Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the shock Horse Q3, 2019 results webcast conference call. At this time, all participants are in listen only mode.
So to speak a presentation there will be a question and answer session to ask a question. During this session. You want me to press Star one on your telephone. Please be advised to today's conference is being recorded if you require any further assistance. Please press star zero I would not only thing in the conference over to your Speaker Mr. guest on 10.
<unk> Chief Financial Officer. Please go ahead sorry.
Thank you operator good morning.
Before we begin this morning's conference call I like to take a moment to remind all listeners that today's conference call includes forward looking statements.
Estimates documents.
And uncertainties they may cause actual results could differ materially from those projected.
The complete Texas sharper statement are forward looking information, including section for the third quarter 2019 earnings press release that is available on SEDAR and on the company's website at <unk> Dot Com I'll now turn over to shock were CEO , Steve or.
Good morning, and thank you for joining us on this morning's conference call.
Before I started like to take a moment in highlight a tremendous milestone for a company.
This year shock worth celebrating its fiftyth year on the TSX, a testament to our value based culture and intense focus on technology and innovation.
Mr Lets show it to the company on the front of stock exchange and 1969, and the journey of shock or as a public company was started.
In achieving 50 years I'd like to thank her customers shareholders suppliers, and especially current and past employees.
Without the dedication of those that have chosen to work and contribute to this company there would not be ashar core.
My sincere gratitude to all for helping to drive short course success throughout the last 50 years.
Now turning to the quarter.
Q3, adjusted EBITDA was 42.4 million, an increase of 17% over the second quarter 2019.
Revenue for the quarter was 394 million, a 4% decrease over the previous quarter.
This quarter's results were supported by comps in sales from both pipe and take products.
Pipe coating in Latin America, and North America for offshore projects. So typically in our their crews, Mexico, and Channelview, Texas facilities and increased demand for wire and cable products.
In Q3, we experienced reduced activity in emerging pipe coating as far as on volumes ramp down in our age Italian facility and familiar vessel based girth wild inspection several projects near completion.
I would note in the quarter, we continue to experienced a very depressed western Canadian market, and we did incur cost associated with capturing and executing future pipe coating projects.
Backlog in the quarter was relatively flat at 5.9, which reflects the flow of smaller projects that are we are winning and has maintained a backlog level.
So in the quarter, we generated over 6 million of cash from divestiture activities.
Q3 results were lined with expectations and reinforce that the near term future success of shock or will be determined by our ability to execute on three main priorities.
The first is the dynamic management of our base book in turn businesses. The second is the securing and executing a pipe coating projects and the third is the reduction of our debt leverage.
I'll speak in more detail in a moment, but in summary.
We remain very confident that shock, where we'll see an uplifting pipe coating activity and that the decisions, we're making to maintain or poor capabilities in the business will be rewarded.
The timing adopted hinges on the continued momentum in offshore in international markets, but more specifically on several projects on would show a core has been selected as a picor choice and which are poised for sanctioning in Q4 2019 in Q1 2020.
Volatility in quarterly performance should be expected as we move through Q4 and in two early 2020 until the pipe coating business is contribution to the overall company results strengthened.
This is increasingly important to note as U.S. show offer your newly found capital spend discipline and pipe coating project execution dynamics have resulted in limited short term visibility for Shankill.
Well Scharnhorst diversified portfolio has begun to expanded it has the potential to bring long term stability, we have retains ability to provide industry, leading coding solutions on a global basis.
We're confident that the industry demand for pipe coating is increasing and that the increase will extend for many years.
Shock or is well positioned to benefit and we're looking for to the future in delivering improved results.
I'll now ask at Santana or CFO to provide some details on the third quarter financial results.
Thanks, Steve.
As Steve mentioned earlier third quarter results were positive in line with our expectation consigned revenue in third quarter decreased by 4% or the second quarter 2019, a pipeline segment revenues decreased by 5% primarily due to lower revenues in the emerging Asia Pacific regions.
To lower pipe coating activity, partially offset by higher activity levels in a Latin America region, primarily relates execution at Liza two project in our Bellacruz Mexico facility.
The quarter also benefited from higher revenues in North America, reflecting higher demand for flexible composite pipe and tanks and small diameter coating, partially offset by lower revenues for large diameter, Coty and grateful inspection services due to the capital discipline focus of your P. operators approval delays of U.S. land transmission line project and continued market softness.
In Western Canada.
Petrochemical industrial segment revenues were lower by 1%, primarily due to lower activity in our automotive heating products, partially offset by higher demand for our wire and cable products in North America.
So I mean, a third quarter two up 19 were 12% higher than a third quarter a year ago that pipeline segment revenues increased by 13%, reflecting higher revenues in North America from the full quarter impact definitions that feel comps, it's partially offset by lower demand North America for small diameter, and large diameter pipe coating flexible composite pipe and tubular.
