Q3 2021 Shawcor Ltd Earnings Call

November 10, 2021

[music].

Ladies and gentlemen, thank you for standing by and walk through the Shawcor Q3, 'twenty 'twenty 2021 results webcast. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you need to press star one on your telephone if you require any further assistance. Please.

Press Star Zero after a brief call I'm sorry, after a brief pause to your conference call will begin one moment.

To differ materially from those projected the complete text of shock with statement on forward. Looking information is included in section four point out of the third quarter 2021 earnings press release that is available on SEDAR and on the Companys website at Shawcor Dot Com I'll now turn it over to <unk>, President and CEO, Mike Reed.

Good morning, and thank you for joining <unk> third quarter conference call today, Megan and I are joined by our CFO Gaslog antenna.

Key macro drivers for our business continue to evolve favorably with increasing global investment in critical infrastructure accelerating demand for premium and electric vehicles and strengthening commodity price fundamentals.

Cumulatively these underpin our confidence that our multiyear up cycle for short course business is developing.

During the third quarter. The company continued to deliver on its commitment to support critical infrastructure markets with highly engineered materials based solutions generating revenue increases in all three business segments compared to the same period last year, excluding the impact of the products business, which was sold in late 2020.

We also increased on backlog on a quarter over quarter basis, with new business capture exceeding backlog consumption in all reporting segments, including a slightly earlier than expected build in pipe coating backlog.

This improvement in backlog and even more favorable change in our budgetary quote balance reflect the increasingly positive macro environment.

Despite this positive mid and long term outlook in the immediate term seasonal cycles are low in pipe coating project activity and constriction in raw material supply chain are expected to drive earnings in the next two quarters to be slightly below Q1 2021 levels.

Tightness across much of Shawcor raw material supply base remains challenging.

Whether our products incorporate specific polymers resins metals or glass fiber, we continue to experience supply limitations extended lead times and sometimes volatile costs most of the materials themselves and related shipping activities.

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 with the availability of certain specific materials now expect it to be tighter than Q4, and the early part of 2022 than previously anticipated.

Good.

Across the company, we continue to work respectfully with our customers to ensure incremental input costs are fairly reflected in our selling prices.

On many years of close cooperation with suppliers, the strategic diversity of sources and the ability to lever our balance sheet the risk lowering forward material purchases. We remain confident that shawcor is well positioned to navigate these continuing global supply challenges, but related near term volatility remains a risk.

Regardless of these near term impacts and the elimination of government subsidies, which have enhanced results in the last 18 months. We are confident the short course annual earnings were once again increase in 2022.

Turning to segment business activity a composite systems segment is primarily influenced by two market forces. The first is demand for premium UL listed underground storage tanks within the North American retail fuel and water markets.

Second as demand for reliable scalable composite pipe to connect newly completed oil and gas wells into existing processing and storage infrastructure.

Third quarter composite systems segment revenue rose by $6 4 million or 7% when compared to the second quarter of 2021.

Q3 shipments of <unk> market, leading underground storage tanks were higher than Q2, a sustained fuel station construction and refurbishment activity and demand for the company's hydro chain storm water management systems continued.

This demand drove tank related backlog to a new record during the quarter and enabled the company to adjust billing practices with most clients now invoicing at the time of product completion, rather than at the time of physical shipment, which is expected to accelerate cash flow and lower seasonal volatility within this business moving forward.

Market demand for both fuel and water related underground tanks is expected to remain robust in the foreseeable future.

Be it with normal seasonal softening in Q1.

Unfortunately tank related raw material availability has tightened further in recent months and continues to be highly volatile.

We currently anticipate this will cause our production output in Q4 and early 2022 to lag demand lowering revenue and negatively impacting plant utilization for the segment in the coming two to three quarters.

Our actions to qualify additional supply sources and our suppliers' actions to increase production are expected to lower the supply chain effects as we've moved through the first half of 2022.

North American demand for composite pipe rose in Q3 versus the prior quarter as improved oil and gas commodity prices drove continued growth in well construction activity in the U S and Canada.

While most onshore oil and gas operators remain conservative in their capital spending plans provided oil and gas commodity prices remain favorable we anticipate north American demand for these products will grow further in 2022.

Normal Q4 seasonal impacts are expected to lower demand for composite pipe compared to Q3 with demand rising again in Q1 of 'twenty two.

At this time, our composite pipe business is not significantly impacted by raw material availability issues. Although price escalation has continued which the company has generally been able to pass through to customers with a modest time lag.

Outside North America, we continue to observe elevated quote activity for composite pipe products, driven by an improving customer capital spending outlook.

While several contract award decisions are expected late in 2021 is likely 2022 before meaningful incremental revenue tied to these awards just delivered.

But shipments associated with the substantial middle East Order noted in our Q1 earnings release continued throughout Q3, and we will do so for the coming 18 months.

In summary, we anticipate robust demand across the composite systems segment throughout 2022, and likely beyond but we'll see lower revenue and earnings contribution during Q4 and Q1 of <unk>.

Seasonality and raw material availability impacts are observed.

Moving to show of course, automotive and industrial segment.

During the third quarter, the segment saw revenue rise $4 $7 million or 7% compared to the second quarter, reaching a new record high in both revenue and adjusted EBITDA.

Increased demand for heat shrink products within automotive applications and for engineered wire and cable products by electrical utilities and communication providers are fueling growth in this business we.

We anticipate these demand dynamics continuing throughout 2022 and likely beyond however, they are subject to supply chain disruption risks.

Specifically, the automotive market place remains challenged by a well publicized shortage of microchips, which in recent months has extended into the premium chip sector.

This development has led several large automakers to reduce production activity of premium vehicles during Q4, which in turn has temporarily lowered demand for short course related heat shrink products tempering, our expectation for this business in the coming quarter.

Central impacts beyond the current quarter are difficult to predict at this time.

When microchip shortages abate, we see a further opportunity for growth in our automotive and industrial business as customer ordering expands to normalize inventory needs.

During Q3, the Shaw flex wire and cable business benefited from substantial deliveries of premium products into five G communication build outs and nuclear refurbishment projects elevating revenue and creating a favorable margin impact.

This margin benefit was further enhanced by the utilization of advanced purchased copper wire, which we discussed in prior quarters.

It should be noted that Pfizer communications build out activities are project based having variability quarter to quarter and we currently anticipate fight G related shipments will return to more modest levels in Q4 and early 2022.

During Q3, our short flex business reached a new record backlog driven by a broad array of critical infrastructure renewal and expansion projects.

We continue to have a constructive view of the mid and long term market trends, which impact this business.

Lastly, our pipeline and pipe services segment revenue during Q3 fell by $24 8 million or 17% compared to the second quarter.

As lower pipe coating activity in all geographic regions was partially offset by higher major project driven pipeline inspection and engineering activity.

Despite this lower revenue level efficient pipe coating execution, coupled with substantial recent footprint and cost optimization enabled the segment to deliver a positive adjusted EBITDA contribution during the quarter.

We continue to focus significant attention on further cost and footprint rationalization, while ensuring we retained the talent capabilities and geographic presence to support our customers globally.

Looking forward, we anticipate these lower levels of pipe coating activity to persist in Q4, and the first part of 2022 before activity rises in the second half of 2022, our secured projects commence the.

The specific geographic and product mix of pipe coating activity scheduled over the next two quarters is likely to result in approximately breakeven adjusted EBITDA for the segment during this period.

However continued favorability in oil and gas commodity prices, coupled with elevated global demand for natural gas is driving an increase in pipeline investment planning activity with multiple mid size in several large pipeline projects expected to reach final investment decision in the coming months.

