Q4 2019 Earnings Call
Hi, and welcome to the shock or Q4, and yearend 2019 results webcast conference call.
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I'd like to hand, the call over to pulp heroes. Please go ahead.
Thank you and a good morning before again this morning's conference call I would like to take a moment to remind all listeners that today's conference call includes forward looking statements.
Bob estimates judgment and uncertainties that may cause actual results to differ materially from those projected.
Complete text of shopper statement on forward looking information is included in section for.
The fourth quarter 2019 earnings press release that is available on SEDAR and all the company's website shopper dot com.
I'll now turn it over to shop or CEO, Steve or.
Good morning, and thank you for joining us on this morning's call first call.
As we start the call I'd like to highlight extreme challenger Triangulating industry.
And the company with a backdrop of ever changing macroeconomics.
Factors that influence the rest of the company.
Our approach is to be conservative and anticipate the possible impacts to the company and is performing.
Yesterday evening, we released our Q4 full year 2019 results with new segment reporting.
This new segment reporting without question provide enhanced granularity into the company's performance, but it will also challenge the historical and in many ways, okay to set of assumptions.
About the Companys portfolio markets and competitors and competitors that result in the company's valuations.
Additionally, the change in segment reporting will bring enhanced clarity to the reasoning why the company has moved with greater urgency to diversify the onsite coating.
Furthermore, the future potential that pipe coating brings.
Now turning to Q4 2019.
Adjusted EBITDA was 30 million a decrease of 30% over the third quarter of 2019, and an increase of 22% over the same quarter one year ago.
Revenue for the quarter was 334 million, 15% decrease over the previous quarter and a 6% less than Q4 2018.
The current quarter's revenue was negatively impacted by the annual seasonal slowdown low demand for products and services related to North American drilling and completions and revenue portion related to a service quality bad.
Partially offset by the addition of assisted is NCL acquisition.
Although Q4 revenue was lower than expected.
As a north American M. P operators pull back and spending was even greater than we had anticipated and we certainly did not forecast the service quality event.
Eva was delivered as expected for the quarter.
Without the direct service quality cost of 7 million provision taken to recall pipe and indirect cost a 10 million plus revenue push over the course the results would have been much better than we expected.
Looking at the segments for the quarter the pipeline and pipe service segment saw the completion of coating work for the bars on project anymore.
The absence of demand for growth, while the inspection in December and both gathering lines at large diameter and the impact of pipe coating of the service quality event.
A competent system segment had a very good quarter for take deliveries, but it did not fully offset the reduction in demand for player in the U.S. land market.
Automotive and industrial segment was as expected with a typical year end slowdown.
Looking forward to Q1 and the full year, we are forecasting that there will be a return in demand for products and services in North America in both the upstream and midstream was strengthened through the first quarter with January being very slow.
We expect demand for our comps a tank products and retail fuel market remained strong with the historical profile shells, where Q1 is the lowest point of the year.
Demand drivers for products and services within automotive industrial segments should remain solid for the full year.
Oh, we are expecting there will be some volatility due to the CRO to virus in Q1, but at this time and I emphasize at this time, we do not expected to impact the full year results.
Pipe coating and offshore and interest in markets, where we are now forecasts and there will be a step change in activity based on projects that are already booked and are expected to be booked.
Q1 will be slow with a progressive build for each quarter through the year Q3 in Q4, we all expect to see the visible step change in performance.
I will speak in much more detail in a moment, but in summary based on very conservative view.
We expect Q1 could be significantly lower than we had just delivered in Q4 2019.
However on the assumption, we'll see continued strengthening in north American upstream and midstream to near 2019 levels, our oil and gas non related businesses will perform at levels similar to 2019.
Pipe coating projects that we have secured or apply certainty of securing an extreme 2020 or not halted her suspended the company will deliver results in 2020 that are an improvement over 2019.
Additionally would like to cite some projects many bids outstanding and the success, we are having the securing work with the Pcs pending if I'd.
Step up that we are forecasting for the second half or 2020, we expect will continue in 2021.
I will now Alaska Saltano, our CFO to provide some details on the fourth quarter financial results.
Thanks, Steve.
As Steve mentioned earlier, the fourth quarter results were in line with our expectations. Despite some challenges in certain areas.
Before I start I'd like to remind all listeners that we have revised our segment reporting we now have three segments.
Pipeline and pipe services copies of systems, and the renamed automotive industrial formally petrochemical industry.
Starting up the revenues consolidated revenue the fourth quarter was 334 million, 6% lower than the fourth quarter of 2018, the pipeline pipe services segment revenues decreased by 14% compared to the prior year, primarily due to lower demand for pipe coating and growth while inspection services in the North America added.
Result at the capital discipline focus I BNP operators and delays in land transmission line projects, partially offset by higher pipe coating project activity in the EMA region.
The current quarter was also negatively impacted by delay of revenue related to the quality issue experienced in the quarter.
