Q2 2021 Shawcor Ltd Earnings Call
[music].
Yeah.
Ladies and gentlemen, thank you for standing by and welcome to Shawcor Q2, 2021 results webcast.
At this time all participants on the listen only mode. After the Speakers' presentation. There would be of question and answer session to ask the question. During the session you will need to press Star then one when your telephone.
Please be advised for today's conference is being recorded.
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Now I'd like to hand, the conference over to your speaker for today, making the kicker and you may begin.
Good morning, before we begin this morning's conference call I would like to take a moment to remind all listeners that today's conference call income.
Forward looking statements that involve estimates judgments risks and uncertainties that may cause actual results to differ materially from those projected the complete text of Shawcor statement on forward looking information is included infection for point of all of the second quarter 2020 One earnings press release that is available.
On SEDAR and on the company's website at Shawcor dotcom.
Now I'll turn it over the Shawcor as President and CEO, Mike Reed.
Good morning, and thank you for joining us on this mornings conference call.
This morning, Megan and I are joined by our CFO Gaslog and kind of.
Yeah.
On June the first Steve will step down as CEO of Shawcor and on behalf of everyone, who had the pleasure of working with him and I wish Steve the very best as he enjoys some well and the time of their staff.
Steve's contributions to the culture, the vision and performance of this organization had been enormous and I'm honored to follow him and this role.
In addition, I want to thank the employees of Shawcor for their continued commitment to keeping each other healthy and safe. Despite the ongoing challenges posed by the pandemic and a number of significant weather events. This year.
Most recently show of course team and Ryan back, Germany was directly impacted by significant flooding.
While all Shawcor employees and the local area had been accounted for and are safe.
Many of these team members have suffered personal property losses and will receive off sort of support this day and their families.
Fortunately our run back production site, so of limited damage and only brief business interruption.
Yesterday, we released our results for Q2.2021 during which the company generated adjusted EBITDA of $35.2 million on revenue of 306 million with cash flow from operations of $24.7 million.
Revenue increased compared to Q1, and 2021, driven primarily by the expected seasonal increase and shipment of composite underground storage tanks and rising demand for flexible composite pipe with.
With show cause composite systems segment, delivering its highest quarterly revenue since Q4.2019 and.
In addition continued strong sales of heat shrink tubing and premium wire and cable products, coupled with pricing escalation tied to elevated copper input costs enabled shawcor is automotive and industrial segment to achieve another record revenue quarter materially exceeding pre pandemic levels.
Our pipeline and pipe services segment saw flat quarter over quarter revenue, but delivered increased margins driven by favorable project mix and continued focus on cost management and efficient project execution.
The company's 90% sequential step up and adjusted EBITDA on 10% sequential revenue growth is a reflection of the meaningful operating leverage inherent in shawcor is increasingly efficient cost structure and physical footprint. A result of the restructuring activities completed to date.
At quarter, and the company's backlog stood at $489 million, reducing less than originally expected versus the prior quarter and the impact of limited New project Awards, and our pipeline and pipe services segment was largely offset by slightly lower than expected pipe coating backlog consumption strong underground storage tank bookings.
And continued order capture and other parts of the business.
Restructuring activities intended to further lower the company's fixed cost base continued with shawcor deciding to permanently close its adria, Italy pipe coating facility and completing the sale of one of our two pipe coating facilities and Argentina.
All of the substantial majority of planned and footprint optimization activity has now been completed we will continue to assess further opportunities to lower our cost basis, while retaining the right capabilities and strategic locations to meet future market needs.
At quarter, and the Companys global salaried workforce stood 27% below March 2020 levels and Q2 SG&A expense was slightly below our continued guidance of $55 million per quarter for the current year due to the COVID-19 wage subsidy received and the quarter.
Thoughtful timing of investment decisions Ltd, Q2, capex spend to $5 million and our full year Capex spend guidance is modestly lowered to $40 million to $45 million.
Looking at Q3, despite industry wide raw material supply chain tightness and other ongoing pandemic impacts, we anticipate continued strength and demand for composite systems, and automotive and industrial products and consistent execution of scheduled pipe coating projects.
This organization remains intensely focused on those variables we can control.
Protecting the health and safety of our employees delivering the products and services needed by our customers generating cash and strengthening the balance sheet and capturing our share of increased customer spend.
<unk> high quality product and service portfolio, including robust non oil and gas components, coupled with early and late cycle oil and gas exposure positions. The company very favorably to create and secure of profitable growth opportunities and spending continues to recover and the energy and transportation and infrastructure markets.
I will provide more detailed comments later in this morning's call off the gaslog ton of Shawcor CFO has discussed the numbers.