Regiment services due to the capital capital discipline focus of M.P. operators and the continued Merck softness in Western Canada.
In addition, a lot of American region achieve higher revenues due to execution Liza two project and I really crews Mexico facility revenue for the petrochemical industry segment increased by 10% compared to the prior year third quarter, primarily due to higher demand for our wire and cable products in North America, partially offset by lower revenues for automotive featuring.
Thanks.
Consolidated gross margin third quarter were 29.1% Harden the 28.5% report in the second quarter of 2019, but more than a 29.5% in a third quarter a year ago.
The pipeline segment gross margin for third quarter was 29.2% higher than the 20.5% of second quarter 2019, primarily due to the increase revenues for flexible comps of pipe and higher facility utilization Latin America from execution Liza two project in our Bellacruz facility.
Compared to the 29.6% reported third quarter 2018, the pipeline segments current quarter margin was lower primarily due to negative impact from the inventory revaluation related to those that T O acquisition in the current quarter.
The petrochemical industries, having gross margin was 28.1% in line with a 20 white, 28.1% second quarter 2019, and below the 28.7% that was reported at third quarter, a year ago, primarily due to unfavorable product mix and heat treat products for the automotive market.
The current quarter results were impacted by nonrecurring items outside the company's normal course of business part of items in the quarter include the gain of 5 million on the sale blended I mentioned this was partially offset by inventory valuation relates as I feel acquisition 4 million a loss of 3 million from the hyper inflation accounting for Argentina, and I wouldn't.
Million dollar expense relates a tax effect of these items.
Excluding these items adjusted EBIT for the current quarter was 42 million, 17% Harden. The 36 million reported second quarter 2019. This increase reflects lower asking expenses and higher foreign exchange gains in the current quarter, excluding the impact from gut feel acquisition cost and related items in this from the second quarter after expenses in the current quarter.
Decreased by 2 million, primarily due to lower compensation expense adjusted EBITDA for the current quarter. It was hard at 38 million reporting third quarter 2018. This increase is primarily due to higher revenues and gross margins discussed earlier, which includes the acquired the T cell business and the positive impact on the adoption of our for 16 the current quarter.
In the current year. This was partially offset by higher <unk> expenses, reflecting the ongoing expenses for those that she openness and higher compensation expense overall.
Let's now discuss cash flows for the quarter.
For changes in noncash working capital cash will provide from operating piece that third quarter is 27 million an increase of increase compared to that 19 million from operating activities and suncorp 19th.
This increase reflects the change in noncash items related to lower gains on sale man and investment in associates, a lower deferred tax income taxes.
Partially offset by lower net income compared to 35 million that was provided from operating activities in the third quarter a year ago. The current course primary down to lower net income and the change in noncash items.
The change in noncash working capital third quarter was a net cash outflow of 19 million compared with outflow of 40 million to second quarter of 19, I know for 55 million in the prior year period.
The 19 million cash outflow from working capital in the current quarters, primarily due to higher contract office and Prepays offset by lower inventories increased accounts payable.
Cash used in best next season in third quarter was 2 million, reflecting $10 million or purchases of property plant equipment, partially offset by 7 million proceeds generated from the sale land during the quarter.
During the third quarter cash used in finance activities was 45 million, reflecting 29 million of debt repayments me in the quarter the payment of lease obligations in our regular quarterly dividends.
Net cash flow for the third quarter in 2019 was negative 40 million compared to a positive 25 million second quarter of 19, and negative 52 million a year ago with respect to the balance sheet, our financial position at the ended the quarter remains strong the company's cash and short term investments decreased during the third quarter $82 million decrease reflects the $29 million every day.
Payments made in the quarter noncash working capital at the end of third quarter was 249 million up from the 228 million at the end of the second quarter 2019, primarily related to investment return capital to support business growth and the newly acquired that's helping us.
With respect to debt. The company is in full compliance with debt covenants as long term debt, a 448 million and 40 million of standard letters of credit as at September 32019.
With the new facility in place the company has available unutilized borrowing capacity of over 290 million at the end of the quarter.
I'll now turn it back to Steve for additional commentary on the company's performance and outlook. Thank you get some.
In the third quarter 2019, adjusted EBITDA was in line with management's forecast, but it did have early signs of possible headwinds late in the quarter.
The quarter had the benefit of strong demand for compensated tank products in retail fuel and competition pipe, primarily due to strong U.S. led the quarters.
He trained sales remained stable despite reduced automotive sales with the demand for wire and cable products remaining strong similar to last quarter.
Hi, coating overall was mixed with higher activity in offshore driving strong performance in our channel do Texas, and Veracruz, Mexico facilities offset by lower activity in our Chilean plant as far as on come to an end.
