May 3, 2013
Executives
Ken Dennard - Co-Founder, Chief Executive Officer and Managing Partner Andrew R. Lane - Chairman, Chief Executive Officer, President, Member of Risk Management Committee, Chief Executive Officer of McJunkin Red Man Corp and President of McJunkin Red Man Corp James E.
Braun - Chief Financial Officer, Executive Vice President and Member of Risk Management Committee
Analysts
David J. Manthey - Robert W.
Baird & Co. Incorporated, Research Division Matt Duncan - Stephens Inc., Research Division James C.
West - Barclays Capital, Research Division Douglas L. Becker - BofA Merrill Lynch, Research Division Jeffrey D.
Hammond - KeyBanc Capital Markets Inc., Research Division Allison Poliniak-Cusic - Wells Fargo Securities, LLC, Research Division Ryan Merkel - William Blair & Company L.L.C., Research Division Igor Levi - Morgan Stanley, Research Division Sam Darkatsh - Raymond James & Associates, Inc., Research Division Walter S. Liptak - Global Hunter Securities, LLC, Research Division Derek Jose - Longbow Research LLC
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the MRC Global First Quarter Earnings Conference Call. [Operator Instructions] Today's conference is being recorded, May 3, 2013.
I would now like to turn the conference over to Ken Dennard. Please go ahead.
Ken Dennard
Thanks, Alicia. Good morning, everyone.
We appreciate you joining us for MRC Global -- its conference call today to review 2013 first quarter results. And I'd also like to welcome the Internet participants that are listening to the call over the Web.
Before I turn the call over to management, I have the normal housekeeping details to run through. For those of you who did not receive an e-mail, the earnings release yesterday afternoon, and like to be added to our distribution list, please call the Dennard · Lascar Offices at (713) 529-6600 and provide us your contact information or you can e-mail me personally.
There will also be a replay of today's call and it will be available by a webcast on the company's website at www.mrcglobal.com. There will also be recorded replay by phone, which will be available until May 17 and that information for dial-in is in the press release yesterday.
Please note that information reported on this call speaks only as of today, May 3, 2013, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. In addition, the comments made by management today of MRC during this conference 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, however, various risks, uncertainties and contingencies could cause MRC's actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener is encouraged to read the company's annual report on Form 10-K, its quarterly reports on 10-Q and current reports on Form 8-K to understand certain of those risks and uncertainties and contingencies.
And now with that being said, I'd like to turn the call over to MRC's CEO, Mr. Andrew Lane.
Andy?
Andrew R. Lane
Thanks, Ken. Good morning, everyone, and thank you for all, for joining us today for our first quarter 2013 investor call.
I'd like to welcome you to the call and thank you for interest in MRC Global. Before reviewing the results of the quarter and turning the call over to our CFO, Jim Braun, for the financial discussion, let me first begin by highlighting some of the noteworthy events that happened during the quarter.
In March, we signed an exclusive logistics agreement with North American Western Asia Holdings, or NAWAH, to service our Iraqi market. Under the agreement, NAWAH will own and operate a new warehouse and logistics service center in Basra.
The new facility will focus on providing equipment to serve the burgeoning oil and gas market in Iraq and represents an exciting growth opportunity for MRC. Iraq has some of the world's largest energy reserves, and the oil and gas infrastructure needed to bring those reserves to market will have to be built and maintained.
This new service center will stock material, which will enable MRC to further build out its Middle East distribution network and more quickly deliver products to Iraq's energy companies. According to IEA World Energy Outlook 2012, between 2016 and 2020, there are only 2 countries in the world that will be leading infrastructure growth and growing reserves.
Those 2 countries are the U.S. and Iraq.
Both will not only be replacing and upgrading old energy infrastructure during that timeframe, but also targeting a production increase of 3 million barrels per day. We're extremely well-positioned in the U.S.
to take advantage of this growth, and now with this new NAWAH alliance we're taking the first steps to position MRC in Iraq as well. During the first quarter, we completed a secondary public offering of 26.45 million shares of common stock on behalf of our largest shareholder, PVF Holdings.
This transaction reduced PVF's percentage ownership of outstanding shares from a controlling interest of 55% down to 29%. As a result, we are no longer classified as a controlled company.
And in compliance with New York Stock Exchange rules, we will evaluate the composition of our Board of Directors so that within 1 year, a majority of members are independent directors. This is a part of the continuing evolution of MRC from a private-equity-sponsored business to a company whose ownership is substantially all publicly held.
And finally during the quarter, we've successfully integrated the operations of Production Specialty Services into our organization and ERP systems. This was done within 90 days of the acquisition, a testament to the efforts and various disciplines within MRC and our ability to quickly integrate North American bolt-on acquisitions.
Now turning to the first quarter results. For the first 2 months of the year, we saw a continuation of the slowdown in U.S.
activity that began in the fourth quarter, particularly in the upstream and midstream sectors, which were also impacted negatively by inclement weather conditions in certain parts of the country. However, we did see activity pick up towards the end of the first quarter, though not enough to make up for the slow start.