Thanks, Mike.
As Mike mentioned earlier operational results and the current quarter reflected strong performance across all business segments, driven by higher pipe coating margins improved demand for composite pipe and continued solid demand and the companys non oil and gas businesses.
Consolidated revenue and the second quarter was 306 million, 15% higher than the second quarter of 2020.
And this reflects increases in the composite systems and automotive and industrial segments.
Partially offset by a decline in the pipeline and pipe services segment compared to the second quarter of 2020.
The composite systems segment revenues increased by 44%, primarily due to higher demand for composite pipe products driven by improved drilling and completion activity in North America, along with continued higher demand for retail fuel and water and wastewater tanks.
The automotive and industrial segment revenues increased by 54% as demand for the Companys automotive products continue to outpace automotive production recovery as a result of increased vehicle electrification and inventory built.
The company also benefited from infrastructure spending and communication transportation and nuclear refurbishment projects.
While the pipeline and pipe services segment revenues decreased by $14 million, reflecting the absence of $22 million of revenue related to the products business sold in December 2020, and lower revenues and North America, and Asia Pacific primarily due to the closure of several of pipe coating facilities.
This is partially offset by an increase of higher large project pipe connectivity and Latin America and EMEA regions.
Consolidated results for the second quarter were impacted by nonrecurring items outside of the companies and all of course of business the.
Current quarter includes $5.2 million of net restructuring costs as a result of ongoing cost saving initiatives completed in the quarter, which included the decision to close our pipe coating facility and the address Italy the same.
<unk> of one of our facilities in Argentina, and the loss of $1.7 million related to Argentina Hyperinflationary accounting.
Prior year second quarter was negatively impacted by $17.1 million of restructuring costs and a loss of 400000 for Argentina Hyperinflationary accounting.
Adjusted EBITDA for the current quarter was $35.2 million significantly higher than the $4.3 million reporting the second quarter of 2020.
The increase is primarily due to improved profitability and our pipeline and pipe services segment, reflecting higher margin from large project pipe current activity and the reduced operating cost base from the completed cost control initiatives and facility closures to date.
Additionally, the increase from the prior year's quarter reflect strong performance and the company's composite pipe and non oil and gases.
S. G&A expenses decreased by $2.9 million compared to the second quarter of 2020, reflecting the absence of $4 million of expenses related to the proxenus and the positive impact of the cost saving initiatives complete the date, partially offset by a reduction of $6.7 million and benefits received from COVID-19 related government wage subsidy.
Cities.
Adjusted EBITDA margin for the second quarter was 12 per cent compared to two per cent for the prior year second quarter due to the reasons mentioned earlier.
The pipeline and pipe services segment margin increased to 9% from negative 2% and the prior year, reflecting the lower operating costs.
The composite systems segment delivered a 16% margin compared to 12% and the second quarter of 2020, and the automotive and industrial segment margin increased to 16% compared to 12% of year ago.
Turning to cash flow and the quarter cash flow provided by operating activities for the second quarter was $24.7 million.
Nightly below the $26.6 million and the second quarter of 2020 the.
This variance is primarily driven by a net change and noncash working capital and foreign exchange offset by lower net losses and non cash items.
And the change of noncash working capital and the quarter was a cash inflow of $3.2 million, which includes $3.1 million decrease and restructuring liabilities, excluding the restructuring liabilities of the current quarter reflects higher accounts payable related timing of purchases and payments and lower inventories and automotive and industrial and composite tank businesses. This.
And this was almost entirely offset by higher accounts receivable from increased revenue and all businesses.
Cash used in investing activities and the second quarter was 0.2 million, primarily due to $5 million of purchases of property plant equipment offset by $5.1 million and proceeds from the sale of property plant and equipment the.
And the prior year quarter had $1.5 million used in investing activities, reflecting $3.7 million of purchases and property plant equipment, partially offset by $1.6 million and proceeds from the sale of property plant equipment.
During the second quarter cash used in financing activities was $79.9 million, primarily reflecting the 75 million repayment of debt outstanding and $4.8 million payment of a quarterly lease obligations. This compares to $5.7 million used and the second quarter of 2020 that included the repayment of lease liabilities of $5.1 million.
Net cash used in the second quarter of 2021 was $54.3 million compared to cash provided of $17.4 million and the second quarter of 2020.
With respect of cash and debt the company had a cash balance of $140 million debt of $359 million and $45.8 million of standardized the credit as at June 30 of 2021.
And the company's liquidity position has benefited from significant initiatives completed in 2020 and it's continued focus on reducing its operating cost basis.
