Q4 2020 Shawcor Ltd Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Shawcor is fourth quarter and year end, 2020 results webcast and conference call.
At this time all participants are in a listen only mode. After the speaker presentation. There will 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 assistance. Please press star zero and it is that my pleasure to introduce external communications and ESG director Megan Mckechnie.
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 that involve estimates judgments risks and uncertainties that may cause actual results to differ materially from those projected the complete texture chocolate statements on forward looking information.
It is included in section five of the fourth quarter of 2020 earnings press release that is available on SEDAR and on the company's website at Shawcor dotcom.
And now I'll turn it over to Shawcor CEO before.
Good morning, and thank you for joining us on this mornings conference call.
This morning, Megan gasoline and I are joined by Mike Reeves.
I joined Shawcor and the role of President with responsibility for all operations in March.
Mike's expertise experience and leadership are outstanding additions to the company.
I look forward to working with Mike to drive performance and saved and shape the future of Shawcor.
I'll start my remarks by acknowledging the support and dedication of the employees of this company.
Environment, and which we all find ourselves is truly foreign and very dynamic.
I'm continuing pressed and appreciate about how well the employees of Shawcor are able to adapt and execute and such times.
Wish for all of them and their families to stay healthy.
Yesterday, we released our Q4 2020 results adjusted EBITDA for the quarter was 46 million on $326 million of revenue.
The financial results delivered exceeded what we were expecting with adjusted EBITDA before Covid related government assistance of $40 million, surpassing the 25 million to $30 million.
Range that we communicated and our last quarter call.
And step up and results from the previous quarter was supported by continued strengthening and the companys non oil and gas related businesses.
And they returned to profitability across our oil and gas related businesses, especially offshore pipe coating.
The better than expected results can be a contributor to three primary elements. The first was the overall higher than expected demand for our book and turn products and services across the portfolio.
This was particularly visible in our automotive and industrial segment, where we did not see any of the usual seasonal slowdown, but rather a continuation of recovery we experienced in Q3.
The second element that contributed to our better than expected results was from pipe coating project work that was executed with limited scheduled interruptions, resulting in plant utilization increases.
The final element was a positive impact from performance of actions, we have taken to reduce the overall administrative cost burden of the company.
These actions have gained traction and are moving faster than we had anticipated.
Some additional color on the quarter the sale of the pipeline performance products business in late December coupled with our actions directed to reduce costs and preserve cash is greatly enhanced the strength of our balance sheet.
In terms of progress on cost structure total.
Salaried workforce reduction from the start of the year.
Our now greater than 22% and progress was made to position several additional pipe coating facilities, serving the international market for closure.
As expected the pressure associated with dual impact of COVID-19, global pandemic and the reduced capital spending of E&P operators certainly remain visible in Q4.
However, we are starting to see real tangible signs from our customers that they are gaining the confidence required to increase their spending going forward. This includes the depressed oil and gas upstream land market in North America and spending on installed projects that were ready to be sanctioned and early 2020 for development and the oil and gas international offshore markets.
I believe our approach of focusing on what we can control and ensuring that we put our full attention and energy into a very narrow set of priorities has been critical improving the position of the company and managing through a period of unprecedented uncertainty.
As we have communicated in past quarters, the priorities for the companies were number one protecting the health of our employees.
Number two delivering the products and services needed by our customers.
Number three.
Strengthening the balance sheet through cost reductions and conserving cash.
With the anticipated spending increases from our customers and project sanctioning and the very near future, we must add a fourth priority.
And to ensure we capture our share of the work that may be contracted over the next three to six months.
Looking into Q1 'twenty 'twenty, one we expect that we will continue to see solid positive results, but not at the Q4 2020 level.
Pipe coating is not expected to be at Q4 levels and Q1 is a seasonally low quarter for several businesses, such as composite tanks and engineering and consulting.
These factors are expected to result in Q1 being the lowest financial performance quarter for the year.
Additionally, we experienced increased COVID-19 induced supply chain and production disruption events early in the quarter and there will be and impact related to the winter weather and Texas. These events have increase the likelihood that work and we've pushed out of the first quarter.
For the full year of 2021, we expect that our book and term businesses will see continued gradual improvement and demand.
And work, we haven't secured will be executed and debt, we will see a real tangible benefited from the costs. We have already taken out are in the process of taking out.
Although the quarter on quarter performance will vary due to pipe coating project execution and timing.
Yearly seasonal elements and COVID-19 related events over and all we expect our annual financial results will be better than we delivered in 2020.
This improved outlook is before any support from Covid related government subsidy programs and new year.
One additional comment 2021 annual financial results could be even better should the recent momentum we are now seeing and offshore projects continue.
North American and completion activity accelerates faster than expected and or stimulus spending increases demand for our products and services servicing non oil and gas related sectors.
Beyond 2021, I would again highlight as I have in past quarters is difficult to forecast. However, we are confident 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 current storm.
And emerge a stronger more profitable organization and spending continues to recover and energy true.
Transportation and infrastructure markets.
Mike and I will provide more detailed comments later in this morning's call, but before we do I'd like to turn the call over to guests on channel Shawcor CFO to discuss the numbers.
Thanks, Steve as Steve mentioned earlier operational results and the current quarter surpassed our expectations. Despite the ongoing COVID-19, pandemic and the volatility of the oil and gas markets.
Consolidated revenue and the fourth quarter was 326 million, 3% lowered and the fourth quarter of 2019.
The pipe in pipe services segment revenues increased by 1% compared to the prior year quarter, primarily due to higher pipe coating project activity in the EMA region, reflecting the execution of the Baltic pipe project and higher activity levels in the Asia Pacific region. This increase was almost entirely offset by lower activity levels and North America.
Resulting from the lower demand of pipe coating and girth Weld inspection services as a result of the significant capital spending cuts by North American E&P operators.
Continued delays and land transmission line projects and the completed closure of the U S land pipe coating facilities during the year.
The composite systems segment revenues decreased by 19% compared to the fourth quarter of 2019, primarily due to the continued lower demand for our composite pipe products. As a result of the continued capital discipline and focus on North American E&P operators.
This decrease was partially offset by higher demand of our composite tank products as the business continues to focus and execution of its backlog and benefits from a solid demand and the retail fuel tank market and increased North America infrastructure spending in.