Pipe coating backlog grew modestly during Q3, improving slightly sooner than previously expected and reflecting the early phase of what the company expects to be a multiyear offshore pipeline capital spend cycle.

Turning to backlog at the end of Q3, the company's committed backlog of work to be completed within the next 12 months stood at $507 million, an increase of $18 million when compared to the prior quarter.

This improvement was the result of new order capture exceeding backlog burn in all three reporting segments with backlogs in our composite systems, and automotive and industrial segments, reaching new record levels.

Previously the company had anticipated pipe coating backlog to decline until year end before benefiting from new contract awards early in 2022.

With some customers demonstrating increased urgency we now believe our pipe coating backlog will build modestly in Q4.

And then more substantially as we enter 2022.

Sure of course bid number reflects the value of what where the company has issued a fair price with proposed contract terms against an explicit scope of work with a defined timeline for execution.

At the end of Q3, the bid balance was $911 million a decline of $61 million when compared to the prior quarter, reflecting the transition of several bids into backlog included.

Included in the bid number are now $237 million of conditional awards pending the clients' final investment decision up from $151 million in the prior quarter as multiple midsized coating projects were conditionally awarded during Q3.

Sure of course, budgetary number reflecting the value of indicative pricing submitted to allow customers to build a project budget ahead of formal procurement activities grew substantially from just over $1 billion in Q2 to approximately one $5 billion at quarter end.

This supports our expectations that pipe coating activity will rebound during the latter part of 2022 and into 'twenty, three which when combined with a constructive outlook for composite and automotive and industrial product demand provides confidence in our long term outlook for shawcor.

In parallel with Shaw calls focus on business execution. We continue to also evaluate our ESG performance and seek opportunities to lower our environmental impact both through the products and services that we provide our customers and our own environmental footprint.

Next week, we will be releasing our annual sustainability report, which will include specific ambitions to significantly reduce our scope, one and two G. H D emissions and materially elevate diversity within our senior leadership team over the coming decade.

We have spent the last 12 months carefully reviewing tangible actions to drive achievement of these ambitions and are confident in our path forward.

Shawcor has driven substantial improvement in multiple ESG related metrics versus our 2019 baseline and we'll continue to share our progress year over year.

Finally on October eight we announced that Gaslog tonneau has elected to step down from the company at the end of May next year. After transitioning his CFO responsibilities to Tom Halloween, who will join Shawcor in December initially as Chief Accounting Officer.

This extended thoughtful executive succession plan is consistent with <unk> long held practices and ensures minimal disruption to the organization's tactical and strategic initiatives.

While Gaston and I will enjoy several more quarterly earnings calls together I would like to take this opportunity to appreciate his selfless dedication to the company and tireless commitment to value creation for all stakeholders.

International core team wishes him the very best in the next phase of his career.

Thanks, Mike shock.

<unk> Q3, adjusted EBITDA was $31 8 million on revenue of 291 million with cash flow from operations of $17 million during the quarter.

These results reflect a record quarterly performance from our automotive and industrial segment and robust demand in our composite systems segment, partially offset by the expected lower pipe coating activity within our pipeline and pipe services segment and increasingly tight supply chain impacts across several business lines.

<unk> revenue in the third quarter was 291 million, 9% higher than the third quarter of 2020. This reflects increases in composite systems, and automotive and industrial segments, partially offset by a decline in the pipeline and pipe services segment compared to the third quarter of 2020, the composite systems segment.

Revenues increased by 23%, primarily due to higher demand for our composite pipe products driven by improved drilling and completion activities in North America, coupled with increased activity in tubular management services.

The automotive and industrial segment revenues increased by 45% as demand for the company's automotive products continue to outpace overall automotive production as a result of electronic content growth in the premium hybrid and full electric vehicle markets. The company also benefited from infrastructure spending a communication transportation and nuclear refurbishment projects.

The pipeline and pipe services segment revenues decreased by $18 million, reflecting the absence of $19 million of revenue attributable to the products business sold in December 2020, and lower revenues in the EMEA and Asia Pacific due to lower pipe coating activity. This was partially offset by higher revenues from an increase in large project pipe coating activity in <unk>.

Latin America, and higher pipe coating girth, Weld inspection and engineering services in North America.

Consolidated results for the third quarter were impacted by nonrecurring items outside the company's normal course of business. The current quarter includes $1 1 million of restructuring and other income, resulting from the sale of a property in western Canada related to a plant closure our reduction of decommissioning provisions on plant closures and cost saving initiatives completed in the quarter. The current quarter also included.

1.8 million gain on investment in associates as well as the negative impact of $11 6 million in the impairment charge related to our F. I F girth weld inspection business and a loss of $1 6 million for Argentina Hyperinflationary accounting.

The prior year third quarter included $8 2 million gain on investment associates as well as negative impacts of $12 4 million of restructuring costs and a loss of 400000 for Argentina Hyperinflationary accounting.

Adjusted EBITDA for the current quarter was $31.8 million significantly higher than the $17 8 million reported third quarter of 2020.

Adjusted EBITDA margins exceeded 10% for the second consecutive quarter, reflecting the company's continued execution of cost reduction and efficiency improving activities at.

At quarter end, the company's global salaried workforce stood at 28% below March 2020 levels and SG&A expense for the third quarter with significant below our previous guidance of $55 million per quarter. Although this result did benefited from an adjustment to incentive compensation across moving forward, we have lowered our quarterly SG&A expense guidance to $53 million.

Turning to cash flow in the quarter cash flow provided from our productivity for the third quarter was $17 million, an increase compared to the $7 3 million in the third quarter of 2020. This increase was primarily driven by an increase in net income and noncash items offset by a cash outflow of $8 7 million and net change in noncash working capital and foreign exchange.

<unk>.

Cash used in investing activities in the third quarter was $2 5 million, primarily due to $5 9 million of purchases of property plant equipment offset by $3 million in proceeds from investment in associates eliminate third quarter Capex spend reflects our continued thoughtful timing of investment decisions and as a result, we have lowered our full year capex spending guidance too.

Approximately $35 million during.

During the third quarter cash used in finance activities was 44 million, reflecting 35 million repayment of debt outstanding and $5 4 million payment of our quarterly lease obligations net.

Net cash used in the third quarter of 2021 was $23 1 million compared to cash provided of $3 1 million in the third quarter of 2020.

With respect to cash and debt. The company has a cash balance of $116 9 million debt of $324 8 million and 41 $8 million of standard letters of credit as at September 32021, the company's liquidity position has benefited from significant initiatives completed in the last 18 months and it's continued focus on reducing its art.

<unk> cost basis with confidence in our outlook. The company is we paid $130 million of its outstanding debt over the past nine months. This reflects a $35 million repaid in the third quarter and $20 million repaid subsequently based on the actions completed and it's I would like the company expect to generate sufficient cash flows to fund its operations and continuing to focus on improving its balance sheet.

<unk>.

Now I'll turn it back to Mike for some final comments.

Thank you <unk>.

This organization remains intensely focused on a short list of key outcomes designed to deliver higher returns with greater consistency and predictability over time.

Firstly, protecting the health and safety of our employees, while thoughtfully lowering our environmental footprint.

Second capturing our share of increased customer spend by delivering a high value products and services with quality and integrity.

Third lowering costs generating cash and strengthening the balance sheet.

And fourth selectively allocating capital to those business lines best aligned with long term macro trends all.

Paulo valuation strategic options for those businesses, which are less well aligned.

In closing.

