Q2 2020 Shawcor Ltd Earnings Call

At this time all participants are in they listen only mode.

After the speakers presentation, they won't be a question and answer session to ask a question. During the session you will need to press star one on your telephone.

Please be advised that today's conference is being recorded if you require any further research. That's please press star zero I would now like to hand, the conference over to your first speaker today Mr., Steve parents Senior Vice President of corporate and Investor Relations. Thank you. Please go ahead Sir.

Sure. Good morning, before we begin a this morning's conference calls I'd like to take a moment to remind all listeners that today's conference call includes forward looking statement.

Edible estimates judgments risks and uncertainties that may cause actual results to differ materially from those projected.

The complete text of Shocker Steven on forward looking information is included in section five.

The second quarter 2020, <unk> earnings press release that is available on SEDAR.

On the company's website at shopper Dot com.

Now I'll turn it over to shoppers, a CEO Steve or.

[music].

Good morning.

Thank you for joining us on this morning's conference call.

Yesterday, we released our Q2 Twentytwenty results.

As expected the factors that drive activity, so extreme pressure in the corner.

As a result of dual impact of cold and 19, corporate pandemic and halting or reduction of capital spending of BNP operators.

For shock or this translates into quarter that was operationally very challenging and one that required extreme discipline to stay focus and execute on those elements that we truly control.

To this point individuals that make up this company have done an outstanding job and pivoting and taking actions on a set of priorities that are very different than what they were just a very short time ago.

It is a commitment to support that employees at this company that brings me the most comfort and he's on certain times that shock or well continue to be an industry leader.

Our employees are truly appreciate it and I wish for all of them and their families to stay healthy.

And our communications last quarter, we made it clear that we were seeing a rapid and substantial reduction in demand for the company's products and services and we fully expected that this reduction one intensified in Q2.

Additionally, oh, the future or was.

And with no question continues to be extremely difficult to predict for shock or are we did expect the company's performance would improve from Q2 into the second half of the here. If we were successful in executing on a very narrow set of priorities.

But just as a backdrop the priorities for Q2 2020 were.

Protecting the health of our employees delivering the products and services needed by our customers and striking the balance sheet through cost reductions in conserving cash.

No very through very early recognition that are cold in 19 response to be centralized.

Coordinated approach together with local implantation, we were able to use a knowledge and best practices from across the company to greatly mitigates the risk.

Through our employees health.

Far from over and certainly a very dynamic challenge requiring daily management I believe we've done well in providing our employees a safe environment. So they in turn can ensure shock weren't able to continue to service our customers.

Within the quarter, we've been successful and delivering products and services to our customer with minimum interruption not an easy task considering all of our businesses had to address covert 19 risk in the workplace with reduced resources and in several businesses such as called had tanks wiring cable and engineering and consulting services welding.

Demand remains strong ores in pipe coating operation.

Was preparing to ramp up operation.

Measured by the results this quarter should be very occurring and we have fully leveraged the execution strength as a company have moved with speed and purpose to reduce cost and preserve cash.

Little certainty into profiles and covering it in the quarter, we took actions to reduce our workforce.

Exit facilities I do not have line us all the site the volumes to support or have opportunities to deliver acceptable margins.

Reduce spending capital expenditures to only those to support work that is visible.

Reduce working capital for receivables and inventories that we have within the business.

As a result of the progress we have made we have high confidence that we'll be able to reach our target of sustainable cost or the company, a 40 million on annualized basis and more than 40 million generated from working capital reduction in asset sales.

Now turning to Q2 2020, adjusted EBITDA was 4 million compared to 6 million in the first quarter 2020.

Revenue quarter to quarter was 266 million a decrease of 17% from the previous quarter.

The quarter's results were in line with what we expected the demand for the majority of the company's products and services dropped sharply as drilling and completing of oil and gas wells on land in North America with all but halted.

Global automotive manufacturers suspended production and large capital projects related to North American transmission lines, and offshore oil and gas development experience operational and continuity issues and delays.

There were areas the resilience in demand that carried over from the previous quarter, such as those relates to North American retail fuel station construction.

Indication infrastructure build out and operating pipeline maintenance integrity programs.

Also late in the quarter, we started to starting to see the positive impact of the execution of work. The company has under contract related to offshore and international capital spending in the energy sector.