The conference It systems segment revenues increased by 10% compared to the fourth quarter of 2018, primarily due to the decile acquisition, which was completed in the second quarter of 2019.
This was partially offset by lower demand for composite pipe products related to the capital discipline focus of U.P. operators and the continued market softness in Western Canada.
In the automotive and industrial segment revenues were higher by 1%, primarily due to higher demand for our wire and cable products in North America, partially offset by lower revenue for our automotive heating products.
On annual basis, it's hard to revenue for 2019 was 1.49 billion an increase of 6% over 2018.
The pipeline and pipe services segment revenues increased slightly over the prior year, primarily due to improved pipe coating activity in emerging region, partially offset by lower revenues in Asia Pacific region.
The competent system segment revenues increased by 20% compared to the prior year, reflecting the benefit from is that's the acquisition. The current year, partially offset by lower demand for composite pipe and tube Your management services related to the capital discipline focus of the MP operators and the continued market Soc and softness in Western Canada.
The automotive and industrial segment revenues increased by 4% compared to the prior year, primarily due to higher demand for wire and cable products North America, partially offset by type decrease in revenues for our automotive heat treat products.
And so all the results for the fourth quarter in the year were negative impact negatively impacted by nonrecurring items outside the company's normal course of business. The current quarter includes a 104 million dollar impairment charge on tangible assets and goodwill for our sharper inspection services business and assets at two pipe coating facilities.
Also a loss of $1 million relates to hyperinflationary carry for Argentina.
This was partially offset by a $5 million gain on investment associates, and a $1 billion gain on sale of land in the quarter.
The annual results reflect the negative impact of $104 million impairment charge does that feel acquisition and related items of 17 million a loss of 5 million related to the hyper inflation accounting for Argentina, partially offsetting offset by gains of 39 million on the sale of lands in Western Canada, and a 5 million dollar gain on investment associates.
On an adjusted basis consolidated adjusted operating income margin for the fourth quarter was 1% compared to 2% for the prior year fourth quarter.
The current years adjusted operating margins reflect positive adjusted margins for the comps it in automotive segments, both at 14.1%.
These positive margins were offset by negative adjusted operating margin of 13% in the pipeline type services segment, which reflects the negative impact of the 7 million dollar cost for the quality issue in the quarter lower demand for good thrown inspection services.
Under utilization or a pipe coating facilities in the emerging Asia Pacific region.
On an annual basis consolidated adjusted operating margin was 3% with cropping systems in automotive and industrial segments, having positive adjusted margins of 14.3% and 15.7%, respectively, partially offset by the pipeline and pay segments being negative 5.2 due to the reasons mentioned earlier for the quarter.
Adjusted EBITDA for the quarter was $30 million, 22% higher than 24 million reporting into fourth quarter of 2018.
This increase is primarily due to the addition of does that feel acquisition and lower adjusted SGN expenses, partially due to lower incentive compensation expense offset by $7 million, a warranty costs and lower foreign exchange gains in the current quarter.
Adjusted EBITDA for the current year was 136 million slightly higher than the prior year. This increase is primarily due to higher revenues discussed earlier, which includes the acquired that CL business. The positive impact from the adoption of the eye for 16, and the current year and lower SGN eight expenses also reflecting lower incentive compensation expense.
Offset by higher warranty costs and lower foreign exchange gain.
Now discuss cash flows for the quarter cash provided from operating activities for the fourth quarter of 2019 was 49 million slightly lower compared to 51 million to fourth quarter of 2018.
This decrease reflects lower net income and higher changes in noncash items in the current quarter.
The change in noncash working capital in the fourth quarter with a net cash inflow of 33 million compared with an inflow of 27 million in the prior year period.
The 33 million cash inflow from working capital in the current quarters, primarily due to a lower accounts receivable and contract assets, partially offset by lower accounts payable.
On an annual basis.
Cash provided from opportunities in 2018 was 54 million compared to 31 million in 2018.
This increase reflects lower investment in working capital, partially offset by lower adjusted net earnings.
Cash used in investing activities in the fourth quarter was 7 million, reflecting 10 million of purchases of property plan equipment, partially offset by 3 million of proceeds generated from the sale and during the quarter on annual basis cash used in investing activities. In 2019 was 242 million to 252 million, reflecting 291 million relates as that C.L. acquisition and.
45 million of capital expenditures, partially offset by 79 million proceeds from sale Lance and investment in associates.
During the fourth quarter cash used in finance activities was 26 million, reflecting a debt repayment of 10 million during the quarter the payment of lease obligation in our regular quarterly dividends on annual basis cash provided in finance activities was 82 million, reflecting a net increase of debt of 148 million relates does that feel acquisition, partially offset by far.
The 2 million of dividends paid and 25 million of lease payments.
