Q3 2020 Shawcor Ltd Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Shop Corp. Third quarter 2020 results webcast conference call. At this time all participants are in a listen only mode. After the speak and presentation. There will be a question and answer session to ask a question during the session you'll need to press star one on your telephone please be advised that todays conference is being recorded.
Do you require any further assistance. Please press star zero I would not like and the conference over to your speaker today pulp year on senior Vice President corporate and Investor Relations. Please go ahead Sir.
Thanks, Josh and good morning, before we begin 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.
Involve estimates judgments risks and uncertainties.
That may cause actual results to differ materially from those projected.
The complete text of shop, where statement on forward looking information is included in Texas and five of the third quarter 2020 earnings release that is available on SEDAR and on the company's website at Shawcor Dot com.
I'll now turn it over to shop for a CEO Steve or.
Thank you Paul and good morning, and thank you for joining us on this mornings conference call.
Yesterday, we released our Q3 2020 results as expected the pressures associated with the dual impact of cold and 19 global tenant and Nick and the reduced capital spending of MP operators continued from Q2 and made Q3 and other operationally challenging quarter.
Focusing on what we can control ensuring that we put our full attention energy into a very narrow set of priorities. We are gaining traction and is resulting in improving position of the company to manage through this period of unprecedented uncertainty.
As we have communicated and past quarters, the priorities for the company or just three.
Everyone protecting the health of our employees.
Number two delivering the products and services needed by our customers and number three shrinking the balance sheet through cost reductions and conserving cash.
Before I go any further I would like to acknowledge the support and dedication of the employees of this company.
The current environment in which we all find ourselves is truly for and and very dynamic and continually impressed and appreciative and how well the employees of shawcor are able to adapt and execute and such times.
I wish for all of them and their families to stay healthy.
And sharing the health or employee is requiring constant resourcing and vigilance.
I believe we've done very well and while we have had several positive cases within our worksite, we've been able to limit propagation and support the impacted individuals.
Operationally the management of over 19 has resulted in changes and where our employees work.
The physical separation of our employees and in some cases temporary production line shutdowns.
As we ramp up activity in the fourth quarter and management of over 19 will continue to be very important.
And we must take very seriously if we're going to be successful.
Now turning to Q3, Twentytwenty adjusted EBITDA was $17.8 million compared to $4.3 million in the second quarter of 2020.
Revenue for the quarter was $268 million flat from the previous quarter.
Overall quarters results had to benefit from the Canadian waste subsidy program.
Operationally the results were primarily due to the positive impact of continued strong demand for complex and tanks for the retail fuel market wide.
Wire and cable products for industrial applications, and engineering integrity services and the midstream energy space.
There is also demand recovering the quarter for heating products for automotive applications.
Apart from composite pipe, the company's products and services related to North American drilling and completions, so little or no improvement from the bluepoint low point of Q2.
Although pipe coating activity related to projects was set up for improvement in Q3, our combination of tight delivery delays.
Startup inefficiencies and supply chain disruptions due to hurricane lower pushed the forecasted improved performance out of the quarter.
Some additional color on the quarter. The pirate project moved from pending if I'd to from order with coating production to start in Q4.
We also continued to reduce cost structure of the company during the quarter, including the initiation of closing one of two of our pipe coating facilities are located in southeast Asia and further reduction in the company's salaried headcount, bringing the total reduction year to date to now over 19%.
Looking into Q4, we are expecting a much stronger performance.
And the stronger performance will come primarily from increased pipe coating activity from projects that are under order continue.
Continue strength and demand for competent tanks and the continued recovery of automotive linked business.
Furthering improvement will be the positive impact of cost measures, we uptake and.
However, we do not anticipate any improvement in Q4 demand for our products and services that are tied to north American drilling and completion market.
The combination of improved activity and cost measures that is expected to result, and adjusted EBITDA net of government assistance in that $25 million to $30 million range for Q4.
Our direction to give specific Q4 guidance reflects the need to address the market's current perception of the company's performance and financial position at this time.
Although it's still difficult to forecast we expect the improved performance we have visibility on for Q4 will continue into 2021 and 20 to 21, we expect that our book and term business will see gradual improvement and demand.
That work, we have secured will remain from and will be executed and that we will see a real tangible benefit from the cost we have already taken out or in the process of taking note.
Although the quarter on quarter performance will vary due to pipe coating project execution timing and yearly seasonal elements overall 2021 outlook due to the factors I've just mentioned is much better than we expect to deliver in 2020.
Beyond this period are again highlighted is 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 and emerge a stronger more per for while more profitable organization when spending recovers and.
Energy.
Transportation and infrastructure markets.
I'll provide more detail comments in a moment I.
I will now turn it over to get from Tennessee, Shawcor CFO to discuss the numbers.
Thanks, Steve as Steve mentioned earlier operational results in the current quarter continued to be negatively impacted by the COVID-19 pandemic and the volatility of the oil and gas markets.
Consolidated revenue third quarter was $268 million, 32% lower and the third quarter 2019 the.