Great well inspection has had very strong first two months. However, the last month of the quarter saw negative impact from approval delays in North America land transmission lines and a decline in demand for our Carlo services related to U.S. small gathering line.
Unfortunately, Western Canada little improvement in the quarter and the demand for short core products and services in this market continues to be very depressed.
Theres little likelihood this market, we'll see any significant recovery in the near future.
Considering what we saw in late Q3 and either late Q4 early Q1 timing of pipe coating project Awards. The factors that influence. The next few quarters will be heavily weighted to our base book in turn businesses.
The factors that we are watching closely are related to the impact on the demand for Shah of course product and services as North American MP operators determine their Q4 spending and the company usual seasonality.
Driven by shareholders demanding that they live within operating cash flows NP operators are under extreme pressure to move off chasing growth in production volumes as their primary objective.
The result of this change is an increasing likelihood to shock or will be negatively impacted in the fourth quarter of 2019 as the industry discipline will result in budget exhaustion of our customers and therefore lower demand for our product and services in North America.
The unknowns and limited visibility or really around the magnitude of the reduction in the fourth quarter and the restart profile of Q1 2020.
The product and services that we are expecting volatility or small diameter pipe coating.
Our 12 inspection.
Tubular inspection and repair and composite pipe.
On the seasonality issue in previous years, the fourth quarter's performance is generally negatively impacted by year end slowdowns.
This is seen across our petrochemical industrial segment and is expected in comps it takes for retail fuel and several of our personnel intense businesses such as Lake Superior consulting.
In summary, we are forecasting that our base book in turn business will be reduced in Q4, and even with expected improvement in pipe coating. The result will be a lower Q4 2019 than we have delivered this quarter.
Additional clarity.
Q4 results could be similar to what we delivered in Q4 2018, and we currently have limited visibility into Q1 2020.
However, demand is expected to return for products and services impacted and we do have high confidence at the contribution for pipe coating will improve moving forward.
Based on this.
We're very optimistic about next year and delivering improved results compared to this year.
As I mentioned in my opening comments in previous calls our success will be determined by our ability to execute on three priorities.
The first priority is the real time management of our book and turn businesses that make up the base as I have just described fluctuations in activity levels or cost of challenge to manage and require a combination of tactical measures and long term repositioning.
Tactically. An example, this quarter would be the continued momentum in leveraging events and DT technology and available conventional NTT crews to serve the large diameter North American land transmission market.
An example of longer term repositioning of the decision we've made to continue to ingest our guardian footprints in Western Canada to better serve our customers with a more efficient and lower cost footprint.
In Q3, we closed the sale of an underutilized facility in Edmonton used to repair and machine all CTG tubulars.
Recent land stabilization and improved capacity in our north Miscue site provided the support to consolidate an exit emptied machine shop.
This sale and the sale that was closed last quarter are examples of repositioning for expected future activity and to bring further efficiencies.
Certainly part of this priority is the importance of delivering on the value extraction of the dead Sea El Compas had business.
Here, we are very pleased with results to date as a cost synergies are on track to meet 8 million an annualized run rate by the end of the first year.
Further our excitement in having said she'll competition within the shock or family is the visibility we are gaining on potential revenue streams that will enable us to meet our synergy target of 35 million.
Well the annualized revenue per year by the end of the year three.
A particular segment this quarter was the progress we are making and leveraging lake superior consulting.
And that's the all costs is to bring a tank install verification service to the retail fuel market.
Before I leave this priority I'd like to give a brief update on our plan to place a competent type facility in the middle East that is as it is also a good example of managing and real time.
We remain committed to expanding market access and enhancing our competitive position in international markets.
Positioning a competent pipe take internationally has attractive returns if it is positioned in the correct markets with a broad enough product offering to ensure plant utilization.
Markets, where we are qualified and have sold project products, such as the Middle East Gulf States.
Indonesia, Australia, and India remain attractive markets and initially we were comfortable to fully move forward with a school product diameter up to four inch.
Recently, we have reevaluated the advantages of having larger diameter, and a new plant and that slowed down the final stage of moving manufacturing equipment to the middle East until our six inch Spoolable family is successful here in North America.
Introduced in North America. This quarter success of the larger diameter Spoolable was substantially reduce the risk of our investment in a new plant.
We now anticipate final plant construction and customer qualification to be in late 2020 .
The second priority is a winning in the flawless execution of pipe coating projects.
The industry is now into the third year recovery for offshore in international markets and is being fueled by lower breakeven in the offshore development and LNG as they transition or replacement energy source.
All the indicators are positive from incoming sub sea order growth for equipment manufacturers year on year through to the number job geography and geographical regions that are posed for increased activities that includes the north sea Gulf of Mexico, Brazil, pre Salt, Mozambique, Australia and.