And the automotive and industrial segment revenues were higher by 16%, primarily due to strong demand for our automotive heat shrink products, resulting from OEM assembly plants and tier one suppliers, increasing capacity levels and restocking inventories coupled with increased shipments for wire and cable products and in North America.
On an annual basis, <unk> revenue and 22020 was $1 $1 8 billion a decrease of 21% over 2019.
The pipeline and pipe services segment revenue decreased significantly over the prior year, primarily due to lower revenues in North America, reflecting lower demand for pipe coating and girth Weld inspection services and the complete closure of several U S pipe coating facilities during the year.
The segment's performance also reflects lower pipe current activity levels, and Latin America, and EMA, partially offset by higher levels and Asia Pacific.
The composite systems segment revenues decreased by 23% compared to the prior year as a result from lower demand for composite pipe products related to the ongoing COVID-19 pandemic and the continued capital discipline and focus of North American E&P operators, partially offset by the sustained solid demand for composite tank business in the retail fuel market.
The automotive and industrial segment revenue decreased by 6% largely as a result.
From a majority of global automotive OEM assembly plants temporary halting production and suspending operations in the first half of the year as a result of the COVID-19 pandemic, while demand started to increase and the second half of the year as OEM assembly plants and tier one suppliers increase capacity levels and restocked inventories.
Consolidate results for the fourth quarter and the year were impacted by nonrecurring items outside the company's normal course of business.
The current quarter includes a gain on sale of pipe pipeline performance products business of $52 million.
Income from investment associates of $2 million and a gain of $1 million from the sale of plant equipment.
The current quarter also reflects 3 million and restructuring costs as a result of the cost saving initiatives completed in the quarter, including the recently announced closure of our pipe coating facility in Argentina, and a $6 million impairment charge.
The annual results reflect the negative impact of $213 million of impairment charges of 33 million and restructuring costs and a loss of $2 million for Argentina Hyperinflationary accounting.
This was partially offset by income from investment associates up $10 million, a gain of $2 million from the sale of land and plant equipment.
And the gain from the sale of approximately <unk>.
Adjusted EBITDA for the current quarter was 46 million and significantly higher than the 30 million reported in the fourth quarter of 2019. The increase was primarily due to higher revenues and our pipeline and pipe services segment from a ramp up of execution of pipe coating work that is secure and the backlog and our automotive and industrial segment, driven by the recovery and the automotive market.
The improvement also reflects the continued demand for retail fuel tanks, and the composite systems segment and reduced SG&A costs.
The decrease of 18 million SG&A is primarily due to the completed cost saving initiatives.
Current quarter also benefited from receipt of COVID-19 related government subsidies of $6 million of which 3 million was recorded in cost of goods sold and $3 million and SG&A expenses.
The prior year quarter was negatively impacted by $7 million and we were costs related to the quality issue at our channel and your facility.
Adjusted EBITDA for the current quarter was $74 million lower than the 136 million and the prior year, primarily due to a lower revenue as discussed earlier offset by lower SG&A costs. As a result of the completed cost control and head count reduction initiatives executed in the year.
Adjusted EBITDA consolidated margin for the fourth quarter was 14% compared to 9% for the prior year fourth quarter due to the reasons mentioned earlier the pipeline and pipe services segment margins increased to 10% from a negative 4% and the prior year quarter.
The composite systems segment decreased to 20% margin and the current quarter compared to 23% and the fourth quarter of 2019, the automotive and industrial segment margin increased to 21% compared to 17% a year ago.
On an annualized basis, the adjusted EBITDA consolidated margin was 6% with automotive industrial and composite systems segments, having positive adjusted EBITDA of 18% and 17%, respectively, partially offset by the pipe line.
And pipe services segment being negative 1%.
The company delivered positive cash flow and the quarter cash flow provided from operating to use for the fourth quarter was $10 million a decrease compared to the 49 million, providing the fourth quarter of 2019.
This decrease in cash flow is primarily driven by lower noncash items and negative change and noncash working capital the.
And that change and non work cash flow in the fourth quarter was a cash outflow of $19 million, which includes $2 million decrease and restructuring liabilities compared to a cash inflow of $33 million from the same period of 2019 the.
And the cash outflow from working capital was primarily driven by higher accounts receivable and contract assets combined with lower accounts payable and contract liabilities, partially offset by lower inventories and prepaid expenses.
On an annualized basis cash provided from our productivity and 2020 was $444 million compared to $54 million and 2018. This decrease reflects lower adjusted net earnings partially offset by lower investment and noncash working capital.
Cash provided by investing activities and the fourth quarter was $106 million, reflecting a $105 million from the sale of products for this.
$3 million and proceeds on the sale of property plant equipment and cash of 5 million from investment associates.
This is partially offset by $7 million of purchases of property plant and equipment. This compares to $7 million used in investing activities and the prior year, reflecting $10 million and purchases of property plant equipment offset by 3 million and proceeds from disposal of property plant equipment on an annualized basis cash provided from by investing activities was $107 million, reflecting the sale of the process.
I mentioned earlier.
$11 million and proceeds on the sale of property plant equipment and cash of 14 million from investment associates, partially offset by $24 million of purchases of property plant equipment.
During the fourth quarter cash use and financing at least was $8 million, reflecting the payment of our quarterly lease obligations. This compares to $27 million used and the fourth quarter of 2019 that reflected a decrease of debt a $10 million a payment of dividends of $11 million and a repayment of lease obligations of lease liabilities of $6 million.
On an annualized basis cash used in financing activities was $37 million, reflecting $23 million of lease payments and $11 million dividend payment and the first quarter of this year.
Net cash flow for the fourth quarter, and 2020 with $108 million compared to 16 million in the fourth quarter of 2019, 2020 cash flow was positive $116 million compared to a negative her and $19 million and 2019.
With respect to cash and debt the company has a cash balance of <unk>.
Almost $215 million debt of $433 million and $44 million of standard letters of credit as of December 31, 2020 and.
In addition to the successful completion of the debt amendments during 2020, the company's liquidity position has benefited from exceeding its stated targets of $60 million sustainable annualized SG&A savings and $40 million and incremental cash generation during the quarter. The company completed further actions to reduce his salary workforce, bringing the total reduction to over 22%.
The company also announced the closure of one of its pipeline facilities, and Argentina, and further reduce capital budgets, resulting in annual expenditures being limited to $24 million as.