Net cash flow for the fourth quarter times, it with a positive 16 million compared to a positive 27 million in the fourth quarter of 2018 2019 annual cash flow was negative 119 million, primarily relates as ex acquisition compared to negative 72 million for 2018.
In terms of the balance sheet, the company's cash and short term investments increased to 98 million compared to 82 million at the end of the third quarter noncash working capital at the end of the fourth quarter is 204 million down from the 249 million at the end of the third quarter primary relates a typical seasonal inflow from working capital in the business.
Property plant equipment goodwill and intangible assets are down compared to third quarter of 2019, primarily due to impairment charges booked in the current quarter.
With respect to debt the company than full compliance with debt covenants and as long term debt, a 438 million and 37 million outstanding letters of credit as of December three for 2019.
As announced in our press release subsequent to year end the company negotiate amendment on its credit facility with its syndicate of lenders. This amendment and manage the maximum net debt leverage covenant in 2022 4.24 times from March 30, Onest and June Thirtyth and two four times for September Thirtyth, the net debt leverage covenant returns to treatment.
3.5 times for December 31st the company obtained this amendment to address the potential risks that it might experienced volatility in a short term results due to the dynamic nature of the demand in North America land market the potential delay of pipe coating projects and the general overall global uncertainty at this time.
The company believes this level relief provide any of them. It is conservative and will not be fully utilized this debt amendment will allow the company to focus its resources in 2020 on delivering on its long term growth strategy.
Now I'll turn it back to Steve for some additional commentary on the company's performance and outlook.
Thank you guests on.
Well first start writing some additional color on Q4.
We had expected and in the Q3 conference call communicated that the impact of North America MP operators capital discipline would result in a reduction in spending in the fourth quarter.
This reduction was forecasted to impact the demand for our products and services that are tied to drilling completions in both our pipeline.
And type services encompasses systems segments.
In the far too much of the fourth quarter, we experienced a slowdown that was in line with what was planned.
However in December many field operators.
Fully operations field operations were fully halted.
Our couture like vision fell below breakeven and product inflation stalled, resulting in north American negative impact on Q4 being greater than we expected.
Causing the pressure on the fourth quarter operational results with the service quality events that occurred at one of our sites in our pipeline and type services segment.
That was limited to one site.
Perfect product.
And application and one customer chalk board decision to rework the product was driven primarily to ensure that the long term credibility of our commitment to send me on our products and services remain intact.
In other words, a key customers not satisfied with what we had delivered and we had to ensure our reputation for technology and execution continues to command a premium in the future.
The impact on the core we're seeing directly in the 7 million provision we had taken.
And indirectly on revenue as other booked work at the facility was also pushed out at the quarter.
It is estimated at revenue impact was in excess of 10 million and that it will take several quarters to reschedule.
Work.
The root cause of Vincent has been addressed this facility is back to production and the customers now satisfied with what is being delivered and has awarded us works it.
Within the Congress and system segment.
Sales from retail fuel remains strong and actual results were better than expected due to favorable weather that increased the number installs in the quarter.
Our progress for the tank business, where the record full year for sales and margins in water and wastewater and we completed the last actions that will result in us achieving 8 million of annualized cost synergies as of the 12 month anniversary of the tail acquisition.
Automotive and industrial results were as expected in the quarter. There was the usual ended the year slowdown in demand for heat and cool trunk products that was partially offset by solid demand, especially wire and cable solutions.
Although at quarter end, the backlog remained relatively flat at 513 million compared to 509 reported yet in Q3 I'm very happy with the success, we are having in winning work to maintain this level.
Additionally, with over 1 billion of outstanding bids, which 240 million as award conditional on Friday. It wasn't good quarter for project positioning to ensure a sharp or is that pipe quarter of choice.
Of note. The recent press release on Pyra sang Amar are examples of projects secured depending if I'd and the Baltic press release is one that follow the normal award process.
In Q1, we are forecasting a slow return in North America MP spending we also expect project restarts in North American midstream after the seasonal break in several regulatory suspension will push into late February or early March.
Project startup in our channel you, Texas could deal, Indonesia, and or hangar, Norway facilities are wrapping up but our ended the quarter loaded.
And we will be taking cost to prepare Scotland in Brazil plans for book or production that will start in Q2.
In our normal seasonal cycle Q1 is the lowest for competition tank sales due to low installs because whether constraints and the automotive industrial segment should see an improvement in Q1 or Q4.
However, there may be some impact in Q1 from the Corona virus.
But we've been actively managing it and all there is uncertainty at this time, we're not forecasting a negative impact on the full year.
The net result are very conservative view that has a slow return of activity in North America late in the quarter pipe coating project starts and costs and seasonally low quarter demand is that Q1 twentytwenty could be significantly lower than we had just delivered in Q4 2019.
For the full year 2020, and we are expecting volatility quarter to quarter in North American upstream and midstream and customer spending on par with 2019.
