Q4 2021 Shawcor Ltd Earnings Call
Hello, and thank you for standing by and welcome to the Shawcor Q4, 2021 results conference call. At this time all participants are in a listen only mode. After the speaker presentation there'll be a question and answer session to ask a question. During this session you will need to press star one on your telephone please be advised that today's.
Conference maybe recorded.
Any further assistance. Please press star Zero I would now like turn the conference over to your speaker today negatively Catherine director of external communications at USG. Please go ahead.
Good morning, before we begin this morning's conference call I'd 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.
Differ materially from those projected the complete text of Shawcor statement on forward looking information is included in section four Plano of the fourth quarter 2021 earnings press release and in the MD&A that is available on SEDAR and on the company's website at <unk> Dot Com I'll now turn it over to <unk> President and CEO .
Mike Reed.
Good morning.
Thank you for joining <unk> fourth quarter conference call today, Megan and I are joined by our CFO Jocelyn Turner, and our Chief Accounting Officer, Tom Halloween.
Before commenting on business performance I want to recognize the employees of Shawcor for their continued dedication to each other and our customers in the face of ongoing pandemic related restrictions risks and impacts.
Unfortunately in recent days these existing challenges have been compounded by the terrible events in Ukraine. When many of our colleagues have friends and family members enduring horrific circumstances, our thoughts are with the people of Ukraine as we hope for a rapid end to this conflict.
Turning to business in addition to delivering higher than previously guided adjusted EBITDA further lowering our cost base generating substantial operating cash flow and expanding our backlog the fourth quarter of 2021, social co complete several important steps in support of our strategic focus on the provision of differentiated.
Materials based technologies into industrial and other critical infrastructure end markets.
Through the announced exit from several smaller noncore business lines, the pending sale and leaseback of our current Toronto footprint issuance of our first public notes and renewal of our revolving credit facility. The company sharpened operational focus lowered net debt leverage and create.
Financial flexibility.
These important strategic actions and others that will evolve over the coming 12 months to 18 months are intended to enhance overtime, the company's margin and operating cash flow profile, lower overall volatility and deliver greater full cycle value to all stakeholders as our market leading technologies enable responsible sustainable renewal.
And enhancement of critical infrastructure.
Key macro drivers for each of our businesses continue to move favorably.
Jewell expansion of global investment in communications transportation, low emissions energy and water management infrastructure, coupled with further strengthening of commodity price fundamentals underpin our confidence that our multiyear upcycle ensure calls primary market is developing.
While the employees of Shawcor works hard every day to deliver on our commitments to customers and to execute critical near and longer term business activities. The challenges lingering pandemic impacts and the recent geopolitical tensions in eastern Europe , particularly in the form of supply chain tightness continue to pose the most meaningful constraint both for Shawcor.
And our customers.
As expected Q4 saw resident availability limit on fuel and water tank manufacturing output, while our automotive customers were forced to idle vehicle production in several locations due to a shortage of microchips.
Additionally, as we've entered Q1, some offshore pipeline customers have advised of delays in the arrival of premium steel tubular.
Which will further lower short course pipeline coating activity in the first half of this year.
When combined with previously communicated project timing and normal seasonal cycles. This ongoing supply chain friction will result in our 2022 business profile being substantially more second half weighted than originally anticipated.
The company's Q1, adjusted EBITDA will be the lowest of the year approximately half the level delivered in Q4 2021 with sequential quarterly growth throughout the rest of 2022, that's all supply chain strategies take further effect onshore oilfield activity rises and incremental offshore pipe coating projects commence.
Full year adjusted EBITDA is now anticipated to be similar to 2021 .
Across the company, we continue to work respectfully with our customers to ensure incremental input costs are fairly reflected in our selling prices.
Built 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 near term volatility remains a risk, particularly in light of the recent tragic events in eastern Europe .
Sure of course direct exposure to customers within Ukraine, and Russia is limited with less than $5 million of annual revenue derived from both markets combined.
While too early to assess indirect impacts from the conflict potential consequences include a further slowing of eurozone automotive production and elevated global energy input costs.
In contrast, elevated oil and gas commodity prices have the potential to spur accelerated north American oilfield activity, which would likely drive incremental demand with ensure cause flex pipe western Canadian pipe coating and oilfield asset management businesses.
Turning to segment specific business activity.
Our composite systems segment is primarily influenced by two market forces. The first is demand for premium underground storage tanks within the North American retail fuel and water markets and the second is demand for reliable spool level composite pipe to connect newly completed oil and gas wells into existing processing and storage infrastructure.
Fourth quarter composite systems segment revenue was virtually unchanged when compared to the third quarter of 2021 with adjusted EBITDA margins falling slightly as lower revenue in manufacturing efficiency within our underground fuel storage tank business was almost entirely offset by increasing sales of water management products and spool composite pipes.
Despite sustained retail fuel station construction and refurbishment activity Q4 shipments of short course market, leading underground fuel storage tanks were lower than Q3, Q2 resin supply constraints.
Tank related backlog reached a new record during the quarter and while resin availability is expected to remain challenged for much of the first half of 2022.
Strategic actions to secure increased supply commitments from current vendors and to qualify alternative resins from new vendors are anticipated to ease limitations as we enter the second half of 2022.