Other important developments in the quarter centered around preparing the company for a very slow recovery and include a negotiation of our recently finalized debt amendment reduction enough DNA expense to achieve our targeted normalized 70 million per quarter rate and cash generation.

Looking into Q3, we expect that we'll see the start of stabilization and the first step of recovery from the on sustainable and very depressed levels of Q2.

Oh, the future continues to be extremely difficult to forecast. We do expect Q2 will be the low points in over plumbing and that we will see strengthening in the second half the year and into 2021.

Our view is supported by an expectation that our book in turn businesses, we'll see a gradual improvement in demand in the quarters ahead that the work. We have secured is said and is set to be executed next 12 months remains occur and the benefits of cost reduction actions, we have already taken or in the process of being carried out will be realized.

Beyond this point I would again highlighted is unclear very difficult to forecast. However, we do expect that 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 entering emerge a stronger more profit organization when spending recovers and energy.

Transportation and infrastructure markets.

I'll provide more detailed comments in a moment I'll now turn it over to guests on techno Shocker CFO to discuss the numbers.

Thanks, Steve.

As Steve mentioned earlier, the second quarter was challenging due to continued negative impact caused by the coven 19 pandemic and the volatility of the oil and gas markets.

Consolidated revenue in the second quarter was 266 million, 35% lower than the second quarter 2019.

The pipeline in pipe services segment revenues decreased by 37% compared to the prior year quarter, primarily due to decreased activity levels, resulting from the ongoing global cobot 19, pandemic and the lower demand for pipe coating and growth while inspection services as a direct result of the significant capital spending cuts by North American MP operators.

And continued delays in land transmission line projects.

The competent systems segment revenues decreased by 40% compared to second quarter of 2019, primarily due to lower demand for our composite pipe products. As a result of decline North America drilling and completion activity across the segments customer base as offers aggressively reduced their capital spending.

In the automotive and industrial segment revenues were lower by 20%, primarily due to lower demand for automotive heat treat products, resulting from the impact of production shutdowns and government lockdown restrictions from Koby 19 that continued well into the second quarter at the majority of automotive OEM Assembly plants in North America and EMA.

Regions.

Consolidated results for the second quarter were negatively impacted by nonrecurring items outside of the company's normal course of business.

The current quarter includes $17.1 million restructuring costs as a result of the cost saving initiatives completed in the quarter a loss of 400000 for Argentina, hyper inflationary accounting, while the prior year second quarter benefit from the gain of 32.6 million from Atlanta from the sale of land in Edmonton and 9.7 million gain on the redemption of any investment associates.

Partially offset by that seal acquisition cost of 12.1 billion no loss of 700000 for Argentina hyperinflation accounting.

Adjusted EBITDA, excluding these items for the quarter was 4.3 million significantly lower than the 36.2 million reporting the second quarter of 2019. This decrease is primarily due to lower revenues and all three segments the impact of lower production activity levels due to the cobot 19, pandemic, partially offset by lower FG and H.

The decrease of 31 million FG and H is primarily due to complete restructuring and cost control initiatives, resulting in decreases of 9.5 million compensation costs, which includes a 5.5 million reduction incentive based compensation and a 3.6 million in travel entertainment expenses.

During the quarter also benefit in the receipt of Kogan 19 related government subsidies of 7.5 million and the absence of nonrecurring acquisition costs related to is that CL business in the current quarter compared to the 8.7 million incurred in the second quarter 2019.

Adjusted EBITDA margin for the second quarter was 2% compared to 9% in a part of your second quarter due to the reasons mentioned earlier.

The pipeline pipe services segment, merch margins decreased to a negative 2% compared to a positive 6% in the prior year.

The conference system segment also experienced declined to 12% in the current quarter compared to 17% second quarter of 2019 in the automotive industrial segment declined to 12% compared to 18% year ago.

The company experienced positive cash flow in the quarter cash flow provided from opera activities for the second quarter was 27 billion, an increase compared to the 21 million used the into second quarter 2019.

This increase in cash was primarily driven by the positive change in noncash working capital and noncash items, partially offset by the loss in the current quarter. The change in noncash working capital in the quarter, where the cash inflow of $46 million, which includes $11 million increase in restructuring I would look liabilities compared to a cash outflow of 39 million.

Same period for 2019.

The cash we're working cap was primarily driven by lower receivables and inventories and larger contract liabilities offset by lower accounts payable and foreign exchange losses.