Q1 will be the low end point for pipe coating activity with strong build in the second half the year due to planned execution of projects that are already booked.
Non oil and gas businesses and our comps at systems in automotive industrial segments will follow their usual annual profile and are expected to remain solid at similar levels for 2019.
Overall, we are forecasting wheel hub earnings improvements over 2019 and that the improvement will be very visible as we exit the second quarter as our international and offshore tight pipe coating business starts to execute.
Since 2014, we've been building a portfolio that is diversified both in offering in markets that leverages. The core strengths. The company that can deliver both sustainability and torque benefits of a large capital projects.
I believe with our new segment reporting it will make clear why and diversification strategy was pursued and the potential that is available in the very near term.
Our automotive and industrial and compensation systems segments are performing well as a result as soon as we've made to add capacity, 25% increasing capacity over the last three years for automotive industrial segment and new offerings tanks in the case accomplice system segment during a very rough long duration.
In terms for our oil and gas capex spending dependent pipeline and price services segment.
Supported by the demand for global LNG as a transition energy source the reduction in offshore development costs.
Subsea tree orders and projects a sharper has booked or is positioned to when there is confident that the pipeline. The pipe service segment is on the verge of returning to contributing meaningful for sharp.
We expect an inflection point that is quarters, not yours away and that the benefit will extend beyond 2020.
The success of the company will be turned by our near term success in managing three elements. The first of the dynamic management of our base book in turn businesses. The second the securing executing pipe coating projects and the third is the reduction of our debt leverage.
Before I open up for questions I'd like to highlight several points you energy sector continues to be challenged to predict due to uncertainties and trade.
Geopolitics and variables on both the supply and demand side of equation.
Hi, this is a backdrop investors should consider owning shock for falling reasons.
Scharnhorst diversified portfolio was underpinned by supportive of long term fundamentals that is positioned to deliver sustainable returns throughout the cycle.
Shock or legacy core business or pipe coating is poised to strengthen with multiple projects tend to be executed and secured in the upcoming quarters.
And there is a growing list of future projects.
Management is executing on clear priorities and they are focused on delivering shareholder value in the long term.
I'll now turn the call over to the operator and open up for any questions that you may have for our guests on the anti.
As a reminder to ask a question you need to press star one on your telephone.
Your your question press the pound Keith.
Please standby, we've compiled the Q and a roster.
Our first question comes from Aaron Mcneil of TD Securities. Your line is open.
Hi, good morning off thanks for taking my questions. Steve when you see that Q1 results could be significantly lower than Q4 can you help us understand the magnitude maybe diving into some of the variables that might.
Attribute to this performance and I guess I'm wondering specifically.
Well, you us land be any different Q1 versus Q4.
What will be the Q1 impact of the Channelview facility in.
Do you expect to incur an additional cost to prepare for contracted work.
Okay. So I think it's a very fair question, but I'd like to highlight.
Management's commentary on Q1.
With the understanding of Ole and I want to make sure I phrase you correctly, all the headwinds and uncertainties as we go into into Q1.
The comment a significant is based on.
Factory in U.S. line that we may not see an improvement from Q4. So we now have one mark.
ER has not recovered.
To the first two months run rate in.
American upstream that we saw the fourth quarter. So that's my first comment.
We have.
We monitor incoming tickets because it really is that book in turn type business for over 12 inspection gathering line pipe sales.
So I assume if it's flat.
And showed no improvements so it becomes a two month quarter than you could expect similar performance to Q4, so no uplift.
The other comment I would make a non oil and gas.
You can look at historical performance of Red Seal Q1 will be low cores that deal.
The the profile of that business.
So if you compare Q4 to Q1, you will see an absence of contribution or a much lower contributions into into Q1.
The comments then on pipe coating.
Facility.
Hi, David Channelview, there will be some impact we took the cost to strip and Requote.
But of course, we had to push work out of this schedule. So there's going to be work that we would've assumed we would have done in Q1 that is still going to be pushed into for the quarters in the year. So there'll be some pressure from the service quality and then on the top line to continue into Q1.
The other comment I'll make.
We really don't know.
The the automotive industrial segment is a very solid segment for us we should see an improvement from Q4 Q1 and I used the word.
Should.
However, the and you probably familiar with our Chinese facilities and automotive customer supply chain using grain.
Such as many points are being impacted by the current.
Pull back.
Extended shutdowns in automotive.
And so the messaging on the significant pullback.
At arm's length of the projects pipe coating and that's the one thing I think were most comfortable with because we have.
The work that we have secured and we're forecasting will be the step up his work that has already secured.
So that one is probably the most confident that we have next confidence that we would have of course is.
That's how we'll be low and the rest relies on really what is the uptick that will happen in North America referenced in Q4, and what will happen on the automotive that.
As we see things play out over the remainder of the quarter for demand.
Of automotive products and our facility that's in China, So I hope that puts it in proportion.
Q4.