Following solid financial performance in Q3, and despite near term seasonal schedule and supply chain driven hurdles showcased superior product portfolio is very well positioned to benefit from increasingly favorable market trends across the critical infrastructure sector.

We are encouraged by the demand fundamentals in our business and expect full year 2022, EBITDA to exceed full year 2021.

I'll focus on margin expansion debt reduction and carefully targeted capital investment remains Paramount.

I'll now turn the call over to the operator and open it up for questions. You may have for myself gastar for Megan.

Ladies and gentlemen, if you have a question or a comment at this time. Please press. The Star then the one key on your Touchtone telephone. If your question has been answered or you wish to move yourself from the queue. Please press the pound key.

First question comes from Michael Robertson with National Bank financial.

Hey, good morning, all and thanks for taking my questions.

Wanted to start with the supply chain challenges you noted on the tank side.

When you're engaging with your your raw material suppliers, what kind of signals are you looking forward to indicate.

Our sense of confidence that the disruptions will be short term in nature and.

Theres some slack on the.

The horizon outside.

Then your third quarters.

Good morning, Michael Thanks for the question Yeah. That's clearly the primary area of focus for us from a supply chain perspective, the one piece of our business, where we have not.

Not being able to consistently secure the inbound supply of raw materials that we need to meet our customers' expectations. The backlog in this business is at record levels.

Demand for the underground storage tank.

Product line, particularly in fuel applications continue to grow as fuel station network expansion and renewal.

North America.

We've got a number of vendors in this space the product in question here is a very specific regulated you listed it resin.

And as we have worked with those vendors they've given us confidence that their ability to produce even greater volumes.

The near term horizon, the impact that they have suffered from primarily.

Availability of specific.

Ingredients that are largely produced on the Gulf coast and were impacted by.

Hurricanes earlier this year and in early Q3.

Forced a number of individual component providers to declare force majeure.

Those forces your notifications have been lifted so we do expect that our existing supply base will improve.

But certainly we don't sit there and.

Waiting for that.

There's a number of actions that are underway.

Some time across the organization.

To expand our supply base to qualify alternative blend and to accelerate other internal efficiencies that should allow us to produce more tonnes.

From the resin that is available.

At the moment, we are optimistic that the severity of these challenges will lower as we move through the first half of 2022.

Got it got it very helpful color.

You you noted a lot of the.

And the backlog was driven by demand for composite tanks and other.

Other non oil and gas related orders.

Given that you also noted some price surcharges being implemented to help.

All set.

Raw material price increases was wondering if you could sort of ballpark how much of the pickup you're seeing in the backlog being driven by price increases versus.

Volume or unit increases.

Would it be roughly a 50 50 split or may be skewed one way or the other more heavily.

Certainly skewed more heavily to demand increases.

There is an element of backlog growth that is tied to the price improvement, but it is well below 50%.

Got it got it that's great.

And I guess.

Sumit.

The raw material inflation subsides at some point would you be expecting to see some margin expansion on the <unk>.

That like would you be able to tap to sort of keep.

Keep the price increases that you've been still over recent quarters.

I think across most of our business lines the degree of demand in the marketplace for our products.

We expect it to remain elevated.

Certainly a favorable environment for us to maintain pricing, even as raw material input costs are lower I would say that at this point.

Input cost of raw materials lowering is not something that we're anticipating in the near term I think I think that dynamic likely remains roughly where it is.

For most of 2022.

It's not a near term effect, but we certainly would expect that we have pricing power in this demand environment.

Fair enough.

Last question before I turn it back.

You posted.

Another record quarter for the automotive and industrial segments.

Based on your current capacity. It was just sort of wondering how close we're to that.

Sort of ceiling in the quarter.

Given the chip shortly as I realised bumping up against capacity is not likely a.

Near term concern, but was just curious how how close you were too that the limit in Q3.

We certainly we're operating towards the upper end of the operational efficiency spectrum that we would choose to but in parallel we've been making continuous investments to ensure that the total capacity of that business, which operates from a.

Our global footprint.

Manufacturing activity in Canada, and Germany and in China.

Has continued to grow so at this point.

I do not believe even with the demand growth that we anticipate moving through 2022.

That business will be challenged in its capacity to meet the customer needs from an overall capacity perspective, the one challenge that we face there is the one that we called out which is this.

Relatively short term issue of autumn automakers are struggling to find all of the component parts they need to assemble their vehicles.

Got it.

That's really helpful color I appreciate you, taking my questions and I'll turn it back.

Our next question comes from Aaron Macneil with TD Securities.

Hey, good morning, all thanks for the time and guests down I know youre not going anywhere anytime soon but all the bets.

Can you remind us what the timeline is between.

And S E for pipe coating project in revenue recognition.

Maybe the <unk>.

We would ask the question is assuming all these conditionally awarded projects go ahead can you give us a sense of that.

Of that $237 million from a revenue recognition perspective.

Yeah. Good morning, Erinn I'll offer some perspective against them they have some additional comments here so.

There's certainly a range of time horizons between F E.

Coating execution.

Very project specific but generally.

We would expect that we see revenue within <unk>.

Ultimately 12 months.

Sometimes it can be as rapidly as you know four to six months post <unk>, sometimes it's a little longer than 12 months out there.

I think that the shape of the pipe coating revenue curve.

Outlined here and all comments being.

Unfortunately, rather depressed here in Q4 and moving into Q1, and then rising as we work our way through the remainder of 2022, certainly back half loaded revenue there.

That's indicative of what we think the revenue from these.

Already sanctioned or.

Awarded conditional on sanctioning projects is going to deliver.

Understood.

<unk> what inning are you in from a cost reduction perspective, I mean to these programs largely wrapped up at this point or is there.

More smaller stuff that youre still working on.

Yeah, I think we continually are looking at.

Our footprints and.

Assessing what the future of Hull and.

And looking for opportunities to reduce our costs.

I Wouldnt say we are in.

Close to close to the end, but we're substantially complete the majority of the significant.

Our initiatives that we think there's opportunities for it.

Understood and then Mike a bit of a high level question now that you've been in the chair for a while can you maybe give us your updated view on that.

Various products to sell in the markets you serve specifically I'm wondering if you could address things like whats your view.

Date of integrity management, which was an early focus here predecessor, it's obviously.

The impairment charge this quarter as well, maybe the automotive and industrial segment, which gives you some great diversification in transitory challenges aside isn't performing really well, but not.

So then you're really getting credit for from a valuation perspective.

Are there any gaps in services or products.

No need for organic business development, or M&A and I know, there's a lot to address the question.

In many cases, it would be tough to get into specifics, but.

Yeah, we're really just trying to get a sense of where you had that for months.

Strategic perspective, and where you'll be steering the business over the next few years.

Yes. It is a great question and you're right it would probably take longer than we have here to walk through all of that in detail but.

What I'd say is having having now had a chance to really understand this business and meet both our internal team as well as many of our customers.

I'm very impressed with the quality of products the value our products and services that we offer.

In many cases truly unique.

And also the culture of this organization so customer focus so urgent so ready to embrace change when necessary to evolve this business to a higher level.

Broadly and we.

Commented on this before.

The organization is quite diverse and perhaps a little more diverse than an organization of this revenue scale.

So I think we have to be thoughtful about where we focus our time, our attention and our capital spend.

You called out a couple of businesses that are I think extremely well positioned for the long term macro trends.

Cause its business, our AI business, particularly we think are very well positioned for the future.

We have a very strong position in many aspects.

Pipeline servicing whether it's coating or integrity management.

Obviously, there are some challenges around politics for pipelines, particularly in North America at this time.

So we have to be thoughtful there.