As a result of these further actions taken and the sale of approximately <unk>. The company expects its quarterly normalized and sustainable SG&A run rate to improve to approximately $60 million $60 million. It is important to note that this includes targeted incentive based compensation.
And the upcoming fiscal year. The company will continue to assess additional optimization actions, including further reductions of its international operations footprint. The company also delivered positive cash flow year, reflecting $31 million from reduced working capital, excluding the impact of restructuring liabilities and almost $130 million from the proceeds of asset sales.
Moving the products business based on the actions completed and planned its diversified business and current backlog the company expects to generate sufficient cash flows have continued access to its credit facilities to fund its operations working capital requirements and capital program.
Ill now turn it back to Steve for some additional commentary on the company's performance and outlook.
Thank you guessed zone.
I'll first start with providing details on Q4 by segment.
The pipeline and pipe services segment revenue was closely tied to the spending of exploration and production operators and transmission line companies and.
And the reaction to uncertainty and both the supply and demand side of the equation and our customers have severely cut capital budgets delayed decisions on large capital expenditures and move forward with strategic alternatives in the merger and acquisition space to gain scale and further reduce cost.
As a result of these factors the fourth quarter for this segment continued to experience depressed real time demand. However, primarily driven by execution of project work that was in our backlog and <unk>.
Fourth quarter was certainly an improvement over the third quarter levels.
Demand for small diameter pipe coating and girth weld inspection that are tied to north American drilling completion activity to continue debt near bottom levels with just a slight improvement over Q3 and <unk>.
Q4 secured project work for pipe coating and large diameter girth weld inspection and move forward very limited schedule interruptions.
Pipe coating revenue increase seen in Q4 as a result of the commencement of project work and several additional facility serving the offshore and international markets during the quarter, including the start of the pipe era project coding and our Veracruz facility.
Two additional notes on revenue for this segment in the fourth quarter. One is the continued positive trend and demand from Q3 that we saw for engineering and consulting business Lake Superior consulting.
Driven by an increased focus on asset integrity, and new and aging North America, and midstream infrastructure and our customers limitation to address this need Lake superior consulting had another good quarter.
And to the sale of the pipeline performance products business on the 20 <unk> of December did result in a short month for our business. It often has batch production and a strong and a month billing.
The sale of the pipeline performance products business and the quarter was a transaction that consider the challenges of establishing synergies with other businesses within our portfolio and the opportunity to obtain full value.
Additional positive for Shawcor from the divestment was the path was the.
Post close strengthening of the balance sheet and a reduction and our enterprise complexity that will allow us to better focus where we have the greatest and largest opportunity to differentiate.
The products business was part of Shawcor for many years and has a very dedicated and talented work force.
I truly wish all of them and the very best as they move forward with Arsenal capital partners.
We continue to make progress and the quarter on reducing the cost structure of this segment, including initiating the shutting down of one of our two pipe coating facilities and Argentina.
The closure of this facility was completed in early Q1, including this closure, we have reduced our pipe coating facility footprint by six fixed plant year to date.
We are focused and we will continue our efforts in 2021 to maintain our positioning to serve our customers, but with a much more cost efficient footprint.
Typically we continue to evaluate our footprint serving international markets and.
And a plant closures are planned.
The composite systems segment is influenced by two main elements. The first is demand for composite tanks, and retail fuel markets and for water and wastewater applications.
The second element is the demand for composite pipe for upstream oil and gas applications in North America and increasingly international markets.
And the fourth quarter overall revenue for the segment was very slim or similar to Q3 levels.
There was some mixed differences quarter on quarter with tanks remaining strong, but lower than Q3 due to the start of the seasonal slowdown being partially offset by increased tubular sales and order for asset management business in Western Canada.
Composite pipe sales remain depressed and flat with Q3 levels as our customers primarily the large capital E&P operators have yet to increase spending.
And the last call. There was a question on the resiliency of the high demand, we're seeing for composite tanks and the retail fuel market and how the forward looking demand is influenced by tank replacement of aged install base.
And starting point to consider is that in 1988, EPA introduced strict regulations governing the storage of petroleum products and hazardous materials and underground storage tanks.
These regulations resulted in a significant number of underground storage tanks being replaced leading up to the 1998 deadline for compliance.
Considering the fuel industry and many state regulatory agency and widely considered as the useful life of an underground storage tank to be 30 years. We are now seeing the replacement of these tanks installed following the Epa's 1988 regulations.
Using available EPA data, while the total number of underground storage tanks is expected to continue to decrease 1% to 2% per year as retail fuel locations are consolidated.
And the population of tanks exceeding 30 years is expected to grow at 3% to 4% each year for the remainder of the decade.
Based on this we fully expect that we have an extended runway of work ahead of us associated with the replacement of end of useful life tanks in the fuel market.
Confidence had retail fuel market demand will remain strong as underpinned by this aging tank runway and new tank purchases as convenience store operators consolidate and update stations.
Competence and retail fuel demand coupled with the success, we are having and our water and wastewater strategy supports why we have high expectations and are excited by this business.
The automotive and industrial segment results and the fourth quarter increased from what was delivered in the third quarter and were better than we had anticipated and the continued strong recovery from low levels. We experienced in Q2 was benefiting from the return of demand for heat shrink products for automotive applications and the continued demand for wire and cable.
Alex from electrical utilities and communication providers.
The better than expected results for the segment and the quarter was due to the absence of the fourth quarter seasonal slowdown that has historically been a signature of this business.
Within the return of demand for heat shrink automotive applications as a newly visible positive impact coming from the transition to electric drivetrains and from internal combustion platforms.
This transition, especially when considering that many new vehicle platforms are hybrids with two drivetrains increases the addressable market per vehicle for heat shrink applications compared to our standard internal combustion vehicle.
With continued low interest rates recent increased importance of personal transportation purchasing incentives and growing acceptance of electric vehicles. We are confident that in 2021. This segment will recover to pre COVID-19 levels.
I'll now turn to Q1 and the full year 2021.
We anticipate in Q1, our financial performance will be solid and and positive but as I stated in my earlier comments not at the level of Q4 2020.
Pipe coating activity and utilization will be below or lower as we have several plants moving between projects and Q1 is seasonally low quarter for several businesses and this is the case for our composite tanks and engineering and consulting businesses.
