Q1 2020 Earnings Call
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I would now looking in the conference over to Paltrow Senior Vice President corporate Investor Relations. Thank you. Please go ahead Sir.
Thank you and good morning, before we get in this morning's conference call I'd like to take a moment to remind all listeners that today's conference call includes forward looking statements that evolve estimates judgments risks and uncertainties that may cause actual results could differ materially from those projected.
The complete text of shock worst statement on forward looking information is included in section five or the first quarter 2020.
Earnings press release that is available on SEDAR and on the company's website at shopper adoption.
I'll now turn the call to shop, where CEO, Steve or.
Well. Thank you Paul good morning, and thank you for joining us on this morning's conference call.
Yesterday, we discussed and released our Q1 2020 result, like many companies in our industry. The first quarter was challenging for Shawcor as the dynamics that drove activity change quickly to the negative at the dual impact of the cobot 19 pandemic and the oversupply warming gases felt.
He's done Harold events have translated into a very difficult environment, It appeared where social and economic outlook is extremely uncertain as we adapt and work through the new and complex challenges in front of us.
I'm very proud of the commitment to our teams across our core and their ability to quickly adjust to this new environment.
For all of them and their families to stay healthy.
As a quarter progressed it was clear that we were heading into a storm and it was imperative that we narrowed our focus and tech clear priorities.
They are number one protecting the health of our employees number to safely delivering products and services needed by our customers and number three taking the actions to strengthen the balance sheet.
Driven to limit propagation ensure containment if one of our sites was exposed to the virus, we've had great success and keeping our employees safe and healthy. This is due in large part to the access our teams took to move early and develop communicate implement new health monitoring and operation protocols.
Our approach essentially madness and locally implemented.
Coupled with our strong safety culture and execution ability aided greatly in mitigating the risk supporting our employees and servicing our customers.
With much lower immediate market demand for the company's products and services in a wide band of uncertain for the near term outlook, we moved to address the balance sheet concern.
And our March 16th and later in our April 21st Press release, we highlighted actions taken it will take to remove cost.
And conserve cash.
Now turning to Q1 2020.
Adjusted EBITDA was 6 million versus 30 million in the fourth quarter of 2019.
Revenue for the quarter was 390 million, a 5% decrease over the previous quarter.
These quarterly results were not as expected the impact of exploration production operators, reducing capital budgets in North America was seen in composite pipe.
Small diameter pipe coating and her 12 inspection further negatively impacted the quarter was a disruption that covert 19 had on our operations supply chain in customer demand levels across energy transportation and infrastructure markets.
Despite these challenges our teams were successful winning new business and order intake continued an upward trend or which resulted in the backlog exceeding 575 million at the ended the quarter.
Looking into Q2, we fully expect that's a negative headwind will intensify and it will be not until Q3 at we expect we will see any real stabilization.
Oh, the future is extremely difficult to forecast, we do expect that work in our backlog will be executed.
That there'll be a gradually turn for demand in our book in turn businesses and when combined with Axis. We are taking to reduce cost straightening will be visible in the second half of the year.
Beyond 2020, the almost becomes more and clear and difficult to estimate. However, we do expect at our diversified portfolio, which has both early and late cycle oil and gas exposure and a growing non oil and gas component has positioned the company to weather the storm in emerging stronger more profitable organization when spending recovers in energy.
Transportation and infrastructure markets.
I'll provide more detailed comments in a moment, but I can turn the call now over to guess on to handle the shock where CFO to discuss the numbers.
Thanks, Steve.
As Steve mentioned earlier, the first quarter results were challenging due to the negative impact caused prices were 19 pandemic and the rapid decline in oil prices, resulting in lower demand for our products and services.
Consolidated revenue in the first quarter was 319 million, 9% lower in the first quarter 2019.
Pipeline and type services segment revenues decreased by 17% compared to the prior year, primarily due to lower demand for pipe coating and grow inspection services as a direct result for the significant capital spending cuts Fyfe North American E N P operators and delays in Lance Commission project.
As expected the current quarter's revenues were also negatively impacted by the execution of work to resolve the fourth quarter 2019 service quality event in our Channelview, Texas facility.
The comps it system segment revenues increased by 16% compared to the first quarter 2019, reflecting the benefit from Exensio acquisition, which was completed in April 2019.
This was partially offset by lower demand for composite pipe products do the rapid decline in north American drilling and completion activity across the segments customer base as operators reduce their capital spent.