The price on pipe service segment revenues decreased by 36% compared to the prior year quarter, primarily due to decreased activity levels, resulting from the ongoing koby 19 pandemic, the lower demand per pipe coating and gross loan specs and services as a direct result of the significant capital spending cuts by North American MP operators and.
And continued delays and land transmission line projects.
The current quarter was also negatively impacted by lower production levels and our channel you facility related to supply chain issues caused by Hurricane Laura.
The conference and system segment revenues decreased by 35 per cent compared to the third quarter of 2019, primarily due to the continued lower demand for composite pipe products. As a result of the decline in North America drilling and completion activity across the segments customer base as operators aggressively reduced their capital spending while revs.
And our comps and tank business remained strong through the continued demand in the retail fuel and water and waste water markets.
And automotive and industrial segment revenues were lower by 8%, primarily due to lower demand for our automotive each free products, resulting from the impact of production shutdowns and government locked on restrictions from quarter to 19 at the majority of automotive OEM Assembly plants in North America, and emerging regions earlier in the year, which have yet to return to full capacity and.
As of the end of the third quarter.
Consolidated results for the third quarter were negatively impacted by nonrecurring items outside of the company's normal course of business.
The current quarter includes $12 million on restructuring costs, and 4 million impairment charge as a result of the ongoing saving initiatives completed in the quarter, including the recently announced closure of a pipe coating facility and Asia Pacific.
The current quarter reflects a gain of $1 million for land and Western Canada, and a gain of $8 million from investment from associates, while the prior year third quarter benefited from a gain of $5 million on the sales land and Western Canada.
Offset by debt scale acquisition cost of $4 million and a loss of $2 million for Argentina Hyperinflationary accounting.
Adjusted EBITDA per quarter was $17.8 million significantly lowered and the free 2.4 million reported third quarter 2019.
This decrease is primarily due to lower revenues and all three segments the impact of lower production activities to the COVID-19, pandemic, partially offset by lower SG and eight.
The decrease of 22 million and SG ne is primarily due to the completed restructuring and cost control initiatives.
That result, and decrease of 12 million compensation costs, and $4 million and travel and entertainment expenses.
The current quarter also benefited from the receipt of Covance related government subsidies of $17 million of which $9.5 million was recorded in cost of goods sold and 7.5 million and X gene and expenses.
Adjusted EBITDA margin and third quarter was 7% compared to 11% for the prior year third quarter due to the reasons mentioned earlier.
The pipe and pipe services segment margins decreased to a negative 9% compared to positive 3% in the prior year the comps and segment system segment experienced an increase of 2.26, 26% and the current quarter compared to 21% and a third quarter 2019.
And the automotive industrial segment also increased to 19% compared to 18% a year ago.
The company delivered positive cash flow and the quarter cash flow provided from operating to third quarter was 7 million a slight decrease compared to the 8 million provided in the third quarter of 2019. This.
This decrease in cash flow is primarily driven by a loss and the current quarter lower non cash items, and partially offset by a positive change and noncash working capital.
The change and non cash working capital on the quarter with a cash inflow of 9 million, which includes $5 million increase and restructuring liabilities compared to a cash outflow of 19 million in the same period of 2019.
Cash from our GAAP are primarily is driven by higher accounts payable lower contract assets and lower inventories offset by higher accounts receivable and prepaid expenses.
Cash provided by investment activities and the third quarter was $3 million, reflecting $6 million and proceeds on sales property plant equipment, and offset by $3 million of purchases of property and equipment.
This increase from the 2 million used and investing activities at the prior year quarter, which reflected 10 million and purchase of property plant equipment offset by $7 million and proceeds from disposal of property plant equipment.
During the third quarter cash used in financing activities was 7 million, reflecting the payment of our core lease obligations and a slight decrease and long term debt.
This compares to 45 million used in second quarter two.
Reflecting income in 2018, which reflected the repayment of debt of $29 million the payment of dividends of $10 million and the repayment of lease liabilities of 5.5.
Net cash flow from the third quarter, and 2019 was positive $3 million compared to an outflow of 40 million and third quarter 2019.
With respect to cash and debt the company had a cash balance of 107 million debt of $435 million and 47 million of standard letters of credit as of March as of September Thirtyth 2020.
In addition to the successful completion of the debt amount and at the beginning of this quarter. The company's liquidity position has benefited from a significant progress made to date.
On our targeted $60 million sustainable annual SG, and a savings and $40 million and incremental cash generation.
During the quarter. The company completed further actions to reduce its route salary workforce, bringing the total reduction to over 19% and.
Announced the closure of one of its pipeline facilities, and Asia Pacific and reduced capital back capital budgets further to the $30 million to $35 million range for the full year of 2020 and.
As a result, the company remains on track to me its goal. According normalized sustainable SGN, a run rate of $70 million, which includes a target incentive compensation costs.