Due to these factors, we expect that Q1 will be the lowest quarter for the company and 2021.
Additionally, we have experienced supply chain and production interruption events from Covid and from winter weather experienced recently and Texas that has increased the likelihood that work that we pushed out of the first quarter.
For the full year of 2021, and we expect better than 2020 on an adjusted EBITDA basis.
Quarterly performance will vary due to pipe coating project execution timing.
Yearly seasonal elements and COVID-19 related events and many ways. This outlook should be considered a conservative as it does not fully considered a positive influence on our results that may come should our customers recalibrate their economics with recent commodity prices increases and benefit from government stimulus programs.
Today, we are working with our customers as they revisit spending and project timing acceleration of projects or increased spending improves the opportunity set across the whole portfolio.
However, it is our businesses that are tied closely to North America upstream such as composite pipe and small diameter girth Weld inspection, we are watching the closest for near term impact.
In terms of project activity, our 12 month backlog as expected fell to $453 million at the end of the year and as we move to full production and our pipe coating facilities and Norway.
Cartland, Mexico Channel view and could deal and we did not anticipate any major awards and the quarter.
There was also a small impact to the backlog from the sales of pipeline products business, but by far the largest influence on the reduction was the pipe coating activity level and the fourth quarter.
Backlog greater than 12 months has increased.
And work secured pending FID also increased and now has over $130 million.
Work secured pending FID is included within our bid number and includes a large order for our South East Asia facility that is expected to be sanctioned and the second half of this year.
And early Q1, we added another project to this category for North Sea development, including the North Sea development work secured pending FID.
Today stands at over $160 million with all projects expected to be decided in 2021.
Our bid and budgetary numbers and indication of future opportunities has remained high at over $2 3 billion.
Considering the addressable market has now been reduced with the recent product business divestment and our exit from the U S. Anti corrosion market. This is a very positive number.
Recently, there has been re energizing our project execution discussions with our customers and as a result, there is an increasingly likelihood that Norway.
Brazil, the middle East.
Mexico, and South Asia East Asia will provide opportunities for our pipe coating operations and the very near future.
Of note.
One region, where we do not expect much for Shawcor and the near term is work associated with land pipelines and East Africa.
As an overview it should be expected debt, we will execute more work than awarded over the next few quarters and as a result.
The 12 month backlog will continue to decline however in the second half of the year.
Backlog should be expected to step up as backlog over 12 months.
Work secured pending FID and work that we are currently pursuing is pulled into the 12 month backlog.
Chuck or has a differentiated offering that is recognized for technology and execution certainty.
We havent focused on maintaining this differentiation, while reducing our cost structure I am very confident and the future of our pipe coating business as we move forward with a very focused offering and a strong opportunity funnel.
And on that note I'd like to turn it over to Mike to spend some time, some time discussing technology Mike.
Thank you, Steve and one.
For it to be a part of the Shawcor team and particularly excited by the portfolio of high value technology, driven solutions This organization and search.
Within <unk> pipe coating business, our unique combination of in house material science experience application engineering and highly reliable operational execution drive our technical leadership and offshore flow assurance coating.
Shawcor is flat ship ultra pipeline installation technology is considered the industry benchmark and enables our customers to achieve net flow assurance targets and challenging subsea environments around the world.
Building. Upon this foundation Shawcor is currently partnered with major operators and EPC and multiple technical development projects to deliver even greater capabilities.
<unk> ultra high temperature flow assurance.
Cutting edge pipeline active heating solutions and increased deployment certainty.
While we have narrowed our coating facility footprint, our unique technology capabilities ensure shawcor continues to be a trusted partner to our customers and the delivery of ever wider operating envelopes.
Shawcor is automotive and industrial segment includes the highly differentiated heat treat technology portfolio of DSG.
DSG offers a unique combination of polymer based materials science and application equipment and technology to address a wide spectrum of needs within the automotive manufacturing market segment.
Rapidly growing hybrid and battery electric vehicle production demands heat treat products capable of consistent performance and substantially we have temperature and voltage environments and traditional internal combustion engine vehicles with a premium placed on quality reliability and installation and accuracy.
<unk> commitment to deliver both the underlying heat shrink materials and.
And the engineered patented automated heat shrink application and technology has enabled gross to continues to outpace this expanding market.
Finally within our composite systems segment, we are intensely focused on providing our customers with cost effective corrosion free and sustainable solutions, which help protect the environment, while enabling a lower carbon future.
One example of this is our composite pipe technology, a lightweight substitutes for traditional steel pipe, which has a dramatically lower manufacturing and emissions profile and consumes and substantially less energy to deploy.
Third party data indicates that the carbon intensity required to produce and install steel pipe is at least one five times that of pipe.
Okay.
Looking at our standard six inch diameter product emissions from steel manufacturing exceeds not a composite by more than 10 tons of cotwo equivalents per kilometer and pipe produced.
To put this in perspective every pipeline kilometer with short course composite solution is used instead of steel we are offsetting the emissions of a commercial aircraft flying from Toronto to Calgary.
I'll now turn it back to Steve for closing comments Steve.
Thank you Mike.
Before we open up for questions I'd like to make the following points shy.
And <unk> diversified portfolio of late and early cycle oil and gas and non oil and gas businesses provides a hedge that will benefit and these very uncertain times.
Shawcor has substantial book of work for execution over the upcoming 12 months and the work is holding firm. Additionally, we are starting to see recovery and many of our book and term businesses and forward movement of large capital projects.
Shawcor has taken and is taken the necessary and difficult actions to reduce costs and preserve cash and these actions include the analysis and consideration of exiting markets and divesting pole businesses.
And finally shock.
<unk> future success continues to be underpinned by supportive long term fundamentals that will drive investment and energy transportation and infrastructure.
And now I'll turn the call over to the operator to open up for questions. You may have for guests on Mike or I.
Andrew operator over to you.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone.
Withdraw your question press the pound key.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Michael Robertson with National Bank.
Hey, good morning, Congrats on the strong quarter and thanks for taking my questions.
You guys really dialed back the cash.
Capex in 2020, and I was just wondering if you could maybe offer some guidance or bookends on where you maybe see that trending in 2021.
Sure Michael Gastro and I can happily do that so right now I think yes, youre right that 2020 was.