Demand for the company's hydro changed storm water management systems also remains high and revenue rose versus the prior quarter as hydro change unique value proposition drove incremental market share gains.
Demand for composite pipe rose in Q4 versus the prior quarter as commercial acceptance of the company's five inch flex pipe product group and improved oil and gas commodity prices drove increased new well construction activity in the U S and Canada.
While most onshore oil and gas operators remained thoughtful in their capital spending plans the expectation of elevated commodity prices in the current year and likely beyond is expected to drive further growth in demand for these products as we move through 2022, notwithstanding the usual seasonal impact of Canadian breakup.
Shawcor supports its composite pipe business from a single production sites in Alberta, and benefits from improved manufacturing efficiencies and enhance margins as revenue increases in this business.
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 timeline.
Looking forward in addition to demand growth driven by rising North American onshore drilling activity.
The company anticipates the introduction of its six inch spool product during 2022 further enhancing our portfolio and positioning shawcor to better serve our customers and are yet to come.
The six inch Spooled product effectively replaces a previous generation of non school level product marketed under the flexible brand.
Consequently, our Q4 results reflect appropriate impairment charges tied to the permanent retirement of the flexible product line among other things.
In summary, while some near term raw material availability impacts will be observed in the underground fuel tank business, we anticipate robust demand across the composite systems segment throughout 2022, and likely beyond and are well positioned to capture incremental margins as revenue rises.
Moving to show cause automotive and industrial segment during the fourth quarter. This segment saw revenue declined by $9 $7 million or 14% compared to the third quarter with an associated reduction in adjusted EBITDA as continued strength in demand for heat shrink tubing and premium wire and cable products from industrial and <unk>.
Markets was insufficient to offset temporary reductions in automotive market demand.
These fourth quarter reductions are typical as our customers lower year end inventories.
Acute shortages in microchip supply caused several customers, particularly in the European region, two idle factories and further exacerbate the normal quarterly impact.
While still constrained entering 2022 microchip availability has begun to improve which when combined with normal seasonal restocking of inventory is expected to drive a rebound in automotive related revenue in Q1.
Automotive supply chain impacts beyond Q1 remain difficult to predict.
While the worst of recent microchip shortages are likely behind the industry. Several European auto manufacturers have components supply chain that extend into Ukraine and the current conflict could result in temporary shortages as geographic rebalancing of supply takes place.
Our short flex wire and cable business benefited from continued deliveries of premium products into five G communication build outs and nuclear refurbishment projects during Q4.
Although previously communicated project timing caused these deliveries to be lower than the prior quarter.
It should be noted that five G communications build out activities on our project based having variability quarter to quarter and early 2022 deliveries into these applications are likely to be similar to those seen in Q4.
During Q4, our automotive and industrial business reached a new record backlog driven by a broad array of critical infrastructure renewal and expansion projects.
We have a constructive view of the mid and long term market trends, which impacted business and continued to invest growth capital to expand and enhance our manufacturing capabilities, including the recently announced intent to relocate our Toronto production site into a larger modern more efficient facility, enabling profitable growth for the next deck.
Jade, we expect the sale leaseback of our current site to close during the second quarter of 2022.
Yeah.
Mostly our pipeline and pipe services segment revenue during Q4 fell by $15 $1 million or 13% compared to the third quarter with adjusted EBITDA falling modestly below neutral on lower pipe coating and pipeline inspection project activity.
As we discussed during our Q3 earnings call the Covid and commodity price driven lack of new offshore pipeline project sanctioning during 2020 in 2021 closed on pipeline and pipe services segment to face a low level of activity in Q4 with those levels falling further still in the first half of 2022.
The anticipation of this multi quarter low has been the primary driver for very substantial cost and fixed footprint optimization over the last two years, which when combined with highly efficient execution remaining work has enabled the segment to deliver positive adjusted EBITDA contribution in 2020 one.
I noted earlier that compounding the pipe coating project schedule several customers have recently communicated delivery delays for premium steel tubular.
This will cause a number of projects originally scheduled for start up during the first half of 2022 to be delayed into the second half of the year driving a substantially higher second half loading of pipeline and pipe services segment business than originally anticipated.
Despite continued cost control. This is expected to cause the segment to return negative adjusted EBITDA during Q1.
While challenged in the near term backlog for the pipeline and pipe services segment Rose again in Q4 as several new projects were awarded an <unk> contract to execute coating of the Scarborough gas pipeline in Australia was activated following final investment decision approval.
Partly driven by this project we anticipate this segment's 12 month backlog will rise more substantially over the first half of 2022.
As discussed on numerous occasions Sjoquist 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 has driven an increase in pipeline investment planning and sanctioning activity, which is expected to continue throughout 2022 and forms the basis for what the company expects to be a multi year offshore pipeline capital spend cycle.
From a low point in Q1 pipeline coating activity is expected to rise each quarter of 2022.
During Q4, the company announced the divestiture of its Shawcor inspection services business, which had historically form part of the pipeline and pipe services segment and in 2021 had contributed $37 $5 million of revenue with negative adjusted EBITDA of $2 $5 million.
This transaction for a sale price of $11 $2 million enables greater focus on short course remaining business lines, while improving overall margins and lowering organizational complexity.