With this conference the company repaid $75 million against the outstanding debt under its credit facility and late April which will result in reduced financing costs for the remainder of the year.
Based on the actions completed and its outlook the company expects to generate sufficient cash flows and have continued access to his credit facility used to finance operations working capital requirements and capital program.
I'll now turn it back to Mike for some additional commentary on the company's performance and outlook.
Thank you got zone.
Before talking in more detail about each of our business segments. It is important to note the tightness across much of Shawcor has the raw material supply base continues to pose the challenge where.
Where the wrong products incorporate specific polymers resins metals or glass fiber and we continue to observe supply limitations extended lead times and sometimes volatile costs most of the materials themselves and related shipping activities.
Driven by supply demand imbalance and based on the expected timing of producers, bringing incremental capacity online. It is reasonable to expect these challenges will continue throughout the remainder of 2021 before abating during the first half of 2022.
Across the company, we have and will continue to work respectfully with our customers to ensure incremental input costs are fairly reflected in our selling prices.
While some limited impact of productivity will continue to be felt and parts of the organization built on many years of close cooperation with suppliers and a strategic diversity of sources and the ability to lever our balance sheet for risk lowering forward material purchases. We remain confident that shawcor is well positioned to navigate these continuing global supply challenges.
Turning to segment business activity.
Composite systems segment is primarily influenced by two market forces the.
First as demand for premium UL listed underground storage tanks within the North American retail fuel and water markets. The.
Second as demand for reliable school of all composite pipe to connect newly completed oil and gas wells into existing processing and storage infrastructure.
Second quarter of composite systems segment revenue rose by $25.6 million for 36% when compared to the first quarter of 2021.
Q2 shipments of Shawcor has market, leading underground fuel storage tanks were substantially higher than Q1, and that's typical seasonally favorable ground conditions drove robust fuel station construction and refurbishment activity.
In addition through strategic partnerships Q2 sort of Shawcor secure of several commercial orders for our expanded hydro change storm water product lines the.
The hydro chain system involves the application of premium composite infiltration chambers to clean and recirculation of water runoff from roadways parking lots and routes back into the aquifers for societies reuse.
And added benefit is that our chambers are constructed from soy resin, which is more environmentally friendly and alternatives.
The hydro train storm water system helps communities manage water from climate events to ensure it has infiltrated back into the natural environment free of contamination for managed services.
This is an area of growing awareness and will continue to increase as the source of demand for our products.
Demand for both fuel and water related underground tanks is expected to remain robust throughout Q3 and into Q4 before experiencing a normal seasonal softening towards year end and into Q1 as ground conditions become less favorable for installation activity.
North American demand for composite pipe rose in Q2 versus the prior quarter with revenue growth outpacing slowly advancing well construction activity levels and the U S and Canada.
This outperformance was driven primarily by increases of drilling and completion activity by several of Shawcor and larger customers.
Provided oil and gas commodity prices remained relatively stable at or near current levels. It is realistic to anticipate near term North American demand for these products will continue at levels similar to Q2.
With further upside potential in 2022 of our customers establish updated capital spending programs and Shawcor brings to market the six inch and flex pipe product.
Outside North America, we are observing increased quote activity for our composite pipe products, driven by and improving customer capital spending outlook.
While several contract award decisions are currently expected to occur later in 2021. It is likely 2022 before meaningful incremental revenue generation and tied to these awards as the visit.
Shipments associated with the substantial middle East Order noted in our Q1 earnings release commenced during Q2 and will continue for the coming 24 months.
In summary, we anticipate continued demand across the composite systems segment during Q3 and into early Q4 for shipments of composite tanks follow a traditional seasonal slowdown.
During the second quarter, Shawcor was automotive and industrial segment revenue rose $3 million of four 6% compared to the first quarter, reaching a new record high.
The growth of this business continues to be driven by increasing demand for heat shrink products within automotive applications and consumption of engineered wire and cable products by electrical utilities and communications providers dynamics, we anticipate continuing into 2022 and beyond.
While the automotive market place remains challenged by a well publicized shortage of microchips at this time, we do not anticipate and immaterial microchip driven disruption in demand for our products.
As previously noted Shawcor is automotive and industrial business includes the substantial production sites and running back of Germany.
The site and the employees working day were directly impacted by recent flooding. However, well established emergency response and recovery of procedures have ensured our employees are safe and related business interruption has been minimal.
Within the short flex wire and cable business, our largest single expense is called the commodity which has experienced sharp price rises in recent quarters.
And our teams of rapidly adopted quoted prices to incorporate these raw material cost changes and Q2 saw modest incremental revenue types of copper cost pass through.