I think you can pull out does that.
Thats Fair you can expect.
Things don't improve from the Q4 run rate in North America upstream it could be a pretty rough quarter fraud.
Okay, and then I just wanted to clarify on your 2020 comment.
Order for 2020 to be higher than 2019, do you need to see activity activity levels flat to 2019, and I guess I'm wondering because based on capital budgets announced in the U.S. So far you asked land upstream spending.
Broadly expected to be lower.
In my in my prepared comments and I'll address by segment. So what do we need to have an improvement over 2020.
The first thing that we need to do is we need to ensure that the revenue that we generate in North America.
North American upstream is equal to what we did 2019 that doesn't necessarily mean that we need the same level of activity because we have more products that are now going into the market and I think a critical one I would identify is the success that we're having in pushing our five inch and larger diameter.
We'll go into the marketplace. So it was commercialize at the end of last year.
And we are expecting and we have line of sight of an increase of mad in international or that will help our comp.
Type business. So we don't need the same level of spending, but we need to be able to successfully execute the hedges to a decline in spending.
Right. So I think that my comment there.
We need.
The same that I mentioned for our automotive and industrial business, we need on CCAR 2019. So.
The the biggest impact on year on year performance is really the execution of work is already secured.
And I think you only have to go back to the press releases that we've made throughout 19 and recently in 2020 and look at the timeline of when they're going to be executed they all start.
And you will see them in in the project plants that I mentioned, which is the.
The plants that are in Brazil, Indonesia is going to see a substantial and we mentioned thats in a press release.
Norway is going to pick up.
We're going to see Channelview once we can clear up the service quality should start to generate a bottom line performance.
And in the later part of year.
Youre going to see Norway, and one that is probably the biggest one is now leaf which was a site we had targeted to consider.
Got it.
It as a footprint.
How does that address the market has been awarded defaulting pipe. So all this has been secured in the second half. So you will see.
No uplift and that's probably the most confidence we have.
Okay, and you had mentioned on the last call the wouldn't look to a substantial reduction in headcount in Q4 for the growth wealth business.
Given an expectation that activity would rebound in Q1, and I guess has that continued weakness in U.S. activity changed your view at all or you still.
I didn't running.
If you'll allow me to correct, we said at the other way, we actually reduce facilities in the fourth quarter and reduced headcount increased 12 infection.
We have moved out of three different geographies in her colleagues section in the fourth quarter.
Okay. That's helpful. Yes, declare we've actually done not so the revenue on course welding the profitability as a percentage for 12 inspection or gathering lines for this call of type work.
Pulled out of several bases are well service basis from adjacent locations that were down or in one quarter.
Okay.
Indeed, obviously.
I assume you think that's.
Good fixed cost structure going forward.
The big Headcounts in that business is the variable headcount, which are the technicians that run the truck.
The technicians compensations are tied directly to activities. So it's kinda self regulating.
Okay.
Thats all for me I'll turn it over.
Our next question comes from Anthony in Linton of National Bank. Your line is open.
Hey, good morning, guys.
Morning.
Just a question to clarify on the backlog. So conditional awards at the end of Q4 19 were 240 million, which was flat to Q3 is that because the letter of the 10 on the wiser project was backfill or is it lower considered to be a part of the conditional awards.
Hi era or like these three remain in this bucket of 240.
Okay.
And.
So is that another large project by by the way the but the two already had.
Oh.
And probably for projects that moved into backlog in that were backfilled by other projects. So we did have a movement up projects.
From 240 bid number that move into backlog that was replaced by other ones.
Okay.
For the quarter.
Okay, and then I guess on a similar no just trying to understand the timing for Baltic Party, and then single Mark where those were those reflected in that in that 500 in the backlog number in the conditional award or should we be thinking about those over and above the release number.
So the second we're in the 240 and ended the quarter. Okay. We had pipes delivery confirmation for bulk pipe. So some of bulk places in the backlog and some of the bulk of pipe beyond the 12 months.
Okay got it.
And then just thinking about the channel view facility. I think you said 10 million is that how we should be thinking about whats getting pushed into Q1 or is that so I'm not going to carry over into Q2.
It will take the whole.
Some of the work is already put into into Q3 Q4.
So it won't be fixed in the back of work all coming in Q2.
Okay and then if we just on the margin side, if we add back that $7 million rework charge. It implies adjusted EBITDA of 36 million with like well with an 11% EBITDA margin is that kind of the profile. The backlog, we should be thinking about in the first half of 2020.
There is there should be some improvement to that as we know we get further utilization or coating facilities.
In the pipe coating side as we execute the secured work that we have in the work that we expect to secure.
So there is there is improvement that's what we've talked about in earlier remarks that we do expect an improvement of results in 2020 over 2019.
Okay. That's it for me I'll turn it back thanks.
Our next question comes from Eli as Carlos of Industrial Securities. Your line is open.