Turning to backlog at the end of Q4, the company's committed backlog of work to be completed within the next 12 months stood at $589 million, an increase of 82 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.
Backlog beyond 12 months also rose in Q4, reaching $155 million versus the prior quarter level of $27 million, primarily driven by the recent Scarborough Award.
Sure cause bid number reflects the value of work where the company has issued a firm price with proposed contract terms against an explicit scope of work with a defined timeline for execution.
At the end of Q4, the bid balance was $843 million a decline of 68 million when compared to the prior quarter, reflecting the transition of several bids into backlog.
Included in the bid number are now $57 million of conditional awards pending the clients' final investment decision down from $237 million in the prior quarter as multiple coating projects crossed the F D milestone.
Show cause budgetary number reflecting the value of indicative pricing submitted to allow customers to build a project budget ahead of formal procurement activities remains unchanged versus the prior quarter at $1.5 billion.
This supports our expectations that pipe coating activity will rebound during the latter part of 2022 and into 2023.
In parallel with short course focus on business execution. We continue to also evaluate our social and governance 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.
During Q4, we released our annual ESG report, which included ambitions to reduce our scope, one and two greenhouse gas or G. H G emissions by 50% and elevate diversity within our senior leadership team by 20% versus our 2019 baseline by the end of the decade.
We have a carefully identified action plan to drive achievement of these specific ambitions and we'll continue to demonstrate broad ESG progression for the benefit of all stakeholders in the years to come.
We also continued to innovate solutions that allow for improved health and wellbeing within our workforce.
As an example, we recently redesigned to offshore automated ultrasonic testing system to reduce the weight from 75 pounds to 46 pounds for a technician on a typical offshore shift this reduces the total amount lifted by about 7000 pounds, reducing Bakken repetitive motion injuries.
Finally late last year, we announced gasolines decision to step down from the company at the end of May 2022, after transitioning his CFO responsibilities at home.
This extended thoughtful executive succession plan is progressing as expected and is consistent with short cause lung health practices, ensuring minimal disruption to the organization's tactical and strategic initiatives.
Stan and Tom will now walk through <unk> fourth quarter, and full year 2021 financial numbers.
Thanks, Mike as Mike mentioned operational results were stronger than originally projected with the four quarters adjusted EBITDA at $20 1 million on revenue of $266 million.
This higher result reflects higher demand for composite pipe in North America, and improved margin mix from shipments of five G communication cable products and lower incentive based compensation related to share price decline in the period.
Consolidated revenue in the fourth quarter was 266 million, 18% lowered in the fourth quarter of 2020.
This reflects a decrease in the pipe in pipe services segment, partially offset by increases in the composite systems, and automotive and industrial segments, when compared to the fourth quarter of 2020.
The pipeline and pipe services segment revenue decreased by 46%, primarily due to lower pipe coating activity in <unk> Asia Pacific and Latin America, coupled with the absence of $17 3 million of revenue related to the products business sold in December 2020.
Systems segment revenue increased by 29%, primarily due to higher demand for composite pipe products, driven by improved drilling and completion activity in North America and the continued strength in North America retail fuel market demand for F. R. P tanks.
The automotive and industrial segment revenues increased by 10%, primarily due to increased shipments of wire and cable products in North America, partially offset by lower near term demand for heat shrink tubing products, resulting from the extended shutdowns of automotive manufacturing facilities due to the premium microchip charges.
On an annual basis consolidate revenue into 'twenty, one was 1.14 billion.
A decrease of 3% over 2020, primarily due to the absence of 87 quite fortnite.
Revenue related to the products business.
Excluding the products business consolidate revenue reflects increases in the composite systems and automotive industrial segments, partially offset by a decrease in the pipeline and pipe services segment when compared to 2020.
The composite systems segment revenue increased by 17% a stronger north American demand for composite pipe products continued solid demand in North America retail fuel and water markets for F. R. P tanks, and higher cavy that Hubert management services in Western Canada.
At a motive and industrial segment revenue increased by 33%, primarily due to strong demand for heat shrink tubing products in all regions. Despite shut down to automotive manufacturing facilities in the second half of the year caused by the premium micro chip shortages faced by our automotive customers.
The segment also benefited from increased shipments for wire and cable products in North America, driven by increased industrial and.
Infrastructure investments.
Consolidators offset for quarter were impacted by nonrecurring items outside the company's normal course of business. The current quarter included $8 9 million of net restructuring costs, reflecting cost saving initiatives completed or committed which include the right sizing of our salaried workforce senior executive changes and business portfolio optimization.
The company also recorded $45 7 million impairment charges related to our annual asset impairment testing.
Current valuation for specific assets and the decision to abandon the flexible pipeline and decline outlook for a small equity investment.
Lastly, our current quarter also included a loss of $1 six nine for Argentina, Hyperinflationary County, as well as a positive effects of a gain on the sale of Shawcor inspection services, a $3.2 million.
The prior year fourth quarter included 52 point why named gain from the sale of <unk> 2 million gain on investment associates, a gain of 1 million from the sale of plant equipment in Toronto, partially offset by $5 9 million of impairment charges $2 8 million of restructuring costs, our boss of half a million for Argentinian hyperinflation.
Kevin.