This incremental revenue delivered little to no incremental gross margin and therefore and modestly lower profit margins and the segment.
During Q2, the Shaw flex business continued to deliver on those five <unk> communications related contracts discussed and our prior call.
It should be noted that five G communications and build out activities are project based and therefore, we will have some variability quarter to quarter.
We anticipate Q3, we'll see an increase and five G related shipments before returning to more modest levels and Q4 and early 'twenty two.
Our pipeline and pipe services segment revenue during Q2 fell by $2 million for $1 four per cent compared to the first quarter as increases and western hemisphere pipe coating project execution offset decreases in eastern hemisphere.
The favorable mix of coating technology pipe size, and and use environment, coupled with ongoing footprint and cost optimization within the segment drove higher profit margins when compared to Q1.
As we have discussed many times shawcor as pipe coating business is tied primarily to the timing of offshore pipeline projects being sanctioned which inherently leads to volatility from quarter to quarter.
Looking forward, we anticipate modestly lower levels of pipe coating activity during Q3 of <unk>.
Project scheduling low then drives lower revenue in Q4 and early 'twenty two although already completed fixed cost optimization and ongoing efficiency initiatives are expected to yield continued positive financial contribution by the segment.
As previously noted we continue to assess optimization opportunities within the segment infrastructure, while remaining focused on providing world class service and value to our customers from a highly cost efficient strategically located footprint.
Additionally, we continue to see key customers demonstrates the need for even higher coating technology performance and are confident of our investments made in recent years to develop market, leading solutions, including Lotus flow and ultra have positioned shawcor to be the partner of choice for customers operating and challenging offshore environment.
In summary.
Following improved financial performance in Q2, we remain confident shawcor will deliver higher adjusted EBITDA and 2021 and then in 2020. Despite continued quarterly variations and the ongoing challenges of supply chain stress and lingering impacts from Covid.
Our full year outlook remains subject to modest upward revision and the event and North American onshore oil and gas activity experienced the most substantial acceleration and currently anticipated during the second half of the year.
Which would drive incremental demand for sure of course composite pipe and girth Weld inspection services.
Turning to backlog at the end of Q2, the company's committed backlog of work to be completed within the next 12 months stood at $489 million the decrease when compared to the prior quarter.
This decline was anticipated and driven by completion of work and backlog within our pipeline and pipe services segment, partially offset by continued growth and our underground storage tank backlog, which reached a new record during the quarter and an increase in orders within the other parts of the organization.
The company anticipates, some modest delays and final investment decisions and contract award decisions and tied to several larger pipe coating projects pushing associated backlog build into early 2022, rather than late 2021 as originally expected.
And most cases the execution schedules for these projects are not expected to be materially delayed.
Sure <unk> bid number reflects the value of work, where the company has issued a firm price with the post contract terms against and explicit scope of work with a defined timeline for execution and.
The end of Q2, the balance was $972 million and increase of $160 million when compared to the prior quarter, reflecting continued robust project planning activity by our customers and the associated migration of projects from budgetary into bid status, which indicates the strength of the potential future work beyond the coming 12 months.
<unk> included and bid are over $151 million of conditional awards pending the clients' final investment decision up from $110 million and the prior quarter.
Sure of course, budgetary number reflecting the value of indicative pricing submitted to allow customers to build of project budget ahead of commencing form of procurement activities remained relatively unchanged at approximately $1 billion a quarter and despite the movement of several projects and budgetary into bid status during Q2.
This supports our outlook for a rebound and pipe coating activity during the latter part of 2020 and into 2020, three which when combined with the constructive outlook for composite and automotive and industrial product demand and provides confidence that shawcor will to the earnings growth in the coming years.
Finally, we continue to evaluate our ESG performance and look for opportunities to lower our environmental impact flow through the products and services that we provide and VI and managing our footprint.
During the quarter by pipeline performance group was awarded a small pipe coating contract by subsea seven for the Northern Lights project, a 100 kilometers of pipeline that will transport liquefied C. O two two and offshore subsea location and the north sea for permanent storage.
Northern lights as part of the full scale carbon capture and storage project in Norway, and known as long ship.
This pipeline will be the first of its kind of in the Norwegian continental shelf.
With this contract and our historical experience coating C. O. Two pipelines, we are well positioned to continue to support decarbonization efforts through carbon capture usage and storage.
With respect to our own footprint. The company is currently completing a comprehensive review of scope, one and two carbon emissions and will establish a thumb suck based carbon reduction commitment by the end of this year.
In closing show of course performance in Q2 provides the demonstration of the earnings leverage which has been created by thoughtful but rapid cost rationalization over the last 18 months.