Cash used in investing activities in the second quarters, what was 1.5 million, reflecting 3.7 million or purchases of property plant equipment offset by $1.6 million proceeds from sale of assets.

This significantly lower than the 225 million used in the prior year quarter, which reflects the acquisition of is that theyll comps that business, partially offset by the 69 million of proceeds received from the sale of land and redemption of investment associates.

During the second quarter cash used in finance activities was 5.7 million, reflecting the payment of our quarterly lease obligations. This has also significantly lower than the 271 million providing the second quarter of 2019 that reflects the debt does that TL comps at acquisition, partially offset by the dividends paid up 10.5 million.

Net cash over the second quarter in 2020 was positive 17 million compared to 25 million second quarter of 2019.

With respect to cash and debt the company as cash and short term investments of 104 million data 435 million and $45 million standardize the credit as at June 32020.

Subsequent to the quarter end the company successfully negotiating amending agreement with its banking syndicate that provides covenant relief through December 2021.

In addition to complete the many agreement the company obtained a waiver of compliance for second quarter financial ratios under the credit facility prior to June Thirtyth.

Despite this waiver being obtain the debt was required we presented to the current liability as at June Thirtyth under I for us because the waiver was conditional on completing the debt amendment by specific date, which meant that the company did not have the unconditional right to defer the repayment of debt beyond 12 months.

As of July 29, 2020 that Dave completion of the many agreement the debt will be presented as a non current liability.

In addition successful completion of the debt commitments the company's equity position has benefited from the significant progress made to date on our targeted 60 million sustainable annualize SDMA savings and 40 million incremental cash generation.

As Steve mentioned earlier this includes significant reductions in compensation salary workforce closure of several facilities in branches to optimize our working our operating footprint and significant cuts to other operating cost and capital budgets.

As a result, the company remains on track to meet it's cool you'll have a quarterly normalized and sustainable SGN a run rate of 70 million, which includes target incentive compensation costs. The company has also delivered a positive cash flow a $44 million from reduced working capital, excluding the impact of restructuring liabilities and $11 million for proceeds of asset sales.

Based on these actions completed and plant is diversified business and current backlog the company expects to generate sufficient cash flows to fund its operations working capital requirements in capital program.

I'll now turn it back to Steve for some additional commentary on the company's performance and outlook.

Thank you guys.

Ill first start with providing details on Q2 by segment.

The pipeline.

Services segment revenue is closely tied to the capital spending of exploration production operators in the upstream and natural transmission line companies in the midstream of the energy sector.

The rapid reduction in capital programs in the upstream now forecasted to be greater than 50% and 20% year on year for North America and international respectively.

Metric or 12 inspection services pipe coating fell sharply.

Additionally, due to the combination of operators revising budgets and adjusting signed schedules.

Corporate 19, interruptions and regulatory uncertainties in the quarter had many delays in both offshore developments and North America and transmission line projects at further reduced results.

Engineering consulting services demand as in Q1 continued to be resilient as north American transmission companies look for expertise to move forward with integrity programs on existing assets.

Substantial progress was made in the quarter to improve the long term sustainable margins of the segment through reduction in overhead costs and the exiting of markets that will not be able to deliver acceptable returns.

To this point in the quarter, we finalized the closure for facilities that deliver fusion upon as a proxy ATSI corrosion coating into the oversupply North American market.

We'll continue our efforts to reduce our pipe coating footprint with additional facility exits in the second half of the year, including selected ones servicing international markets.

One other point pertaining to the pipeline and flight services segment for the quarter that is important to note is the work that we completed in preparing for the ramp up in activity in the second half of the year, We project secured holding firm in both DMR and Asia regions pipe within bounds and we're now ready.

Conference assistance segment results in the quarter provided and proved how diversification based on a core strength can leverage scale and provide de risking while retaining positioning for when activity returns.

With type two very distinct markets Q2 revenue for the comps consistent segment was one of two extremes.

On one hand demand for completed pipe and downhole tubular products and inspection services experienced record loan demand.

These offerings and they're closer tie to North American rig count with us dropping into the 200 and Canada into the teens explains well what happened to demand as operators halted and slash capital spending.

On the other end demand pickup tanks remained very strong and our efforts to address facility inefficiencies, resulting in an exceptionally strong quarter.

The high demand for underground.

Competent tanks is being supported by the urgency to replace retail fuel tanks that are beyond their design life.