In automotive and industrial segment revenues were lower by 9%, primarily due to lower demand for automotive heating products, resulting from the impact of production shutdowns in government locked down restrictions from the covert 19.
On the majority of automotive OEM Assembly plants in North America, and DMR regions.
Consolidated results for the first quarter were negatively impacted by nonrecurring items outside of the company's normal course of business.
The current quarter includes 203 million of impairment charges, reflecting 144 million and 46 million on goodwill intangible assets for pipeline performance group and shock for inspection services respectively.
And 13 million on assets that to U.S. land pipe coating facilities and certain assets related to large diameter products in the comps it systems business.
The current quarter also included a loss of 500000 roommates hyperinflation accounting for Argentina, and 200000 of restructuring charges.
Adjusted EBITDA for the quarter was 6 million significantly lower than the 28 million reporting the first quarter 2019. This decrease is primarily due to the revenue declines in all three segments. If you exclude the positive impact from the acquisition of that T. L. In April 2019, and higher eschewing expenses, reflecting the addition of his NCR business.
And higher cost and insurance professional fees and other equipment costs, partially offset by lower incentive compensation expense.
Adjusted EBITDA margins, the first quarter was 2% compared to 8% for the prior year first quarter due to the reasons mentioned earlier.
Pipeline pipes services segment margins decreased in negative, 4% compared to a positive 1% in the prior year. The comps assistance segment also experienced declined to 12% margin in the current quarter compared to 28% in the first quarter 2019.
The automotive industrial segment margin declined slightly to 18% compared to 19% a year ago.
Now, let's discuss cash flows for the quarter cash provided from operating activities for the first quarter of 2020, 100000, lower compared to the 18 million first quarter of 2019.
This decrease reflects lower net income and.
Items in the current quarter the change in noncash working capital in the first quarter was net cash inflow of 9 million compared with the outflow of 700000 in the prior year period, the cash inflow from working capital in the current quarters, primarily due to higher accounts payable and lower taxes receivable and foreign exchange gains.
Partially offset by higher accounts receivables and inventories.
Cash used investment activities in the first quarter was 300000, reflecting $10 million purchases of property plant equipment almost entirely offset by 9 million of additional proceeds received during the quarter from the redemption of a minority investments.
During the first quarter cash used in financing activities was 17 million, reflecting the payment of our quarterly dividend and lease obligations. This is significantly lower than 118 million of cash used in France activities in the prior year quarter, which reflected the net impact of the repayment of the senior notes long term debt and the payment will be topic.
Nation in quarterly dividend.
Net cash flow for the first quarter in 2020 was negative 12 million compared to negative I heard 19 million the first quarter 2019.
With respect to cash and that.
The company has cash and short term investments of 86 million long term debt of 435 million and 37 million of standard letters of credit at markets. We for 2020.
In addition, the company is full compliance with its debt covenants as of March 31st to 2020.
However, due to the current adverse conditions caused by the global carbon 19 pandemic and the volatility in the oil and gas industry. There is uncertainty that our financial results. There is uncertainty in our financial results and our ability to remain in compliance with certain covenants for the remainder of 2020.
In response to this uncertainty as mentioned earlier the company has completed several restructuring initiatives, including the suspension of its dividends to deliver significant cost savings in cash conservation.
The company also isn't currently in discussions because lenders to speak to seek revenue relief from certain of its covenants and expect that these discussions will be successful and that's suitable terms for the relief will be obtained.
Based on our actions completed an unplanned our diversified business and our current backlog the company expects to generate sufficient cash flows to find its operations.
Working capital requirements and capital investments I'll now turn it back to Steve Some additional commentary on the company's performance and outlook.
Thank you guys.
Ill first start with providing some additional color on Q1 by segment.
The pipeline and type services segment experienced a significant step down in demand for the company's product and services that are related to north American upstream.
Particularly in small diameter pipe coating and grow 12 inspection that are important to our book in turn volumes.
With activity Encana already being very depressed the step down as a direct result of reduced capital programs of exploration and development operators in the U.S. shale plays now trending at a greater than 40% reduction year on year.
The expected execution of pipe coating projects, both North America land transmission lines and offshore and international projects was also negatively impacted by project delays and supply chain disruptions from cold and 19.
Obviously is a positive a positive spot was a seasonally high demand for engineering integrity services from Lake Superior consulting as our customers contracts in our technical resources to address increasing workloads and buyers related restrictions.
Pipe coating for offshore projects as expected did see increase activity as we move to execute work in our backlog in Norway, Indonesia, UAE and Scotland.