Our downstream sector improved as the anticipated turnaround activity at U.S. refineries began to get under way.
For the first quarter, our total revenues were $1.305 billion, down 6% from a year ago. Much of the decline is attributable to the downsizing of our OCTG business, which we have actively been working to deemphasized to enhance earnings stability and profitability.
As a result of this strategy, OCTG represent only 10% of our total sales in the quarter compared to 16% a year ago. Without the OCTG business, our core product offerings posted year-over-year revenue growth of 2%, consisting of 7% growth from acquisitions partially offset by a 5% organic decline.
By end market sector, we had declines in the year-over-year revenue of 11% in our upstream sector and 4% in our midstream sector, while our downstream sector was up 2%. If you exclude OCTG, upstream revenues were up 5% from a year ago.
Adjusted EBITDA for the first quarter was $104 million or 8% of revenue compared to first quarter 2012 adjusted EBITDA of $115 million, which was 8.3% of revenue. For the quarter, we reported net income of $46.2 million or $0.45 per share compared to $37.5 million or $0.44 per share for the same period a year ago.
Although our net income was up 23% from a year ago, our earnings per share increase was only modest because our outstanding diluted share count increased by 21% over the same period as a result of our IPO in April 2012. We continue to make progress on the implementation of our 5-year global Enterprise Framework Agreement with Shell, which has added some incremental growth to the business in our current market.
It is a process, though, as broad contracts such as these take time to implement. As we have in the past, we will continue to look for acquisition opportunities, particularly those that can build on the international presence, so that we are better able to serve -- service customers with a full product offering in meeting their MRO and their project business needs.
Before turning the call over to Jim, let me mention our cash flow during the quarter. We generated $174 million of cash from operations during the quarter due to solid operating results and improved working capital metrics.
As a result, we reduced our net debt to $1.046 billion with a leverage ratio of 2.3. This is our lowest net debt level in 5 years.
Strong cash flow and paying down debt continues to be a major part of our strategy. A strong balance sheet offers us flexibility in being able to execute on our acquisition strategy.
With that, let me now turn the call over to Jim Braun, to review our first quarter results in more detail.
James E. Braun
Well, thanks, Andrew, and good morning, everyone. First, let me begin with some comments on first quarter market conditions.
As Andrew mentioned earlier, the slowdown in customer activity that we experienced during the fourth quarter continued into the first months of the first quarter. Some of that slowdown was weather-related, as parts of the Midwest and the Northeast experienced a harsher winter than a year ago.
U.S. drilling activity was down 12% in the first quarter from the same period a year ago, while the Canadian rig count was down 5% over the same time period.
Revenues for the first quarter were $1,305,000,000, which was down 5.6% from last year's first quarter. As you may remember, we noted in our last call that we expected the year-over-year decline from OCTG would be about $100 million.
Revenues from OCTG, which only has the North America presence, were down $95 million year-over-year to $126 million in the quarter. Excluding the OCTG business, revenues rose 1.5% from last year.
That 1.5% revenue growth was the net increase from a 5.2 organic decrease and acquired growth of 6.7%. U.S.
revenues were $966 million in the quarter, down 8.3% from the first quarter of last year. Excluding OCTG, revenues in the U.S.
were up 2.1%, reflecting an organic decrease of 3.9% offset by acquisition growth of 6%. However, our organic business did begin to pick up in March despite the softness we saw for most of the quarter.
Canadian revenues were $205 million in the quarter, down 1.8% from the first quarter of last year. And a 5% Canadian rig count decrease had a muted impact on our business, as we continue to see solid activity in the heavy oil and oil sand region of Canada.
Internationally, first quarter revenues were up 11% from a year ago to $135 million due mostly to the contribution from our Piping Systems Australian acquisition in March of 2012. Organically, the International business was down 11.5% compared to the first quarter of 2012, but the PSA acquisition more than made up for the $11 million organic decline.
This decline reflected weaker demand in Europe and parts of Australia. And now turning our results -- to our results based on end market sector.
In the upstream sector, first quarter sales decreased 11% from the same quarter a year ago to $578 million. This decrease was mostly driven by the $95 million year-over-year OCTG revenue decline.
Without OCTG, the upstream sector grew 5.1%, due largely to the acquisitions of Chaparral Supply in June of 2012 and Production Specialty Services in December 2012, offset by an organic decline of 9%. First quarter sales in the midstream sector were down 3.9% to $346 million, largely due to a 5.5% decrease in the U.S., which was the result of continued slowness that began in the fourth quarter, as well as weather-related issues.
This demand slowdown was concentrated among some of our larger pipeline and gathering line customers, as well as some of our gas utility accounts and has put additional pressure on pricing in the line pipe market with some pricing down approximately 10% over the past 6 months. However, we continue to be disciplined with our inventory levels and our approach to the market, balancing market share and gross profit margins.