And the build out of large consolidated service centers by convenience store operators.

And the increased receptance of competence for water and wastewater applications.

The book in turn element of composite pipe sales contributed greatly to the speed that this business will see demand swings.

With adequate inventory on hand, and clear signs that our customers would be ordering very little in the near term. We took the measure to halt all pipe production in the quarter and reduce support overheads.

One of the challenges on the tank side of the business has been to ensure the health of our employees will increasing output quality.

In the quarter, we continue to work at a rate higher than our production output.

But did have success and adding additional ships and several of our plans while implementing measures that mitigate risks to the health of our employees.

My last point on comps the system segment is that pipe orders did see some improvements as the quarter closed and we.

Our approaching a point and have restarted the pipe production.

This supports our expectation that Q2 will be the low point and there will be some return and levels of demand in the quarters ahead.

The lower results in automotive industrial segment recover due to the rolling shutdowns of vehicle Assembly plants in North America in Europe, and lower production in China, reducing the demand for heat treat products.

Partially offsetting the decline in heating products was an increase in orders for wire and cable products from electrical utilities and communication providers.

In fact, the wire and cable products business posted one of the best quarters I.

An outstanding achievement, considering they to experienced production challenges related to coal is 19.

Like the pipeline the pipe services and the comps at system segment. The automotive industrial segment has also taken measures to reduce cost base.

I'll now turn to Q3 Q4 and early quarters of 2021.

Based on what we're seeing today, but with a full recognition that we continue to be in period of extreme uncertainty. We believe that Q2 will be the low point and that our performance will strengthen the second half of 2020 on into 2021.

The improvement is based on expectation that the start a recovery that we're now seeing from the gradual lifting of restrictions will continue and there will be a return to a minimal level spending from our customers.

This will positively impact our book and term businesses, but it will also result in the revenue generation.

From the execution of work that we have secured and is captured in our 553 million 12 month backlog.

Additionally, the actions, we have taken disease, such as reducing the salary headcount by over 15% closing facilities and aggressively reducing variable cost a much much lower forecasted together with actions that are in progress will assist improving the bottom line.

In terms of project activity, our backlog is holding.

And we have yet to have a project castle that was already booked.

New pipe coating work in Q2 were very muted as expected.

As our customers put tremendous effort in reviewing their capital spending programs.

General observation is that reviews are resulting in project Fi de decisions being pushed out 12 to 15 months.

Overall project opportunities really has stayed very high we are bidding budgetary at over 2.3 billion.

There is strengthened our bid at just over $790 million, although it was impacted by delays in projects sanctioning. It also has increased from bids submitted in the quarter.

I would note that our bid at the end of Q2.

Does contain over $180 million that we have been award, but is conditional UNEV I'd.

We are expecting to see decisions in the upcoming quarters that will determine when we can formerly book this work.

One final note is the return of projects removed from a bit and budgetary that are being reconsider due to positive changes in local investment conditions.

Example of this is a large east Africa led pipeline that is not in our bid or budgetary at the into Q2, but we anticipate we will bid or rebid in late Q3 or the Q4.

Before we open up for questions I'd like to make the following point.

Shock or a diversified portfolio of late in early cycle oil and gas and non oil and gas businesses provide to hedge that will benefit in these very uncertain times.

Shawcor has a substantial book of work for execution over the upcoming 12 months and the work is holding firm.

Shawcor has and is taking the necessary and difficult actions to reduce the cost to preserve cash versus needed in these very uncertain times and finally.

Chuck horse future success continues to be underpinned by support long term fundamentals, which will drive investments in energy transportation and infrastructure.

With that I'd now like to turn the call over to Cindy the operator and open up for questions that you may have for gas on ROI.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

And we'll compiled acumen roster.

Your first question comes from Michael Robertson from National Bank financing.

Hey, good morning, Gentex, taking my call.

Good morning.

Just a couple of quick ones for me.

How should we think about the impact from the Cws going forward.

I think you guys noted like 7.5 million contribution during the quarter.

Yes, so Michael we're at this point in time, our current forecast doesn't include any.

You asked for subsidy that we could receive in future periods.

What we reflect to date is only what we've received in the quarter. We are in the process of applying more.

Applying for additional periods.

But as you can.

May be aware is there is some.

