and CFO)
Hey, Nathan, I was just gonna add one more thing to what Rob said. You know, when we saw how much cash we generated closing out 2023 and what we're projecting for 2024, we saw pretty quickly that if we went out to the market to do a refi of the term loan, we were gonna be putting a lot of cash just immediately on the balance sheet, right? I mean, like, literally like $200 million of cash on the balance sheet. And we can always go back out to the market. You know, there's nothing that says we have to do it right now. We always have that flexibility. And so, you know, time is on our side. We've got, you know, very good projections ahead of us.
As Rob said in his prepared comments, and I think I mentioned it too, we're gonna have minimal net debt at the end of the year, so we think we're very well positioned.
Nathan Jones (Managing Director and Senior Equity Analyst)
Yeah, I think you're in a good spot for that. Just on the ERP system, I guess the implication is about $30 million of CapEx in 2024 on that. Can you talk about how long the total rollout is and what the total cost of the ERP system is gonna be? And then what you expect to be the financial and operational benefits that you can generate from that new system?
Kelly Youngblood (EVP and CFO)
Yeah, absolutely, Nathan. A good question. Now, we, you know, we said in the prepared comments, the total project costs, we're estimating around $50 million. We think we'll incur $25 million-$30 million of that here in 2024, with the remainder in 2025. We think we'll be, you know, fully up and running on the new system in the second half of 2025. So this doesn't, you know, go on for, for many years. It's really just kind of an 18-month period that we're gonna be doing the implementation. And so, you know, and that's on top of our normal run rate of CapEx, around $15 million, you know, to get you to the guide that we have this year of $40 million-$45 million.
You know, the benefits we expect to receive, you know, we're kind of really just in the early days of the design phase right now, but let me tell you, we've been working on this for over a year. We spent the first six months of last year going through software selection to make sure we were getting the best fit tool for our business. And then we spent, you know, really the second half of the year making sure we got a, you know, best-in-class implementation partner, you know, to take us through the whole process. And, you know, some of the benefits we think we're gonna get, you know, if you look at just the maintenance costs we have on the existing system versus the new, it's $2 million annual savings from that alone.
You know, the being on a mainframe system, which is what we are right now on the North, you know, for North America, it, you know, there's just a lot of compatibility issues, integration issues with other equipment, software, industry standards. So, you know, that system has been, you know, served us very well, very well for many decades, but it just becomes more and more challenging to maintain an old system like that. And even just hiring employees and contract resources to maintain, support, and operate the system becomes very difficult. And so, you know, it really is time for us to move on to, you know, to something new.
And, you know, as far as you know, I know there's always concern about the level of risk of a new system like this, but let me tell you, we, as I mentioned, we spent the last year doing our homework. We've selected a first-class team of MRC employees to work on this. Many of them, this is not their first ERP project. They've worked on other ERP implementations, and so they're not new to this. This is a North America-only implementation, which I think is very important. We're not dealing with a lot of, you know, countries around the globe, which, you know, can introduce different risk.
You know, if you look at our footprint here in North America, between our service centers and our RDCs, we have a very standardized approach and processes in the way we run the business. And then we really intend to have very little to no customization. You know, that introduces risk when you do that. And with the cloud-based systems you have today, off-the-shelf, they give you virtually all the functionality that you need. I mean, you know, off-the-shelf functionality, there's hundreds or even thousands of companies that are using the software package already, and so it's not like you're having to, you know, program things from the ground up. You know, it's already been proven and in use for many years now, and so we feel pretty comfortable.
And then on top of that, we're gonna have multiple, what we call, conference room pilot testing, before we go live with the system to make sure that, you know, everything's working, correctly. So we're very excited about it. I think this is gonna be a game changer for the company. It's gonna help us with our reporting, our forecasting. You know, we've made a lot of improvement in working capital efficiencies, but I think this new system is gonna take us even to the next level, in demand forecasting and better inventory management and things like that.
Nathan Jones (Managing Director and Senior Equity Analyst)
Great. That's awesome. Thank you.
Operator (participant)
Next question comes from Ken Newman with KeyBanc Capital Markets. Please go ahead.
Ken Newman (VP and Equity Research Analyst)
Hey, good morning, guys.
Nathan Jones (Managing Director and Senior Equity Analyst)
Morning, Ken.
Kelly Youngblood (EVP and CFO)
Morning.