In the downstream sector, first quarter revenues increased by 2.1% to $381 million. A large portion of the increase was attributable to our acquisition of PSA, which added $50 million to our downstream results.
The anticipated U.S. turnaround activity began to materialize in the quarter, as U.S.
revenues were up 4.5% from a year ago. In terms of sales by product class, our energy carbon steel tubular products accounted for $388 million or 30% of our sales during the first quarter of 2013 with line pipe sales of $262 million and OCTG sales of $126 million.
Overall, sales from this product class decreased 24% in the quarter from Q1 a year ago driven mostly by the decline in OCTG. Sales of valves, fittings, flanges and other products reached $917 million in the first quarter or 70% of sales.
This represents an increase of 5.3% over the first quarter of 2012 results. Our valves and specialty products led the way, up 9.3% from a year ago to $363 million in sales, roughly half from acquisitions and half organically.
Growth in our industrial valve business has been a core goal of our strategy. And now turning to margins.
The gross profit percentage in the first quarter of 2013 increased 180 basis points to 18.9%, up from 17.1% in last year's first quarter. Margins benefited from the change in our product mix and other gross profit enhancement strategies.
We also had a $3.1 million LIFO-related benefit, which compares with a $6.9 million increase in our cost of sales during the same period of 2012. Our adjusted gross profit percentage, which is gross profit plus depreciation and amortization, the amortization intangibles and plus or minus the impact of LIFO inventory costing, increased 1.3 percentage points to 20.1% from 18.8% in the first quarter of 2012.
First quarter SG&A costs were $160.8 million or 12.3% of sales compared to $146.4 million or 10.6% of sales in the first quarter of 2012. Of the $14.4 million year-over-year increase, approximately $11 million was due to incremental SG&A expense from our March and December acquisitions of Piping Systems of Australia and Production Specialty Services, respectively, with the remainder due to higher personnel costs.
The 2 acquisitions added approximately 370 personnel, bringing our total headcount to 4,723. On a percent of sales basis, SG&A was impacted by the OCTG revenue drop.
Without the OCTG revenue decline, SG&A would have been 11.5% of sales. Operating income for the first quarter decreased to $85.8 million from $90.2 million in last year's first quarter.
The decrease in operating income was a result of several factors, including the net sales decline and the incremental SG&A expense, partially offset by our gross profit improvement initiatives as evidenced by the increase in operating margin to 6.6% in the first quarter of 2013 from 6.5% in the same period last year. Our interest expense totaled $15.3 million in the first quarter, which was a 55% reduction compared with the $33.7 million in the first quarter of 2012.
This was primarily due to the redemption of our and 9.5% Senior Secured Notes in the fourth quarter of last year, as well as lower debt levels. Average debt levels were approximately $375 million lower in Q1 of this year as compared to the first quarter of 2012, largely attributable to our April 2012 IPO.
Our effective tax rate for the first quarter of 2013 was 35.1% compared to 36% for the same period last year. We reported net income of $46.2 million for the quarter or $0.45 per diluted share, as compared to a net profit of $37.5 million or $0.44 per share in the first quarter of 2012.
Again, keep in mind that the per-share results are impacted by a year-over-year share count increase of 21% over that time, from 84.8 million shares outstanding to 102.4 million shares outstanding. Adjusted EBITDA was down 10% year-over-year to $103.9 million versus $115.2 million a year ago.
However, adjusted EBITDA margin held up very well at 8% in the first quarter of 2013 as compared to 8.3% a year ago. Our outstanding debt at March 31, 2013 was $1.073 billion, decreasing from $1.257 billion at the end of 2012.
At the end of the first quarter, our leverage ratio, defined as total debt less cash, through the trailing 12 months of adjusted EBITDA was 2.3x as compared to 2.6x as of December 2012. In part because of this improving leverage metric in April, S&P upgraded our corporate credit rating to BB- from B+.
This is the second rating upgrade from S&P in the last 12 months. Our operations generated cash of $174 million in the first quarter, which was the results of improving working capital metrics and solid operating results in the quarter.
However, we expect to see use of cash in the second quarter because of revenue growth and because we expect to make 2 U.S. estimated tax payments in Q2 where none were required in the first quarter.
Our working capital at the end of the first quarter was a $1,073,000,000 and down 11% from the end of 2012. Cash used in investing activities totaled $4.5 million in the first quarter and included capital expenditures of $4.9 million.
And now I'll turn the call back to Andy for his closing comments.
Andrew R. Lane
Thanks, Jim. And let me conclude with some thoughts on the current business environment.
Our backlog at March 31 was $688 million, including $456 million in the U.S., $69 million in Canada, and $163 million in our International segment. This represents a 4% increase since the end of 2012 and has strengthened further in April.
As a result of the soft first quarter and an improving second quarter, though not as robust as we originally expected, we had lowered the top end of our 2013 annual guidance. For the full year 2013, we expect MRC revenues to be in the range of $5.75 billion to $5.95 billion.