Some nuances in respect to what qualifying revenue to calculate exactly how much you will collect and the recent changes have also changed the ability of it being extended to December and there is kind of a threshold of decline basis based on things So right now.

Although we do expect to having its very difficult for us to estimate the level of waste sub sea. So at this point our forecast that do not include any of that.

Okay fair enough.

Switching gears you guided to about 40 to 50 million in Capex this year.

So far it seems you're sort of on a conservative case relative to that.

Being evenly distributed throughout the year should we be expecting a lumpier quarter on the back half or do you think that sort of the balance would be roughly evenly distributed.

So I think I think two things is I think you know we had.

Provided some guidance project between around $40 million to $50 million right now, we're tracking slightly below the bottom of that range.

As you can imagine the second quarter was challenging to add to spend capex into implement capex. So we do expect about even amount of capex.

In the back half of this year to get us closer to that does that bottom of the range that you mentioned in the run the 40 Mark.

Okay got it.

Thanks success Thats very helpful.

Lastly.

On the backlog it was good to see it hold up relatively well sequentially given the severity of the challenges in the quarter.

Based diesel and maybe just even broader than the backlog itself looking at the you're budgetary analysis.

Based on the current sorta portfolio projects, you're looking at and assuming commodity prices remain relatively tight to current levels.

Would you Rob would you say you have a high degree of confidence multiples projects going forward eventually or would you need to see a material increase in commodity prices or.

The underlying economics of the projects to feel more confident about the moving forward.

So Mike let me answer your question and kind of.

Different.

Different components, so first of all the backlog.

We have high confidence for sex of the backlog and there has been some movement.

Jaime.

Mostly because of the supply chain not because the decisions of operators. So all of the backlog and booked work is holding so I have high confidence in the.

In the backlog number.

Q2.

I also have increasingly high confidence at the $180 million that we have in.

Bid that.

We will have some decisions shortly.

Goes and a component of that I think everybody is probably watching is pay era and the news in the elections.

I will translate into the backlog so I'm.

Hi confident in network.

In the bid is an interesting phenomenon thats happening so.

It is quickly moving where projects that are moving ahead are really.

Our narrowing around.

Yes related to demand.

Consumption in the Middle East there are several large projects that are in the bid that are moving ahead, and they're not slowing down and.

There will be very important for us as we move into the second half of the 2021.

The other area of course is offshore in particular in areas, where governments are making it more attractive and the one stendal cross where we have a very nice position is Norway, Norway has changed the fiscal terms of how operators can write off taxes. So we see an increase beating and project visibility in that area.

Yes and.

The other one I would mention.

There's also.

A component of ROI regulations are changing and I did mention a project that was very visible not that long ago that was in our budgetary that moved to bid and then the bid elapse. It's now back in the works again, because regulators have provided assistance.

To the operator to make it more attractive so Mike my confidence is increasing that slug of work that we were expecting to have secured and be at by indeed.

That has stalled in Q2 is now it's moved but it's moved 12 to 15 months and governments are standing up and making it more attractive. So I do think that as we get the later half of 2020, we're going to see acceleration of confirmation at work and it will impact. The later half of 2021 in 2022.

So I hope that answers your question.

Very very comfortable in the in the backlog increasingly more positive on the 180, that's in our bid.

I am also increasingly more positive that we aren't going to see sanctioning moving ahead as we get to the end of 2020 and there is a factor that I never really considered in March timeframe of this year, where regulators are making it more attractive so that there is investments.

Okay.

Great color I really appreciate it and I'll turn it back thanks a lot.

Your next question comes from Aaron Mcneil with TD Securities.

Hi, good morning, Thanks for taking my questions I'm thinking about the EBITDA profile for the back half of the year in light of your new company.

And so given that you wait covenants in Q3 read reintroduced covenants in Q4.

EBITDA annualized should we be thinking about higher EBITDA in Q4 relative to Q3 or am I, just reading too much into that.

No you should expect and if you just think about the project announcements that we've made Eric.

And you think about okay Baltic pipe.

Started now in Q2 and as we go through pipe production.

Things ramp up so, yes, definitely Q4's heading up to be a.

This quarter, just a little from the pipe coating.

Perfect. Thanks, Thats kind of tight you do a question going to ask.

Later, but the backlog, which was quite resilient on a sequential basis.

Given the broader industry challenges.

Can you maybe give us a sense of what new bookings were in the quarter. What was brought forward from beyond the 12 month time period, and what relates to US at Sea also we can kind of data.