I think premature to talk specifically about any one or two businesses that.

May or may not be.

A point of focus in the in the short term, but all in all I think.

We have a very clear vision.

Which businesses.

Very best connectivity to the macro trends that are favorable here.

Those are the ones that will get the bulk of our attention and our capital.

Yes.

Understood appreciate the color I'll turn it over.

Our next question comes from Tim Marcelo with ATB capital markets.

Hey, good morning, everyone.

First question just around the cost side of the business and particularly the euro.

Crops that pipe.

You heard.

Heard some rumblings from other people in the industry that supply.

Supply chain and shortages on the steel side of the CTG market are developing as we look over the next couple of quarters are you seeing.

Switching to composite pipe in CTG for them from customers like the traditional use steel just given that they might not have access to steel.

So certainly as we look at sure.

Shortages across the let's say the.

Raw materials spectrum.

I think what Youre hearing is something that's likely to play out.

Every reason to believe that.

Steel availability will drop here.

We've not seen a dramatic or measurable movement, driven by a lack of access to steel pricing.

What we continue to see our customers that are looking for.

Total cost of ownership.

Gathering lines.

We're continuing to see that a composite solution offers a better result than steel.

Alison.

Obviously, sometimes.

Harder than others to convince customers that that's the right move to make.

But I think we're having some success there although I wouldn't say it is driven by a lack of access to steel at this point.

Okay got it.

Quick sort of housekeeping item you guys mentioned.

40% revenue tied to non oil and gas business lines that would.

Include the you know the fuel oil side of the pipe to take business sorry.

Alright.

Yeah.

That's correct okay.

Okay got it.

And then one on the AI segment.

Yes, a pretty strong quarter.

Despite headwinds that you're seeing.

For microchip shortages.

Is that the growth in revenue quarter over quarter and the growth in EBITDA quarter over quarter, obviously part of that would be from <unk>.

Increase the revenues have increased copper.

Prices, but is the majority of that just because of the <unk> project that you're getting it seems to be coming to an end I guess in Q4.

So what I'd say, Tim is that first copper prices, while they still bounce around a little bit.

They've been much more stable the last couple of quarters than they were in the beginning part of this year. So no movement in either revenue or EBITDA in Q3 versus Q2.

Not much to do with copper pricing.

It was more to do with the volume and the mix.

Deliveries as we can.

Commented I think.

Particularly we had a robust quarter of deliveries into nuclear refurbishment applications and a robust quarter of deliveries into five key build out projects.

Both of those revenue streams have a little bit of lumpiness to them.

There's a sequencing effect in nuclear refurbishment that causes demand to move around quarter to quarter. Although the overall project duration is many years long and on.

<unk> sites, we have.

At a particular project that we were supporting in Q3 that will get close to it and as we move through Q4, so there'll be it will be a little lower on five key sales in Q4.

We had a.

Little bit of benefit not a material amount, but a little bit of benefit from the advanced purchase copper wire that we made earlier this year and I think we've noted in our Q2 earnings call.

Advanced purchase copper was consumed as we delivered our commitments during Q3, and we benefited from a little bit.

Price.

Benefit in that respect so a mixture of things.

What I'd say is that Q3.

I don't have a lot of favorability built in there and when you look at the margins in the business that we delivered in Q2 and in Q3 setting kind of realistic forward expectations.

Is that your expectation is that on average with somewhere between those two but we're likely to continue to see.

A little bit of volatility quarter to quarter, just based on the project based nature of some of the things we deliver there.

Okay, that's very helpful.

You mentioned in the.

In the commentary around the automotive and industrial segment, some energy shortages, which are impacting.

The plant in China.

Do you expect it energy shortages in the region are going to.

Be a lasting issue.

And is there any risk to energy shortages, perhaps impacting your customers' production facilities in the automotive and industrial segment in China.

Well certainly the Chinese energy supply situation is a little unusual right.

Government enforced.

Energy restrictions that effectively lower our available working days by about 10%.

Liberty.

At the moment, it's difficult to know how long that scenario.

We continue and certainly everybody who is in energy consumer and China is impacted to some degree by this so I don't think our customers will be exactly what.

What I'd say is that all of our automotive and industrial team both in China in a global level are extremely resourceful.

I have worked to ensure that while we have fewer days with energy available in China.

It has lowered our overall production output from the facility.

We scheduled shifts.

And ways to work around this issue. So I don't expect that this will have a material impact on our business near term.

If it were to elevate beyond the 10%.

Then.

You start to have to re evaluate their but in what we can see at this time I don't see it impacting the ability of our business.

Okay. That's helpful.

And then last one for me.

In the PPS segment, you're probably benefiting.

To an extent.

Or maybe not benefiting but dodging some supply chain issues, just given sort.

Sort of lower throughput in the business currently.

But as you look to some of the projects that you're expecting to book early.

In 2022.

Has the lead time for those projects extended and you think there's potential risk around delivery just based on supply chain issues, maybe for steel that you can get the pipe to coat or for some of the inputs that you might need to actually coat the pipe.

But at this point I don't believe that we have material risk on that front.

For a number of reasons firstly, the raw materials that we can see them in the pipe coating process.

Still generally available there's certainly been some price movement and the way our contracts are structured that passes through to our customers. So we certainly do not get caught in the middle there and win larger projects are reached late stages of a award.

As our customers lock in their commitments to us we lock in our commitments to our supply chain vendors, they commit and lock in their commitments to supply to us. So I think our supply chain is.

Relatively low risk there.

Obviously, you know steel availability is something that our customers have to continue to keep a thoughtful I own and what we see is that they they are generally managing that risk well and doing so by.

For the allocating award steel pipe purchase to multiple vendors, particularly on larger projects to hedge their risks at this point I don't believe that that's going to impact us.

Obviously, if the steel supply situations tightened dramatically.

That may have a knock on effect, but I don't envision it at this time.

Okay. That's great. That's all for me I'll turn it back.

Yeah.

Our next question comes from Keith Mackey with RBC capital markets.

Hi, Good morning, just a question first on the.

The budgetary number certainly it came up pretty nicely in the pipe in pipe services segment can you maybe just talk about some of the some of the new projects that have come into the into that number.

Project Titan.

Customer type, whether it's N O CS or Super majors doing this type of work and and.

And is it you know offshore oil or other LNG type type work.

And any color on any of those items you could give there would be helpful. Yeah. Good morning, Keith.

Obviously, when we engage with customers we tend to sign confidentiality agreements, which makes it a little difficult to provide too much detail here, what I'd say is.

<unk>, certainly got budgetary number jumped substantially quarter over quarter.

And I think generally that is a very good indicator of the degree of let's see urgency that our customers are starting to exhibit.

Contemplate new pipeline projects.

The.

The items that elevated that budgetary number.

A mix so.

Coming from both the eastern Hemisphere in the Western Hemisphere coming in I would say both on the smaller end of the spectrum in the larger end of the spectrum in terms of project size.

And our mix also in terms of customers so both national oil companies and.

International oil companies driving that.

More of the activity is directed to gas than it is oil, but there certainly are.

Oil element to this.

I think what I'd say in general is that we have.

Probably all observing the impact of.

Not enough energy for the world more concentrated in some thoughts than others and.

The oil and gas industry at large.

Seeing the impacts of quite substantial underinvestment over the last five years.

With elevated oil and gas prices elevated demand and an expectation that that will continue for some time.

We are certainly optimistic that this this early stage budgetary activity that has started to really rise will translate into.

Ultimately fully sanction projects and elevated revenue.

The ability for that pipe coating business of ours.