Additionally, backlog increased to 575 million from projects that had been sanctioning.
And have approval and are continuing with momentum.
These projects include Sagamore and Baltic pipe.
During the quarter. Our teams worked closely with operators any Pcs to ensure project continuity and to support them as they review projects and capital programs.
Taking into consideration recent reductions in forecasting commodity prices that most likely will result in project delays.
In the compensated systems segment, our pipe business was also impacted by the reduced capital expenditures in U.S. land shales as operators completed fewer wells and therefore required less gathering line meters or could manage with existing inventory.
Although we had orders for newly introduced large diameter composite pipe and in international markets. It only partially made up for the reduction experience in North America.
Our competent tank business continues to perform nicely and incoming orders remain above the levels realized over one year ago and has resulted in strong backlog bookings.
We continue to see strengthened retail fuel.
Water and wastewater markets and continue to deliver tanks for oil and gas midstream applications.
Although Q1 tank volume output and customer tank installs were negatively impacted by cobot 19, as we implemented new protocols, which resulted in factory floor inefficiencies and our customers experienced on site construction delays.
In the automotive industrial segment, the impact to covert 19 expanded in the quarter from a primary China operational and demand issues, one that wasn't material headwind across the whole segment.
Operating at reduced capacity due to production shutdowns and shelter in place orders demand declines and inefficiencies were seen throughout the catering business, especially late in the quarter when the OEM Assembly lines were completely halted.
Our specialty wire and cable business saw stable demand and did experience higher than usual incoming orders from electrical utilities and communication applications late in the quarter, but it to experienced supply chain challenges related to call that 19.
As I turn to Q2 and the balance of 2020, I believe everyone. Joining us today on the call would acknowledge we are without question in a period of extreme uncertainty.
Forecasting how the upcoming quarters will evolve is very challenging in difficult task.
However, based on what we know today, we expect the second quarter is likely to be the most disruptive quarter. The company has ever experienced as a full impact of covert 19, and the capital spending cuts no gas or felt.
With limited opportunity to quickly offset the impact we are and we now expect the financial results for the core to be lower than what we just have delivered this quarter.
As we moved to the second half the year, we're very cautious, but we're expecting a gradual returned a demand lifting of restrictions that we'll see improved performance in our book in turn businesses across the company from the Q2 low point.
Should this be the case and the work we have booked and captured in our backlog specifically offshore pipe coating continues to remain from the second half of the year will be a significant improvement over what we delivered this quarter.
It should be noted that we're not counting on a swift return of the activity and our planning for an extended downturn by putting our energy into what we can control.
Simply stated we are focused on executing work under order, reducing cost and preserving cash.
In terms of project activity. The company has been successful in securing work related to multiple offshore projects and captured in our backlog of 575 million at the end of the corner.
Based on discuss discussions with our customers in the reality that many projects are in advance stages with substantial investments already made including pipe being ordered we continue expect that we will execute work secured.
However, we do not hold the same confidence for projects that we are still pursuing and we do expect that operators will pause to recalibrate their capital programs and that some projects will be delayed or even halted.
An example of this is would sides recent decision to suspend drives a major offshore Australia LNG project, a very large opportunity for shock or is it last quarter was captured in our budgetary number.
However projects that are tied to sourcing gas such as those in the middle Eastern Asia or maintaining access such as always in Latin America will likely move forward.
[noise] captured in our bid in budgetary numbers is over 2 billion potential pipe coating opportunities that will gain support as commodity prices return and the economics improve.
I should add at the end of Q1 that come to continue to have 100 million <unk> hundred $90 million of work secured conditionally pending if I'd, which is not in our backlog and should be consider at lower risk.
On the cost side, we are moving ahead aggressively to cut and generate additional cash with the goal of a minimum of 60 million of cost out and 40 million of cash generated Tas include a reduction.
Our fixed pipe coating footprint with four plants targeted for closure this year and the exiting of lower margin markets, where the outlook does not justify remaining.
Before we open up to questions I'd like to make the following point.
Chuck worth diversified portfolio of late in early cycle oil and gas and non oil and gas businesses provide ahead that will be a benefit in these very uncertain times.
Chuck or has a sustainable book of work.
And it is substantial for execution over the upcoming 12 months and the work is holding firm.
Shawcor is taking the necessary a difficult actions to reduce costs are cash which is needed and these very uncertain times.
And finally Shockers future success continues to be underpinned by supportive long term fundamentals that will drive investments in energy transportation and infrastructure.