Annual results reflect the negative impact of $57 3 million of impairment charges $16 4 million of restructuring costs and a loss of $6 1 million for Argentina Hyperinflationary accounting.
This was partially offset by 1.8 million gain on the desk and associates.
And a $3 2 million gain from the sale of Shawcor inspection services business.
The prior year included.
$212 6 million of impairment charges, $32 6 million of restructuring costs and a loss of $1.8 million of Argentina Hyperinflationary accounting. This was partially offset by 52.19 gain from the sale of approximately <unk>. As previously mentioned couple of gains of $10 1 million on investment associates, and a 2.2 lane the sale of land in.
Plant equipment.
Adjusted EBITDA for the current quarter was $21 million lower as anticipated and the $46 million reporting the fourth quarter of 2020.
The decrease from the prior year quarter was attributable to lower pipe coating activity.
The absence of any contribution from the proxies and the absence of $6 million and Covid related government weight subsidies and the seasonal effects within the automotive and industrial segment, which was exasperated by extended holiday shutdowns at automotive facilities due to the premium microchip charges.
These declines were partially offset by the continued steady demand of composite tanks increased demand for composite pipe products, and a strong activity levels and infrastructure and industrial markets.
Adjusted EBIT for the current year was $105 six nine higher than the $74 3 million in the prior year, primarily due to increased demand in the composite systems animal of industrial segments, partially offset by negative impacts of raw material price increases and cost inflation.
Despite this increase in raw material costs the company on an overall lower operating cost base and as a result of completed cost controlling head count reduction initiatives that began in 2020.
At yearend, our global salaried workforce stood at 28% below March 'twenty 'twenty levels and SG&A expenses for the fourth quarter of 2021 were $48 6 million were significantly below our previously commuted guidance of $53 million per quarter, which included lower discretionary spending and incentive based compensation.
As a result of the continued portfolio optimization and the cost saving initiatives. The company expects the SG&A quarterly run rate to be 15 million going forward I'll now turn it to Tom to discuss cash flow and debt position.
Thanks, Scott song turning to cash flow in the quarter cash flow provided by operating activities for the fourth quarter was $42.3 million an increase from the $10.4 million in the fourth quarter of 2020.
This increase was primarily driven by a higher inflow from a change in noncash working capital and foreign exchange, partially offset by a lower net income.
On an annual basis cash provided by operating activities in 2020 , one was $64 $7 million compared to $44.4 million in 2020.
This variance was primarily due to a lower net loss, partially offset by lower inflow from a change in noncash working capital and foreign exchange.
Cash provided by investing activities in the fourth quarter was $1.5 million, reflecting $10.2 million from the sale of Salt core inspection services and $1.6 million in proceeds from the disposal of property plant and equipment and offset by $9 $9 million of purchases of property plant and <unk>.
<unk>.
On an annual basis cash provided by investing activities in 2021 was $3 $8 million, reflecting $10.2 million from the sale of Shawcor inspection services $9.3 million of income from investment in associates and $8 $7 million in proceeds from the disposal of property.
Plant and equipment.
This was partially offset by $25 $1 million of purchases of property plant and equipment of which $9 $8 million was it related to gross capital expenditures to increase production capacity in the automotive and industrial segment as well as production process and equipment improvements and the composite systems segment.
<unk>.
During the fourth quarter cash used in financing activities was $37.5 million, reflecting $33.3 million and net long term debt repayment and $4.2 million of lease payments.
On an annual basis cash used in financing activities for 2021 was $163.5 million, reflecting $143 $5 million and net debt repayments and $20 million of lease payments.
Net cash generated in the fourth quarter of 2021 was $7 5 million compared.
Compared to $107.7 million in the fourth quarter of 2020.
Annually net cash used in 2020 , one was $90 1 million compared.
Compared to net cash generated of $116 $3 million in 2020.
The decrease is primarily due to the $105 $4 million of proceeds received from the sale of the products business in the fourth quarter of 2020.
With respect to cash and debt, we have a cash balance of $124 4 million debt of $292.1 million and $44.1 million of standard letters of credit.
As of December 31, 2021.
Our liquidity position has benefited from the significant initiatives undertaken in 2020 and continued focus on reducing the operating cost base.
We repaid $153 $5 million of outstanding net long term debt since the start of 2021, which includes the $33 $3 million repaid in the fourth quarter and $10 million repaid subsequent to year end.
In the fourth quarter, we revised our debt structure by issuing $150 million of senior notes in Canada and use the net proceeds to repay amounts under our existing credit facility and reduced the maximum credit facility borrowing availability from 500 million U S dollars to $300 million sub.
Subsequent to year end, we renewed our credit facility for a term of four years with revised covenants.
This revised debt structure provides us with additional flexibility to execute on our strategy of portfolio optimization and begin to explore M&A opportunities.
Based on the actions completed in confidence in our outlook, we expect to generate sufficient cash flows and have continued access to our credit facilities to fund our operations working capital requirements and capital program.
I'll now turn it back over to Mike for some final comments.
Thanks, Tom.
With a constructive outlook for the fundamental drivers of our primary business lines are strong and continuing focus on operational and cost efficiency.
Commitment to simplify and high grade our portfolio.
Substantially derisked balance sheet and significantly greater flexibility in our debt structure.