Although as we said before we don't see that revenue really starting to appear until we're into the second half of 2022.

And then moving through 'twenty three 'twenty four.

Got it thanks for that color.

Maybe just on capital allocation. So understand the next couple of quarters might take a bit of a.

A bit of a step down but as you go forward and things ramp up pipe services normalizes a bit in your experience growth in your in your core growth segments.

What do you see as your more ideal capital allocation type methodology as you as you go through maybe the next one to two years.

And is there is there going to be excess cash that you'd like to allocate beyond maintenance capital and debt reduction or or is it are those kind of the main priorities for the foreseeable future.

So in terms of you know.

The cash generation of the company and are intended to use is obviously first and foremost it is make sure that we protect the balance sheet and continue to move towards our targeted debt levels.

Consistent stated are on the order of one and a half times.

We certainly believe we will have.

Access to sufficient cash to manage all of the.

Maintenance and growth capital needs that we may have over the next couple of years.

Thirdly say that the work that's been done, particularly within the pipe coating business to right size. The fixed facility footprint has meant that the underlying maintenance capital needs of that business are substantially lower today than they were two years ago. So when we think about total capex spend.

Our original guidance for 2021 was the 40 to 50 range, we've lowered that here. The last couple of quarters, just based on actual needs and we're guiding to approximately 35 I think as we as we look forward to 2022, I'd say that full year guidance for once again be in that 40%.

Right.

And I think in that range, we have the capacity to meet all of our maintenance capital needs and.

Ensure that we have carefully directed growth capital into those businesses that are likely to see continued high levels of demand.

As we've discussed are particularly the composite business in the automotive and industrial business.

Okay.

Perfect. Okay. Thank you and one last one so its EBITDA over the next two quarters it steps down from 31 to around 18.

He said that pipe services goes to about breakeven. So the other roughly half of the of the reduction would you expect that to be evenly split between competence and Eni or is there one that steps down large than the other.

At this point I think our estimation is that it's roughly even it won't be perfect but.

They're impacted by slightly different things.

The magnitude of the impact is similar.

Okay. Thanks, very much that's it for me.

Our next question comes from Matthew Weekes with <unk> capital.

Okay.

Good morning, Thanks, I all of my questions have actually been quite a while to put myself thought back in the queue. Thanks.

And I'm not showing any further questions at this time I'd like to turn the call back to Mr. <unk> for any closing remarks.

Okay.

Thank you very much so.

Just close by saying Thank you all for your time and your attention and your interest in the company. This morning, we'll look forward to talking to everybody again next quarter.

Wish you all a great day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

Yes.

Okay.

[music].

Ladies and gentlemen, thank you for standing by and walked through the Shawcor Q3, 2020, 2021 results webcast. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you need to press star one on your telephone.

You require any further assistance. Please press star zero after a brief call I'm sorry. After a brief pause your conference call will begin one Bob good.

Good morning, before we begin this morning's conference call I would like to take a moment to remind all listeners that today's 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 text of Shawcor statement on forward looking information is included in section four point all of the.

Third quarter 2021 earnings press release that is available on SEDAR and on the company's website at Shawcor Dot com.

Now I'll turn it over to <unk>, President and CEO, Mike Reed.

Good morning, and thank you for joining short course third quarter conference call today, Megan and I are joined by our CFO Gaslog antenna.

Cumulatively these underpin our confidence that our multiyear up cycle for short course business is developing.

This improvement in backlog and even more favorable change in our budgetary quote balance reflect the increasingly positive macro environment.

Despite this positive mid and long term outlook in the immediate term seasonal cycles are low in pipe coating project activity and constriction enrollment cereal supply chain are expected to drive earnings in the next two quarters to be slightly below Q1 2021 levels.

Tightness across much of short course raw material supply base remains challenging.

There are products incorporate specific polymers resins metals glass fiber, we continued to experience supply and limitations extended lead times and sometimes volatile costs, both of the materials themselves and related shipping activities.

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 a big thing during the first half of 2022 with the availability of certain specific materials now expect it to be tighter than Q4 and the early parts of 2022 than previously anticipated.

It.

Across the company, we continue to what respectfully with all customers to ensure incremental input costs are fairly reflected in our selling prices.

On many years of close cooperation with suppliers, the 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, but related near term volatility remains a risk.

Regardless of these near term impacts and the elimination of government subsidies, which have enhanced results in the last 18 months. We are confident that short course annual earnings were once again increase in 2022.

Turning to segment business activity.

Composite systems segment is primarily influenced by two market forces. The first just demand for premium UL listed underground storage tanks within the North American retail fuel and water markets.

Second as demand for reliable scalable composite pipe to connect newly completed oil and gas wells into the existing processing and storage infrastructure.

Third quarter composite systems segment revenue rose by $6 4 million or 7% when compared to the second quarter of 2021.

Q3 shipments of short goes market, leading underground storage tanks were higher than Q2, a sustained fuel station construction and refurbishment activity and demand for the company's hydro chain storm water management systems continued.

Market demand for both fuel and water related underground tanks is expected to remain robust in the foreseeable future.

With normal seasonal softening in Q1.

Unfortunately tank related raw material availability has tightened further in recent months and continues to be highly volatile.

We currently anticipate this will cause our tank production output in Q4, and early 2022 to lag demand lowering revenue and negatively impacting plant utilization for the segment in the coming two to three quarters.

Our actions to qualify additional supply sources and our suppliers' actions to increase production are expected to lower the supply chain effect as we move through the first half of 2022.

Yeah.

North American demand for composite pipe rose in Q3 versus the prior quarter.

Improved oil and gas commodity prices drove continued growth in well construction activity in the U S and Canada.

While most onshore oil and gas operators remain conservative in their capital spending plans provided the oil and gas commodity prices remain favorable we anticipate north American demand for these products will grow further in 2022.

Normal Q4 seasonal impacts are expected to lower demand for composite pipe compared to Q3 with demand rising again in Q1 of 'twenty two.

Outside North America, we continue to observe elevated quote activity for our composite pipe products, driven by an improving customer capital spending outlook.

While several contract award decisions are expected late in 2021.

Likely 2022 before meaningful incremental revenue tied to these awards just delivered.

Pipe shipments associated with the substantial middle East Order noted in our Q1 earnings release continued throughout Q3 and will do so for the coming 18 months.

In summary, we anticipate robust demand across the composite systems segment throughout 2022, and likely beyond but we'll see lower revenue and earnings contribution during Q4, and Q1 seasonality enrollment serial availability impacts are observed.

Yeah.

Moving to show of course, automotive and industrial segment during.

During the third quarter, the segment saw revenue rise $4 $7 million or 7% compared to the second quarter, reaching a new record high in both revenue and adjusted EBITDA.

Increased demand for heat shrink products within automotive applications and for engineered wire and cable products by electrical utilities and communications providers are fueling growth in this business we.

We anticipate these demand dynamics continuing throughout 2022 and likely beyond however, they are subject to supply chain disruption risks.

Specifically, the automotive market place remains challenged by a well publicized shortage of microchips, which in recent months has extended into the premium chip sector.

Our expectation for this business in the coming quarter.

Central impacts beyond the current quarter are difficult to predict at this time.

When microchip shortages abate, we see a further opportunity for growth in our automotive and industrial business.

Customer ordering expands to normalize inventory needs.

During Q3, the short flex wire and cable business benefited from substantial deliveries of premium products into five G communication build outs and nuclear refurbishment projects elevating revenue and creating a favorable margin impact.

This margin benefit was further enhanced by the utilization of advanced purchased copper wire, which we discussed in prior quarters.