Yeah.
Lower breakevens are being achieved in part from a change in contracting model, where mpcs or given larger scopes.
There is a link between free if I do you work award and the construction contract and the construction contract is conditional UNEV I'd or sanctioning of the project.
This changing contracting model is enhancing the importance of shock Forbes dpcs and advancing the timing that commitments are made as EGPC success is dependent on the performance of suppliers they select.
What this means for shock or is that we're able to secure work that is conditional only on projects sanctioning.
By the end of Q3 work that we have secured through Mpcs that is pending projects sanctioning is now over 240 million up from the 150 million, we called up Q2.
Additionally, the majority of projects and the 240 million, including one that is over 100 million are set for investment decision in late Q4 early Q1.
With respect to book orders the backlog at the end of Q3 2019 was 509 million.
The stability of the backlog represents a success, we're having and securing smaller projects.
Which were the first to be sanction does a cycle started is slow recovery.
We didnt budgetary remained very high with more to 2.7 billion invisible opportunities globally.
This is exceptionally strong, especially when you consider we have we moved well over 360 million from the bid related to a land base East Africa projects suspension.
And the 240 million to work secure pending if I'd I just mentioned.
Is included in the bit number.
Shocker tenant continues to be position for future pipe coating work with investments being made to see that shock for selected as the pay quarter of choice.
In the upcoming quarters, our investments will continue with a focus on those projects that are very near decision point.
With anticipation that projects will be approved we will have increased visibility on execution plans and the associated fixed and mobile as planned configurations needed to serve our customers over the next several years.
As a result of the gain visibility, we will take steps to reduce the fixed cost base of our global plant footprint, including the exiting of some sites.
The third and final priority pertains to the actions, we're taking to strengthen the balance sheet. After the acquisition of that shell competence we.
We continue to be very focused on the management of working capital and capital expenditures in all areas.
Additionally, we will continue to take steps on assets that have been determined to be noncore or long term dilutive, where we have divestment opportunities.
Before I open it up for questions I'd like to take a moment and highlight several points.
The energy sector continues to be challenged to predict due to uncertainty from trade geopolitics and variables on both the supply and demand side of the equation.
With this as a backdrop investors should consider owning shock or for the following reasons.
Shockers diverse portfolio was underpinned by supportive long term fundamentals and is positioned to deliver sustainable returns throughout the cycle.
Chuck Wars legacy core business of pipeline is poised to strengthen with multiple projects set to be approved in the upcoming quarters and there is a growing list of future projects.
Management is executing a clear priorities and they are focused on delivering shareholder value in the long term.
I'll now turn the call or to the operator to open up for any questions you may have forgotten, Illinois.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound King please stand by while we compile the Q and a roster.
My first question will come from Aaron Mcneil with TD Securities.
Hi, good morning, all.
Good morning here.
Thanks for the additional detail on some of the factors impacting the fourth quarter in your prepared remarks, but I.
I guess.
Demand for the business is in products that you outlined are you also experiencing pricing pricing pressure in those businesses and so can you maybe quantify the impact.
So maybe we can walk through the businesses. So aired first and foremost probably the largest impact that we are stating relating to us land drilling completion related services. So I think it's pretty well known knowing the market hasn't been telegraph from both.
Suppliers and operators.
That the budgets will be exhausted and there's going to be a digital pull back in the fourth quarter.
In Q3, we saw it for what we refer to as call those services on Gershenfeld inspection. So these are trucks.
And technicians that are assigned to bases across the U.S. shale plays.
And they really don't know the projects ill go to.
Often with less than 48 hours notice.
And so this was.
Two good months in a in Q3 and then the third month basically slapshot and this was the what I called the field services work and it's unlikely that is going to come back because we have a late Thanksgiving. This year and I think operators will just call. It a day and we'll see a return of all this activity in Q1.
So now it's very difficult for me to make a comment on pricing because even if you drop pricing is unlikely you're going to put these crews back to work.
In Q4.
What you're going to see is we are going to maintain the crew count because we do expect that the budget will be exhausted and we have talked to operators directly.
And they're managing by their fiscal year, and so they're going to turn everything back on in Q1. So.
For us to go through a substantial reduction of head count and lay down cruise makes total sense. When we can manage the cost as tight as we can and be ready to go so not only you're going to have a reduction in revenue we're going to have some costs associated with carrying these cruise with lower utilization per crew.
The second and so Thats a field services type business. The other one that we're just starting to see now in the month in November .
And so that is self inflicted.
It is in the competition pipe in particular, the products, including featuring sleeve, where we have very good visibility on customers' inventory.
And although we have committed orders and we could push them into Q4, and we could make them happen because we have peos in fact over doing as loading inventory for next year. So we're going to see the decline. The next year. So what we're doing has tried to proactive desorption rate in manufacturing and we're working with the customer and they'll take the orders in Q1.