Quarter over quarter.

Review in a bit more detail.

I will refer to my prepared remarks first of all we I was very clear that bookings in the quarter were very muted.

Right, Okay. The second component that affects the backlog of course.

Referring to my prepared remarks, we had delays.

Throughout the workflow and pipe coating that kept resilience in the backlog because we didn't execute the work.

Got you then I think about the major projects that we've announced.

They do go on and.

Good example would be.

Faulting pipe.

Ed.

Has started and we'll run into 2021 that would it came into the backlog. So it's a combination of.

We didnt chew through the backlog as much as we could.

We never booked.

Very little work in the quarter went into the backlog. So it's really a pull in backlog.

Component that was outside of 12 months and kept is there.

Understood.

And then this ties into what you had said earlier, but based on the projects and revenue profile that you're seeing.

I expect segment EBITDA for the pipe coating segment.

So margins you prove back into positive territory you three another ramp up in Q4 and longer term can you keep those margins elevated.

Without material Backfilling of large projects.

Based on the cost cutting you've done over the last couple of quarters. So let me theres three questions. There so Q3.

Margins will improve and they'll improve again into Q4.

And the cost reductions that were taking out our sustainable cost reductions.

Such as exiting facilities and consolidating.

Structural or call it management structures, so we will see improved.

Margins in the PPS segment over historical levels. So I.

I think Thats sounds mentioned several times.

We are targeting sustainable cost reductions in particular entity in the PBM segment.

Yes, so if you let's say.

There is a bit about a delayed before you get some new major large projects do you think you can sustain the margin levels, you'll you'll hit in Q4 with multi site.

Without major Backfilling of two projects.

This would be a longer term longer term question.

So if you think about what's happening in the PPS segment.

What's hurting margins is.

North America.

Pull back which in particular are helping or hurting our I am.

Field services, so if we get any recovery in North America, because it was.

They're very weak and we're not forecasting it to strength. So that goes up that will be very very positive on PPI segment.

But of course of you, referring just to pipe coating, we have to backfill projects to keep.

But our burden rate costs will be lower so to answer your question.

When we look forward into Q4 into early 2021, we think the margins that will achieve in Q4 will carry into 2021 I hope that that address so yes, we have visibility on work to keep going.

And it doesn't mean that we need to win a $50 million project. There is enough work that's coming in deal for example single MHRA.

Which is in that range kicks in in Q1 2021.

Okay. So all my comments around Q3 to four and into 2021 right we have.

I think in terms of.

Pipe coating.

The potential at the same thing that we were speaking about March were.

PPS segment will start to contribute.

Still very true.

Maybe the magnitude of contribution will be the same but.

It will run nicely in Q4 and into 2021.

Okay great.

Mentioned additional facility exits in the back half year their prepared remarks.

Can you give us a sense that magnitude or is that is it too early and when all the dust settles can you remind us how much you intend to shrink the overall footprint of your global.

Coding business.

So I think we have to be very careful on what we disclose on what regions because as you as you were very much where we bid work using multiple combinations of facilities.

The facilities that.

We've already closed.

Okay discussing so weve closed before that are in North America, or sort of North America lower end any corrosion coding.

I did allude in prepared remarks after several more to go these are much more and in geographies that are difficult to close the served primarily the offshore market.

And we will close them.

And.

We have to be very carefully.

In particular, one still has worked to finish up and we're bidding the another one.

Our project as a backup facility, but we will move ahead in actually this quarter, even one in fourth quarter will pull the trigger on the second one to two more to go serving in international markets Thats lined up.

Okay and then maybe this is a final question for focused on the restructuring charges of 17 million was quite a bit higher than the guidance you gave on the Q on call on between.

Tenant $11 million.

Did you end up making larger than expected cats.

Then you were intending it the kind of Q I'd call and with these additional facility closures result in further restructuring costs in the back half the year.

Yes so.

The increase is really related to.

The timing of when we completed restructuring activities are what we thought we were going to complete at this point in time, we accelerate a bunch of different things and found other opportunities.

During the quarter.

To accelerate certain initiatives.

That we that we want to do in respect to our ability to target that normalize sustainable 70 million X gene a run rate.

We expect.

That we have further restructuring costs in the range of $10 million to $15 million for the back half the year.

And that is that again will be.

Determined based on.