<unk> is positioned not just to successfully navigate any near term market volatility, but to thoughtfully deploy capital both organically and inorganically in order to spur accelerated profitable growth over the coming years.
Thank you for your interest in Shawcor.
I'll now turn the call over to the operator and open it up for questions. You may have for myself guest on Tom or Megan.
As a reminder to ask a question you will need to press star one on your telephone.
Withdraw your question press the bogey.
Our first question comes from Michael Robertson with National Bank. You May proceed with your question.
Hey, good morning, all and thanks for taking my questions.
Mike in your opening comments there.
Spoke to.
Some of the the easing at Microchip.
Our semiconductor chip the supply concerns.
You also noted.
Some of the headwinds in Russia, and Ukraine for some of your automotive clients I was wondering.
Speaking to those clients if theres any broader concerns right now.
Maybe a bit longer term with respect to semiconductor chips given that.
A lot of a lot of the critical raw materials.
For their production are sourced in that region.
Yeah. Good morning, Michael Thank you for the questions.
Obviously, the the mid to longer term impacts of what's evolving in eastern Europe right now are very difficult to pinpoint. So I'd say that the first thing is we are.
Working very closely with our customers and with various points of contact throughout the various industries that we support to try to stay as well educated as we can possibly be on what may evolve here I think it will depend greatly on exactly the nature of the ongoing conflict the duration and obviously the severity of the sanctions.
What I'd say to you is at this point in time.
The supply of microchips into the automotive market has improved as we have moved into the first part of 2022 compared to where it was in the late portion of 2021.
Our particularly European auto manufacturing customers certainly are working through an assessment and appropriate action plan to address any challenges that may be tied to particularly Ukrainian parts supply.
So while we've not yet seen a material change in their near term forecast for vehicle production, we remain alert to the possibility that that could occur.
The longer term impact in terms of critical material availability for both microchips and in a variety of other component parts for vehicles.
Quite broadly lots of consumer goods is something that we're keeping a close eye on but at this point I think it'd be premature for me to tell you that we have a clear vision or that we have a specific impact.
What I'd tell you is that our close relationship with our customers means I have very good confidence that we will know what to expect when they know what to expect and we can take appropriate action at the appropriate time.
To just more broadly comment on Russia, Ukraine as I said in my opening statement the direct impact to Shawcor is really.
Fairly nominal or annualized sales to customers across all of our end markets in Russia, Ukraine and Belarus.
Is substantially less than 5 million Canadian dollars per year.
Hopefully that provides some context.
That's really helpful color, Mike I appreciate that and also the <unk>.
Fluidity of the situation.
The other thing I wanted to touch on you guys have made a lot of changes over the past few years and judging by your ear opening comments prepared.
To make a few more over the coming 12 months to 18 months looking at the impairments Ricky.
<unk> recorded in the quarter specifically.
How sort of far along.
Do you see this in terms of.
Where you're at.
Making potential further impairments down the road do you feel like you've pretty much close to kitchen sink that at this point or is this something that we shouldn't we should expect more moving forward.
So I'll offer some some thoughts and then actually pass it to Tom for a bit more detail here. So.
First I appreciate that.
We've had a number of impairments spread over a number of quarters here, but.
I realize it's a source of.
Certainly a focus for the investing community what I'd tell you is I think the team have done an extraordinary job.
Really looking very very closely at the assets on our books and thoughtfully.
Whether the carrying value is appropriate or not given what we know today and what we expect going forward.
Obviously, it's hard to say there will be never be any more impairments, but what I would tell you standing here today as I think we have got mark carrying values for our assets appropriate at this point in time, so I would not anticipate.
A continued stream of impairments.
Tom any added color you'd like to put on that morning, I would just echo what Mike said I think we've we've cleaned out the things we think needed to be adjusted.
And and marked everything to the proper fair.
So we wouldn't anticipate future impairments, but as Mike said.
This evolves, we will have to evaluate it each quarter, but not nothing anticipated.
Got it got it alright, well that's it that's really helpful color I. Appreciate you, taking my questions and I'll turn it back.
Thank you. Our next question comes from David Ocampo with core Mark Securities. You May proceed with your question.
Thank you good morning, everyone.
Good morning.
So you guys have sold I think nine plants down in a couple of assets do you guys now feel like you're at the optimal size and then probably as a follow up to that now as we're heading into this multi year.
Cycle that you guys are talking about how much of the peak can you capture relative to say 2014 or 2015 is at 80 or 90% of the level just curious to hear your thoughts on that.
I appreciate the question. Thank you.
So obviously, specifically when we talk about facilities that have been closed or sold over the last couple of years, we are talking about.
Pipeline and pipe services segment, specifically, our pipe coating business, what I'd tell you is I think that business is now.
We're very close to the appropriate size for the market that we foresee going forward and obviously, we continue to expect that that market will have some volatility quarter to quarter year to year. It is inherent in that business, but when we contemplate having a.
Fishing to cost basis, we could possibly have.
Weather periods like the current quarter.
I think we're close to that still some work to do and we work very hard on a daily basis to ensure.
Pursue those opportunities.
But equally well when we look forward to the levels of activity that we anticipate as we roll into the second half of 2022 and into 2023, which will be substantially higher than they are today I think that facility footprint is perfectly capable of taking advantage of those opportunities.