A very low level of Capex and.
And one that we cannot maintain as we look forward into 2021, we are expecting a return back to levels of levels that we communicated in the past for the company, which is around $40 million to $50 million that would include maintenance capex.
And facilities, plus investments and growth Capex, and our composite tank and automotive business to increase capacity to meet current demand levels and of course capex related to secure pipe coating projects that we have.
Also and important to note that there's little impact on maintenance capex from the closure of the facilities and the sale of approximately this as those businesses had really old equipment and debt required very low level of maintenance capex going forward.
Got it thanks, Thats, all and Thats really helpful.
I was also wondering if you could maybe sort of ballpark quantify.
The amount of the products business would have been included in the backlog prior to the sales.
So we don't.
Of course speak to specific business back.
Contributions from the backlog, but what we're very clear on there's two major components, which is pipe coating and of course, the legacy backlog that was always publicly reported from the Z CL tank businesses and there. So what I can tell you is the major component of the backlog remains pipe coating and followed by debt <unk> and there is and not a material impact from the remove.
And without the products business.
Got it got it thank you.
Last one for me just sort of wondering if maybe you could also ballpark.
How much.
Of the cash or the proceeds from the Fox business sale, you think will eventually be applied to the balance sheet specifically.
Looking at.
Our Q4 financials, you exited the year with a pretty heavy cash balance I guess, just given how sort of close that sale was the year and and yes any any.
Any sort of guidance you can offer on that front would be very helpful.
Yes.
And important for US right now is to look at.
How much cash we need to fund the current operations.
And that would include both the Capex that I spoke about earlier along with.
<unk> increase in working capital.
Since we do have a seasonal build coming up in our composite tank business and automotive and industrial businesses and some increased investment to match the increased demand.
We have and those businesses along Halo and we do expect increased activities and pipe coating and then also there could be a possible need and working capital requirements for the composite pipe business.
And I think that's first we need to get that visibility or certainty of how much we require the business requires before we start thinking about the word about the debt side. As you know we have completed the amendments to the things that gives us debt relief and we have significant cash.
Covenant relief all the way to the end of 2021.
And then we will look at see how much we will actually put down the debt and then of course and like always the board is always looking at.
Share buybacks and dividends and figuring out, but that's but that needs to be really focused on sustainable earnings and sustainable cash flow.
Got it and it's sort of I guess, I'll wait and see approach on that front.
Thanks, and thanks again for taking my call and.
And I appreciate the time and I'll turn it back.
Thank you.
Thank you and our next question comes from the line of Aaron Macneil with TD Securities.
Hey, good morning, al Congrats from the new gig might kick in.
The prepared remarks, you talked about 2020 being better based on a number of factors that I think included.
Offshore pipe coating and the work awarded pending F $150 million, but can you realistically add offshore backlog at this point, meaning.
Meaningfully convert to revenue and 2021 or with new.
Large project out and be more of a 'twenty two.
And Amit on and can you also say how much is and the backlog that and beyond that 12 month time period. So we can think about the moving parts as the quarters progress.
So to answer your first questions certainly.
And already as we come to the end of Q1 were adding projects that will influence the revenue in 2021, so without question.
There is work and as you recall in 2020 projects were ready to be sanctioned.
And in some cases contracts were let pending and on smaller wants to go. So yes. So there is still work to be one net will influence our 2021 numbers in offshore pipe coating.
The second question you had on whats outside of the 12 months right.
And so we don't give a number but I was pretty clear in my prepared remark that is substantially bigger than it was when we.
When we gave our Q3 numbers. So we have one work that is now influencing outside of 12 months and the covenants that we have is that work.
<unk>.
And with the discussions that we're having right now there is an opportunity that it will be pull forward, but certainly it starts to come in as the quarter starts to progress. So the magnitude it's enough to move the needle in the current backlog, but im comfortable to give you a number.
And then the pending.
Which just to correct. So the number is about 130 and then we landed another project that I expect will be more and more visible we're under an NDA. So we wont, but it is and north Sea project pushes it to about $160 million.
And those projects will be decided.
In the second half of the year and it depends on when the but one project in particular could come into the fourth quarter.
But right now and our forecast we have it into 2022. So I think those were the three questions correct Erin.
Yes, I think that I think you've covered it up I was just trying to marry like that the commentary and the backlog declining and the first half of the year and bumping and the back half of the year. So just trying to understand all the moving pieces, but and.
And I don't want to put words in your mouth, but it sounds like what you've got beyond 12 months.
And for that to play out as you expect.
Two things that hedge my comments.
And that I have confidence so for sure the work outside the 12 months, we have confidence because it's both price. So we know when it will come in and the schedules.
The second one of course is that we have line of sight of some awards that are coming that will influenced the year. So those are the strongest ones the ones that will really really move the needle on backlog or in the <unk>.
Secured pending FID and it's all about when those projects.
And that's the one and I don't know yet, but as the commodity price strengthens the risk of them not sanctioning or being becomes less and less of course right.
Understood.
As it relates to some of the items you talked about that are going to impact the first quarter.
Can you give us any sense of magnitude in terms of EBITDA impact.
And you talked about clients moving between project and severe weather and.
Seasonal elements.
Like can you give us any more.
Targeted guidance on what that could look like from Q1.
So natural activity fourth quarter versus Q1, if you just look at the Teng business alone and I think you can look at the historical performance and public.
Tank business it was not surprising for them not to contribute EBITDA in Q1, if you look at it. So it's a substantial decline when you think of the commentary we gave you and the composite business with pipe is not.
And really stepping up from Q3 to Q4, so is that near levels. So you can imagine if you just look at it and say, okay. What happens if composite tanks is not participating and into Q1 and contributing to EBITDA.
It can go down.
Maybe half of what we delivered in in the fourth quarter.
And then think about okay projects, it's really too early for us to say because if we can get a strong month in March.
We could take up a lot of the interruptions that happened between Covid and the storm, but I tell you the storm affected not only our production to turn on the facilities, but the supply chain got rattled pretty bad. So some of our absorptions is going to be influenced because suppliers have put people on <unk>.
Patients to get through this short period of time before they can start again, so it's a little bit early but I think it's a real number right. It's a material number that can move into Q2 now that being said I don't think anybody should be spooked.