The company has also delivered positive cash flow and the first nine months of the year, reflecting $47 million from reduced working capital excluding the impact of restructuring liabilities and $17 million from proceeds of asset sales based on these actions completed and planned its diversified business and current backlog of the company expects to generate sufficient cash flows from its operations were.
And capital requirements and capital program on.
I'll now turn it back to Steve for some additional commentary on the company's performance and outlook.
Thank you get on.
Ill first start from providing details on Q3 by segment.
And the pipeline and pipe services segment revenue is closely tied to the capital spending of exploration and production operators and upstream.
And that of transmission line companies and the midstream of the energy sector.
As a result of uncertainty and forward looking economics, our customers are under pressure and have reacted by severely cutting capital budgets and delaying decisions on large capital expenditures.
Additionally.
Driven to reduce cost and gain scale strategic alternatives, such as mergers and acquisitions are moving forward and this is resulting in the consolidation on the end customer base. That's shawcor serves in the PPS segment.
As a result of these factors and third quarter continued to be very challenging for the segment.
The price demand for small diameter pipe coating and growth, while inspection, which are tied to north American drilling completion activity continued at Q2 levels as a result of the reduced spending in this market.
Great flow inspection of the larger diameter pipe was up from the low level of Q2 was project started team mobilized as cold and 19 measures were implemented and regulatory induced delays experienced some investments.
Pipe coating in the quarter was not as expected, even though we had from production schedules. This.
This was due to lower than expected run rates and our leaf operations due to customer pipe quality issues.
And our channel view facility halted production is a key raw material was not available from our supplier.
The root cause on the supply chain disruption was hurricane lowers damage to electrical grid servicing the supplier's facility and.
Note alternative sourcing solutions were available but were rejected by both shawcor and our customer due to the perceived higher risk to the insulation coating performance and.
The supply chain issues has now been addressed that kind of new facility is now back to production and we estimate that the impact of the interest has and will be approximately 6 million in EBITDA from a combination and work being moved out into later quarters and additional holding costs within the quarter.
Engineering consulting services demand.
As in the first half of the year continued to be resilient as north American transmission companies look for expertise to move forward with integrity programs on existing assets.
We continue to make progress in the quarter on reducing the cost structure of this segment, including the initiation of shutting down one of our two pipe coating facilities and southeast Asia.
The facility shutdown is well underway and will be concluded in early 2021. After the completion and work that the facility has under order.
With this facility closure, we have reduced our pipe coating facility footprint by five fixed plans year to date.
We will continue on our efforts to reduce our pipe coating footprint and the upcoming quarters with a specific focus on one servicing international markets.
One additional point pertain to the pipeline and price services segment for the quarter that is important to note is the preparation that has occurred to de risk the step up and activity that will start in the fourth quarter from work that is in our backlog.
Furthermore, worked under or from both pipe coating and large diameter growth, while inspection had positive delta on developments in the quarter.
Pipe coating with the Finalization of the payer of project contracts and growth while inspection with an award approximately $20 million related to construction of a major us land transmission line.
The Q3 results for the composite system segment in the third quarter had two main components. The first was continued very strong demand for composite tanks from the retail fuel market and increasing demand for our tanks in water and wastewater applications.
The second was the improved demand for composite pipe and both North America and international markets from the very low level of Q2.
As a result of increased competition quite volumes in the quarter. This business was able to be a positive contributor to the overall results.
Hi demand for tankers is expected to be resilient as convenient store margins remain high.
And the remains and inventory of aged tanks that need, replacing which now includes older generation single walled composite tanks and from the traction we are gaining and our strategy for water and wastewater.
Let me go into a little more detail on our strategy for water and wastewater.
What other markets, we are targeting and the water sectors storm water.
Studies have shown that 30% of the solution in North America, and waterways comes from and treated stormwater runoff.
Our strategic approach and storm waters to connect our tank products with third party components and build integrated systems that treat and clean store runoff water before net returns to the waterways.
One of our systems is capable of processing 2.5 million gallons of storm water per year or the equivalent to four Olympic swimming pools.
By clean store and water runoff, our integrated assistance and protect our communities portable water sources.
Control storm water flow and reduce flooding risks and thus, creating a core future demand element for our composite segment.
Composite pipe demand has improved from Q2 low point as completion activity and North America has improved and our customers hold low inventory levels.
And from project orders and international markets.
Continuing recovery in the quarters ahead, and we'll be tied very tight and increasing well completion activity in North America, and our presence with select offers that will be active.
This bed business benefits from a very low support cost base that results from material torque and profitability as volumes increase.
The most recent outlook outlook has indicated and most active operators will be those that have adopted composite pipe over steel plate.
Currently it does appear that Q2 will be the low point for our composite pipe business.
The automotive industrial segment results in the quarter benefited from one the return of demand for heating products for automotive applications as vehicle Assembly plants in North America, and Europe resumed production and to continued demand for wire and cable price from electrical utilities and communication providers.
Although we do expect some impact from the usual seasonal slowdown in the fourth quarter. The fundamentals of the segments are turning supporter for a faster recovery than we had first anticipated.
Low interest rates.