We are proud of our differentiated product and service portfolio.
Commitment to technology development and every one of the employees, who make sure call the partner of choice for so many of our customers around the world.
I'll now turn the call over to the operator and open it up for questions. You may have for myself gasped on Omega.
Thank you.
Ladies and gentlemen, as a reminder to ask the question you will need the press Star then one of your telephone.
To withdraw your question and press the pound key.
Again, Thats star one to ask the question.
Please standby, while we compile the Q&A roster.
Our first question comes from the line Aaron Macneil with TD Securities. Your line is open.
Hey, good morning, and all and thanks for taking my questions. Mike I've got a couple of follow up questions for you on your cost inflation commentary most.
Most of them relate the steel because that's a bit and the news but.
I wanted to look at it from a customer behavior perspective, so specifically what I'm wondering.
And using steel as an example is that delaying and <unk> for new pipeline projects.
Or is it changing the competitiveness of offshore pipeline versus F. P. M. So I'm also wondering on the.
The flip side of it is positively impacting the market share for composite pipes versus steel but.
Perhaps you could also sell and the blanks for other dining.
Dynamics of they may not be thinking about.
Absolutely and good morning.
I think if we look at steel, particularly and related to our pipeline.
Business.
We are not seeing albeit as evidence that our customers are making.
The decisions or changing the timing of the decisions based on the cost of of steel.
And what we're what we're generally seeing is that those customers.
Very focused on prioritizing their investment on pipelines that have the highest need and.
And in some cases, we see customers revisiting their engineering process to determine if there's any opportunity to consume less material and the construction of their intended pipeline. So we've talked a little bit about some some modest delays and decisions.
And in some cases those are related to revisiting the engineering of the project to see if there's an opportunity to simply use less material.
But we've certainly not seen any evidence that there are decisions being either delayed or rejected because of the cost of the raw material.
Moving to flexible spool of of pipe certainly as steel increases and costs, you would expect but the customer thought process on the selection of the material. They use would continue to swing more favorably towards composite materials I would tell you that we haven't yet seen.
That particular issue drive a substantial proportion of the customer base to change their buying behavior.
But we certainly keep a close eye on it and it is an important part of our conversations with customers to highlight the opportunity that they may have in front of them to convert to the composite pipe and.
So in summary, I think we would we would expect generally and our composite pipe business.
But we would be favorably impacted by continued elevated costs for steel.
But I don't see clear evidence that it is yet showing up in the buying behavior of our customers.
And that helps.
Got it that's helpful.
You mentioned in your prepared remarks carbon capture the potential growth opportunity.
Can you walk us through the types of coatings that of Cc U S pipeline may require it.
And the normal pipelines and if you have any sort of proprietary intellectual property and that area that might help you win a day.
Disproportionate amount of that kind of work.
So first I'd say that the the volume of FCC U S offshore <unk> pipeline is.
Is the <unk>.
Yet a material number.
We highlighted the the project award that we are very proud to be of part of.
In the Norwegian Continental shelf.
That's the first of its kind in that geography. So we're in the early stages I think of <unk> related pipelines and the offshore environment, but certainly would expect that it will expand over time.
It depends very much on the environment as to the the requirements from a coding perspective, but generally they are very similar to the types of technologies used and pipelines and pipeline coating for oil and gas transportation.
And so not not a materially different set of technologies required what I'd say is that the same the same capabilities that differentiate shawcor and the the traditional oil and gas pipeline and coating space differentiate us and the Cc U S coatings space so proximity experience.
<unk> to execute on time on budget with.
And extremely high quality.
And I think it's those capabilities that are likely to ensure that we take.
More than our fair share of the <unk> pipeline coating space as time evolves.
Understood and then maybe one question for Gastar and I guess just.
Yeah.
How much of the quarter over quarter change and the pipe coating margins was a function of product mix versus the cost rationalization measures that you implemented and I can appreciate that you probably don't have an exact number handy, but yes.
And I'm, just trying to get more of a sense of what was the most meaningful of a quarter.
Yeah. So so I think it's difficult for look at it and on a year on year basis. So we need to point out of that part of share.
Yes quarter over quarter.
Thank.
You know there is some additional cost impact and the current and the in Q2 versus Q1.
But the majority of that cost was already built out since we completed the majority of our restructuring efforts in 2020 and.
We haven't played some other ones, but they have yet to impact the quarter and.
And so it's a.
A bigger chunk of that is of higher margin business.
And this but also.
The higher revenue Aaron as you can understand that drives higher utilization and the additional absorption of costs. So.
I think this quarter is good highlight of the margins that are capable of.
And in that business.