I'll now turn the call over to off the operator, Bernard Bridget to open it up for questions that you may have forgotten in <unk>.
As a reminder, if you have a question at this time. Please press star in the number one of your touched on telephone.
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My first question comes from the line of grid Coleman with National Bank Financial Your line is open.
Hi, gentlemen, thanks for taking my question just warning.
I wanted to.
I'm, sorry, I'm, having some some phone problems just want to confirm can you hear me.
Yes, you can hear you find yeah.
Wonderful thanks, guys.
I wanted to start by talking about the backlog the seven to 575 million can you talk to us a little bit about the expected margin profile of the order backlog I know that in the past its vary greatly and can kind of bounce all over the place in more recent commentary in a general churn you've talked about how the style of project awarding has changed and how.
You are involved in earlier stage with your customers. So I was wondering if you could talk to me a little bit about the expected margin profile of that backlog and how it would compare to I mean say the trailing 12 months of margin performance.
Yes, so Greg I guess the color on the margins so as expected the work that we're going to execute and the first work that will execute in the second half year is representative of orders that we booked as the cycle turns and so we were filling capacity. So I would look at the at the margins.
In the.
Mid thirtys to high Thirtys.
In what we're going to do in the near six months.
There is work that is in there as you get closer to the end at higher has higher margins, but of course, it's a mix because some of the work that we wanted the very beginning with just to fill capacity.
And it will.
It will progressively get better, but I think in mid Thirtys high Thirtys is a good number to take.
Got it and just for clarity, Steve we're talking about operating margins there obviously.
Of course, Mark gross margins gross margins correct.
Got it.
On on the pipe and pipe services segment. If we just focus on that for Q1, you generated negative $8 million ish and EBITDA can you give us a little bit at color on the regional profitability. We're all the regions you operated at all and about the same at that negative 4% or were so materially lower some materially higher documentary.
Positive just looking a little got a little bit granularity there.
Yes, you go ahead.
Greg I think it's it's important that there is a mix I think you know there was better probably a better profitability in a and emerge and Asia Pacific as we executed some work there.
And there was a bigger decline is specifically in North America as it relates to both.
Demand for small diameter convenient.
Plan business and Western Canada, and then of course, the more importantly, as you know as we execute the work in our channel B. facility.
There wasn't revenue being generated there. So there was a lot of.
Have a lack of profitability in that facility because absorption of overhead wasn't with red and we didn't have remy to absorb the overheads.
Maybe Greg if you allow me an extension to your question and I think it's an important point to make is.
The pipe coating business can kind of be divided into two distinct buckets.
So one bucket is.
Call it NT corrosion or a lower barriers to entry service.
We do deliver and corrosion related to the second bucket, which is primarily the offshore concrete or inflated coding.
When primarily in the U.S. land or Canadian market, where it is primarily NT corrosion.
The margins are are attractive if you have a high volume going through the fine so and it's not the absolute margins, but you can get volume uplift when you use up capacity or the absorption rate in the facility.
When the demand for or the capital spend in North America.
Fell.
In the first quarter very quickly the volume drop and the margins that you make because they're not of attractive per meter that you apply in the pipe.
Drops so certainly there is a difference between margins made an offshore project that is underway in Asia versus a facility in North America that no longer can pay for this auction rate.
You got it was very that's very visible in Q1.
Okay got it I think I got enough, but enough color on that one to to be dangerous I appreciate the added clarity.
Just two more quick ones from the first of all in the bid book the forbids fell by over 200 million to just under 800 as projects were pushed out.
Can you help us understand the risks associated with the remaining bit book is one where where it based on your discussions with these counterparties, we could expect that not just under 800 million to continue to Wayne I mean, it's the rapidly evolving environment, but just wondering how you're confident just on that 800.
Okay.
So first the think everything in context.
The backlog.
The bid and budgetary and so in the prepared remarks, we were very cleared at a very substantial project has been removed from the budget there.
And so the budgetary.
Was influenced by the removal of this large project because now it's what we refer to as a plan period, we don't have any.
Any visibility on.
A schedule so we pulled that out altogether and we don't referred to anymore as an indicative offer similar to what we did with the project called E Comm up if you recall.
So the influence on the.
The influence on the on the budgetary was we had in discussions with customers relooked at the timing and the proposal. So any projects that kind of have a gray area on execution, we've now pushed into budgetary.
And that's why.
You see some sustainability in the budgetary numbers because as we pulled browse out we sell projects move from bid to budgetary and these are the uncertainty component then the other thing of course.