Good morning.
Turning playing in that.
I want to hit on some sort of general overall were items.
Given the current share price.
Have you considered and the board and issuer bid or is that something that fits maybe off the table for a while given the amendments to the credit facility.
Yeah I think.
I think we should temper.
Priorities. So I think the near term priorities to man then dynamics.
Certainly as we have line of sight.
Debt leverage coming down.
A share buyback program, certainly as more and more attractive as the share Franco's down, but as we mentioned there is kind of three priorities in the third one is we really have to get that confidence in the balance sheet back that I would say is lacking.
And then and then.
As we generate more cash and we expect to generate the cash from the pipe coating that in the second half and then I think.
The board and management is aligned that there is opportunity to use excess cash, including returning to shareholders in the form of the share buyback.
But we have to get there right we have to get this second half running.
We really need to see what's going to happen in the underpinning markets.
And I think at this time with the uncertainty from many different headwinds that.
I never thought I would see in my.
My career in oil and gas we need to see these headwinds.
The final what really is going to happen.
The concern now is on a light as you probably reading as much as I am on the long term impact on demand and does this switch the whole supply chain. So I think the uncertainty right now.
Hi Inn focus needs to be securing the balance sheet.
Got it yeah, hi, I appreciate that color in it it's not surprising, but I did want to for the basket.
Are there any asset sales that you might have.
Thank you are working on no specifics, but.
I kind of think there must be a few things that are possible.
The board and management.
Pending a considerable amount of time evaluating the value of assets that sits in that portfolio.
And the long term strategy of the company.
It's important that I don't get granularity on particular businesses, but certainly that is the topic of focus right now.
Okay.
Got.
That high level color it is appreciated.
Finally on focusing on anchor bar.
Given that the work as opposed to start in 2021 that is not in backlog and we can start to see that come in over the next few quarters correct.
Yes, correct. So we actually will generate a little bit of revenue in the tail end of 2020.
And the way, we generate revenue pipe coating is a small percentage.
The overall revenue that will generate will coal from loading in the pipe. The lion share is done by enjoying to pipe that your coat.
Accepted and then there is a small percentage as you'll know it out.
Quoted in the loan in will be some cash that we receive revenue received to run trials at the pipe in our facility.
We're going to see some of that.
In Q4.
So.
Then as production starts in Q1, so as we released the ended Q1 results you'll start seeing saying Amar in the backlog is how to work.
Then as we do Q2, you'll start to see now two quarters of the total production come in so you're right. So it's not captured in today's backlog, but you'll start seeing coming in next quarter.
Okay, Great maybe one last question and I don't want to beat this to death or just kind of understand.
You had where you work through Q4 pushed revenue out it when you said, it's pushing revenue out for Q1 into Q2, but you presumably had revenue in Q4 that would have been pushed into Q1, unless you were planning to do some re tooling is that correct in other words, when you're when you're doing the rework everything slide.
Stock, but there seems to be a bit of a gap is not because some retooling number facility.
So the sort of quality event.
Hi, coating that one of the biggest barriers to entry and pipe coating is.
To apply the technology and this and this particular case and I think everybody's assuming its channel. These so its installation.
With any corrosion combine so one of the issues is when you run up production volume through the facility.
And discovered on.
Or on the customer site.
You now need to retrench, all that playing back into facility in the capacity.
He then goes into a locked down and all effort going to removing the coating that you're already applied on the value.
So in Q4, what we would have done is we would have stalled all revenue generating work on would have put the money into stripping the plane.
So that's what happened and then as we got to the end of Q4 that you start reapplying.
The coding on on the pipe. The challenge that you have is that your schedule is backed up so now you need to reschedule.
So the revenue in Q4 that is.
Now being pushed there's two components one is from the facility itself, which will be rescheduled throughout the year. So you slide in his rework.
Big chunk of it happened in Q4, Q1, but theres more rework and what I mean rework is more coating to be applied on pipe at leader sections. So.
So you need to push all these other projects to make so because if you add were booked for Q1 already so there won't be an uplift from the work because we need to put it in someplace else. The second revenue that Mr right away.
Is we provide services in the spool.
Art of applying coating on the field joint as a as it goes on to the vessel while these effects not available than they don't school of pipe, we don't generate revenue and that revenue also was pushed until we finish that in later quarters.
So it's not as these terms you already had work. So we can put more work into the facility because it was booked out so now you need to slotted into another facility.
Which means you need to move the pipe or you wait for later in the year to slot. It. So theres a finite number of capacity that we can push through view, so theres no room to push it into Q1.
Okay I understand that thank you very much for that clarification and I'll turn the call back.
Our next question comes from Tim on the shallow.
It's a corp capital your line is open.
No. Thanks very much most my questions, we touched on and maybe just a little bit additional detail.
Just following on the quality issues in Q1, I mean, there's a $7 million so impact to costs.