During Q3, our short flex business reached a new record backlog driven by a broad array of critical infrastructure renewal and expansion projects.

We continue to have a constructive view of the mid and long term market trends, which impact this business.

Lastly, our pipeline and pipe services segment revenue during Q3 fell by $24 8 million or 17% compared to the second quarter.

As lower pipe coating activity in all geographic regions was partially offset by higher major project driven pipeline inspection and engineering activity.

This lower revenue level efficient pipe coating execution, coupled with substantial recent footprint and cost optimization enabled the segment to deliver a positive adjusted EBITDA contribution during the quarter.

We continue to focus significant attention on further cost and footprint rationalization, while ensuring we retained the talent capabilities and geographic presence to support our customers globally.

The specific geographic and product mix it pipe coating activity scheduled over the next two quarters is likely to result in approximately breakeven adjusted EBITDA for the segment during this period.

As we have discussed many times show coast pipe coating business is tied primarily to the timing of offshore pipeline project sanctioning, which inherently leads to volatility from quarter to quarter. However continued favorability in oil and gas commodity prices, coupled with elevated global demand for natural gas is driving an increase in pipeline investment planning.

<unk> with multiple mid size in several large pipeline projects expected to reach final investment decision in the coming months.

Turning to the backlog at the end of Q3, the company's committed backlog of work to be completed within the next 12 months stood at $507 million, an increase of $18 million when compared to the prior quarter.

Previously the company had anticipated pipe coating backlog to decline until year end before benefiting from new contract awards early in 2022.

With some customers demonstrating increased urgency we now believe our pipe coating backlog will build modestly in Q4.

And then more substantially as we enter 2022.

Sure of course bid number reflects the value of what where the company has issued a sub price with proposed contract terms against an explicit scope of work with a defined timeline for execution.

At the end of Q3, the bid balance was $911 million a decline of $61 million when compared to the prior quarter, reflecting the transition of several bids into backlog included.

In parallel with sharp cost focus on business execution. We continue to also evaluate our ESG performance and seek opportunities to lower our environmental impact both through the products and services that we provide our customers and our own environmental footprint.

Next week, we will be releasing our annual sustainability report, which will include specific ambitions to significantly reduce our scope, one and two GHT emissions and materially elevate diversity within our senior leadership team over the coming decade, we.

We have spent the last 12 months carefully reviewing tangible actions to drive achievement of these ambitions and our confidence in our path forward.

Shawcor has driven substantial improvement in multiple ESG related metrics versus our 2019 baseline and we'll continue to share our progress year over year.

Finally on October eight we announced that Gaslog has elected to step down from the company at the end of May next June after transitioning his CFO responsibilities to Tom Halloween, who will join Shawcor in December initially as Chief Accounting Officer.

This extended thoughtful executive succession plan is consistent with <unk> long held practices and ensures minimal disruption to the organization's tactical and strategic initiatives.

Well Gaston and I will enjoy several more quarterly earnings calls together I would like to take this opportunity to appreciate his selfless dedication to the company and tireless commitment to value creation for all stakeholders.

International core team wishes him the very best in the next phase of his career.

Thanks, Mike shock.

<unk> Q3, adjusted EBITDA was $31 8 million on revenue of 291 million with cash flow from operations of $17 million during the quarter.

<unk> revenue in the third quarter was 291 million, 9% higher than the third quarter of 2020, that's reflects increases in composite systems, and automotive and industrial segments, partially offset by a decline in the pipeline and pipe services segment compared to the third quarter of 2020, the composite systems segment.

Latin America, and higher pipe coating girth, Weld inspection and engineering services in North America.

$1 8 million gain on investment in associates as well as the negative impacts of $11 6 million in the impairment charge related to our F. I F girth weld inspection business and a loss of $1 6 million for Argentina Hyperinflationary accounting.

Adjusted EBITDA for the current quarter was $31 $8 million significantly higher than the $17 8 million reported third quarter of 2020.

Adjusted EBITDA margins exceeded 10% for the second consecutive quarter, reflecting the company's continued execution of cost reduction and efficiency improving activities.

Range.

Approximately $35 million during.

During the third quarter cash used in finance activities was 44 million, reflecting 35 million repayment of debt outstanding and $5 4 million payment of our quarterly lease obligations net.

Net cash used in the third quarter of 2021 was $23 1 million compared to cash provided of $3 1 million in the third quarter of 2020.

With respect to cash and debt. The company has a cash balance of $116 9 million debt of $324 8 million and $41 8 million of standard letters of credit as at September 32021, the company's liquidity position has benefited from significant initiatives completed in the last 18 months and it's continued focus on reducing its op.

<unk> cost basis with confidence in our outlook. The company is we paid 130 million of its outstanding debt over the past nine months. This reflects a $35 million repaid in the third quarter and $20 million repaid subsequently based on the actions completed in it that would like the company expect to generate sufficient cash flows to fund its operations and continuing to focus on improving its balance sheet.

<unk>.

Now I'll turn it back to Mike for some final comments.

Thank you <unk>.

This organization remains intensely focused on a short list of key outcomes designed to deliver higher returns with greater consistency and predictability over time.

Firstly, protecting the health and safety of our employees, while thoughtfully lowering our environmental footprint.

Second capturing our share of increased customer spend by delivering a high value products and services with quality and integrity.

Third lowering costs generating cash and strengthening the balance sheet.

And fourth selectively allocating capital to those business lines best aligned with long term macro trends follow valuation.

<unk> strategic options for those businesses, which are less well aligned.

In closing.

Following solid financial performance in Q3, and despite near term seasonal schedule and supply chain driven hurdles shoko superior product portfolio is very well positioned to benefit from increasingly favorable market trends across the critical infrastructure sector. We.

We are encouraged by the demand fundamentals in our business and expect full year 2022, EBITDA to exceed full year 2021.

Focus on margin expansion debt reduction and carefully targeted capital investment remains Paramount.

I'll now turn the call over to the operator and open it up for questions. You may have for myself gastar for Megan.

Ladies and gentlemen, if you have a question or a comment at this time. Please press. The Star then the one key on your Touchtone telephone. If your question has been answered already which can move yourself from the queue. Please press the pound key.

Our first question comes from Michael Robertson with National Bank financial.

Hey, good morning, all and thanks for taking my questions.

Wanted to start with the supply chain challenges you noted on the constant tank side.

When you're engaging with your your raw material suppliers, what kind of signals are you looking forward to indicate.

Our sense of confidence that the disruptions will be short term in nature and that there are some slack on the.

The horizon outside than your third quarters.

Good morning, Michael Thanks for the question Yeah. That's clearly the primary area of focus for us from a supply chain perspective, it's the one piece of our business, where we have not been able to consistently secure the inbound supply of raw materials that we need to meet our customers' expectations the backlog in this business.

Is at record levels.

And demand for the underground storage tank.

Product line, particularly in fuel applications has continued to grow.

Fuel station network expansion and renewal occurs across.

North America.

We've got a number of vendors in this space the product in question here is a very specific regulated UL listed resin.

And as we have worked with those vendors they've given us confidence that their ability to produce in greater volumes is on the near term horizon the impact that they have suffered from primarily.

Availability of specific.

Ingredients that are largely produced on the Gulf coast and were impacted by the hurricane.

Earlier this year.

Early Q3.

Forced a number of individual component providers to declare force majeure.

Those sports leisure notifications have been lifted so we do expect that our existing supply base will improve.

But certainly we don't sit there and wait for that to happen. So there's a number of actions that are underway comes into play.

For some time across the organization.

To expand our supply base to qualify alternative Glenn and to accelerate other internal efficiencies that should allow us to produce more tons.