The increasing importance of personal transportation and response to the patent and Nick and electrical and hybrid purchasing incentives are all positive factors for this segment.
We are cautiously optimistic that returning to our pre Cove and 19 level for this segment could now occur in late 2021.
I'll now turn to Q4 and into 2021.
Q4 is set to be a much better quarter for the company and as I stated earlier, we expect that we will deliver adjusted EBITDA net of government cold and 19 assistance in the $25 million to $30 million range.
We anticipate improved performance will be sustained into 2021, although this step up and performance should be expected to have quarter on quarter volatility due to project execution timing.
The improvement is based on an expectation that the start of recovery that we are now seeing will continue and there will be a return to a minimum level of spending from our customers.
This will positively impact our book and term businesses and but it will also result in revenue generation from the execution and work that is captured in our 542 million 12 month backlog and growing secured work outside of 12 months.
Additionally, we have taken to date.
Additionally, the actions we have taken to date and we will take such as reducing the salary headcount by over 19% closing facilities and aggressive and reducing the variable cost to match on much lower forecast will assist and improving the bottom line.
In terms of project activity on backlog is holding and no book project has been cancelled and we are seeing projects that were pending award in March of this year, starting to be revisited with associated pipe delivery schedules, albeit.
12 to 18 months delayed from what was originally being considered.
Our bid and budgetary numbers and indication of future opportunities have remained high at 2.5 billion.
EBIT is just over $870 million resilience and bid is related to submissions associated with natural gas and the middle East and Asia regions.
And the offshore markets on the Gulf of Mexico, Brazil, and Norway.
I would note our bid at the end of Q3 does contain over $120 million that we have been award but is conditional on fiveg.
Before we open up for questions I'd like to make the following points.
Shawcor diversified portfolio of late and early cycle oil and gas and non oil and gas businesses provides a hedge that would be a benefit and these uncertain times.
Shawcor has us essential book of work for execution over the upcoming 12 months.
And the work is holding from Additionally, we're starting to see the start of recovery and many of our book and term businesses.
Shawcor has taken and is taking the necessary and difficult actions to reduce cost and preserve cash was needed and these very uncertain times. These actions include the analysis and consideration of exiting markets and divesting full businesses.
Chuck Force future success continues to be underpinned by supportive long term fundamentals that will drive investments and energy transportation and infrastructure.
With that I'll now turn the call over to Josh the operator, and we can open up for questions that you may have for guests on it and I.
Thank you as a reminder to ask a question on each press star one on your telephone.
And with time and question question on key please standby on composites, you and I are upstairs.
Our first question comes from and with me on with TD Securities. You May proceed with your question.
Hey, good morning, all thanks for taking my question each competent systems seem to have a very good quarter and Q3 and from a sequential revenue perspective can you give us a sense of how much of the sequential increase was the debt CL business versus the composite pipe business and.
And maybe what the approximate revenue split for those two sub segments, where in Q3.
So and as we've discussed before we don't split total revenue in the compass of business by.
By tank pipe or lying tubing. So we don't split it in my prepared remarks, I did comment that we had a better quarter for pipe.
In the quarter. So you can assume that therefore, the revenue was higher because it is now profitable where it wasnt in Q2 and.
And tank, we had as usual we.
Historically tanks are better and Q3 than Q2.
And should be should be good and Q4 as well. So I think the incremental improvement was equal around tanks, and pipe and and little to nothing from Stifel asset management or the line tubing business.
Understood and Thats helpful. I will be trying to get into specifics I was just trying to get a sense of on the quarter over quarter change.
And also hoping to get a bit more details on the guidance.
Got to 30 million, excluding subsidies, obviously, if I take your Q3, excluding subsidies and basically at a breakeven on an EBITDA basis.
And wondering if you could perhaps bridge the gap from quarter to quarter or in other words can you walk us through how you get from Q3 EBITDA to Q4 EBITDA what are all the main moving parts and each segment I know you mentioned, the $6 million and and.
And but non recurring items from on the pipe coating segment, and just trying to get a sense of bridging the gap quarter to quarter, Yes, I think I think his first day, if you look at.
At the Q3 numbers and you do it by segment the biggest improvement certainly that Weve message is in the PPS segment and.
And the major uplift will be.
Pipe coating, but also in the OEM business and coach Weld inspection because of the work that I.
Data that we had won so its primarily in the PPS segment.
That being said, we expect debt to accomplish that segment will have a strong quarter.
Pipe is off the bottom of Q2.
And we of course, we have a view because October is close to being.
Finalized so pipe will be strong and tank in the in the fourth quarter, using and December and as a little bit of a pullback, but it will be strong and so I don't think theres much movement there and.
Automotive and industrial in the in the 25 to 30 million. It is probably the largest variable I would say because as you probably see and other sectors and automotive there is.
A spike and activity in the fourth quarter that nobody anticipated on and we expect that we will participate in it. So if you kind of back through what I. Just said so the major difference will be and TPS segment and the variable in the range is probably in the automotive and industrial segments.