I would caution you that I personally don't think that the offshore pipeline construction marketplace that we will see in this coming up cycle.
Due to the extreme that we may have seen.
The 2013 2014 timeframe.
But regardless I think we are well positioned geographically we have retained all of the capabilities that are so essential to both win.
And execute projects around the world.
Don't believe any of the actions that we've taken in the last 24 months have impaired our ability to win against our competition.
Yes.
Patient.
Right. That's helpful commentary and then you guys brought up.
Your balance sheet is in much better shape now than there might be some potential M&A opportunities on the horizon is there a particular area that you guys are focused in on.
Maybe perhaps more more more tilted towards industrial type.
Acquisitions.
Yes happy to address that first I just reinforce.
<unk>.
Areas of focus for capital. The first is to continue to ensure that our balance sheet.
It is.
Is tight that our net debt leverage is.
Close to our target at 1.5 is we can get to.
And beyond that it is to invest in the organic growth of this business to take advantage of.
Growth potential primarily industrially oriented markets, which means primarily our composite and automotive and industrial operating segments.
Then obviously to look at.
Interesting M&A opportunities that may bring additional adjacent capability, whether it's geographic or technical again focus specifically on expanding our industrially oriented businesses and then of course.
Where we have an appropriate degree of stability.
And cash flow.
Looking at ways to return cash to our shareholders.
So going back to the M&A piece I would just say.
While we are now positioned to take advantage of opportunities and we certainly have started to invest a modest amount of time in assessing opportunities you should not expect to see any substantial M&A activity in the near term we're focused in smaller tuck in.
Highly valuable opportunities that can.
Flow through the existing infrastructure of the organization and create substantial value to shareholders in that process.
That's helpful. And then just one last clarifying question for maybe goffstown. The 2022 guidance that you guys put out.
That it is going to come in above 20 or come in relatively in line with 2021 does that include the Qs as well as government subsidies that you guys got.
So for the 2022, we don't expect any wage subsidy at all so we have we have we basically haven't received any after Q1 of 2021. So there is no expectation of additional hfcs in our forecast for 2022.
No I just meant that.
And you guys are going to be flat 'twenty two to 'twenty, one 'twenty, one including your subsidies.
Sorry, yes that is the expectation my my outlook right now is that 2022, adjusted EBITDA will be substantially similar to 2021.
And that includes the impact of Qs.
Okay perfect. Thank you guys.
Thank you. Our next question comes from Keith Mackey with RBC you May proceed with your question.
Hi, good morning, and thanks for taking my questions maybe.
Maybe first just to start off you know I realize there are exceptional circumstances in the current environment, but.
Mike and Tom as your tenure with the business grows and you continue to sharpen the focus of the business I'm. Just curious if you have say developed broad EBITDA margin targets for the different business lines within the business or the company as a whole.
Good morning, Keith.
So the answer is yes, I think it would be a little premature for us to share those publicly.
Obviously theres a dip.
Pathway to reach our objectives.
A few items that are not yet in the public domain.
The answer is yes, and our focus as I said in my my opening statement are to take actions.
Through the course of the next 12 to 18 months that deliver a higher margin profile higher cash flow profile lower volatility and more consistent returns to all stakeholders across this business.
Got it okay.
And just maybe turning to the pipe delivery.
Delays that you that you discussed can you can you just give us a little bit more.
Color or detail on what regions. Those may have been associated with was it one or two specific projects or were they more broad based geographically.
Yeah, So obviously a limit to what I can share here, because our customers have us under confidentiality, but what I'd tell you is.
It was it was a relatively limited number of projects.
Low single digits.
The challenge was primarily euro zone sourced steel to builders.
But the projects themselves were associated with more than one geographic region.
And I got it but it was it was delays associated with some very specific.
Tier steel tubular not kind of a broad tightness in.
Let's say average tier steel tubular.
Got it got it makes sense.
And as your backlog.
Grows and we anticipate.
Level of pipe coating up cycle in the next couple of years Scarborough included what level of capital expenditures do you think you'll need to spend in the pipe business and then the and then the broader company as a whole.
For say 2022, and if you have 2023.
So the 2020 guidance on capital spend hasn't changed so we shared that prior quarter $40 million to $50 million for the year. So no changes there while we did announce the award of the or the final investment decision on Scarborough post our prior earnings call. We had fully anticipated that it would occur and it was incorporated into our <unk>.
'twenty three it's a little soon to say there are a number of <unk>.
Relatively large pipe coating projects that have not yet been.
Totally awarded.
I would expect that we will have visibility on.
2023, more clearly as we roll into the third quarter of this year.
Perfect. Thanks, very much that's it for me.
Thank you. Our next question comes from Matthew Weekes I E Capital You May proceed with your question.
Okay.
Good morning, Thanks for taking my questions, just a little bit on the composite tanks, and and you talked about moving into the new more modernized facility for automotive and industrials to support growing demand there. It seems like composite tanks similarity there's pretty strong demand generally positive macro trend I'm, just wondering what sort of a limited.
Patients that you've seen on supply in this environment are you looking at maybe part of your tuck in strategy organic growth expanding a little bit of capacity on the tank side of the business and maybe building out some redundancy in the production capacity.