Is within the bid you look at it was over 1 billion in in Q4 and of that $240 million was this.
Section that we call pending I'd, so and you can assume they're saying that more was in that so the impact on the bid number was we saw a movement into the backlog, but we also saw movement into the budgetary as it went the other way.
So as it sits right now.
The $800 million that are in the bid.
The ended the quarter, we still had a view of production schedules that would happen. So I do expect.
That you are going to see that 800 million with the exception of a few projects that we have confidence that will go.
You will see us stalling of decisions of vote.
And we use this number historically that it was about 18 months by the time, we saw a project in that moved into a revenue generation I think you're going to have to add a 12 month period at a minimum too.
What we thought at the beginning of March versus what we see now in that project is shooshan. So in reality, what we thought was going to be a very very strong 2021, and we were quite excited about it at the beginning of the marks on the back of a build up on 2020, we're going to see a build up in 2020, it's going to extend we expect.
Correct as we burned through the backlog into 2021, but there may be right now unless several key projects that were seeing that our material move ahead.
You may see installing and it won't be until the second half a 2021 that 800 million starts to populate the backlog again.
But to answer your question the 800 million that we have in our bid our projects that we have pricing terms and conditions Andy schedule, if not we've moved them to budgetary.
Got it I appreciate that.
Then just lastly from me.
On your commentary regarding.
You talked about Q2 weakening from Q1, and then a strengthening in the second half from the first half. So that's sort of a trough in Q2, and some sort of letter shaped recovery, whether its Ah you have the euro Nike swim.
I'm curious is your confidence in that strengthening second half driven more so by your micro knowledge, meaning your confidence in the work in the backlog being executed coming through your facilities driving up utilization.
Flowing through the income statement.
Or is that driven more by your opinions on the changing macro environment, meaning a restart in end use markets like automotive and the book insured activity at the land based type.
Market.
And where my question is predicated on is.
If we see a changing macro.
Is that very very likely to materially change your view.
If that's where the <unk> the majority of your your college competencies or is it the micro that drives it and its execution of the backlog that drives it mainly.
Hi, good that so we and again I think there's all kinds of uncertainty right. Now is we're very comfortable with the backlog project by project and the backlog execution.
And I like your term micro gives us confidence that the second half the year will be a significant improvement from what we just did this quarter so significant.
So a material impact improvement.
And then if I go kind of the next step is.
On the recovery mode.
Things like automotive.
How does that influence the magnitude of recovery off of Q2, because we are expecting to see the full impact of zero demand in automotive from the OEM shutdown. So thats why we keep saying that Q2 could be.
Very difficult quarters for the company because there is businesses that have had zero activity and we're in that workflows. So it's going to get us.
So it is the backlog the secured in pipe coating and we need to make sure everybody understands that today. The backlog also captures backlog from our tank business, which is trending and just look at historical numbers is trending better than has been historically, so we have confidence in.
Pipe coating and we have confidence in the dead TL profile will happen like it does every year with the second half is substantially better than the first half.
There is an element of certainty in the cost that were in order to company. So by the time, we get to Q3 to four we're going to get the benefits of what we are doing in Q2.
And then the macro that you mentioned is just what is the magnitude and the profile.
Of the.
Okay. What is the letter in the ultimate to use short term that it looks like on the other side in a lot of the businesses that are related to automotive.
To infrastructure.
We have exposure for example in global Poly and that infrastructure in municipalities turns back very quickly.
The second half the magnitude of a changes so essentially.
But we do have confidence in the backlog both through pipe coating is as you know and we do have confidence in the cost that were going to take out.
Got it appreciate that color that is it for me. Thank you very much.
Thank you. Our next question comes from the line of Mcneill with TD Securities. Your line is open.
Hi, Good morning, all can you hear me.
Good morning Fournier.
Perfect.
I'm not confident system segment EBITDA margins.
Seasonal slow period presented seal was there anything one time in the quarter and if so what would be normalized EBITDA margins for that segment.
Aaron as the margins for the comps the business are impacted.
By the seasonality of is that TL business.
It is a lower seasonality impact in comparison to what you see in the back half.
And in Q2, but I think the other part of it is is a factor of a lower demand for our higher margin composite pipe business.
So if you.
Look at it from a perspective of margins perspective, looking at compared to a year ago.
The lower demand for a composite pipe did have a negative impact and overall.
Because of higher are how high the margins on a constant price so.