Okay.
Does the TPS segment needs to be made to have positive EBITDA for you guys to hit that $25 million to $30 million excluding subsidies.
Potentially positive EBITDA.
Got it.
And then I know your guidance, maybe and I'll give some additional color right. So guidance and it's something we don't usually do so we did it this time in particular, because we had signaled the second half of the year was going to be stronger.
And projects do move on so with the EBITDA that we put on the table and Q3, we wanted and make sure that mark and understood that our view in the second half remains exactly the same but it means a stronger Q4.
In order for us to give guidance you have to imagine the confidence that we have to have and the number and if it's a project based work cannot be one facility. So projects are now being executed and in Asia, Norway, Scotland and channel view, and we're starting the and our project and bear.
Coolers and.
And so we're we're finally getting back to the point where the utilization.
And I would say better margin projects are going to start running through our pipe coating facilities in Q4, and our hedges and we have more than one facility running.
Understood.
Last question from me I know your guidance excludes wage subsidies, but can you give us a sense of what Q4 wage subsidy proceeds might be as well as what restructuring costs would be if any and can we expect any other major facility closures in the coming quarters.
Yes, so I think looking at in the short term on the weighted sub sea side Aaron.
It can be significant less.
You know if you period three to seven represented that is the amount of the 17 million and be book. This quarter. We basically this point in time on you have two more to book.
The Canadian government has extended the sub sea, we're still reviewing and what that impact is for us.
So we're not expecting that number to be greater than $2 million to $3 million and in the fourth quarter.
At this persist.
On the on the restructuring there is some further restructuring and but it will not be to the extent that we've had and last two quarters. So right now it is going to be in the range of.
Okay.
I would recommend about $3 million to $5 million.
And thats, probably probably on the low price.
On the more appropriate the low range of the low that bottom of that range.
From that perspective.
And yes, we will continue to look at facilities for closure and.
It may not be in in in the fourth quarter, but and probably more into early 2020 one.
Okay. Thanks for the color I appreciate it turn it over.
Thank you. Our next question comes from Mike Raab Regional and National Bank Financial you May proceed with your question.
Hey, good morning team thanks for taking my questions.
I thought it was interesting jump quarter over quarter on the value of the budgetary estimates that 2.5 billion.
From a high level, what's the sort of the composition of that 2.5 billion in terms of oil gas and non oil and gas and as that composition shifted significantly relative to the second quarter.
Yes, let me, let me kind of break it apart a little bit so that we're very clear so the budgetary.
Yes, and as you are aware, but I'll clarify for everybody on the call budgetary is when we give and number two a customer on a given scope of work so that he can make and estimate in that number.
I think it's somewhat inflated because there is a project and East Africa, that's now and the budgetary number that we put in there after removing it from a previous period of time that that several hundred million dollars. So I would.
There is a project that we're actively discussing but I really don't.
Anticipate the likelihood of it going ahead or shot on goal and getting and attractive return on participation in the near term. So you need to back that out and the number.
And then the number that I'm quite.
We're comfortable that is staying strength is the big number that I mentioned and in that and which is numbers that we actually have good and proposals.
Through tender process or direct and we have a line of sight of it is primarily gas in the middle East.
And gas and the middle East for domestic consumption, but also export of LNG.
Asia for export of LNG, So it's heavily gas related but the offshore market.
Brazil, the Gulf of Mexico, and Norway are oil so if I ask you look and break down the 800 million Thats in there it is.
It's probably 60 30.
Towards the gas and 60% gas 30% oil.
That's good color and has that sort of changed significantly over the recent quarters or is it sort of had a holding steady at that ratio.
I think it's oil it's come back a little bit in it but the bigger projects continue to be gas related.
Got it.
So the big.
Biggest weights and move that number is GAAP.
Got it.
You noted expected improvements and financial performance heading into 2021.
Would it be fair to assume that you are expecting the quarterly EBITDA performance the disorders and the ballpark with what you guidance you in Q4 as we enter the new year.
I think on average and.
On average for for next year, I think thats, a safe assumption so on average but.
The portfolio of the company. So for example, that's yell seasonally has a slow down in Q1 is the factory. So we we we shipped less tanks and Q1.
Also it's really difficult getting the pipe coating business and it was demonstrated in Q3, we have production schedules in Q2 for Q3 of this year and we're pretty confident it was going to go is really.
Not unusual per pipe to show up we scale that takes us back and.
Second clean up trips through the facility that will push revenue out. So I think it's a very safe assumption that we will average the Q4 number.
In two across 2021, but there is going to be volatility per quarter. So.
The guidance that we've given for Q4 is is something nobody should expect us doing again right thought.
Got it got it yes, I understand the difficulty in this environment, that's great color I'll turn it back thanks, a lot for taking my questions.
Your next question comes from Matthew weeks, and industrial Linings Securities. You May proceed with your question.
Hi, Thank you good morning, and thanks for taking my questions here I was just cash.
Specifically about North America, and pipeline type services and it looks like on a sequential basis.