From the resin that is available.

At the moment, we are optimistic that the severity of these challenges will will lower as we move through the first half of 2022.

Got it got it that's very helpful color.

You you noted a lot of the.

Greece, and the backlog was driven by demand for composite tanks and other.

Other non oil and gas related orders.

Given that you also noted some price surcharges being implemented to help.

To help offset.

Raw material price increases was wondering if you could sort of ballpark how much of the pickup you're seeing in the backlog are being driven by price increases versus you know like volume or unit increases.

Would it be roughly a 50 50 split or may be skewed one way or the other more heavily.

Certainly skewed more heavily to demand increases.

There's an element of backlog growth that is tied to the price improvement, but it is well below 50%.

Got it got it that's great.

And I guess I'm assuming.

The raw material inflation subsided at some point would you be expecting to see some margin expansion on the back of that like would you be able to sort of.

Keep that the price increases that you've been still over recent quarters.

I think across most of our business lines the degree of demand in the marketplace for our products.

We expect it to remain elevated and that's certainly a favorable environment for us to maintain pricing even as raw material input costs are lower I would say that at this point the input cost of raw materials lowering is not something that we're anticipating in the near term I think.

I think that dynamic likely remains roughly where it is.

For most of 2022, so it's not a near term effect, but we certainly would expect that we have pricing power in this demand environment.

Fair enough.

Last question before I turn it back.

You posted what I think was another record quarter for the automotive and industrial segments.

Based on your current capacity. It was just sort of wondering how close you were to that.

Solid ceiling in the quarter.

Given the chip shortage is I realized bumping up against capacity is not likely.

A near term concern, but was just curious how how close you were too that the limit in Q3.

Our global footprint with manufacturing activity in Canada, and Germany and in China.

<unk> has continued to grow so it at this point.

I do not believe even with the demand growth that we anticipate moving through 2022.

That business will be challenged in its capacity to meet the customer needs from an overall capacity perspective.

One challenge that we face there is the one that we called out which is this.

Relatively short term issue of autumn automakers are struggling to find all of the component parts they need to assemble their vehicles.

Got it.

That's really helpful color I appreciate you, taking my questions and I'll turn it back.

Our next question comes from Aaron Macneil with TD Securities.

Hey, good morning, all thanks for the time and guests down I know youre not going anywhere anytime soon but all the best.

Mike can you remind us what the timeline is between.

And S E for pipe coating project in revenue recognition.

Maybe the better way to ask the question is assuming all these conditionally awarded projects go ahead can you give us a sense of that.

Of that $237 million from a revenue recognition perspective.

Yeah. Good morning, Erinn I'll offer some perspective gosh that may have some additional comments here so.

There's certainly a range of <unk>.

Mine horizons between F E and pipe.

<unk> execution.

Very project specific but generally.

We would expect that we see revenue within.

Approximately 12 months.

Sometimes it can be as rapidly as you know four to six months post <unk>, sometimes it's a little longer than 12 months out there.

I think that the shape of the pipe coating revenue curve that we've outlined here and all comments being.

Unfortunately, rather depressed here in Q4 moving into Q1, and then rising as we work our way through the remainder of 2022, certainly back half loaded revenue there that's indicative of what we think the revenue from these <unk>.

Already sanctioned or awarded.

Awarded conditional on sanctioning projects is going to deliver.

Understood.

<unk> done what inning are you in from a cost reduction perspective. These programs largely wrapped up at this point or is there.

More smaller stuff that you're still working on.

Yeah, I think we continually are looking at you know our footprint and.

<unk>, what the future holds.

And looking for opportunities to reduce our costs are I wouldn't say we are in.

Close to close to the end, but we're substantially complete the majority of the significant.

Initiatives that we think there's opportunities for it.

Understood and then Mike a bit of a high level question now that you've been in the chair for a while.

Give us your updated view on.

Various products to sell and market. It serves and specifically I'm wondering if you could address things like whats your view of the fate of integrity management, which was an early focus here predecessor, you, obviously announced the impairment charge this quarter as well maybe the.

Automotive and industrial segment, which gives you some great diversification in transitory challenges aside of them performing really well, but.

Not something Youre really getting credit for from a valuation perspective.

Are there any gaps in services or products.

No need for organic business development, or M&A, and I know, there's a lot to addressing the question.

In many cases, it would be tough to get into specifics, but really just trying to get a sense of where your head's at Paramount.

Strategic perspective, and where there'll be steering the business over the next few years.

Yeah. It is a great question and you're right, there's a credibly take longer than we have here to walk through all of that in detail but.

What I'd say is having having now had a chance to really understand this business and meet both our internal team as well as many of our customers.

I'm very impressed with the quality of products the value our products and services that we offer in many cases truly unique.

And also the culture of this organization so customer focus so urgent so ready to embrace change where necessary to evolve this business to a higher level.

Think broadly and we've certainly commented on this before.

The organization is quite diverse and perhaps a little more diverse than an organization of this revenue scale.

So I think we have to be thoughtful about where we focus our time, our attention and our capital spend and you called out a couple of businesses that are I think extremely well positioned for the long term macro trends.

Composites business, our Eni business, particularly we think are very well positioned for the future.

We have a very strong position in many aspects of.

Pipeline servicing whether it's coating or integrity management.

But obviously there are some challenges around politics for pipelines, particularly in North America at this time.

So we have to be thoughtful there.

I think premature to talk specifically about any one or two businesses that.

May or may not be.

A point of focus.

In the short term, but all in all I think we have a very clear vision.

Which businesses have the very best connectivity to the macro trends that are favorable here.

These are the ones that will get the bulk of our attention and our capital investment.

Understood I appreciate the color I'll turn it over.

Yeah.

Our next question comes from Tim Marcelo with ATB capital markets.

Hey, good morning, everyone.

Good morning.

First question just around the cost side of the business and particularly the euro.

Composite pipe.

We've heard some rumblings from other people in the industry that.

No.

By change and shortages on the steel side of the CTG market are developing.

Look you know over the next couple of quarters are you seeing.

Since switching to composite pipe in CTG for from customers like traditional you steal just given that they might not have access to steel.

So certainly as we look at.

Shortages across the let's say the raw material spectrum.

I think what Youre hearing is something that's likely to play out.

Every reason to believe that.

Steel availability will drop here.

We've not seen a dramatic or measurable movement, driven by a lack of access to steel pricing I think what we continue to see our customers that are looking thoughtfully at a total cost of ownership of the gathering lines.

And are continuing to see that a composite solution offers a better result than steel in that comparison.

Obviously, sometimes harder than others to convince customers that that's the right move to make.

But I think we're having some success there although I wouldn't say it is driven by a lack of access to steel at this point.

Okay got it.

Quick sort of housekeeping item you guys mentioned.

40% revenue tied to non oil and gas business lines that would.

Include the <unk>.

Fuel side of the pipe to take business sorry.

Right.

Yeah.

Gotcha.

Correct Okay.

Okay got it.

And then one on the AI segment.

Yes, a pretty strong quarter, despite headwinds that you're seeing.

Throat for Microchip shortages.

Is that the growth in revenue quarter over quarter and the growth in EBITDA quarter over quarter, obviously part of that would be from.

Increase the revenue side of the increased copper prices.

Prices, but is the majority of that just because of the the five <unk> projects that you're doing that seems to be coming to an end I guess in Q4.

So what I'd say, Tim is that first copper prices, while they still bounce around a little bit.

They've been much more stable the last couple of quarters than they were in the beginning part of this year. So.