So again at that particular point the orders are under appeal. So there's not pricing in our composite pipe has a unique offerings. So I don't expect the pricing pressures.
Right.
So that's the big nuances so it's not only a drop in revenue that we expect Q4, because but we are going to have lower absorption rate in manufacturing for clay and his auction rates for field services. So it's kind of a double whammy.
Were you it doesnt make any sense to do anything catastrophic in or restructuring of the business for couple of months expected decline.
And so we've been very clear on the singling on how bad it could get I think it's we have yet to see it fully play out so I hope that helps a little bit on the color.
That helps a lot I just wanted to understand the some of the competitive dynamics.
Occurring.
I guess switching gears a bit to the $240 million conditional awards historically, when you've talked about larger projects first and call. It a six to nine month lag.
Between project award and revenue recognition.
And I guess can you speak to if that rule of thumb applies for these projects or if revenue recognition could be faster given that the project scopes have been determined and all vendors like shock or have been engaged earlier in the process.
So if I was to look at the 240, so across the 240 and.
Maybe I'll provide even more granularity that didnt prepared remarks, so theres 240, Theres at one project Thats over 100 million.
The 100 million and another project is around 40 million.
We have been awarded the contract.
And the sanctioning the project is what we required for the full greenlighting.
However, we're working with the PC on execution plan and both those projects would quickly be.
Important to what were messaging on the upside in 2020 . So if they go and there's some board meetings that are planned here shortly with the operators to make the decision.
It will impact the magnitude of what we're communicating will be the uplift to 2020, so what I'm, saying is the majority of the $240 million that were stating will be seen in an impact 2020, although some of them, especially the 100 million one will roll into 2021.
Okay. That's helpful.
And then is it fair to assume that Theres three projects that comprise that 240 million or would it be more than that.
Hi, This is too that I mentioned, and then probably nine other ones.
I think weve.
Done this on purpose Weve press release twice now a consolidated grouping of projects with Pcs.
And that consolidated grouping is the same model that this other projects that I mentioned are there.
Okay. That's helpful.
And.
Kind of margin performance as implied by these conditional awards I mean, obviously there'd be some leverage over your fixed costs are absorption of fixed costs, but I guess I'm, just trying to understand how that might impact.
Your EBITDA or earnings.
So I think.
We've always we've always been very careful because there's such a huge influence or the plant that is idle to one that ramps up in utilization, but if you want to try to peg a margin on backlog I think it's fair that you can go somewhere between 35% to 40%.
Is that on a gross margin basis or on an EBITDA basis, no gross margin basis, yes, okay understood.
And then final question for me you had mentioned in your prepared remarks that you're exiting some sites can you quantify.
A number of sites and for the percentage of capacity and the potential run rate cost savings that Mike.
Rise from that.
So first I'm going to be very.
Very up twos or non directional and the sites because the sites that we closed.
As as I mentioned the determination of closing the sites are based on the increased visibility we expect to get on the project awards, because we will know the execution strategy for them. So as you are very much where we bid on a particular project multiple sites, depending on the MPC and the possible scenarios, where the pipe.
Those come from.
So until we actually lock it in a very reluctant to say, we're going to shut down a particular plan because you kind of shows our cards to the competitors or potentially the pipe mill.
That may not be additive eventually should we shutdown particular fine so I'm not going to say, but I will give you some information on.
Capacity take away and ER and cost. So if you think about running.
Facility and if its stationary I think on the last quarter, we said that a plan to say a scale the belief in Scotland.
And you just just in a calendar year in terms of lease keeping it warm stacked in excess of two and a half million dollars.
Okay. So that's when we state $15 million of costs associated to pursue.
We talk about a plant like leaf on a run rate in a year could be $2.5 million right.
Capacity for the company.
We have almost unlimited capacity because if you recall two more while facilities went into sort of Texas into Mexico, and did $360 million worth their work and there are more while.
So we don't look at it that way.
Because of the proven ability for us to mobilize where the work is going I don't believe we're going to take any additional capacity out of the marketplace and certainly we're going to remove facilities, where we have redundancy in a region.
We have quite a few plant.
In the North America, we have quite a few clients in the Europe landscape and we have quite a few plans associated with Asia Pacific and the Middle East. So those are kind of the areas, where we're looking for consolidation opportunities.
And I guess maybe to.
Not to get into specifics then but.
Are you targeting like.
You know a certain number of facilities or how should we think about the magnitude.
So the way we look at this is first of all the securing of the next five years worth of work what plans do we need to service that work.
Right. So as as we go forward, we look at the five years, we want to keep a an ability to serve those markets. For example, the offshore markets, we want to make sure we maintained presence.