As the pipe was stripped sounds like the rework and the re coating is ongoing today are you expecting any cost impact in the first quarter as well on top of the revenue push.
The only in Q1 only negative input will be.
Is the lower utilization in the facility as we're recording the work we've taken.
Certainly the lions share of the cost upfront to strip and recall the pipe, but there is a cost efficiency.
The plant is working on non revenue producing project right. So there'll be some inefficiencies.
Yes.
We've we've taken the majority of the costs. It's now just.
Because you have no capacity you can't push any more through that quarter through that facility.
Right. So the out of pocket Costa Rico the pipe.
Were taken in the fourth quarter.
Absolutely, yes, okay got it.
And I mean.
I imagine that the majority of the we're going through Channelview has to do as Lisa too.
Correct me, if I'm wrong, but does that have would that have any impact to the timing of the payer project.
So I can give you the project.
Or project, it's a product issue.
It was one customer since award. This work. So you can assume it's in MPC it was not.
Okay. It was not nothing to do Lisa project, which was quoted by the way not just in Channelview, but also bear cruise.
So if it was at least issue it would have been.
It could have been successfully higher as you would have been two facilities, we would add to the troubleshoot and get the root cause from.
So it wasn't and Thats, how you mentioned in the last.
Three quarterly calls.
As a very busy facility.
Both because of work.
We plugged in up at least a project, but a lot of the smaller tie ins in the Gulf of Mexico were all being done in calendar.
Okay.
I was hoping maybe you could give a little bit more clarity on your commentary on through an entire sounds like you're expecting some near term impact, but there should be mitigated through the rest the year and largely that has to do is the automotive sector.
What would be the 2020 impact.
If that had any contagion into oil and gas sector.
And it was I think it looks very good question. So maybe I'll can I break your and responded into near term I will say immediate short term medium term in long term.
Sure So the short term impact.
What we're seeing right knowledge, there will be volatility.
In our automotive industrial segment, primarily to do with.
Longer so they've extended.
Back to work today at a lower production volumes.
Lunar new year in China.
The extended it so the facility work less in China.
The that impact is extended beyond our facility because our customers did the same thing.
So the whole.
Backup of supply chain compressed into first quarter, so you're going to see a short term volatility.
Our thinking is right now what we're seeing is that okay. This is a slug in its going to pick up and unless there is a fundamental change in demand.
For automotive and.
Stalling of electrical.
Explication of cars. This is going to work their sales. So I think that one is probably not the biggest impact as a company if I didn't go to the medium term.
And if the supply disruption top and substantially in China.
Then we may see an impact on.
The linked to the supply chain into oil and gas and in some of our businesses in certainly in our composite business.
We have a large.
Several supplier base in China for our core components glass and rather than a lot of this is sourced multiple locations in China, but this could be an issue on the supply chain.
I was further extending the medium term if the shock of uncertainty in demand continues to drive the price oil.
At a level below where we are today is sustainable youre going to see a pullback and us land.
And so thats what were singling that could happen you may not see the U.S. landmark and come back.
In the long term.
Our.
I think this is yet to be seen east of long term readjustment in the supply chain.
Overall GDP pulls back.
And there's no other efforts to address the supply and demand is going down as supply is not addressed you may see substantial pull back and capital spending even to the point that impacts the offshore projects that we are expecting to contribute substantially into 2021 and 2020.
Two.
So thats kind of the short term medium long term for the company as it pertains to okay. How long does his goal.
And does it ash the readjust the supply chain and GDP from China.
Okay, then just as to pull ups on the two in the near term guidance you gave there.
Look at the revenue impact be from.
From Chinese outages overeat on this first quarter in your view on revenue so.
I can save yet I think we were just starting as I as I mentioned.
The automotive and announcements of automotive and certainly now it's going to South Korea.
If the automotive was to go to a screaming halt the business of DSG news, which is the heat shrink and coal trxs at.
As in our automotive and industrial segment could see a substantial pullback we haven't seen it but I guess in theory. It could be bad is what it was in 2000 age right.
Right Okay.
And then and that's why I use his term all the time at this time, because we're not we're not considering how bad it could get for automotive.
Okay, and then lesser entrepreneurs.
Are there any international pipe coating facilities that are in affected regions were are scheduled to start up that are in affected regions are near affected regions that could delay.
No of course, we have facilities in Italy, but large projects that we are counting on are not going to be done from age patella, but there is okay of course, the viruses in Italy, and it's not for the region, where our facility is there, but it's not.
There's no impact from it because we don't have a lot of work to go through it in the second half.
Okay.
And then just last question.
Is there an update around your expectations for the timing of Scarborough.
I can only.
So overall I think it's highly highly.
Unlikely that Scarborough not goal if anyone has been calling Scarborough Scarborough lens gas into Pluto.
Uh Huh, So agreement has been signed because total.
Is owned by a different group of operators and they've given license now discuss or go there and they need to gas so.