The timing of when we're going to complete the remaining initiatives.

That we've identified and a lot a lot of that refers to some of the international.

Coating facilities that Steve just mentioned on your previous question. So.

We are no. It's all about timing it wasn't necessarily a maybe a there is a little bit there in respect to estimates in respect to low cost.

To do certain initiatives, but the majority of the variance really is focused on the timing of execution.

Okay, great. Thanks for taking my question I'll turn it over I.

All right. Thank you there.

Your next question comes from Matthew weeks from Industrial Alliance.

Good morning.

Good morning.

First question was kind of a clarification I'm just wondering what's that long term.

Targeted 7 million $70 million annualized does that include.

Expected R&D expenses in that figure.

No. It does not that so that's a separate line on our financial statements.

Okay. So and then but it does just to be clear that 70 million does include.

Incentive compensation that targets.

So okay. So as to be clear so that is our expected normalized sustainable SG in a run rate within with incentive compensation or turn.

Okay. Thanks.

And this is another and this may sort of just the sort of a rephrase and have a question that was maybe yes.

Earlier, a little bit but.

Looking at how backlog.

Quarter opening backlog was pretty strong and kind of converted in the quarter was.

Sort of a bit lower than expected.

Mentioned that it was difficult to complete some international work.

Was the kind of low conversion to the backlog more so due to that and sort of the impacts of coal goodnight team or was it more to do with.

A greater weight, adding up the backlog towards comp is the tanks.

Uh huh.

No primary uses in the call it the PPS segment.

Where work is booked.

And.

Inefficiencies and went to covert 19 within our operations are within.

Delivery or logistics of getting the pipe to us.

And then the second come on as I mentioned, there was a movement from work that's outside of the 12 months just based on the project awards that we have announced that had moved into the 12 month period.

So that's why the backlog was resilient.

Okay.

Thanks, That's that's everything from me.

Thank you.

Thank you.

Your next question comes from Tim Moneta, Chello with HBP capital markets.

Hey, good morning.

Yes.

First question just on these downstream crude oil pipeline he has mentioned.

Jimmy as well.

Has really come back up for bidding.

The timing.

Materially changed.

Tim you sorry can you hear me.

Yes can you try again, sorry, you broke up at the beginning.

Sorry about that.

In terms of the East African crude oil pipeline, which she me as we're talking about when you say that there's that project.

Going back up for bidding in the third quarter here I'm just curious if the timeline for that project as.

Purely shifted given kogut, where if you expect to sort of pick up where it left off.

Difficult.

So of course, it shifted from the original time that we bid.

The the operator has singled strongly that upon the agreement with government and again.

You've identified a project it's difficult for me to tell you yes. Thank you.

You've got the region.

Everyone can follow what's in the press is that the operator now has an arrangement that is conducive for into maybe for them to make the investment.

They have a single to all the suppliers of a timeframe of when they would like to goal we in revised material Thats already sensing.

And as far as me right. We know right now that they are execution timeframe to get in the country remains the same about 18 months.

Okay got you and is there.

As the trajectory relative range that you might yield provides.

We've always stated that it was over.

Much much over $100 million. So it was always a large project right, we never really discussed, but it was much over $100 million.

Okay.

Just as a follow on to Aarons question regarding restructuring.

Tim I, maybe clarify the but if you go back through some of the transcripts of the previous call. When we actually we moved the projects out of our bid we actually said it was greater than 200 million.

Gotcha. Thanks.

Thank you for that.

Just a follow on this my second question to Aaron's question around.

The severance and restructuring.

And the.

Acceleration or some the initiatives that you guys have done.

I understand it was that international closures for sort of slated for end of year 2021.

So I'm curious if there's.

Any other projects you expect to slow into 2021 there'd be any.

Further restructuring costs that you expect past 2020.

There may be a little but restructuring the way. It works is when when you.

Contractually or serve node.

You take the cost right away. So for example, when you serve notice to an employee that determination has happened you take the cost our intention is before we finished the year.

The.

Hi cost items of shutting down international facilities, we will have served notification and we will be in a position too.

To book to full cost so the biggest wants to come or actually shutting down the facility.

But there may be little leakage into the first quarter 2021, because you can you can take the costs until you you're able to serve notice and there is right now because it over 19.

We probably would have been events.

In some some regions, but the government has restrictions on on how or when we can release employees.

Okay.