In terms of revenues, we saw about a $15 million decline. There I was wondering if it'd be possible to breakout kind of how much of that can be attributed to.
Closures and facilities and the second quarter versus how much is attributable to the one time impacts resulting from hurt you more.
So.
And your question is quarter on quarter correct.
Yes, that's correct okay.
Okay. So.
As we mentioned not much from North America completions.
Because Q2 was a low point and we saw no improvement in Q3. So if you look at that piece so whether be.
And in our small diameter, 12 inspection or our small diameter pipe coating and of course, we've removed a lot and capacity out of the market.
Not much so what you're really seeing and.
The Delta and we expected to to actually be an increase is three things that I commented about so.
First of all channel view.
As we said.
The overall impact and I didn't give a revenue number I gave it estimated EBITDA, but you can you can figure it out quite a bit on revenue in.
In channel view was pushed out and Thats included in the North America.
The second comment I would make on on the revenue drop is there was a delay in pipe a rival that also affected.
Channel New facility.
And we had a slow.
Slow or delayed start.
On business. So it's kind of those three things that pushed it out.
But not.
Q2, Q3, if I look at and North America drilling and completion with the exception of competent pipe.
Still at the Q2 level, so theres not much.
Okay, and so really the quarter on quarter decline was mostly due to these kind of delays rather than average you.
You kind of worsening and act.
Activity.
I think the majority of the drop that you see that.
EPS segment or things that we didn't anticipate and order.
Okay, great. Thank you Thats helpful.
I'll turn the call back.
Thank you. Our next question comes from my goal on DRAM with Cormark. You May proceed with your question.
Thanks. Good morning, So you flags potential plant closures and also studied that you should not rely on existing product lines can you provide some color as to what specific product lines do you view as non core.
And it's a very very good question I think what what I, what I want to make clear and when we're in the prepared remarks is that.
We are working through the complete portfolio of the company.
And we are are not and.
We're not ruling out divestitures of businesses.
Whether it be a one product line. So we recently have divested of a product line within the automotive industrial business that will be visible in the fourth quarter, which is a couple million dollars a sale of a trademark and a product line that is better fit with somebody else. That's an example, but.
But we are looking at a whole businesses.
And and it's difficult for me to identify them on the call some of them are.
In process.
And some are just and consideration.
Perfect Thats very helpful on lots on from me with the rebound expected in Q4, how should we think about Capex and if there is an uptick and Capex, where do you think this will be directed.
Yes, so I said and as we communicated in our and our documents and debt prepared remarks, we.
We've reduced our overall range for planned capital expenditures to that 30 to 35 million, so probably again, probably a conservative and more at the bottom of that range for things and really it will that continues to reflect is maintenance capex that we have and.
EBIT of growth Capex for key.
A key growth segments like the comps and tank business.
And a little bit of.
Capex required for increased activity and the pipe coating side.
And the plants that we expect to continue to have revenue generation and going forward. So.
That's really that's really where we're at right now.
Perfect Thats very helpful on thanks for taking the questions.
Thank you on our next question comes from Tim Monotone Day TV capital markets. You May proceed with your question.
Hey, good morning, everyone. Good morning.
[music].
First question just a clarification on the Q4 guidance that excludes the onetime cost from hurricane.
Hurricane Laura correct.
In Q4 and no no no debt.
It is the $25 million to $30 million is the operating EBITDA.
So there is no one times and the number yet so.
Okay and must have been confused you mentioned $6 million of.
Impacts from.
Hurricane Sandy which quarter is on Q3 as the quarter was okay, sorry about.
Gianella site.
Okay.
Yes.
And I was encouraged to see that the budgetary and bid and backlog right.
Up in the quarter I'm trying to square that up with the commentary around.
And to increase.
I guess timing around project awards of 12 to 18 months so I'm.
Wondering if you could just talk a little bit about what the average contract award timing might be within the bid right now.
Yes.
Yes.
To me, it's a difficult one right. So maybe I'll go back because I think it's a good good questions and give a point of reference of where we are so historically when a historically pre 2016.
It was usually by the time and first saw project. It went through budgetary bid and award it was around.
18 months.
Then in 2016 of course everything cancelled and.
And I would actually use the term infinity because we the projects actually were removed from bidding budgetary. So you know we started.
Having visibility on them, they would move to bid and them and 16 hit day Ashley disappeared.
In March of this year, we had several projects that had worked through the 2016 out.
Out put back into numbers reworked and there were pending EPS I'd and that was.
If you think about day were moved and 16 came back from probably a 24 month 36 cycles to get us to the point, where they were prepared to be awarded.
They now.
And my prepared remarks, I said 12 to 18 month delay. So the projects that were pending award in March 2020, and now starting to be discussed again, but the price schedules and pipe coating revenue recognition is.
12 to 18 months pushed out from what we thought was going to happen in March of Twentytwenty.
If I now look at the current bid number that's out there.
We moved.
We've moved nine months down the road from March So I would say, we're now 12 months.