Because with the exception of some absorption issues, it's all going to or the majority of it minuses option will move into Q3 Q4.
Q2, Q3, Q4 will be higher because of it so I'm not overly concerned and besides the additional cost burdens of having facilities that are shut down because of storm or we are having.
Across the board issues, where we have lines and being halted because of COVID-19 incidents. So that's revenue push not not an issue right. So it can be material.
I think the one I forgot with semiconductor shortage on the automotive and industrial segment is that like a meaningful impact to the from the <unk> zero in Q1.
Seeing nothing from of course, let's see what happens as it turns out.
And not calling it out for Q1 impact.
Got it okay.
And then maybe final one from me guest on the G&A and the quarter was below that forward run rate guidance of $60 million. So I'm just wondering like what is there anything unusual in Q4 that would have positively impacted the DNA.
So I think I think people need to understand and respect to the 2020 SG&A reflects basically a couple of things very little incentive based compensation.
Secondly is a reduction of discretionary.
Spending down to very low.
The levels that we can maintain along with wage subsidy on top of that so if you think about it you should be really looking at we started the year. We expected a run rate where would include targeted incentive based compensation to be about $85 million and then we chart and then we communicate out that we were going to achieve $60 million of SG&A savings.
That would bring down our SG&A run rate target that we communicated $70 million. We are now forecasting next year to be at a lower level to $60 million and that additional $10 million a decrease.
And reflects half of that's coming from the sale of products to this so SG&A and I know that relates the prices and half from additional savings from our initial.
Initiatives completed so it's very important for people to understand that that includes targeted incentive based compensation and the current year of 2020 had basically a very small amount related to that.
Okay. It makes sense to me and ill turn it over thanks guys. Thank you.
Thank you.
And our next question comes from the line of John Gibson with BMO capital markets.
Good morning, everyone. Congrats on the strong quarter here.
Just first looking at margins and pipe coating is nice and can move back into positive territory specific to Q1, and I'm wondering Q on 'twenty, one and Im just wondering given the plant closures and cost improvements can we expect some some improvements in margins relative to Q2 and Q3 of last year.
Q3 to Q2 any day.
Check.
And.
I think maybe just as a general comment John is in the <unk>.
Pipeline and.
And pipe services segment.
We're becoming more and more comfortable with.
The margins because of lower footprint and the quality of backlog.
For pipe coating I think the biggest for US is the realization is that as projects move the margins will move quarter to quarter, but we really need some traction in the U S land market in particular for the girth Weld inspection business to have.
And a strong sustainable margins that we're targeting at 10% EBITDA.
Get some color on the previous periods and Tony.
The important thing.
Talk about is that we have made lots of reductions and cost there. So we do expect.
And for <unk>.
<unk> pipe in pipe services segment to be positive contributors to EBITDA.
And.
And the second and second and third quarters also so.
I mean, it still depends of course and are related to the timing of projects and you know.
And how they shift and the quarters.
But I think it's important to note that we do expect a positive contribution.
From the pipe pipe services segment.
And throughout 2021, and you know it all depends on respect to volatility that gets created and the quarter of debt what extent that is.
I think thats and.
That sounds comments, everyone should be.
Should consider debt if we don't have.
The tail winds of North American upstream project movements quarter to quarter, Ken can move the margin substantially but on average.
General statements, we expect pipe coating to contribute positive throughout the quarters, but there could be substantial moving from one quarter to another so for example, we're calling out.
Q1.
When we when we look kind of Ed we had some quarters that are going to be exceptionally strong range.
Okay.
And it's explained.
I appreciate that sort of following on that could you provide any guidance on closure cost for the Argentina facility and Q1 and.
And maybe any other restructuring costs expected to hit this quarter.
Yes.
Yes, so yes, so we the risk.
<unk> costs were booked for Argentina were booked in the fourth quarter and that's one way and.
When we announced it.
We do expect as we continue to look at optimization of our international footprint.
There could be further restructuring cost that.
And that we have.
In 2021 and.
At this point, it's hard to give you.
And absolute number here, John just because we're still finalizing our plans and continue to do our analysis of what makes sense.
But you should expect as we continue to.
Find opportunities to reduce further costs that there will be some restructuring in 2020 one.
But again that will have further positive improvement in our SG&A run rate.
Okay.
Good color. Thanks last one from me just looking at comps it looks like producers are kind of holding the line on spending and the near term, but are sort of indicating and we could see a ramp and the back half of the year I'm. Just wondering if you share this view and if so when could we expect to see a pick up and in that segment.
I think it's a great question, because I think that there is potentially a little bit of them. Okay.
Conflict in the disciplined net operators are having to try to reframe from increasing their capital budgets to what they are actually starting to communicate.
So for us composite.
In particular is what we're watching as I made in the prepared remarks, the rig count is actually coming back nicely, but if you look at the.
And the operators that are asking are adding rigs or other.
The lower <unk>.
Capital E&P or private.
E&P companies that are adding at our sweet spot are the large or capital.
<unk> operators.
Trading so the recent news that you saw where exxonmobil and Chevron have highlighted that theyre going to invest in the Permian and Exxon Mobil and particular as also highlighted to you and a project. This is good for us.
But these are large companies don't turn capital budgets increases or decreases overnight. So we are watching it very closely.
As expected, we did not see an increase and composite from Q3 to Q4, we're optimistic that both some traction that we're gaining and international markets.
And some tail winds and by the time, we break out in Q2, we should start seeing some positive unplanned.
Support for the pipe business, but it's just too early for these guys to turn everything back on again.
Okay, Great and I appreciate the color I'll turn it back.
Thank you and our next question comes from the line of Tim Monticello with ATB capital markets.
Hey, good morning, everyone.
I guess just a follow on question from.
From Aaron's line of questioning around G&A.
Yes.
A lot lower than that.
The run rate has been in the fourth quarter, and certainly lower than what you're guiding to for on average and 'twenty 'twenty. One do you expect a ramp up to that $60 million run rate from where you were in the fourth quarter. What do you think that you have a sort of step change into 2020 one to that level.
No I think the run rate that we expect is really the quarterly run rate starting in Q1 and 2021, Tim again I have to stress to you that.
This includes targeted incentive based compensation.
And also does it have any benefit from Covid related.
Wage subsidies that we don't expect much to receive anything going forward.
But know that that is the new run rate and I think again and.