Good morning, Matthew Thanks for the question so.
On the tank side, we served the north American fuel and water tank market from six facilities. So we are nicely distributed geographically with a fair amount of.
Overlapping capabilities between those facilities. So I would I would tell you that our current production footprint for tanks.
Is not today and is not expected in the future to be a limitation on our ability to serve that market.
The.
The one thing that is slowing our production output right. Now is this continuing limited availability of very specific so most of that residence.
Which have been a challenge since the middle of last year.
Were a challenge during the recently announced quarter and will continue to be a challenge as we roll through certainly most of the first half of this year I think the corrective actions that we have been taking in partnership with existing vendors and with.
Soon to be quantified vendors gives me confidence that as we roll into the second half of the year.
Access to that resin will be improving.
And in that circumstance, even with the very substantial backlog that we have in that business I do not foresee that our production footprint will be a constraint.
So at this point, we have no plans to specifically invest in adding production capacity.
Although of course, we reserve the right to perhaps do that in the future. If we see even further growth in demand.
On the automotive and industrial side the facility here in Toronto is.
Bursting at the seams.
An older facility decades old.
And not necessarily configured the way, we would choose and therefore, not as efficient either in layout or in energy consumption.
Hughes.
The announced sale leaseback and the associated relocation to a more modern facility here in the Toronto area will give us the opportunity.
To position ourselves that business for longer term growth more efficient growth more efficient manufacturing more efficient energy use.
Quite frankly, a nice environment for our employees to work and so we're excited about that and as I mentioned expect to close that sale leaseback transaction during the second quarter.
Okay. Thank you I appreciate the commentary on that and just a quick follow up on the tanks. I was wondering if you could just provide a quick comment on sort of how you're seeing demand trend and how youre seeing the penetration go in terms of supplying more tanks for the water wastewater markets.
It's a it's an exciting area of our business one that we talked about a few times over the last year.
The water market, particularly the storm water market is one that is.
A substantial market to start with it is growing rapidly with continued tightening.
Expectations around the quality of water that's allowed to enter municipalities systems or re enter groundwater. So the the pace at which that business is growing has accelerated as we moved into the early part of this year and as a reminder, that business, while still fairly modest in <unk>.
Harrison to the fuels business.
<unk> is a combination it is it is tanks.
But the majority of revenue associated with a storm water installation for Shawcor is actually tied to other.
Technically differentiated patented technologies associated with filtration separation and infiltration so while it does consume more tanks and that's that's good.
It's a system and it involves a number of other components.
That allow us to differentiate ourselves from our competitors on a number of places.
Okay. Thank you I appreciate the commentary I'll turn the call back thanks.
Thank you. Our next question comes from Aaron Macneil with TD Securities. You May proceed with your question.
Hey, good morning, all just building on a few earlier questions. I'm also trying to understand where you are at from a business line optimization perspective, you gave us the balance sheet perspective, the M&A perspective, but maybe you could also give us sort of the current foot print perspective in <unk>.
Specifically do you think we'll see shawcor exit or sell.
More businesses or product lines in the next 12 to 18 months as part of your sort of longer term clients yeah.
Good morning, and thank you for the question obviously.
It wouldn't be appropriate for me to comment publicly on.
Too specific of a response to that question, but what I would tell you is that.
As noted over the course of the last several quarters and reinforced this morning, we continue to look very closely at.
At our portfolio I think Shawcor has for a number of years been quite a complex organization with with a really broad portfolio of businesses and products.
Perhaps a little broader than an organization of our size should or could reasonably support so.
The portfolio simplification began with the sale of the pipeline products business in late 2020 has continued.
With the sale of our <unk> business here in 2021, and a number of smaller businesses being either sold off or shut down and I'd. Just tell you. We continue to be very focused on those businesses.
But have the closest connection to long term growth.
Which includes.
The majority of our portfolio, but there is a minority of our portfolio that perhaps doesn't quite fit as well and we will continue to look closely at those businesses and determine whether we are the right owners or not.
So.
Obviously, we'll share information as soon as we were in a position to do so.
But we are still looking at the portfolio.
Understood.
I guess I'm just trying to understand.
And your progression.
For pipe coating and it better I know, there's probably some uncertainty there.
Yeah.
Can you give us any sense or any insights into the second quarter and.
In terms of when you might see deliveries of steel in an inflection point and coating activity and then maybe you could also comment on what your maximum quarterly revenue throughput could be for the segment.
Do you think you'll get there in Q3 and Q4, given the pent up demand and higher backlog.
Yeah, No I appreciate the questions and I'd love to give you that information, but I'm not sure that it would be appropriate for me to give you quite that level of detail what I can tell you is we.
Very confident that the second quarter performance of our pipeline coating business and Shawcor overall.
We'll move upwards from what we've guided for the first quarter.
The first quarter is.
And an unusual combination of timing.
On a variety of pipeline coating projects.
Causes us to be at the low point and I suspect for certainly for the last several decades.
Pipeline coating business.
And we expect to build from here. So Q2 will be a step up from Q1.
Maybe I'll ask the Q3 Q4 question differently.
Do you think you'll be able to get to all the work.
Through your facilities.