If we have this level of revenue that we have this thing that we have and this and this quarter so and so.
So I think the majority of you know the majority of it you know and is really being based on the.
And the higher margin business that we have and just higher overall revenue and absorption.
Understood. Okay. That's all for me I'll turn it over.
Thank you.
Our next question comes from the line of Michael Robertson with National Bank of America.
Your line is open.
Hey, good morning, Congrats on the solid quarter and thanks for taking my questions.
You noted in the release the production levels for the tank business were impacted by raw material shortages and the quarter.
I was wondering if you could ballpark how much of the limiting factor that was in Q2, either as you know like a rough percentage of sales of units that could have been sold with without the limitations.
Yes, good morning, Michael.
I think maybe to talk more generally about supply chain and then all of zero in on your question I think.
You've listened to earnings releases of many many manufacturers across the quite frankly, all industries not just energy related.
Supply chain tightness for input materials and related transportation costs and availability as of meaningful challenge.
As we as we look internally while those challenges are certainly present across all of our businesses. They have had the most material impact in our composites business and it's purely a question of.
Exactly which.
Variance of certain polymers, we consume and that business and their availability.
So generally when we think about the tanks business the impact from the the supply chain challenges is more one of availability than it is of cost we have the ability to pass through costs to our customers and a relatively rapid fashion.
That that availability was certainly felt during Q2 and I think we should expect to continue to feel it in Q3 into Q4, but we do have a number of of our key vendors that have committed to us that they will bring incremental production online later this year and most cases towards the very end of the year and.
And what gives me and the.
Spirit challenges will abate as we move into the first half 2022.
And I'd, rather not give an explicit the the percentage or dollar impact.
That we've experienced the there is probably some competitive value to that being in the and the public domain, but what I would say is the I think our team have done an extraordinary job of navigating. This challenge they have been limited by the number of tanks. They can produce but have still done.
And a very good job of meeting customer expectations in terms of deliveries and as you saw by the numbers are meeting or beating our expectations of the performance during the quarter and I'm confident they'll continue to do that.
Got it and I appreciate you wanted to keep some of that debt.
Most of the vast and that's that's helpful color Nonetheless.
Yes, the staying in that same vein.
As raw material shortages also impacted your production for our composite pipe or have you been able to fulfill a lot of that recovery and demand from.
And maybe making some of existing inventory levels.
I would say outside of the composite tank business we.
We have been able to navigate the material shortage challenges without any impact to our production schedules, so whether it's composite pipe.
And the various products that we offer through all of automotive and industrial business and also everything that we do and our pipeline and pipe services business, we have not seen a delay and production schedules from raw material shortage issues. Those issues have been concentrated to this point entirely and the tax business.
Got it got it. Thank you that's helpful. Maybe.
And maybe one last one for GAAP.
Good to see some strong cash flow from operations and the quarter.
With the activity levels of recovering and liquidity concerns. The easing was wondering if you could give us an update on how youre thinking about capital allocation priorities and this environment and and moving forward.
Yeah sure Mike So I think for US as you know, we do have our improved outlook on liquidity.
And our continued focus is.
And as you know funding, our working capital and Capex needs, but our positive cash flow outlook that we have.
And we'll have excess cash that we hope to.
Deploy to further debt repayments in the back half of this year of course.
So it'll be dependent on continued recovery and requirements that we need and working capital and but we're feeling very confident that we'll be able to fund additional debt repayments of the year.
But from the capital allocation I think that that is our <unk> priority at this point and time.
That's at top of asphalt and maybe just as a follow up.
Looking longer term do you sort of have of targets.
And range of comfort zone for you know either of carrying balance on the facility or just the.
Our net debt to EBITDA sort of metric leverage level that youre looking for.
Well it really depends on the overall EBIT level, but I think you know the and requirements that we need it but I think you know somewhere in the range of.
The debt level.
That level of under two times is something that I think we've sat and the past is where we feel comfortable.
Maybe the slightly lower and that at one five times, but it's still.
And you talked about the mix and and the stability of our EBITDA and we're so that is where you know weapons and start providing that EBITDA for us and debt ensuring that we can stay within our debt covenants, along with having flexibility and liquidity for internal funding for working capital and working capital needs and whatever else we need.
Got it okay, and what that that's very helpful color team I. Appreciate you, taking my questions and I'll turn it off.
Thank you.
Our next question comes from the line of Tim on the Tallo with ATB capital market. Your line is open.
And thanks for taking my questions and so some of the previous questions answered some of them. So the list of short of and easy.
Hmm.
I'm cognizant of the sensitivity around the impacts and the quarter I'm, just I'm curious to understand how much either on an aggregate basis for the entire business pass through costs impacted the margin in Q2.