And there is some.
Bringing some discretionary spending and back to kind of a new normal, albeit at a much lower base, but.
And we do expect that some of our discretionary spending that we aggressively cut to zero or and.
And delayed there'll be some of that also.
Okay.
The commentary around.
I guess international pipe coating projects seems to have strengthened.
A little bit of commentary around some near term possibilities of awards and I'm curious if those awards.
Would be outside of the conditional awards.
There's a couple of pieces that conditional award that I can sort of pinpoint it doesn't seem like there's much outside of a couple of large projects and the one that you mentioned and the North Sea.
Are you expecting to wins from our projects that go straight from from.
Outside the conditional words backlog.
And next few months, yes, absolutely yet there is still this.
And secured pending FID was something that came.
And came to realization in back in 2020 when projects.
Projects were fully engineered and the model changed where Epc's, we're doing the feed and then they were and pull place to do the the construction right the procurement and the construction. So there continues to be the legacy model, where you win work after FID.
And that still continues to be probably the majority of the opportunities.
But there still is this ongoing link between EPC is doing the upfront work and securing the.
The supply chain and the awards pending so yes, both still are very very visible and as I mentioned with air and question. There is work that we are targeting to secure that will go directly into backlog and could and as the real likelihood to influence the 2021 numbers.
Okay.
<unk>.
I guess that translates into an acceleration of.
Awards from.
And the commentary on Q3, which was there was about a 12 to 18 months.
Delay that you guys were seeing from project Awards could you talk about how that acceleration and that's transpired and what youre seeing.
And now.
And maybe I should clarify right. So we use this 18 months is kind of pre 2016 was kind of the life cycle of when we saw project by the time, we generated revenue right.
And as you can imagine debt that's moved to Infinity in 2016, where projects were just killed.
And to kind of a combination of infinity and we're going to push it off until we <unk> the project in 2020.
So if you were asking me now.
What is the what is the timeframe by the time, we engage the customer and I think what you're really asking is when it shows up and budgetary works through bid ends up in backlog and generates revenue.
And I don't think I can call it yet because we still we're not back to any any sense of normalization. What I can tell you is it's kind of a unique environment because projects that we are discussing in most cases have already been thoroughly vented on the technical and engineering side.
So should the economics be attractive day.
And could be sanctioned engineered and contracted.
Faster than before because of the work has already been done and in most cases.
The combination of the operators holding the head count and the EPC operating holding the head count because the contract and model has changed.
I have not seen the killing of projects that we would have seen in 2016 timeframe because the projects have still remind for lack of a better term warm.
So I.
I don't have a number for you, but it certainly is.
And is not back to where I can tell you. It's 18 months, but I think the opportunity for it to be even quicker.
Is there right because these projects have been engineered.
Okay No that's helpful.
And then my last question is just around the automotive and industrial segment.
Clearly the fourth quarter was very strong I am curious if there was.
Yes.
Our backlog of demand coming out of Covid that made Q4 stronger than you'd expect going forward and do you.
And do you expect Q1 Q2 to be sort of at the same level or do you expect that to come down a little bit is that.
Backlog of demand and just worked through.
So it's not just to clarify because I think we don't want to sending and confusion the majority and I think all vary.
And I can't think of a very much of a backlog and automotive. So it's really a kind of a book and turn yes, we have production schedules, but it's not like pipe coating and where it goes to the backlog so but in terms of visibility. There is certainly a component in Q3 and in Q4.
Where because of shutdown and facilities and burning of inventory there is a component of inventory restocking in the numbers.
So I think that's what got you so Q4 and.
And it was a positive surprise for us that automotive and industrial was so strong and Q4, because if you look seasonally Q4 is a low quarter and we are anticipating the same but there is a.
A component of inventory restocking, but the other thing that's very very clear and we tried to make it.
Apparent in the prepared remarks, the business is not the same.
Because of the market accessible market as vehicles change is bigger for us and the business is quite interesting because we make the best margins on new platforms.
And as platform start to mature then procurement takes over who make less so there is a function of that and the other thing I would identify is that.
Like all of the company, we did not back off automotive and industrial when we decided and.
And in 2020 that we were going to take cost out and I see and congratulate the management and those employees and automotive and industrial because they took the opportunity to really look at could they lean out the organization and become much more efficient so they've done a very very good job, but I think there is a component and Q4 of call. It <unk>.
Catch up.
Okay, Yeah, perhaps pent up demands that are.
Put that.
So backlog, but do you have a sense of I guess, what inning youre in in terms of inventory restocking.
I think it's starting to taper owed right. So we'll see it we'll see it maybe we're maxed out in Q4, but I can't give you a percentage of their revenue because.
There is and these other components of strong demand and that is going to replace what I have been able to say is that in Q2.
And it was a low point for this segment and we said and our Q3 call. We expected that it would get back to the 2019 rate in 2022 now we're have the confidence that it's going to get back to the 2019 and very strong right at the top line in 2021.
Okay, Great. That's very helpful I'll turn it back.
Okay.
Thank you and our next question comes from the line of Keith Mackey with RBC capital markets.
Hi, good morning, Thanks for taking my questions.
Just to start.
And we appointed Mike Mike as President and can you maybe just comment on.
Some of the near term priorities for the role and if there is.
And any particular initiatives working on or is it mostly a.
Mined.
And the shop.
Kind of priority for the near term.
Absolutely not right, so I think adding Mike to the strength of the company and his expertise.
And is critical yes, certainly and helping us manage the operations and tactical but Mike brings a wealth and experience and added added bandwidth to the management team as you know as we get more and more confidence that we've weathered. This storm on what we're going to do next where we make investment decisions.
<unk>.
It's been it's been a substantial workload for the company and the management team and so Mike has a critical tactical and strategic.
Addition to the company and.
And then on top of that as we announced and it is.
And we should not shy away from Mike's skill set within the succession planning of the company right. So without question, it's not minding the shop not the job.
Got it makes sense last question.
You talked about your cash on the balance sheet and some of the priorities.
Can you maybe just comment a little bit on what you view now as the right amount of leverage debt to EBITDA leverage to have on the business.
All right.
I think thats and Thats a difficult one to answer.
Ideally it would be much lower than it is today, but of course, it's figuring out what is the sustainable level of EBITDA that we can.