In those for upcoming work, but I think in some cases, the offshore markets are becoming soft and we have over capacity or we can service them through mobile technology closer to the pipe mills.
So it's not a simple equation, but.
Certainly.
You could expect to company to take three or four plants out over the next calendar year.
Am I right to assume that that's.
$7 million to $10 million.
Run rate.
Impact depending.
Anywhere the scientists I think Thats fair, Okay. That's all for me thanks for your time.
Thank you. Our next question comes from Greg Coleman with National Bank.
Great. Thanks for taking my questions on the added color I want to start by looking at sort of the near term outlook just to layer on a couple of things that Aaron was talking about.
You mentioned in your and your comments the next few quarters will be heavily influenced by the Facebook.
Sorry book in turn business should we be interpreting this net for at least the first off 2020.
We expect aggregate financial results to resemble something about like we saw in Q3.
Presumably.
Those things are restart after budget exhaustion in Q4 or am I interpreting those incorrectly.
No I think that's that's a good way to look at it just I think thats a good baseline.
And Greg the.
The kind of magnitude of the difference would be.
Number one what operators do in Q1 right.
We could expect one of two approaches I think other.
Unfortunately, what we often see in oil and gas is a very very quick return to work all hands on deck. So a very.
Profile than Q1, or we could see much gradual returned to work through Q1 into Q2, and the second which is quite important.
Is.
Where the projects that we have.
Order today actually slot into the quarter.
As as historic performance of the company when you look back.
It is not unusual for the company to be plus or minus EUR on revenue and profitability on a quarter Baie projects slipping.
From one quarter to the other because we're not in control of the delivery of pipe into the facilities.
But I think thats, a very nice way to look at.
As we sit right now the base book in turn business, we should expect kind of Q3 run rate for Q1 Q2 next year.
And you know.
The excitement in the company right now is that we have line of sight of pipe coating work. We're we know that we're in the driver seats. When these projects are sanctioned on time.
The turns the whole view of the company quite different for 2020, because we were now in execution mode of some substantial volume of work in a business today pipe coating, which in Q4 is the first time, we'll see the assay contributed right.
Got it.
Okay. I appreciate that color just factually I guess to make sure that I'm getting a couple numbers that you put out in the route and the results correctly.
You know backlog is 509 condition rewards.
Through 40 I believe.
In October you announced the.
Since murder up and offshore Australia project 30 to 50 million in aggregate Dot is not included in the 240 I'm assuming it is not additive.
No the projects that we announced their in backlog.
So we got to we have nots announced any project.
That are under conditional awards, so all the announced that we made our booked work that will be that.
We're about to execute that's in backlog Yule, Hans Heidrick is an example and taxes.
Theres also a bit of backlog outside of the 12 month period at similar levels that we've talked about in Q2.
So that may be very clear so theres no confusion to Fivenine includes work that is secured there is a pricing contract execution schedule of when the pipe with the rights.
There is so its contractual obligations that will do the work. The 240 is carried in the big number.
Okay. So when you actually think of what the company has secured work maybe we've introduced a fourth buckets. So we have backlog of five nine we have this kind of gray area between bid in backlog of 240 that we put into bid.
And.
Then we have the budgetary which is kind of on the horizon.
The other clarity and makers, we pulled out well over $360 million for an East Africa project and I think anybody that's done any research probably knows the project and it's not represented in bid.
Backlog.
And certainly we have not put it budgetary because we don't even know the configuration.
Future pipeline as the operator has now gone into a suspension mode.
So I hope that click on it.
It really does and just entered and just to hone in on that one part there. The October announcements. The 30 to 50 million that is in the five all nine and not additives.
So all the announcement made.
To date, the two roofing WPC are either in the five nine and there may be a very small out hanging that's beyond 12 months.
Right, Okay short shortly.
This is fivenine is what will is is scheduled work for the forward looking 12 months.
Got it and starting for the Patrick on that I, just want to make sure that it was clear. This the last one from me Tom bigger picture in a lot of the remarks, you've been talking about sort of see two competing dynamics on the upswing. Obviously, we have the offshore which is looking very good as we trended says a lot of credit 2020 and beyond in the risk apart or in the short term we have the onshore.
Markets in North America, obviously, causing pause in Q4, and we'll see in probably causing volatility in early 2020.
You reiterated your confidence that we are going to see a lift or we should see or are expected to see a lift in activity in aggregate in shock or in 2020 over 29 cheap.
What has to happen to the negative part of that outlook, what has to happen to North America for your confidence in aggregate results lifting in 2020 to be at risk.
So there's two factors I think you've already hit the first one is we have to see the U.S. land.
Work.
To to at least have a sustainable revenue level around into Q4, sorry, Q3, but we just delivered that's for so we need to get back.
We can see the if the decline that we are expecting and have visibility in Q4 continues.
The first half of next year.