Yeah.
Yeah.
Okay.
Charges.
Yeah, Good morning, Tim.
This is one where perhaps I'll offer some thoughts and then the gaslog and they have some additional ones.
And again, we're a little hesitant to get into too much detail there because I think our we believe that our supply chain and.
And our relationships with our vendors and our ability to secure.
Materials from those vendors is a competitive advantage I mean theres no doubt that we are impacted and.
And have been and will continue to be impacted.
But I think we have a competitive advantage and how we manage that versus some of those that we compete within the and the marketplace.
And so that's really and the reason we want to be a little cautious here about how much we should.
Guests non I don't know if there's anything you would add there.
No I think that's a fair comment Mike I think for US as is the.
Tim we've been able to pass on a majority of the costs that we've been experiencing.
And the bigger impact I think for US is its impact on our ability for absorptions.
To produce our products and.
The negative impact on absorption so.
But at any of it so it's not something we want to share, but I think we're doing a very good job about.
And offsetting those things with the new ships that Mike mentioned with our vendors and then and then are you know our strong competitive advantage and the market and our ability to.
Play and price increases or surcharges as required.
Okay got it.
The margin is relatively strong even with surcharges of just kind of curious where it would have been without it but I understand the sensitivity.
And just thinking about the cadence of earnings for and EBITDA, I guess cash flow for the second half of the year of.
Key moving parts of their and <unk>.
Some of the Tolerability, which sector.
<unk> revenues to come in and you also have the.
And marginally improving.
The trend line and the composite business in Q3, obviously some seasonality in Q4.
And then the automotive and automotive and industrial segment seems to be going well. So do you expect Q3 EBITDA.
The EBITDA to the higher than Q2.
Yeah.
So Tim I would say that.
I think Q3.
Is unlikely to be higher than Q2.
And part just because of the the timing of certain pipe coating projects, which as you know are fairly large and their impact to the overall business.
I agree with your thoughts there that the the automotive and industrial business and certainly continuing to see robust demand.
Across the the composite business the demand is.
Likely to remain.
Fairly robust the one thing I'd say is that.
And North America, but.
Actually globally are for.
Pipe customers.
And to buy from us.
And placed the pipe in their own inventory and then consumed from their own inventory. So we ended up in the circumstance, where there's a little bit of Lumpiness and the order timing for flex pipe.
And a very robust marketplace that tends to even itself out obviously the market is nowhere near of spot as robust as it was pre COVID-19. So we're still seeing some lumpiness and the exact timing of orders and for the flex pipe product. So I just caution you not to expect a perfectly flat up into the right curve on that product.
Line.
And generally I'd say I think Q3 will be a good quarter.
Don't know that it will reach Q2 levels and as you pointed out.
Q4 will see the the normal seasonal impacts that affect both of our fuel tank business and.
To some degree of the automotive and industrial business.
So we should all have realistic expectations for Q4.
And Tom would you I didn't think of it.
No Mike I think he did a good job there.
Yeah.
Okay, Yeah that's helpful.
Can you speak a little bit about what the capex items that you're looking to I guess investing and the back half of the year.
And the guest on you want to cover this one.
Yeah sure so.
As we mentioned is we do expect to be still.
Orders decreasing our Capex range of 40 to 45 for the remainder of the year, we spent about $10 million. So far so it is back half loaded.
The key thing is that we continue to.
The optimistic of the products will be able to complete in the back half where the key focus on continued capacity expansion and the.
The automotive and industrial.
To meet the growing demands there.
Also we expect to invest in capex related to the commercialization of our larger diameter of flexible pipe.
And then the other thing that we have and the back half as we have to start spending for the consolidation of our western Canada of pipe coating and footprint.
As you recall a couple of years back we sold one of our facilities that lease is coming up so we need to start preparing for the move of that business.
And the the pipe that we have and the current facility to consolidate and other facilities. So you will see some spending and regard in that regard also.
Okay. That's helpful and then last one for me.
And nice to see the the bid increase fairly.
Fairly substantially quarter over quarter and the conditional words.
The book increase as well can you speak to what Youre seeing on the ground in terms of new project opportunities.
Yeah. So.
Agreed we were.
Certainly pleased to see the the bid number continue to move up.
And.
And the conditional award number came up largely on the back of the single award and in Norway.
But what we're seeing is certainly an elevated level of requests for quote and.
And really meaningful engagement from our customer base around the world.
It gives me continued confidence that the outlook for pipe coating activity as we move into the lots of part of 'twenty two into 'twenty, three and possibly beyond will be substantially more robust than we've experienced here and the last several years.