Movement in either revenue or EBITDA in Q3 versus Q2, I have not much to do with copper pricing.

It was more to do with the volume and the mix of certain deliveries and as we commented I think.

Particularly we had a robust quarter of deliveries into nuclear refurbishment applications and a robust quarter of deliveries into <unk> build out projects.

Both of those revenue streams have a little bit of lumpiness to them.

There's a sequencing effect in nuclear refurbishment that causes demand to move around quarter to quarter. Although the overall project duration is many years long and on the <unk> side. We had a particular project that we were supporting in Q3 that will get close to expand as we move through Q4, so there'll be it will be a.

Little over on <unk> sales in Q4.

We had a.

A little bit of benefit not a material amount, but a little bit of benefit from the advanced purchase of copper wire that we made earlier this year and I think we've noted in our Q2 earnings call.

That had bonds purchased copper was consumed as we delivered our commitments during Q3, and we benefited from a little bit.

Price.

Benefit in that respect so a mixture of things.

What I'd say is that Q3.

I don't have a lot of favorability built in there and when you look at the margins in the business that we delivered in Q2 and in Q3 setting kind of realistic forward expectations.

Is that your expectation is that on average with somewhere between those two but we're likely to continue to see.

A little bit of volatility quarter to quarter, just based on the project based nature of some of the things we deliver there.

Okay, that's very helpful.

You mentioned in the.

In the commentary and the automotive and industrial segment.

Some energy shortages, which are impacting.

The plant in China.

Do you expect it energy shortages in the region are going to.

Lasting issue.

And is there any risk to energy shortages, perhaps impacting your customers' production facilities in the automotive and industrial segment in China.

Well certainly the Chinese energy supply situation is a little unusual right now.

Government enforced.

Energy restrictions that effectively lower our available working days by about 10%.

Liberty.

At the moment, it's difficult to know how long that scenario.

Will continue and certainly everybody who is in energy consumer in China is impacted to some degree by this so I don't think our customers will be exactly what I.

I'd say is that all of our automotive and industrial team both in China and at a global level are extremely resourceful.

I have worked to ensure that while we have fewer days with energy available in China.

Is it lowered our overall production output in the.

Facility.

Scheduled shifts and found ways to work around this issue. So I don't expect that this will have a material impact on our business.

Uh huh.

Of course, if it were to elevate beyond the 10%.

Right.

You start to have to re evaluate their but in what we can see at this time I don't see it impacting the ability of our business to perform.

Okay.

Okay. That's helpful.

And then last one for me.

And the PPS segment, you're probably benefiting to.

To an extent or maybe not benefiting but dodging some supply chain issues just given sort.

Sort of lower throughput in the business currently.

But as you look to some of the projects that you're expecting to book early.

In 2022.

Has the lead time for those projects extended and you think there's potential risk around delivery just based on supply chain issues maybe.

You can get the pipe to coat or for some of the inputs that you might need to actually coat the pipe.

But at this point I don't believe that we have material risk on that front.

For a number of reasons firstly, the raw materials that we can see them in the pipe coating process.

Larger projects are.

The late stages of of award.

As our customers lock in their commitments to us we lock in our commitments to our supply chain vendors and they commit and lock in their commitments to supply to us. So I think our supply chain is relative.

Relatively low risk.

Obviously steel availability is something that our customers have to continue to keep a thoughtful eye on and what we see is that they they are generally managing that risk well and doing so by.

For the allocating award a steel pipe purchase to multiple vendors, particularly on larger projects to hedge their risks at this point I don't believe that that's going to impact us.

Obviously, if the steel supply situations tightened dramatically.

That may have a knock on effect, but I don't envision it at this time.

Okay.

Okay. That's great. That's all for me I'll turn it back.

Our next question comes from Keith Mackey with RBC capital markets.

Hi, Good morning, just a question first on the.

Project tie.

Customer types, whether it's an ocs or super majors doing this type of work and and is it offshore oil or other LNG type type work.

And any color on any of those items you could give there would be helpful. Yeah. Good morning, Keith.

Obviously, when we engage with customers we tend to sign confidentiality agreements, which makes it a little difficult to provide too much detail here, what I'd say is you're right certainly that budgetary number jumped substantially quarter over quarter.

I think generally that is a very good indicator of the degree of.

Urgency that our customers are starting to exhibit as they contemplate new pipeline projects.

The items that elevated that budgetary number.

Our mix so.

Coming from both the eastern Hemisphere, and the Western Hemisphere coming in I would say both on the smaller end of the spectrum in the larger end of the spectrum in terms of project size.

And our mix also in terms of customers so both national oil companies and.

International oil companies driving that.

More of the activity is directed to gas than it is oil, but there's certainly.

Oil element to this.

I think what I'd say in general is that we are probably all observing the impact of.

Not enough energy for the world more concentrated in some thoughts than others.

Oil and gas industry at large.

Seeing the impacts of quite substantial underinvestment over the last five years.

With elevated oil and gas prices elevated demand and an expectation that that will continue for some time.

We are certainly optimistic that this this early stage budgetary activity that has started to really rise will translate into.

Ultimately fully sanction projects and elevated revenue.

The ability for that pipe coating business of ours.

Although as we said before we don't see that revenue really starting to appear until we're into the second half of 2022.

And then moving through 'twenty, three and probably 24.

Got it thanks for that color.

Maybe just on capital allocation. So understand the next couple of quarters might take a bit of a bit of a step down but as you go forward and things ramp up pipe services normalizes a bit in your experienced growth in your in your core growth segments.

What do you see as your more ideal capital allocation type methodology as you as you go through maybe the next one to two years.

Is there is there going to be excess cash that you'd like to allocate beyond maintenance capital and debt reduction.

Or is it are those kind of the main priorities.

Foreseeable future.

So in terms of.

The cash generation of the company and are intended to use is obviously first and foremost it is make sure that we protect the balance sheet and continue to move towards our targeted debt levels, which we've consistently stated are on the order of one and a half times.

We certainly believe we will have.

Access to sufficient cash to manage all of the <unk>.

Maintenance and growth capital needs that we may have over the next couple of years.

<unk>.

Thirdly say that the work that's been done, particularly within the pipe coating business too.

Rightsize the fixed facility footprint has meant that the underlying maintenance capital needs of that business are substantially lower today than they were two years ago. So when we think about total capex spend our original guidance for 2021 was the 40 to 50 range we've lowered that.

Here the last couple of quarters, just based on actual needs and we're guiding to approximately 35 I think as we as we look forward to 2022, I'd say that we'll give guidance will once again be in that 40 to 50 range.

And I think in that range, we have the capacity to meet all of our maintenance capital needs and.

Ensure that we have carefully directed growth capital into those businesses that are likely to see continued high levels of demand.

As we've discussed are particularly the composite business in the automotive and industrial business.

Okay.

Perfect. Okay. Thank you and one last one so its EBITDA over the next two quarters it steps down from 31 to around 18.

At this point I think our estimation is that it's roughly even it won't be perfect but.

They're impacted by slightly different things.

But the magnitude of the impact is similar.

Okay. Thanks, very much that's it for me thanks.

Our next question comes from Matthew Weekes with <unk> capital.

Good morning, Thanks, I all of my questions have actually been asked at this point put myself thought back in the queue. Thanks.

And I'm not showing any further questions at this time I'd like to turn the call back to Mr. <unk> for any closing remarks.

Thank you very much so.

Just close by saying Thank you all for your time and your attention and your interest in the company. This morning, we'll look forward to talking to everybody again next quarter.

You all have a great day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

Q3 2021 Shawcor Ltd Earnings Call

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