Ken Newman (VP and Equity Research Analyst)
You know, the cash flow comments earlier were very helpful. Thought I'd maybe ask a working capital question a little differently. You know, obviously, working cap's gonna 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 get to longer term? Is there a target that you'd be willing to quantify?
Kelly Youngblood (EVP and CFO)
Yeah. So, you know, we finished last year at 15.5%. You know, net working capital as a 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, you know, continue to do even better on that metric. You know, I'm hoping that we can get a 14 handle on that percent versus a 15. You know, and it's always a function. You know, inventory, we can, we—you know, it's a lot easier for us to control. We'll be reducing inventory in 2024. You know, the receivable side of it, you know, getting the collection from customers can vary, you know, quarter by quarter. You know, I'll say the fourth quarter of 2023, 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, you know, stay on top of that, keep working it. But again, I think we'll be in that 14%-15%, you know, percentage range, when you look at the net working capital as a % of revenue.
Ken Newman (VP and Equity Research Analyst)
Got it. That's, that's very helpful. And then maybe just go a little bit more in-depth on, you know, you've got the ERP system 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 (EVP and CFO)
Yeah, I mean, you know, I think, as I mentioned, the inventory management is something that we're really extremely focused on. You know, centralizing inventory where we can, reducing turn rates, where we can. As I mentioned, I think the ERP, we've made a ton of progress in that area, but I think the ERP system is gonna take us even to the next level with improving analytics. You know, we're gonna have some AI functionality that's gonna be embedded, you know, machine learning type functionality. But just the forecasting capability, better reporting, and things like that, we think we can continue to improve, you know, like, you know, 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 (President and CEO)
Yeah, 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. We've done a lot of centralization of the decision-making around inventory purchases, and we're making sure that you know, any inventory that we add to our system will absolutely, you know, pay for itself and then some.
And so I think going forward, you're just gonna 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, key driver of the working capital efficiency measure.
Ken Newman (VP and Equity Research Analyst)
Yep. Maybe another follow-on question to one that Nathan asked earlier. But, you know, in terms of, you know, you're gonna 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, you know, pay that off? And I guess, where on the priority list would a take out of the preferred land for capital deployment?
Rob Saltiel (President and CEO)
Well, we think it's a little premature on this call to talk about all the things that we're gonna be doing four quarters from now, but we did wanna give you, as investors, some insight to how we're thinking about the capital structure and the flexibility that we're gonna have, that frankly, we've never had as a public company to really consider these things and not over-lever ourselves. But we, you know, we're gonna 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 wanna 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 (VP and Equity Research Analyst)
That's helpful. If I could just squeeze one more in. You know, 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 impact from the administration calls on LNG permitting, and just where does that fit into your DIET and PTI guidance for the year?
Rob Saltiel (President and CEO)
Yeah. 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 U.S. still has, you know, abundant supplies of natural gas that is cheap and can be transported safely and reliably around the world. So we think LNG is gonna 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, you know, 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 this space as we go forward. We hope this is a temporary issue that works itself out because, again, we're bullish on LNG, and this is a great growth opportunity for MRC Global.
Ken Newman (VP and Equity Research Analyst)
Very helpful, guys. Thank you.
Rob Saltiel (President and CEO)
You're welcome.
Operator (participant)
Next question, Chris Dankert with Loop Capital, please go ahead.
Chris Dankert (SVP of Equity Research)
Hey, morning, guys.
Rob Saltiel (President and CEO)
Morning.
Chris Dankert (SVP of Equity Research)
Glad to hear about the, the, you know, kind of proactive efforts around SG&A, and then thank you for kind of getting into the, into the moving parts there. But maybe, can you try and size what some of these proactive actions are for, for 2024, and, and maybe just even kind of level set us for what to expect going into the first quarter on SG&A?
Rob Saltiel (President and CEO)
Yeah, I mean, look, we're we recognize that as revenues stagnate or potentially even fall a little bit from 2023-2024, 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, you know, 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 gonna get back on a growth trajectory.
So we're not looking to take a, you know, 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 U.S. 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 gonna be looking at a new RDC in the Atlanta area that's gonna 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 gonna be flat to slightly down on revenue, at least we anticipate that, that'll allow us to maintain that 7% EBITDA margin. And we think that's really important for shareholders and something that we wanna make sure that we preserve as we move through this transition year.
Kelly Youngblood (EVP and CFO)
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, you know, through the year as we progress. And then, as we said in our guidance, you know, we think we can keep that as a percent of revenue below 15%. In 2023, we were 14.7%, so still keeping it, you know, that percentage in that same range.