Think despite the fact that there is intense pressure from an ESG perspective and of course and intense pressure on investor returns.
A lot of our customers have underinvested and the pipeline infrastructure for a number of years and there are certain projects that just needs to get constructed so while we've seen a modest delay and a couple of other processes here.
And I do not currently see any substantial lowering of interest or lowering of the expectations for activity.
Activity levels and the next couple of years. So I would say generally very favorable of course, there is uncertainty on exactly when the decisions get made.
M.
But we've lived the network for a long time and I'm sure as a long time and list for this business you're used to it as well.
Okay and that's.
Very helpful. I appreciate I'll turn it back.
Thank you.
As a reminder, ladies and gentlemen that star one to ask the question.
Our next question comes from the line of Keith Mackey with RBC. Your line is open.
Hi, good morning, everyone and thanks for taking my question here I just.
I wanted to ask about.
And do you think your composite market share sits.
And maybe separate separating the pipe and the tanks.
Where does that sit today and and how has it changed as you have introduced new products and the car.
The composite pipe space recently.
The recently introduced the five inch pipe now youre talking about a six inch pipe have you seen and the increase in <unk>.
Revenue and share that you would have thought.
And then more broadly to that how much more runway do you think there is for composite of general to take share from from scale over time and it hasn't been a harder sell.
And that you might have thought of.
Earlier on and the business.
Good morning, Keith.
Happy to address that so I'll start with tanks I think while we don't have perfect visibility because of the information isn't published.
Across the industry, we certainly believe we are.
Substantially the largest supplier of underground fuel tanks to the North American market.
When we think about our market share there I believe that our continued investment and manufacturing technology to ensure that first time quality continues to rise and our capability to incorporate certain unique features into our tanks that our customers find valuable.
Should ensure that at the very at least we're able to defend that market share position.
And obviously, we push hard to grow it I would note that while we continue to be very encouraged by the progress, we're making on water and wastewater related tanks and related technology.
And is certainly a space, where we are a small market share player today and an opportunity for growth over time that we're excited about.
And the pipe side and the introduction of our five inch product certainly has has brought with it and opportunity to participate and a number of customer projects that otherwise we would not have had the opportunity to participate. So we have seen early adoption of that product and the revenue coming from it is not yet.
The material percentage of our flex pipe revenue, but certainly growing and I think initial feedback from customers as they use the product has been very encouraging and we would expect exactly the same when we introduced the six inch product.
The that's five and six inch.
Addition to the portfolio gives us access to.
Two the higher flow sub sectors that historically, we've we've addressed with multiple lines of smaller diameter and in some cases customers don't find that and acceptable solution. So I think very encouraging for our sales force to and I'll have a broader portfolio to offer our customers.
Market share and in North America again, it's difficult to pin down, but we certainly would put ourselves and the top one or two.
We have opportunities to grow from.
From here both in terms of market share, but I certainly think there is a substantial percentage of onshore north American operators, who still have not completely adopted composite pipe technology.
Many of them use composite pipe occasionally and some of them still are 100% committed to steel pipe and.
And so the not nave enough to believe we can convert 100% of that population to composite pipe, but I'm confident we can convert more of them over time. So I think the runway is still substantial on that product line.
Got it thanks for that and.
And just a follow up then.
And in the water and wastewater business.
Mentioned that small small, but growing and and you did and easy to discuss some new product applications that year that youre seeing just curious how the margins in that segment might compare to some of the other tank and tank applications. If if if they are different or similar at all.
And they are generally a little higher.
And then fuel tank applications.
And of what I'd say as the mention of the hydro chain solution and the in the scripted comments earlier.
Really it's an important step for us.
And historically, we've been a provider of of some of the components and a water or wastewater treatment solution and as.
As we have advanced in that space over the last year or so we're now in a position where we can offer the hydro change solution, which is.
And really a holistic solution that involves capture conveyance storage and treatment of rainwater runoff.
So that opens up a much broader sector for us and I'm very excited by the mid and long term opportunities for growth.
I would say I still don't think that that will be a material percentage of company revenue or earnings for the at least another two years.
But we are aggressively pursuing and the long term opportunities there are very very substantial.
I see thanks, very much I appreciate the color of how that's it for me.
Thank you.
Ladies and gentlemen that concludes our Q&A session I would now like to turn the call back over to Michael for closing remarks.
Yeah.
Thank you so much operator, I would just like to thank everybody for their participation and continued interest and shawcor.
We will look forward to talking with you again next quarter.
Ladies and gentlemen, this concludes the conference call and thank you for your participation you may now disconnect.
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