A large volume of the bid and budgetary will be decided in the next six to 12 months.
Okay, great. So I guess.
Just to make sure I understand that.
In 2021 do you expect that you could be awarded.
On a decently large percentage of that did.
Depending on success rates, but you don't expect that there'll be a ton of revenue recognition from that bid.
It depends right. So I think some of the work that we have in under contract pending if I'd will be decided.
Right. So there is a $120 million there that's included in our bid number and that's pending a decision on on on the Fi D.
That's a quick one to go and that's a 2021.
We have other projects that are.
And in particular and middle East gas that will be side and the next to three.
And next three to six months and.
And it will possibly have revenue in the to backfill in our backlog in.
In 2021, and the later quarters, so we still have projects in the.
In the Big book that should they go ahead, and our expected timing it will start to fill back in the backlog.
Which is means there is revenue in 2021.
But we have a very strong outlook for 2021 because.
We have a strong backlog for the next 12 months and our backlog.
Which will not include the fourth quarter and 2021, we have work that we secured and Gan as an example that has worked for the fourth quarter thats on into backlog. So our actual backlog is higher than the number that we communicated for 2021, because the fourth quarters on it.
Okay understood.
And then I was just curious around.
Around the North American.
Comps type business.
As you come out of the second quarter Lois.
And thanks, Serge recover do you think that that business has outperformed the broader market recovery.
Good day.
And give us a quarter.
I think that talent that we have.
And because we actually on the Reals on which the customer have pipe on and we have a very good handle on the inventory of the customers.
So I think what I'd ask is give us a little bit of time and give us the fourth quarter because in the fourth quarter. We will understand what is the impact of the inventory that's sitting on that the customers have.
Substantially depleted.
And there is a lag between this little bit of strength and completion that we're seeing right now and when they're start going to reload their inventory and buy from us.
The second comment I would ask why we need a little bit more time is Texas and cost consolidation that you are seeing in us land.
Is it is providing some hat having in who is the person is doing the purchasing as you can understand.
But I will make and overall comment is that us land will continue to reward those.
Those companies that bring advancements in technology that bring efficiency or lower cost solutions to the market and so composite pipe.
And in my prepared remark I said is the is the gathering line of choice for the majority of the large customers now.
And so really it's the market share over steel that's important to us with the customers that are actually active so give us one quarter and and I think I'll give some commentary next quarter on how pipe is doing versus the general market. I think we have this kind of buffer of inventory that we need to figure out and see.
Okay.
Yes, maybe ill provide a little context for the question.
From what you said on the call my understanding is that Q3 was.
On more profitable and above breakeven quarter from the cops and pipe segment, whereas Q2 was not is that correct, yes thats correct.
Okay.
And then with the backdrop of sort of the average rig counts across us being down quarter over quarter and the Q3 from Q2, and obviously completions activity is probably.
Outperform drilling activity over that period Im just curious how that profitability has has transformed is that a function of higher top line revenue and more a function of just cost being taken out of the business or a combination of two.
It's really that tipping point.
Really a one facility business. So there is a.
And as auction rate at once you get over the business turns profitable so it's.
A margin improvement and revenue that pushed the business over this auction rate.
Okay got it thanks.
Thanks, a lot and I do.
Clarify in the call that it's not just us land, we booked and nice order in the international market.
Okay, and Thats something that.
Bill.
Continue to be processed and the next couple of quarters as U.S. lender redemption.
To the international order is a is a nice hedge into the fourth quarter.
Okay, great appreciate it.
Thank you and as a reminder, task and questioning on each press star one on and on our next question comes from Keith Markey with RBC. You May proceed with your question.
Hi, Good morning. Thanks for taking my question just wanted to start out on the water strategy in Q3, I think there was about 35% of your revenue that was non oil and gas obviously water would would be and there can you say and give us a sense of where the water business is in that mix now.
And where you think it could potentially get to given your strategy and is the strategy incremental to the channel synergies you would have identified in the debt deal acquisition or is that or was that sort of included in there.
So I can give some numbers referenced to the performance of the water business for tanks because.
T. out prior to the acquisition disclose that number so a very good year for them was ER and they had challenges to break through the 23 24 million dollar range.
And so that was and they always had water has that as identified market on on how to go.
Yes, our strategy as I mentioned is where.
And it's a challenge as you can imagine because the capacity and our current facilities to serve the fuel market because current market is quite strong.
We need to effectively.
Actively manage the capacity to ensure that our strategy and water and gets traction and we're using in some cases third party manufacturing to get it done.
The the current revenue projection.
For the end of the year, we will surpass.
Net sales will will surpass is kind of line that they were challenged and get past.
So you can assume that.
It will be beyond the 23 $24 million and we said.
When we actually break down on the water business and our offering I think we could get this $2 million to $100 million, but we need to find.
The manufacturing capacity to do and which would involve utilizing tool manufacturing, but what's really really important for us is that we fully realize that the fuel business has.
An annuity of replacing steel tanks and older composite tanks that is non forever.