Chris Dankert (SVP of Equity Research)
Got it. That's all extremely helpful. Thank you for the color there, guys. And then I guess just with, you know, the Trans Mountain Pipeline, you know, 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 that's done? Just how do we think about Canada overall?
Rob Saltiel (President and CEO)
Well, Canada, to be fair, has been a bit of a challenge for us in terms of the revenue profile, and for a couple 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 a challenge for us. And you know, it's a very competitive market as well. And so you know, we are seeing you know, 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, you know, 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, you know, historically or recently, historically for us, been a pretty tough market.
Chris Dankert (SVP of Equity Research)
Yeah, makes sense. Makes sense. If I could sneak just one last one in. Again, like I say, net cash position in 2025, you know, more optionality than, than, you know, recent years here. Where would you see, you know, kind of any potential M&A opportunities? Obviously, you-- 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, help bolster growth here, if, if any?
Rob Saltiel (President and CEO)
Yeah, look, we, we're gonna look at various capital allocation strategies, and, and we're big believers that you know, growing our business is important to shareholders as well. Obviously, any M&A that we would consider or undertake has to be really thoughtful and, and absolutely accretive to the, to the story and to the financials of the company. We're big believers that if you can get scale economies, in a business, that that is certainly a, a really, good way to gain, you know, to, to, to gain market share and also to have some synergies right out of the gate in terms of cost reduction. But... And then opportunities potentially, to expand the, the scope of services that we provide, those kind of things are fair game as well.
But I don't wanna get too far ahead of ourselves in terms of saying that we've got a very, let's say, well-developed M&A plan around particular acquisitions. We continue to look at the market and see what makes sense. Again, it's gonna have to be a high hurdle for any significant M&A to really make our cut, because we're really conscious of the fact that we've got to, you know, do right by our shareholders in terms of making sure that they share in the bounty that we're now developing through all this cash generation. So I would just say stay tuned on that, and as and when we see deals that make sense for this company, we'll, we'll certainly be happy to, to share those thoughts, you know, when they're developed.
Chris Dankert (SVP of Equity Research)
Understood. Well, best of luck on 2024, guys.
Rob Saltiel (President and CEO)
Great. Thank you.
Operator (participant)
Next question, Tommy Moll with Stephens Inc. Please go ahead.
Max Canan (Equity Research Associate)
Good morning, this is Max Canan for Tommy. I was wondering if you could provide us with any additional color on gross margin seasonality for 2024, and whether or not you're expecting margins to be sequentially higher in 1Q?
Kelly Youngblood (EVP and CFO)
Yeah, well, Max, we guided, you know, that we thought, you know, for the full year average, you know, we'll, you know, we feel comfortable that we can maintain the 21%+ margins that we've, you know, been enjoying for seven quarters in a row now. So we're pretty proud of that fact. You know, I think, you know, in Q4, you know, we had elevated margins of 21.9%. That was really strong. We had some good sales, some bulky, you know, line pipe sales that came in at high margins that helped, you know, prop that up, higher than, you know, just the normal kind of low 21% range. You know, I think in Q1, you won't see a 21.9%.
It is gonna moderate from that level, but still be above the 21%, you know, 21. You know, call it low 21% type range is probably what we're thinking. But again, for the full year, you know, we're proud 7 quarters in a row. We're gonna keep that trend going. You know, the one that really works against us there is the line pipe margins. You know, there has been a deflation over the last year or so that we have to deal with, but we've been focusing on product mix and the higher margin product categories, you know, to offset or help offset, you know, the impact that we see in line pipe.
Also, with the double-digit growth that we've had in the international business, that is a nice tailwind for us because the international business has accretive gross margins compared to the company average. And so, you know, we feel like everything's pointing in the right direction to, you know, to keep that trend going at 21+.
Max Canan (Equity Research Associate)
Okay, great. Yeah, thanks for the color. And yeah, you have already covered the rest of my questions, so I'll go ahead and turn it back. You have a nice day.
Kelly Youngblood (EVP and CFO)
Thank you. Thank you.
Operator (participant)
Thank you. I will now turn the call over to Monica Broughton for closing remarks.
Monica Broughton (VP of Investor Relations and Treasury)
Thank you all for joining our call today and for your interest in MRC Global. We look forward to having you join us for our first quarter conference call in May. Have a great day.
Operator (participant)
This concludes today's teleconference. You may disconnect your lines at this time.