And have and you know we are moving our businesses to more stable type of businesses that arent really have.
And affected by the volatility and the oil and gas markets.
So it's very difficult for us to target something right now.
And long term future as we again I can stress and we do want to have definitely and lower leverage share and we have especially with the cash that we have on hand.
And the improved performance in 2021 is that we will have we will be in full compliance with our covenants as we exit the modification periods and.
And so I think it's still it's still for us to figure out what the ideal level of leverage is going forward.
Keith I think if you'll allow me to make maybe a soft off the cuff comment is.
We are in a different position than we were in not that long ago and.
When you ask me and kind of smiled. When you asked the question is that there is certainly a level that we have to get to so people are able to sleep at night and I am smiling I guess on here, we are now sleeping much better because of it now once we get certainty as we go forward and it gives us some options right.
But we are taking the volatility out of the business.
As we start to grow more and more and especially the non oil and gas business is primarily automotive is a nice.
Is a nice stable business right.
Yes.
Absolutely got it okay, well that's it thanks very much for the color.
Thank you.
Our next question comes from the line of Matthew Weekes with <unk> capital markets.
Good morning, Thanks for taking my question.
I think I was just wanted to focus on sort of the expectations specifically for the international pipe coating.
And just based on the backlog right now.
Historically.
Year end backlog would convert and the next 12 months revenue at a ratio of about 1.2 and in recent years, we've seen that fall off is the expectation for the year ahead debt backlog. That's there right now will really converts.
More at that historical sort of above one.
Show driving that strong performance there.
No I think historical ratios don't mean much anymore, because the backlog is less.
Factors to the overall performance of the company. So we have more call it book and turn our reoccurring.
Hmm.
What you can kind of come to summary of the backlog is of course, it's going to be executed and next 12 months.
Backlog is absence of low margin anti corrosion and U S line business in many cases right. So it's a higher quality backlog.
But I don't think the ratio of historical backlog conversion into revenue means becomes less and less of a factor in terms of the overall revenue that the company will generate just because it's a lower percentage now right.
Okay. Thanks, that's helpful and.
In terms of the kind of amount of book and turn them back and not international.
And.
Pipe coating work are you able to provide any sort of color on that.
Well couldn't turn so the a lot of the book and turn that we would have gotten so what I mean is book and doesn't show up into the backlog would have come from the U S land anti corrosion.
And and Western Canada.
And so on.
Our project based as the majority of what we'll go through pipe coating now of course in the pipeline and pipe services segment.
There's also two other businesses girth weld inspection and the engineering and consulting and Thats All book and turn right. So you can't really look at it.
You can't look just at pipe coating backlog for the pipeline and pipe services segment.
So, but pipe coating and because of the removal and the U S land and the weak performance in Western Canada is primarily a backlog driven business now for sure.
So it sounds the Buck and turn so that's really more closely and North America.
Essentially.
Yes, yes, that's correct, yes, there is some offshore girth weld inspection, sometimes but it's almost all North America yet correct.
Thank you given the expectation that backlog will kind of fall off and then and then increase later in the year and the confidence and those are.
Projects, better and the secured pending FY <unk> and beyond 12 months.
Is it reasonable to expect that we could expect.
The Q4 performance and that international pipeline and pipe services, there was about a $130 million and revenue to continue on an annualized basis and 2021.
And they come in.
Again, it's hard to tell you the sense of looking at just Youre looking at a small segment of the pipe in pipe services segment had a small segment, but a segment of the pipe in pipe services segment, and and really it really depending on timing of projects.
And over the quarter of things, but we do expect again as I stress a positive contribution from the pipe in pipe services segment and <unk>.
And that includes you know pipe coating activity.
And to be to be healthy during that timeframe along with the positive.
And contributions that we see from the cost saving initiatives that we've implemented so it's.
We shouldnt be looking at this solely on just.
A smaller set of <unk>.
<unk> of the business here and just international offshore we do expect that to be to be positive and contributing but it's also the higher utilization of the facility is going to be a big contributor of our profitability in that segment.
Okay. Thanks, I appreciate the color I'll turn the call back.
And.
Thank you.
And our next question comes from the line of David Ocampo with core Mark Securities.
Good morning, everyone and thanks for sneaking me in here at the and I just wanted to circle back on your comments on automotive and mentioned that there is no impact from on the chip shortage and that Youre looking to expand your footprint with some capex. This year. So should we frame that as you guys were sort of running at full tilt right now and.
And what should we think about the expansion opportunities is that just more equipment going into your facilities.
Yes, so just just to clarify the semiconductor that we've called out we do not expect it to hit Q1, right. We have no reason to be concerned, but I think if you look at the risks and which we put out it is included and that that could influence the overall year, but we're not anticipating it.
Debt capital that we're investing are in existing facility. So of course, we have three core facilities one in Toronto.
And in Germany, and one in China, and the majority of the capital that we're putting in for equipment now is to address the changing.
And the changing market around electrical vehicles and.
No.
And without going and details or specific products that we make for the electrical vehicles and the importance of terminations and particular, so we build the equipment ourselves and we are forecasting that we're going to be at.
An uncomfortable level of capacity based on what Oems require so they want a surge capacity.
And we're starting to bump up against that so we are reviewing capital expenditures and real time, right now and I guess on a singles, we will put capital into the automotive business. This year.
And then just one clarification from me you mentioned that its a book and turn business, but I imagine its the same type of.
Automotive contract with all the other other auto parts companies have where you wouldnt from a life, but the platform is that is that correct.
No I don't think that's fair right. So I think what happens is you usually are even and automotive your identified as the platform at the beginning.
And if it's not.
A major component and then supply chain takes over and they very seldom go single source.
And then based on multiple factors of reliability and service delivery and price your component of what you get of the platform changes, but I think any automotive supplier will tell you.
Over the life of our platform.
And the procurement traction of getting additional suppliers and the influence on margin only goes one way.
So there.
Yes.
Can lose it platform and heat shrink for sure.
Okay. That's helpful. Thank you.
Thank you and I'm.
Showing no further questions. So with that I will turn the call back over to CEO, Steve or for any closing remarks.
Thank you very much for everyone and taking the time to attend the call and I look forward to myself guests on Mike and Megan to speaking to everybody again as we conclude the Q1 quarter. So thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
[music].
Right.
Sure.
And then.
And then.