And so as we start to develop our water and wastewater business is what we're trying to ensure will provide a stable long term demand for the tank business and it was always part of the discussion and rationale why we did that.
That theyll acquisition, because we identified the risk of a of an endpoint for the refurbishment or fuel tanks.
Got it okay. Thanks, thanks for that color.
My last question is just in pipe services.
Had negative EBITDA and Q3, you said you expect it to be positive in Q4, I'm just wondering if if revenue.
And were to be at Q3 levels and we incorporate the changes you've made in that and that business and with the five plant shutdowns et cetera.
Should we expect that business to be EBITDA positive go forward. If revenue were at Q3 levels or or is there still more more room to.
And to run there.
No at the Q3 levels.
The current cost structure.
No it would not.
So we would and and our focus is to take more and more costs on the segment, but Q3 level revenue was was very low.
Got it Okay and is the biggest lever there I'm guessing it is on on on additional plant closures that would get that number to be there to be to be positive at Q2 levels or are you not even considering sort of planning at those levels just because it was.
Kind of a onetime low and you expect that the run rate market to be better.
No there was a substantial drag in Q2 and Q3 from our field services business tied to drilling completions. So this is the girth wealth business.
And also large diameter growth while inspection is is not contributing so.
It's really field services and under absorption of plan so two elements.
So PPS.
EPS segment, we often talk about pipe coating, but there is a substantial drag that we're seeing in our field services I am oriented business with the exception of.
Of our engineering consulting services, which is profitable.
Got it okay. Okay thats it from me thanks very much.
Thank you. Our next question comes from John Gibson with BMO Capital markets. You May proceed with your question.
Thanks, Good morning, guys.
And just given your prior views around facility closures do you feel that you are still well positioned relative to your peers to win some of these awards and your bid log or I guess, what I'm trying to ask is now that you've you have fewer pipe coating facilities and play.
What has changed with regard to your outlook for winning New York Newark.
As so we've been very strategic on the plant closures that were doing both domestically where.
The model of high volume low margins without the high volume doesn't work. So that's a strategic direction to reduce our exposure to that business I'll put those to one side. The most recent shutdown that we did it.
International offshore orientated facility.
And by doing it and were taking capacity out of the market, but certainly as I said its one of two facilities and southeast Asia. So we are very much still on the running for work that's there.
The additional facility closures that we are targeted to do.
All are the ones that.
We are.
We're taking the capacity to other market, but without question, we have access to the market to another facility. So in some cases, what we're actually doing is reduced reducing the options for the customer.
I think you've ever and one is following the pipe coating business.
Capacity is coming on to the market quickly our competitors are also shutting facilities.
And there was a recent announcement in the Gulf of Mexico on a competitor that we have there. So the competitive landscape is quickly quickly changing and I think customers.
As we communicated this shutdown on our southeast Asia facility are understanding that they're just not going to have the choice anymore.
So we will give and execution strategy of.
And one facility not multiple facilities going forward.
Okay, great. Thanks, a lot.
Last one from me a bit more of a high level, one, but when you look at your EBITDA covenants.
The kicked back and get back in Q4, where.
Our EBITDA gets analyzed annualized I guess and a worst case scenario where could you.
British and sort of current work said relative to sort of at a minimum EBITDA threshold.
Sales and covenants here in Q4, and and you think and sort of a worst case scenario, where and maybe another.
What some of that it's that there's potential to breach.
Yeah, I know I think we based on the range that we provided we have sufficient room.
For the covenants the amended covenant that we have for Q4 and only basis. So.
There is no concern there. It's also important to note that you know.
The covenant is based on an adjusted EBITDA basis. So.
So that is really the focus that we have and that's why we have disclosed on adjusted EBITDA. So at this point in time I don't believe.
We have any concerns about meeting our covenants and the fourth quarter.
Okay actually one quick one from me as well on just you talked to a larger diameter comps and demand being strong from international areas. I think you touched on it a little bit of color can you talk about I will just markets from it.
Hi, So just a correction so large diameter and in the pipe World is using 20 inch and above we don't supply 20 inch composite pipe. So I mentioned that there was strong.
Demand in the quarter.
With it with an order and international market. So we have spent tremendous time in getting our product certified internationally.
And so as a.
And a lot of the delay to come because of cold and 19 getting access to the customers and making decisions. So we usually have orders in international markets throughout the year and it's more project related.
In the third quarter, we started to see closures and of these orders So appeals being issued and we expect it will continue into Q4. So it was usually not material overall with the exception on with some large orders that we did in Australia and Saudi historically. So these are three $4 million.
Other size orders that go through and I expect it will be sporadic as we go forward, but they are now moving forward and as I said it is something that brings some confidence to us in Q4, because we have appealed for pipe.
Okay, Great I appreciate the color on sort of.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call over to Steve Warren for any further accounts.
I really do appreciate the interest in the company and everyone taking the time to join US for this mornings call and I look forward to speaking to you again next quarter and everybody on the call today say healthy. Thank you.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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