The second comment I'd make is reserves even at the current gas price increase substantially for Scarborough and Woodside continues to be very very confident that they will do the project.
I've heard.
Different both from our employees that are on the ground.
The customer press releases that it's a twentytwenty idea announcement.
I wouldn't be surprised that it's at June timeframe, but also wouldn't be surprised if we get a green light.
Or the services that are involved in the project get a green light to go head start in events.
He as early as.
Archer April.
But I think formal if I knew you will probably be mid year, but I wouldn't be surprised that the Pcs that pipe mills.
Those that are competing for the coding work, we'll get a green light earlier.
Okay do you think that that's potentially still in the first quarter or do you think that's more likely in the second third quarter.
Carbon or be resolved in the year I think.
In terms of the idea and we should count on it by midyear I think.
Yes, I think there's a possibility that no later than the third quarter, you'll see it.
Headquarter wins it will be in their backlog I think thats essentially.
Great rupees really appreciate the color I'll turn it back.
Thank you.
Again to ask a question. Please press Star then one.
Next question comes from key Smacky of RBC. Your line is open.
Thank you good morning, everyone I just wanted to start by.
Clarifying what I've heard on the outlook just to make sure I've got it correct. So your forecast for 2020, improving over 2019 is based on.
One improved pipe coating contribution from projects, you've already won and expect to begin work on starting in Q2 Q3 timeframe.
Number two.
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Market share gains in composites, I would like to five inch spoolable and so forth and strong demand from.
You will tanks offsetting expected or potential expected weakness in actual U.S. completion activity and number three is stable I work in the automotive and industrial segment is that if I got that right.
Yes, you.
No further comment yet you have it.
Okay. Thank you and so just under that scenario what would be your outlook for for free cash flow for for 2020.
This I think you know it will be stronger than what we did in 2018 of course.
Part of it is being driven by advance payments that we will get on pipe coating projects.
But work will be executed so free cash flow wise I think it's more important to look at operating margins that we expect to be higher as pipe coating contributes and that will in turn lead into free cash flow.
In the second half of between 20 and lead into 2021.
Okay, Thanks, and just not to belabor it but is there is there a magnitude on the on the pipe coating operating margin that you would that you would target given what you know you expect to happen.
It's still it's still you know there's lots of things that depend on it to keep that for me. It's very difficult for me to give you that right now and it's not something that.
Is that where you know that we feel comfortable sharing at this point in time, there's lots of volatility here that we need to match.
But it is going to be it is going to be positive contributor versus a negative negative negative will lie that we had in in 2019.
Okay. Thanks, that's helpful.
And just on the automotive industrial segment.
The last the last few questions.
Maybe just to play off of that is just.
What do you what do you kind of see as the breakdown of revenue between automotive things that may be more affected by this potential long term negative scenario corona virus versus the industrial which may not be as be as a as exposed.
As you know there first of all I'll point to the name change so.
The.
The company has moved historically petrochemical was it was a good way to capture the segment because it participated a lot in the.
A lot around western Canada on the heavy oil extraction and processing.
Our value add components. This segment is now called automotive and industrial.
And it's the news.
DSG conducive isn't heat treat culture is heavily weighted to automotive.
And so Shaw flex, which is the cable business I think will be quite positive this year because of.
Not only does it participate in the high run cable business. It is.
Nicely positioned for the rebuilding new theaters, which our nuclear work, which is right in its niche of high specialties cable so.
I think a good way to look at the business is just look at 2008 of petrochemical industrial and see the magnitude of what a global slowdown can do to a GDP focused business right, but answer your question.
A large percentage of automotive industrial is based on direct flying.
Wire harness the and wire components.
And protection of wind components into automotive high percentage.
Greater than 50%.
Okay.
Well, that's that's very helpful.
That's it for me so thanks very much for your time.
There are no further questions like just turn the call back over to Paul pure rooms for any closing remarks.
All right so I want to.
Before I pass it over to Paul to close the call I just want to put some additional color on on comments that we made both in the prepared remarks that during the question. So first of all.
The times of uncertainty.
Both because of the macro economics industry and I think sediment overall for publicly traded company is a challenge to give you a correct.
Management approach has been quite conservative in our messaging and I think that links into our approach that we've done with the debt amendments.
I would suggest people consider.
What we've done.
The 2020 outlook, we do expect as a strategy of.
Different cycles within oil and gas will protect the company in many ways from others because pipe coating is scheduled through too.
Improve in the second half year.
And that generally.
The conversion of gas as the greener alternative.
The higher demand and LNG lower cost and offshore will continue beyond 2021.
With that I'll turn it over to Paul Dakota, Okay. Thanks, Steve I.
I'd like to thank everyone for their participation and interest today and we look forward to talking to you again next quarter.
Ladies and gentlemen. This concludes today's conference call. You may now disconnect everyone have a great day.
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