There is seasonality was LTL and then it is also an impact just because of higher demand and there are no onetime items in the in the thing right now it's all just business related.
Okay perfect.
You mentioned in the prepared remarks or not.
In the press release that Youre adjusted structure I.
Understanding that there was a bit of uncertainty even in the current quarter, how should we think about margins going forward.
Either next quarter or beyond that whenever you can get those.
Cost structure changes.
Push through.
Can you get back to maybe those historical margin levels lower activity.
In the back half the year.
Yes, So I think that's I think there whats going to in the back half of the year, we will get.
Back to close to the margin levels on the comps inside the business.
By the end of half based on all the cost structures that we have a and then of course the growth that we continue to see in the comps the tank business.
But a big part of I think there's all related to the amount of cross that we're going to take out of the business.
You know as we talked about here our targeted.
His take on $60 million of SGN a cost.
Across the group.
And come to a run rate by the end of the year annualized at 70 million and so.
It is a function of really respect to the cost that we have and some level of base business for cost of tanks and some growth on the.
Sorry, some based as other comes to pipe and then some some strengthening in comps. Thanks.
Got it can you guys touched on a bit as part of Gregs question, but can you maybe give us a sense.
The impact on the automotive industrial segment outlook for Q2.
Based on the headwinds you kind of discuss qualitatively.
I can give you a range.
Yes.
It could be zero.
It is very very difficult to say right now if I was to estimate based just on what happened to China and because China. If you recall cobot 19 impact in China, and they shut down all the.
Production in China for automotive and we went to zero revenue in China very quickly and it took us the better part of two and half month and we're now at kind of 70% of what we were Prequaled thing team.
So I think.
It is very reasonable to expect that we could have a.
A month.
For the revenue could be very very low.
And I'm, saying that because if Oems do not start up.
Then there is no there's no stand.
The pre loaded.
But demand as normal at the end of Q4.
And then if you estimate that okay. They had a higher inventory at the end of Q4's, they normally do and then they burn through that in Q1, they shut down in Q1.
So it could be substantial.
Understood and then final question for me just on the potential impact dose of severance in the second quarter do you have any kind of ranges that you'd be willing to providers that something that still ongoing.
I will I think you know if you look at our press release that we had in April.
When you first.
We did given estimates in there.
And I'm just.
With an estimated severance cost of $6 million.
And that.
There will be other on top of that other things that we do on a on especially closure of facilities.
That will be making a greater number but you know, it's it's probably another oh.
Four to five maybe.
But it's still experience.
Alright, Thanks, Thats all from me I'll turn it over.
Thank you on our next question comes on the line of keeps Mackie with RBC. Your line is open.
Total everybody's doing.
Good morning, Hope everybody is doing well.
If you just sort of touched on a on one of my questions in the automotive section.
It's actually wondering in the confidence it segment, whether whether you're seeing or have seen any pre loading of inventory from customers heading into the downturn.
In the comp as it side, particularly in the North American upstream just trying to gauge how should we expect that segment of the business to be down commensurate with the rig count or or or or potentially more given given your customers have tree loaded.
Pre loaded any any inventory they needed are expected to need.
So we actually have a.
Very good visibility so we the real in which our pipe is stored on.
Customers hold our our our wheels.
And so we track how many kilometers are sold how many of the commerce that customer sits on and what is their completion one of the issues that we had in 2019.
Hi volume of inventory on the customers and as things got a little bit questionable and fourth quarter and the budgets were used up they start burning inventory. So today, it's almost real time.
There is no inventory buffer with our large customers orders are now on a weekly basis, we don't get much visibility and what they want for the year, which is expected right now in uncertain times.
And so I expect should activity come back.
And.
The kind of the the expectation that the activity will start first with those wells that are shut in B services that are required to turn it back on again and then the normal processes they'll do the drilled but not completed and we'll start to see an uptake and then of course, the rigs will come back kind of as the process.
I think.
If everybody looks at the shale plays today, there's no question that unlike.
Any other deferent I've I've experienced.
That didn't cut in the oil sectors has been extreme so I think.
There's been a substantial capacity out take that as happened.
And so you have to think that.
On top of under investment overall in energy sector now cut in also services sector that is substantial.
When things turn.
Services companies are not going to go back to work it must have confidence or higher margins and I think thats. The case for the composite pipe as well when things turn.
We're not going to get much noticed.
And it will be a pretty much immediate and they don't have any buffer of inventory.
Got it thanks for that color.
Next question, that's just on working capital.