We expect adjusted EBITDA that to be in the range of $480 million to $510 million, and earnings per share to be in the range of $2.10 to $2.30. Natural gas prices have been on a strong rally of late and are now above the $4 level driven in part by a cold winter in much of the country.
Although North American gas rig counts have fallen 37% year-over-year, there remains healthy demand for the infrastructure needed to move gas and NGLs from existing wells to end users. Crude prices have been trading in the mid-80s to high-90s for most of the past 12 months and this remains an economically favorable environment for continuing on infrastructure development in the upstream and midstream sectors.
For the downstream markets, we should continue to see some more of the spring turnaround activity in the early half of the second quarter. Activity in our important midstream line pipe and gas products business is expected to improve throughout the spring and summer months, although weak NGL pricing may impact the timing of some midstream projects.
For the balance of 2013, we will continue to focus on seeking out of new opportunities to expand our geographic reach, establish more integrated supply and MRO relationships where we can act as the one-stop shop, much as we do for the Shell Enterprise Framework Agreement. As the Shell contract continues to ramp up, we're continuing to pursue similar agreement with other key international operating companies.
We still expect to have a second broad framework agreement signed this year. Our goal is to continue to be the name the energy industry looks for in PVF products and integrated services, essentially an extension of their internal supply organization, bringing energy and industrial companies up to focus on what they do best while letting us handle the procurement, inventory management and distribution service that we do best.
With that, we will now take your questions.
Operator
[Operator Instructions] And our first question comes from the line of David Manthey with Robert W. Baird.
David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division
First off, on the trends getting better into March, I was wondering if you could comment on April. I know there's still been a number of adverse weather events in April, but anything there?
And then as it relates to the weather, if you could talk about if you have any data, or just anecdotally, growth or activity in areas that were less impacted by whether versus those that were.
Andrew R. Lane
Yes, Dave, this is Andy. Let me start, and Jim may want to add some more color.
Let me first cover the first quarter. It really was a mirror image to the fourth quarter of 2012, where we had a very strong October and a slowing November and December.
And really, we saw the exact opposite, a slow January, February with a strong March in the first quarter. So we feel good about that, the way the quarter ended.
So from a high level, that's how the first quarter played out, which ended up being flat as we guided at the last call, what we expected to come. And then when you look at April, a little slower than we thought would be in the second quarter.
And I think you're still seeing, as you mentioned, this is the winter that just won't end. We're still seeing some slight impact through April in any event.
And the way it impacts us in 2 ways. Well, first, the OCTG pull down was by our own strategy, and so we feel good about implementing that and the timing we did that.
But what the weather has impact us, both in the first quarter and continued into April, was really in the line pipe, midstream construction cycle and also with our gas products in our gas utility business. So when you look at our business, our other products, general oil field, upstream, our valves, our downstream business was good through those months and it really was minimum weather impact in plants and both in our Gulf Coast area.
And the impact is isolated in the Rocky Mountains and the Northeast and in the 2 product lines I mentioned, line pipe and gas products for us. But our best 6 months and -- or cycle always happen from May through October.
So this is when we have minimum weather impact and the construction cycle is in full gear. And we feel equally strong this year that we have the best next 6 months ahead of us still.
David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division
Great. That sounds good, Andy.
And the second question, just in terms of downstream turnarounds. Last quarter, it sounded like some of the deferrals that you saw previously had broken free and you expected a strong year this year.
You made some comments about that in the monologue. Could you just give us an update?
Has your outlook, at all, changed on the downstream-turnaround activity in 2013?
Andrew R. Lane
No, our outlook is still good. It has improved over the last 2 years where the growth wasn't that strong.
We started out in the first quarter with -- in a tough market with growth in the downstream. We see the turnaround activity continuing in April and May for the second quarter.
And we expect to see an active turnaround in the fall. So it still looks good for us.
The chemical still looks -- and petrochemical still look real good for us through the year. So those are bright spots that -- in our outlook in the downstream.
Operator
Our next question comes from the line of Matt Duncan with Stephens Inc.
Matt Duncan - Stephens Inc., Research Division
Andy, the first one I've got is just a follow-up on Dave's question, kind of about the tone of the 2Q. I'm wondering if maybe you can give us some thoughts of each of the 3 energy streams.
As we look at 2Q '13 versus 2Q '12, I would assume you still have a headwind in upstream from OCTG. But it sounds like in downstream, the turnaround market is going to allow for you to grow that business year-over-year.
I guess I'm a little less clear on midstream. Do you expect midstream, even given the weather in April, to be up year-over-year as you sit here today in the 2Q?
Andrew R. Lane
Yes, let me just make a couple of general comments, and Jim is going to -- can give you some guidance by stream the way we're -- with our new annual guidance, how we see the year playing out. But specifically for second quarter, May, June and also the summer months is really the best time for us in midstream.
April wasn't outstanding for us. And I think so the market is still responding, weather's still giving us a little havoc but just on the construction cycle.