That would be.
A negative on for 2020.
Then the second part is okay. We already have work secured which is the 5.9 plus overhang beyond the 5.9, because we will have the fourth quarter next year.
But the magnitude of what we land in the next three to four months.
Has a big impact on what's going to happen on Q3 Q4.
So.
We feel right now we've been done the different scenario planning that we will see an uplift on on what I think is.
At Best standard results on 2019 with now that we see a softer Q4 and 2020 will be an uplift the magnitude of the uplift will be the strength in the U.S. land business.
So how does it return and then what's going to happen over the next three and four months, which will influence Q3 two for next year.
And Thats pipe coating.
Got it well I do appreciate that essentially the color and I'll turn it back.
Thank you. Our next question comes from your line is less Paula Swift Industrial Alliance.
Good morning.
Good morning life.
Oh I have a question most of my questions have been answered on the bid book.
You did lose as you mentioned the project worth I think it was 360 million, but did book only declined by I'm guessing about 100 million.
Can you.
Provide some color on what.
You know ballpark 300 million dollar additions came in with a one project where they multiple small projects because.
It did quite a substantial makeup.
Yes, correct. So first just to clarify the large projects or the East Africa project referred to.
It is not lost we pulled it out or the bid, but it hasn't been awarded to anybody so what's out there somewhere.
The on bid and budgetary so it's out there in the marketplace Someplace does it go ahead or not I think people can read the politics that are happening in the prices as much as I guess.
The replacement.
Right.
Placement of the volume of bid of course was in the budgetary.
Before right.
Projects from budgetary into bid that's all I'll talk about that first.
Several of those projects are associated with gas in the middle East.
Right and those projects are in.
Bob The press release scale, so the $30 million of Canadian that we kind of the threshold of one press release.
Right.
The.
Other area that I would highlight is there is now.
Increased intensified beating in both the Gulf of Mexico.
From I overseas now that we moved beyond the tie ins and Brazil.
That's where they're they're coming from and I would say on average, it's probably a healthy mitchell's smaller projects, but several of the projects are certainly above this 30 million threshold.
Budgetary kinda had some resilience to it because now we're starting to provide what we called project estimates for some large projects.
Our associated with Australia gas at made up a movement of budget and there's there's one in particular that is quite large.
Okay. Thanks, very much for Sohu dot color.
If I could summarize your outlook.
You seem to be a little cautious over the next few quarters.
Quite a bit more optimistic because again I'll point you back on one of your comments would you said right I think I've got this right you mentioned something that maintaining your core capability will be rewarded.
Is that fair outlook and of course, we're we're probably that rewarding.
Comment probably applies to Q3 Q4 next year.
Yeah, I think maybe I'll break down today, what I said so the confidence comes from the difference between Q2 Q3 work that we have secured.
With the Pcs pending at Heidi. So you know in our in our risk profile. There's two elements one is.
Do we win.
Maybe the chosen by quarter and does the project go ahead. So this SC model, which is probably the biggest change in offshore developments.
He is really providing the opportunity for us to work with the Pcs to de risk what they're taking on which is much larger project.
So that's the first part is that and I think you're going to see as we move forward. This is going to be a common approach and we are going to lend more projects pre fiveg. So the operators seen the advantage of this.
The.
The additional component of we will be rewarded is if we would have shut down and button to everything up we would not being the position to offer.
The complexity of the execution to the Pcs. So we wouldnt to be quite fair, we wouldn't be in the running for we've won Lisa one we wouldn't Lisa to Theres, Lisa three and four out there to get.
If we had not putting the resources free.
The sanctioning of at least a projects we would not even be in a preferred position with site Pat and I think this is going to continue so our outlook.
And I'll read Dirty what I said earlier, it's coming down to the next three or four months.
We're going to see what's going to happen next three or four months because the one thing we don't control.
The confidence that operators have in in LNG in the offshore in the long term and do these projects actually get sanctioned or not.
Everything else is positive our tail, we tail the matter the sub sea manufacturer equipment manufacturers. So the cameron's in summer JV, FMC or the Technip FMC and their order intake.
Year on year is very very strong in there there are about one year ahead of us. So it's now in terms of tenure of project Awards.
Even those that are not MPC.
100% or EGPC I led.
There were being awarded work as a function of sanctions if I'd all those other projects that we're not talking about our boat to happen.
So.
We spend a lot of time speaking about MPC, but there is another volume of work out there that is going to conventional way and tree manufacturing subsea tree manufacturing and sales is a leading indicator what's coming our way and so yes confidence is quite high and I do see that 2020.
The question to that will be stronger as to what does the magnitude of improvement is going to happen for us right.
Okay. Thanks, Thanks, very much for for adding that color and I think almost all my other questions have been asked so all of turn.
Maybe one other question.