Do you still expect to see a release in the second quarter and if so can you maybe just give us a little bit more on what to magnitude you might expect.
Well, it's difficult for us to really determine what the actual amounts is.
And then there will be some in the second quarter, but it's going to be a little more interest in the back half.
That is part of the $40 million target that we have on cash conservation.
You know if you think beyond that $9 million every received our minority investment.
But right now Keith it's it's difficult to estimate, but we do expect to release as we expect our book in turn business.
Like comps that pipe.
To be impacted there will be a release of working capital.
Got it thank you and finally, just on the on the Bank line and the Covenant Covenant relief.
Appreciate things are still ongoing maybe if you could just talk a little bit more about 70 inputs into that decision is it more just a matter of waiting to see how things look to know how much relief you should be asking for or or just.
Is there something else that you're working through as part of that process.
Oh, I think it's important to to notice as I mentioned in my comments.
We are we are seeking relief on covenants.
We currently believe is that the company will generate sufficient cash flows to.
Support the.
Working capital of the capital spend and fund our you know our obligations and it is really just relief in our covenant is really to deflect directly related to our outlook.
But you know this this is a long term view that we're trying to get here in respect to the uncertainty is that we have in our results.
And you know we are fortunate that we have a very.
Co-operative syndicated bank that we're working with.
And we're working through how long relief, we require and you know and sufficient room for us to stay on side take care.
There are some of the uncertainty that exist in our outlook.
Got it okay. That's it that's it for me thanks very much.
Thank you. Our next question comes from Tim Monnet shallow.
Your line is open.
Hey, good morning, everyone.
Most of my questions here than than us, but.
I suppose I'd like to understand a little bit better a few that in price discovery on the book in turn businesses through this downturn or what you expect to see underpricing level.
If you see a a rebound.
In demand for those this product was.
No no change in pricing.
It doesn't make it doesn't matter.
If you reduced pricing the demand for the products in Q1 and I expect in Q2, it doesn't matter. It's we're not.
Of course.
Like everybody in the industry.
We're being asked by customers on price decreasing and pain syndromes delays and we're doing the same to our suppliers, but there's no concessions on pricing because there is no commitment on work volumes right now so I don't see any deterioration in pricing.
But I also don't see until the demand increases that theres enough to move pricing either.
I didn't make a comment on pricing on work that we have secured and it's a variable.
The pricing on work that we have secured is that pores. The earliest that we secured work and it gets better as we get to the end of it. So thats, how we got the average of that mid 30 on gross margin.
Okay Gotcha.
And then a question on the impairment it was a bit surprised to see dimension of the large diameter comps that type of the Alberta facility is wondering if you could should put that in context of some of the other commentary around a year view that you expect increasing demand and increased product skews that were sander.
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Okay. So I think we need to separate the large diameter into two different platforms. So we have a large diameter.
That we introduced into the market that's a school product late last year.
And I mentioned that yesterday on the again, so five inch and above and I mentioned on this call that is gaining success.
And then we have a large diameter project product that is a stick product.
And it today has a commercialized six inch.
And we're preparing to formally push into the market eight inch and larger diameter.
In light of the demand and the way it works.
As you have indications of impairment and then certainly that's what we have today with the decrease in the commodity prices.
Our decision to retract.
Resources that are put into the eight inch and focusing on the larger diameter Spoolable results in a change in revenue and margin profile going forward and Thats why you take the hit.
It does not by any means that turned to strategic direction to continue to push.
For a stick large diameter platform because the spoolable.
Your your limited on how much bigger we can go it just doesn't become economical to move the real is around and internationally. It doesn't work. So we need as a long term as a company to be successful in a stick.
Large diameter platform, but at this time.
We don't make it a priority to invest and the market itself that results in impairment.
Okay understood.
And then just maybe a little bit of clarity on the the second half guidance being stronger than the first half based on some of the stuff that you've already mentioned does that guidance.
Include.
The one time fees for severance and restructuring or expected to be no worse flat.
You did include those fees.
I think both.
No the guidance excludes those fees.
The Tim It says well we believe as you know is really talking about the run rate and we expect to have in the second half if you exclude the onetime items.
Okay got you are it'll turn it back thanks much.
Thank you.
Thank you. Our next question comes from the line of Matchy weeks with Industrial line. Your line is open.
Good morning. My first question is just a bit of a clarification question, then sorry could you kind of been answered, but on the cost reduction side that kind of $60 million and targeted cost reductions and that was that mostly on the gen and you side or will that be reflected in the cost of sales as well.