But I think we're going to have a $50 million headwind, as Jim mentioned on the last call, on year-over-year decrease on comparisons with OCTG on upstream. Jim, do you want to give some little more guidance on -- by stream for the year?
James E. Braun
Yes, for the year. Again, just updating what we talked about on the last call.
It's the midpoint of our guidance now, it's a 4% to 5% organic growth overall. And then by stream, up is 3% to 4%.
The midstream is 5% to 6%, and downstream is 5% to 6%. So from the last update, mid's come down a little bit.
The downstream is still holding up relatively strong.
Matt Duncan - Stephens Inc., Research Division
Okay. That's helpful.
And then secondly for me on the M&A environment, Andy, you hinted in your prepared remarks that the focus on M&A right now seems to be international. I assume you're also still looking at bolt-on tier domestically.
Can you give us an update sort of on where you are with how the funnel looks from an M&A perspective and how much you might think you guys can do this year?
James E. Braun
Yes, Matt, it's -- we're still very active in that area. The one thing we spent a lot of time in the first quarter was the last 2 acquisitions we did.
We're fully integrating both systems and management, personnel in Australia. We feel real good about that.
And we actually did the full integration of PSS in under 90 days, 75 days. So that is all 100% integrated into the company.
So we're very good, especially in North America, at getting a quick turnaround on our acquisitions. So that was a focus in the first quarter.
Lots of candidate still out there. We were very active, had detailed discussions with approximately 5 companies, and didn't pull the trigger on any of them based on valuation expectations in the first quarter.
We focused on Southeast Asia and looked at both Canada and some more in the U.S. So very active, but because of that, we won't have an announcement in the second quarter, but we have a lot of ongoing discussions for acquisitions in the third and fourth.
So part of our guidance adjustment is due to the softness in these first 4 months, but also remember that that's a guidance without any acquisitions. And we will do acquisitions this year, but it will be in the second half.
Operator
Our next question comes from the line of James West with Barclays.
James C. West - Barclays Capital, Research Division
I just wanted to dig into the midstream a little bit further. Jim, I believe you said 5% to 6% growth this year is what you were thinking.
But if I look at the MLPs, which are primarily the midstream companies, they're raising $1 billion a week or so right now on the capital market. It seems like that's a conservative number.
So I guess one, are you being conservative? And then two is, I guess -- my view that it might be conservative.
Is your view that you have better visibility out there? And then I'm thinking about it in terms of -- maybe I'm thinking about in terms of cycle times being shorter.
James E. Braun
Yes, James. The last 3 years, the midstream has been our fastest growing end sector.
We still feel very good about our competitive position there and we feel good about the amount of money that is going to be spent. The weather really impacted us early on, slow capital budgets getting started -- at least spent in the midstream early on.
So that kind of painted our view to slow down our expectation on annual growth. Well, we've certainly may have a much different view after the next 2 quarters when we get a full summer construction cycle.
The money is going to be spent. We're not seeing the infrastructure very active in dry gas as you'd expect with the pullback on dry gas all through the end of last year.
But we do think that -- and we watch all the same things that we talked to our midstream customers every week and there is a lot of projects still queued up.
James C. West - Barclays Capital, Research Division
Okay. Fair enough.
And then Andy, as you think about these large global agreements, like with Shell, I know you're targeting an additional one this year. Is the target of kind of one per year to be signed and announced, is that a MRC-driven decision based on your capabilities?
Or is that more just how you think the customer base is adapting to moving forward with these types of agreements?
Andrew R. Lane
Yes, James, I think it's a little bit both. I mean Shell tends to be an early mover in the industry, and that's why they went first.
But it's also a little bit of our capacity to ramp up on a major contract like that and get all the inventory in place on a global basis to support a customer like that. So there's a lot of implementation.
There's a lot of work with EPCs on the project side. So that takes a lot of personnel and time and inventory management.
So to do it right and when we talk about our top 2 or 3 customers, we definitely, as we take on a broader scope with them, want to make sure we do it exactly right in ramping up to support them. So it's a little bit of both, James.
I think it's -- I think that's the kind of trend we'll have, is one a year. And it may take us a little ramp up, a little more speed when we're a couple of years out.
And it is more of a common practice. But it is also because the one's we're targeting are a significant scale to us.
So it takes us a lot of resource to ramp up for them.
Operator
Our next question comes from the line of Doug Becker with Bank of America Merrill Lynch.
Douglas L. Becker - BofA Merrill Lynch, Research Division
I wanted to get into a little more detail on the downstream guidance. It sounds like 5% to 6% growth in 2013, down a little bit from 7% to 8%.
Was this because the turnaround activity was just a little bit slower than expected in the first quarter? And does that mean that there's still some pent-up demand down the road that if we do see a decline in refinery margins that we see a pickup in turnaround activity for you guys?
James E. Braun
Yes, Doug. I would say in general, I have some comments.
I would say from the downstream perspective, a little less robust in refinery for the year activity and a little stronger in chemical and petrochemicals is our general view. But no, the turnaround activity in the first quarter was good.