One final one.
Anymore.
Thank you alluded to this any more possible.
Asset pipe land sales that you'd be looking out in the near term.
That would have a material impact.
Yes material so.
We see similar scope to the last few quarters.
As much as.
We had a really good quarter in Q2.
But I think you will.
We have a long list.
And all of them of course, we have to make sure that there is.
An audience or an appetite or third party that's available, but you'll see continued sales of.
Assets as we rationalize your footprint, including land and equipment and we will even divest some businesses that are.
As we finished or finishing up our plan that.
Our dilutive so yes, you will continue to see this.
Great I'll leave it at that thank you very much.
Thank you.
Thank you. Your next question comes from Keith Mackie with RBC.
Hi, good morning.
Keith.
Just a question for you have the grey area of the the containing the projects of 100 million 40 million and then the additional groupings can you maybe give us a ordering of the probabilities in your in your and your scenario analysis that those projects.
That those projects go ahead or get if I need in the next few months just kind of are you thinking it's the 100 million that's likely going to go ahead first or is it the other ones that that you would say are more more likely.
Well so great great question right. So I think the ones that are most important is 140 right. So.
The market is waiting for under 40 so.
We are expecting to 140 to go in.
Over the next couple of months, maybe even sooner.
One.
Watching quite closely on how the operator.
In country.
Versus actual project sanctioning so that the project is ready to go so.
I think similar to what you saw in Lisa too.
Where the contracts will be given and license or 42 span.
And started doing old early work, which is the PTT plans to pipe assistance.
It could be done in a two stage approach, meaning that you don't get full sanctioning of the project, but they give authorizations for the full supply chain to go ahead.
With sanctioning of the project to be confirmed that are later date before they start putting in water and that's if you recall that's what's happened to lease the two we made a press release said we were awarded the work pending if I'd.
And then before we knew it even though the equity hadn't happened pipe was showing up and we're doing the work. So theres a project there that may go that way.
And the second one.
It's pretty much digital Theres, a board meeting plan it makes logical sense.
Yes as needed.
There is partners involved in it so I'm not privy to what happens in the boardroom, but I would give it an 85% chance that it should go.
And then the smaller ones all have their nuances and do they go in the short term under they push a couple of quarters.
It's hard to say by one.
Got you Okay, no that's a that's appreciated color.
I guess on my next question.
Of the facilities that you'd potentially be looking to sell or monetize.
Are you do you think these would likely go to a competitor or would they be re purpose for some other use just trying to get a sense of is there going to be less capacity in the market post a sale of your facilities or is it just going to be a different competitive dynamic then.
So as I mentioned Theres, two you're talking primarily around pipe coating I suspect right.
Yes.
Okay, because I personally say that what we did this quarter was too to sell land.
Well for that will re purpose the land that land value had gone up and we moved a.
Capacity or consolidated that capacity.
Sites. So in that case capacity has come out in the market. So thats, a very and its western Canada. So this should be no surprise you need less machining capacity until we put it all on one site.
For pipe coating, there's two elements right. So one is the equipment itself in the second is aligned.
Right.
So the equipment in some cases, there is a market for it.
In in pipe mills, particularly to to do edgy corrosion.
So in some cases.
Really participating in the marketplace, because low end and to corrosion coating, primarily net North America is a little market share for us so.
Would've put additional.
Pipe coating capacity into the market.
I think in a lot of cases, all is doing this repositioning it so it's moving it from from what we see is challenging location and we could do it someplace else. So we're reducing our capacity and we will push it into into a pipe mill, so thats the equipment.
Land.
Most definitely you can relate land sales it gets re purposes to the capacity of pipe storage into the market.
So as you've seen we've sold.
Land and we'll continue to sell that each time, you sell land you remove the amount of stockpiling for pipe into the marketplace. So as we sell and especially pipe coating line, whether it be offshore related facilities.
Or.
Land related facilities that capacity to store in stage pipe is reduced but the barrier to entry to store pipe is.
It doesn't cost very much to its into millions of dollars. If you want to Restabilize land. So it's not capacity that couldn't come back in the market relatively quickly.
Thanks.
I see okay.
That's it for me. Thank you very much yet maybe an extension just so everyone to clear is it's not a pressure pumping or.
No offshore rig story.
If you take capacity of NT corrosion, though to the market you can buy that equipment and install it and the cost of developing land is quite cheap. So it's not you shouldn't see a pricing increase because we take capacity out of the market.
Okay awesome. Thank you.
I'm showing no further questions at this time I would now like to turn the call back over to Mr., Steve or Chief Executive Officer for any further.
Well I'd like to thank everybody for taking the time for the call and joining US This morning, and I look forward to touch base with everybody again at the end of the fourth quarter. Thank you very much.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect did not I'm Jackie Quinn.