Yes, the majority of it isn't yesterday side, there is a smaller amounts in in the cost of goods.
But the majority of of the $60 million will will be seen through at Genie.
Okay. Thanks, I'm looking at the automotive.
Section again, and I know this was kind of talked about earlier, but I I kind of just want to get to sort of an idea where that's going to go on basically is the idea that.
You know looking at China.
And as a leading indicator and seeing what happened there. We can expect didn't sort of Europe and North America, essentially one month.
Lets say April of zero to kind of no sales due to total shutdown and then looking at China again kind there can we expect that as economic activity restarts, a little bit that it's kind of going to be the quickest segment to come back.
Albeit to lower than historical levels that kind of the same trend. We can expect in in the DMR and North American regions.
I again.
Really hard to use the word expect I think a point of reference certainly in the profile in China as you have outlined.
I think the challenge that were already.
Faced with is our automotive business in China is primarily a domestic supply into the Chinese market and back office to our European and North America production.
However, our Toronto and Germany facilities supply there are international call at Western World Automotive and so there's multiple variables in terms of countries of how they opened up so how does Germany opened up how does Mexico opened up in terms of their production, but more importantly, how does the retail space.
Open up for the demand for automotive, so I really hard to predict right now, but I think was his search and.
For the first part of Q2 as their workflow happens we are going to see the impact of zero production on Oems on the automotive so does it strengthened as we go through Q2.
As I said, we expected the demand will start to grow beyond Q2 over Q3 into into Q4 and based on China that it won't be as high as it was before but I think 70% is a safe number based on that profile. So we really it's kind of wait to see how the economy's open up but.
It ultimately is driven by how many cars are.
How many cars are purchased by their retailers and in the market.
There is other.
Companies that have released their results.
And they have made a run.
At.
What does the automobile production look like going to the year and it's a huge band of uncertainty. So I am not really searching on what's going to happen, but based on China, you've outlined it very nicely.
Okay. Thanks appreciate the color there.
Last question for me.
Looking at you talk about in terms of restructuring exiting certain low profitability markets. I was wondering if you just be able to provide a little more color on kind of which markets specifically you'd be looking out kind of product wise and geographically.
So I give some direction as I mentioned yesterday on the ATM, it's very very difficult to identify as a particular facility or product line.
Because as you as you go ahead on these action items, you have to manager employee base chat to manage your customers yet that manages a competitive landscape and type putting in particular shutting down a facility that used as a alternative in the pursuit and you give notice may be a competitive disadvantage, we liebert leveraged.
However.
There is businesses and I've already alluded to it which is the such as the anti corrosion line.
Primary in North America that if you don't have confidence in volumes.
And has historically not recovered since 2016, you have to question why you're going to stay in it.
If you have no ability or expectation that you're going to get a volume of work through the facilities.
One market that we certainly are looking at is how to become.
How to become much much more.
Paid for the value that we deliver and it's not in the anti corrosion in North America necessary, but it doesn't mean that we're going to pull out of all the anti corrosion facilities are markets in North America, but it certainly is a product line for.
Example, that just doesn't make any sense day.
Okay.
Thanks, I appreciate the color on and I'll turn the call back.
Thank you next question comes from Greg Coleman with National Bank Financial your line is okay.
Thanks, just a quick follow up and apologies if you touched on this but I don't believe you did on the Channelview facility rework you identified some point $3 million costs in Q4, and then mentioned that it had an impact in Q1.
Did you quantify the Q1 impact and also do you expect that impact to persist into Q2 and beyond.
So.
The 7 million dollar impact or accrual that was booked in Q4 related expenses that were incurred in it that were based incurred in Q1.
So the impact that we had in Q1 was directly related to the lack of being able to execute other work to generate revenue in that facility. So there was under absorption perspective, and no we have not disclose that Greg.
Okay got it cast so it was a lower revenue number because you were working on the reworked.
And that's the rework wrapped up to you. So do you have that capacity Bakken hours is it kind of persist into Q2 and beyond.
The majority it has been completed a there is some remaining work that will hop in Q3 Q4 timeframe.
Got it the majority thanks.
That's it from.
Thank you I'm not showing any further questions I'll now turn the call back to Steve or for closing remarks.
Well again I. Thank you all for attending.
Quarter close conference call and I look forward to speaking to all of you again in as we close the Q2. Thank you very much.
Ladies and gentlemen, this does conclude the program you may now disconnect everyone have a great day.
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