We expect it to be up a little bit more in the second quarter. And I think that's my general comments.
Andrew R. Lane
So, Doug, I think you're right. I think it's a little bit slower, and I think there's could be some pent-up demand as utilizations fall.
Douglas L. Becker - BofA Merrill Lynch, Research Division
It makes sense. And then just -- I guess just a few housekeeping items for Jim.
Very nice working capital improvement in the quarter. Just any thoughts on 2Q and just on SG&A in the second quarter, given the bump we saw in the first quarter?
James E. Braun
Yes, I think you'll see the SG&A levels run about where they were in the first quarter, that 161 level. There's nothing that's in the drawer or on plans to increase that significantly.
We've work through the acquisitions that are in there. Like most companies, we had our merit increases January 1.
So I think those are all taken care of.
Douglas L. Becker - BofA Merrill Lynch, Research Division
And on working capital?
James E. Braun
Yes, on the working capital, we had talked at the last call around $200 million for the year of cash from operations. We will consume some cash, as I mentioned in the script, due to the revenue growth and some other tax needs.
So we're thinking the cash flow will now be in the 240 range for the full year, so we'll be able to continue to have a strong cash flow for the balance of the year.
Operator
Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.
Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division
Just on the overall margin performance. I think you mentioned in the gross profit, some margin enhancement initiatives and mix and some of that probably OCTG.
But I just want understand how you think about the sustainability of those better -- the better margin performance as we move into 2Q and the rest of the year?
Andrew R. Lane
Yes, Jeff, this is Andy. I would say we focused a lot on that and getting the mix right has been a big part of our strategy.
So you're seeing the advantage of the product mix and the higher profit on what we're emphasizing. Continued emphasis on the valves will drive that even further as we make a shift.
And we also, during the quarter, as we said it on the last call, we absorbed the SG&A expense associated with selling OCTG. We didn't have an active cost reduction because we moved them over to line pipe.
Now we haven't seen the line pipe sales pick up with the midstream activity, but we will for the balance of the year, so that we'll also have a nice advantage for us going forward from an operating income perspective. But we feel good, the only thing we are really in the marketplace is under pressure is really ERW.
Line pipe in the spot market has, of course, pricing pressure on it. The rest of our product lines are -- we're in -- feel very good about.
James E. Braun
Jeff, I would add that even when you get past the improvement from the OCTG change within the balance of the products, when we sell more valves and smaller levels of line pipe like we had in the first quarter, you will see improved margins just due to the mix. The other thing we've done is we've continued to work hard on the supplier cost side across all our products, as well as we've talked before about our pricing initiative where we are trying to work the transactional customers to maximize margin opportunities there, and we've continued to enjoy some success.
I think, as you move into the second quarter, I would tell you that the 20% is a top end. We may see a little bit come down to the 19.5% as a result of some of this pressure, pricing pressure in the line pipe area.
Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division
Okay. Great.
And then this might be rounding or maybe something else is in there, but it seems like you recalibrated your growth in each of the streams by a couple of points, and it seems like the midpoint of the guidance is coming down by right around 1 point of gross. So is there something else going the other way or an acquisition running in?
Or how should we think about that?
James E. Braun
Yes, those growth rates that we gave, again, are -- they're the organic growth rates after you back out the OCTG drop and you factor in the acquisitions. So there are -- I've described this on a gross basis before for those other 2 items.
Operator
Our next question comes from the line of Allison Poliniak with Wells Fargo.
Allison Poliniak-Cusic - Wells Fargo Securities, LLC, Research Division
So, obviously, it sounds like weather was a big -- the big negative impact here in Q1, but as you look out to the rest of the year, I mean, it sounds pretty positive from a secular growth perspective, but is there any area that you're starting to get a little bit more concerned about?
James E. Braun
No, Allison. Really, we're not -- we're going to have a good year, as shown by our guidance.
And it really was the double impact of the pullback in OCTG and then the weather impact that impacted line pipe and gas products. Besides that, we feel very good about the rest of our business.
And those 2 things get taken cared of. We think we're going to have a good year in gas utilities, we know we are.
And we're going to have very active year in midstream and pipeline and -- who are both new installations and integrity work. So we really just has to play out over the next 2 quarters where it is our most active season, and we think it is going to be just fine.
Operator
Our next question comes from the line of Ryan Merkel with William Blair.
Ryan Merkel - William Blair & Company L.L.C., Research Division
My first question had to do with the quarterly forecasting. I was just hoping you could provide a little bit more detail.
Are you expecting a less-than-normal seasonal boost in the second quarter and then a bigger boost in the third and fourth quarter at this point?
Andrew R. Lane
Well, let me make a general comment, Ryan, and then Jim can add a little color. But we definitely projecting a much stronger second half than the first half from a general standpoint.
The second quarter, as Jim guided to, we will have the $50 million year-on-year OCTG win to overcome. So -- but it still will be better than the first quarter.