And then just sort of housekeeping item in I understand you waivers on the covenants for the quarter, but just curious if EBITDA for covenant calculations would have been equal to that.

4 million national because provider.

There are some other adjustments that need to be done for covenant EBITDA.

As we as we always disclosed Tim the EBITDA calculation.

For covenants also excludes foreign exchange.

And then has also adjusted for the new account via for 16.

So that's.

Thats directly related disclosed in our our covenants and in the our debt agreement.

On seat, but I'd be posts on SEDAR.

And we'll go to offer a 60 adjustments have been accord.

You can look at our lease obligations.

And I'd tell you what the numbers.

Okay. Thanks appreciate it.

Yes.

Your next question comes from Keith Mackie with RBC.

Thank you.

Hi, good morning, everyone.

Good morning keys.

Just a question here on confirming the additional two plant closures I know, we've we've we've talked about it a lot but can you just.

Quickly confirmed for me that these these additional closures are included in your stated cost saving target or would this be incremental to to the 60 million.

It was always in right and if you go back through even last quarter transcript, we very clear that it was facilities that were going to take out of the international.

Offshore serving market.

Got you okay perfect.

And.

Just on this the African pipeline, you mentioned that could be upwards of 200 million now do you expect the bid to be one single chunky bid or is there potential that it's broken up into multiple bids that may be awarded to multiple parties.

So far theirs.

No.

There will be for the pipe coating portion nerves.

The only one supplier so it's a digital I guess might make response with its in the digital.

Word.

Other get or you don't get it.

I see okay, and this would be through NEPC type arrangement as well or is that a direct.

Direct bid the operator today, we bid to the operator, but he.

As a reserve the right.

Push the pipe coating contracted.

But we bid today to the operator.

Okay. Okay. Thanks.

And just one other question here can you maybe give us a target or an indication of what portion of your revenue today comes from non oil and gas industry.

Yes.

Second we.

As we stated that.

Fourth quarter it was around 25%.

Second here.

When if you go ahead. If you have another question will come from the number here.

Okay, maybe maybe one more just on comps as rich mentioned the restart of some of the some of the pipe type.

Manufacturing.

Which we expect to influence Q3 results and Q2 had a very strong quarter for topic. It tanks due to the retail fuel demand do you expect to retail fuel demand to continue into Q3 as well as the as it did have an uptick in the in the return in.

Moderate moderate return I guess in oil and gas.

So let me clarify competence. So I'll ask you Youre. Your first question around 29% is now non oil and gas for the company.

So that's first and so let me clarify some some comments around competition so competent tanks runs.

A very pronounced cycle performance.

And so it's it's expected that Q2 in Q3 are strong quarters for this business and.

They are having very good performance, partly because of the synergy extraction of cost from the acquisition that was targeted also from efficiencies and production, but the incoming orders are holding very very strong.

We do we expected to continue and it will drop off as we get to the end of year as per the normal profile.

Composite pipe.

And.

To demonstrate how extreme we went several weeks in Q2 with zero orders so.

In my prepared remarks, I kind of box did in saying that operators not only stopped their their operations and there's multiple reasons why they did it but they also burn up inventory that they had on Ed.

We knew that was coming because it was single to us quite strongly as we exited.

Q1, so we shut the plant now.

The plant in my prepared remarks, the plant is now working.

And we've had a return to demand already in the month of July so.

We're not forecasting.

A business in the comp.

In North America to even reach the low levels of 2016 in the remainder of the year. So we're being very.

Very very conservative on the output. So what you should expect and as a cycle continues as you get into Q4 and carpeted tank.

Normal performance goes.

The composite segment and less pipe coating and North America and there is some positive signs I want to make that clear.

That should that completions will lead drilling and completions are good for us that we may be.

In a position where the pipe capacity pipe makes up for the drop in.

In tanks Norton revenue, but in profitability because.

Our margins in the pipe business are higher than our margins and the tank business. So I hope that boxes in kind of the model for you.

Yes, thats helpful. Thanks, very much.

I'm showing no further questions at this time I would now like to turn the conference back to Steve or see Oh.

Well I'd like to thank everybody for joining us on the call. This morning, and myself guest on and Paul look forward due to meeting with you again as we close Q3. So thank you very much and please everyone face health safe.

Ladies and gentlemen, this does conclude today's conference. Thank you for participating you may now disconnect.

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