It will be a ramp-up as we normally do, and we'll really see in May and June how good it will be.
Ryan Merkel - William Blair & Company L.L.C., Research Division
Okay. Great.
And then I was hopeful you could back out or -- yes, tell us what the project growth was in the quarter. Is that a number you have?
James E. Braun
Ryan, that's something we don't have right at our hands. So to give you a good number, we want to look at that.
Ryan Merkel - William Blair & Company L.L.C., Research Division
Okay. Would expect that the large-project business is going to outgrow the MRO business this year?
Or how does that mix look?
Andrew R. Lane
Yes, but now if you look at the first quarter, the mix was a little bit above our 70, 30 that we finished last year at. So it weighted a little bit more towards MRO because of the big projects in midstream didn't happen in the first quarter.
So we actually weighed a little bit higher towards MRO, but we'll see how it blends over the year because we will be picking up some good project work as the construction cycles goes on in the summer months.
Ryan Merkel - William Blair & Company L.L.C., Research Division
Okay. And then just last one for me.
If I back out the OCTG, organic sales are down about 5% but that's on a really, really big comparison. So from my view, that's a fairly positive result, given the slowdown we've seen.
Is that your view as well? It just seems to me that underlying demand is actually there.
James E. Braun
No, that's right, Ryan. I mean, it was down 5% but it held up pretty well in light of everything else going on.
Operator
Our next question comes from the line of Igor Levi with Morgan Stanley.
Igor Levi - Morgan Stanley, Research Division
Could you give us a bit of more detailed breakdown on pricing for various products? I know you mentioned that OCTG and line pipe have remained under pressure and that valves are doing a bit better.
Has valve and fitting prices actually continued to go up through the quarter?
Andrew R. Lane
Yes, you are -- I would say, you're exactly right on the pricing pressures on OCTG and mostly ERW line pipe. Within line pipe, though, I would say seamless as been stable.
And in our other categories, carbon and stainless fittings and flange, stable to slightly up. And valves, stable to slightly up.
And -- as lead times continue to push out on demand against industrial valves. So it's really the mix of those.
Igor Levi - Morgan Stanley, Research Division
Okay, so would you say it's industrial valves is really what's really tight out there compared to more of the energy?
Andrew R. Lane
Yes.
Igor Levi - Morgan Stanley, Research Division
Great. That's helpful.
And then, again, on the SG&A side, I know that you mentioned you expect to stay kind of at a similar dollar level. But as a percentage of sales, I figure, long-term as remodeling this given in this quarter was much higher because of the acquisitions, should we assume maybe 10% or 11%?
What do you think is fair?
James E. Braun
Yes, I think it's going to be in that 10% to 11% range.
Operator
Our next question comes from the line of Matt Duncan with Stephens Inc.
Matt Duncan - Stephens Inc., Research Division
Andy, on the progress towards the next global supply agreement, I don't know how much you're willing to share with us at this point, just in terms of timing of when you think you might be able to get something finished. And then also relative maybe to the Shell deal in terms of impact on your business, should it be similar in financial impact based on sort of what you know today?
Andrew R. Lane
Yes, Matt. I would expect we'd announce one in the third quarter, and I expect it would be of a nature similar to the Shell, in that ballpark.
And also we haven't really given guidance externally on the NAWAH, but we see that as a good opportunity for us, just as since our initial focus. We're not a big Middle East company up to this point, and there's a lot of PVF marketplace there to go after.
And if you look at Iraq with the old infrastructure they need to upgrade after years and years of underinvestment and the ramping up of new production. And it's all our major customers in there, it's ExxonMobil and Shell and Chevron.
We -- from just the announcement of being participating in that market, we already have $10 million in backlog in sales for Iraq. So we feel very good about that market being ramping up with our partner.
I would see it in a couple of years out that, easily, that should be a $40 million to $50 million-plus annual market for us. So that's all new market share for us where we haven't participated.
And also, we're ramping up the Shell contract in Qatar. So we're starting to get the first phase of Middle East presence and build some scale there that will have nice long-term impacts.
And so it also adds another regional dimension when we talked to these major IOCs about how we can serve them on a global basis. So it's important -- from that and our growth in the Middle East going out next year and the year after, along with the contracts, these are all key differentiators from our other competitors in the marketplace.
Matt Duncan - Stephens Inc., Research Division
Sure. And then with the Shell agreement specifically in Australia, I know, originally, that agreement did not include the PFF in Australia but I think there was some hope you might be able to add that.
Have you indeed been able to add that? And then obviously, you guys are now the largest PVF distributor down there.
What are you seeing going on in that Australian market? Obviously, there was a project, a big project cancellation LNG there recently.
What are you seeing in that Australian market?
Andrew R. Lane
Yes, we like -- the first part of your question, we haven't added the Shell PFF yet. We're still working on that.
We need to wait till that contract runs out, the incumbent one. But it certainly is a target we're going to go after, and we like that market.
We're forecasting -- as we've said before, that is going to be a nice solid $300-million-a-year business for us down there. What we have seen is some softness in refineries as they've done some consolidation in refining there.
We don't have a big exposure to mining, but a little bit of softness in mining, and Jim mentioned that in his script, and then a little softness in stainless related to LNG. But from a standpoint of being the clear #1 in the established position there, we feel very good about the Australian market and our position there.
Operator
Your next question comes from the line of Sam Darkatsh with Raymond James.
Sam Darkatsh - Raymond James & Associates, Inc., Research Division
I think most of my questions have been asked and answered, although I did -- was bumped off the call there for a minute. So I hope I'm not asking something that someone already covered.
The second half organic growth that you're expecting, we saw some -- on the SG&A line, some organic deleveraging this quarter. Once the growth switches back, what pull-through [ph] rates are you expecting, Jim, in the back half of this year once you begin to grow again organically?
James E. Braun
Yes, Sam, as we get into the back half and we resume the organic growth rate, we'll see 50% to 70% flow-through on the EBITDA to the gross profit line.
Sam Darkatsh - Raymond James & Associates, Inc., Research Division
So the deleverage there organically, I think you were up like $3 million or $4 million, x the acquisitions, year-on-year in SG&A in the first quarter despite organic sales growth being down. You cited a little bit of a labor inflation, but was there anything else there that caused the deleverage?
James E. Braun
No, it was just the additional payroll cost. We did add a few people, compared to last year, into the organization, in some of our supply chain business development roles.
But that should hold firm going forward.
Andrew R. Lane
Sam, I would just add in the second half, you're going to see the leverage gain from moving the resources focused on OCTG over the line pipe. And we didn't get an advantage of that in the first quarter, and you will see it in the second half and that will be a nice build for us.
Operator
Our next question comes from the line of Walt Liptak with Global Hunter Security.
Walter S. Liptak - Global Hunter Securities, LLC, Research Division
Most of my questions have been asked, too. So I -- just one would be, just a little bit more clarification on the Iraq opportunity.
I think what I've heard you say is a $40 million to $50 million opportunity. Is that right?
Andrew R. Lane
Yes, and I think that's conservative a couple of years out. We really only announced that a couple of months ago.
We've been working on some things directly with our end customers and we have a backlog now of $10 million of orders there. But it's a huge market.
It has a lot of old infrastructure that needs to be replaced on a PVF standpoint, and ambitious goals for adding new production. And so we'll work closely with our major customers that are now taking contracts in there, and we'll work closely with our partner as they build out the freight-forwarding and the warehouse capability in Basra, which is -- will serve us very well from a local supply standpoint.
So I -- conservatively, I see it ramping up from today's initial $10 million, easily, to $40 million to $50 million a year, and we probably are underestimating the amount of PVF spend that is in that market by itself.
Walter S. Liptak - Global Hunter Securities, LLC, Research Division
Okay. Good.
And then you kind of alluded to this, but I wonder if you could talk a little bit about what the profitability would be on this contract maybe compared to the Shell agreement or other U.S.-based contracts?
Andrew R. Lane
Yes, it will be a higher profit contract because of the difficulties of getting product and doing business there. You'll find that with the other oil field service and equipment suppliers.
It's tough -- a tough place and so it requires -- the cost of service is higher, so it requires a higher margin.
Walter S. Liptak - Global Hunter Securities, LLC, Research Division
Okay. Great.
And then a last one. I didn't hear a tax rate update.
I wondered if you could talk about the second quarter and full year.
James E. Braun
Well, we're still projecting a tax rate in the 35% to 36% range.
Operator
Our next question comes from the line of Derek Jose with Longbow Research.
Derek Jose - Longbow Research LLC
I was wondering if you had any internal targets for your credit rating by the end of the year.
James E. Braun
Derek, we don't really target that way. We haven't set a goal, it's just we want to be at a certain level.
We know it's appropriate to use a certain amount of leverage. But as you know, we've moved up a couple of notches recently.
So we're going to continue to generate cash, pay down debt and use that as the liquidity to fund our acquisition program, but we haven't targeted a specific rating to try to achieve.
Derek Jose - Longbow Research LLC
Okay. And if you look at your balance sheet and when you talk about the credit rating with the credit rating companies, besides leverage, is there anything that they want to specifically see in terms of upgrading the credit rating, like a little less cyclicality in the business, higher-margin?
I'm just curious what was kind of going into maybe you guys getting to investment-grade possible [ph] at the end of year.
James E. Braun
Sure. Well, certainly, the cyclicality is something that's addressed.
The way they like to see that addressed is by diversifying, getting bigger, getting a bigger international presence, spreading out the business to more geography. That's certainly one of the biggest.
Operator
I'm showing no further questions in the queue at this time. I'd like to turn the conference back to management for final remarks.
Andrew R. Lane
Okay. Thank you, all, for joining us today on the call and your interest in MRC Global.
We look forward to talking to you again after the conclusion of the second quarter.
Operator
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