Yes, I think I think the work the pipeline coating business is particularly in the offshore arena.
Our marketplace, where.
<unk> are identified engineered.
Wanted.
Well in advance of work starting so we have a very clear view of the projects that we expect our customers to initiate over the course of this year.
Obviously, there are times when they run into challenges like this challenge with supply of steel tubular is here that's impacting a couple of projects in the first half of the year, but notwithstanding that element generally we have a good view with perhaps you know plus or minus a month of when projects are going to stop.
Activity and based on everything that we see in the schedule for 2022, I have no concerns and our ability to be ready and to execute on those projects through our network of fixed facility footprint.
Okay, Great. One more question for me just on steel prices I think generics this quarter talked about of CTG prices up.
24% or something Crazy from October 2020, so.
I guess I'm just wondering.
From a demand and price perspective.
And minuses for your composite business your pipe coating business, maybe just walk us through how how high steel prices are impacting shawcor.
Steel is not a component that we are a particularly big consumer off so in terms of our own supply chain our own input costs the impact is fairly nominal.
The composite business.
Really doesn't consume steel I was thinking more in terms of competitiveness with with.
Convince yes deal.
Yeah. So so what we do see is that the you know those customers who have held out perhaps and are continuing to use steel in terms of underground storage tanks or steel.
Line pipe.
For our gathering lines in North American oil and gas markets I would expect that while we are certainly elevating our selling prices to reflect inflation and raw material and labor costs.
We will find ourselves in an even more competitive position versus steel alternatives across all industries. So I didn't get bodes well for our composite business broadly.
I think the only place where there is a.
But potentially.
Negative consequence of high cost.
Of steel.
As to our customers on the pipeline coating side, but.
But I think at this point the projects that are scheduled for this year are highly unlikely to see deferral or delay because of steel costs.
So hopefully that provides some helpful guidance exactly what I was looking for thanks, I'll turn it over.
Thank you and as a reminder to ask a question you will need to press star one on your telephone. Our next question comes from Tim Monticello with ATV capital markets. You May proceed with your question.
Hey, good morning, everyone.
First question here, just on the Russia, Ukraine conflict.
Obviously, there is some supply disruptions.
Potentially long term supply disruptions to the global oil macro.
Are you hearing any initial indications from your customers regarding a potential for higher activity offshore.
Some of the majors.
Within the service space are talking a little bit about that and then also on the same sort of topic are there any projects that you're following.
The region that could be disrupted by the conflict.
So good morning, Tim Thanks for the questions I'll answer the second question first we do not have in our.
Backlog budgetary or our bid any pipeline projects that were associated with Russia or Ukraine. So there's there's no expectation of disruption there.
The potential for both onshore and offshore oil and gas exploration activity to rise in the face of elevated.
Suddenly near probably mid potentially long term oil and gas prices.
<unk> is definitely there.
We are continuing to hear customers.
Talk about the need to thoughtfully.
Expand production, which I think means we're unlikely to see a rush and in fairness, even if customers wanted to rush to put a huge amount of extra.
Exploration.
Development work in place I think they would struggled to find capable equipment and people to do so.
So I think what we are likely to see is this is a slight upturn in the pace of growth that we've been seeing over the last several quarters and certainly I think that bodes well for us as an organization.
One of the things we look very closely at in North America land in particular is the activity around completion, because when you think about our flex pipe product that is used to connect completed oil wells to existing midstream infrastructure.
And there are still.
Several thousand wells drilled but not completed here in North America land. So I do think that could be an additional.
Near term demand.
What I would tell you is I think we see an expectation of an uptick in activity and we are certainly geared to take full advantage of that but I don't think we're going to see.
An explosion in activity.
Okay.
Thanks for that.
No.
The market has been extremely volatile on the macro front for some time and obviously timing is tough to call on the project front, but it ends up being pretty important to investors and meeting guidance and street expectations for Shawcor, especially given the operating leverage in the business.
Well in terms of steel tubular availability, what gives you that confidence.
It gives you confidence that.
Supply chain challenges won't persist.
And you know project you have scheduled for the second half of the ear market push.
Well I think the first thing I'd say is obviously we.
We recognize that there are there's volatility there and things could evolve.
But.
Specific causes for the delays in delivery of the steel tubular is that have impacted us here in Q1.
We're really nothing to do with the macro it was to do with some very specific vendor.
Vendor issues that have been addressed.
I think the availability of things like nickel and other component parts to a higher tier steels could certainly be impacted.
Exports from Russia.
Overcome from other places.
When we look at what our customers have in place for their plans when they placed orders for the steel tubular for projects that we expect to cut this year.
I think we have.
A clear line of sight.
On their ability to deliver those steel tubular is enabling us to coat those steel tubular.
I would say subject to some unforeseen change that's the current expectation.
And we will keep you fully informed because we certainly recognize that your ability to assess the expected performance of this business and your clients' ability to assess that map is deeply it matters deeply to us and we try to be as transparent as we can in these conversations to ensure you have everything that we can possibly provide.
Yeah understood.
Also understood that a lot of the stuff is outside of your control.
Third question here.
Just on I guess your view on inventory management, obviously, there's been some moment supply chain challenges your big consumers of certain inputs.
Are there any opportunities to be more vertically integrated in certain core inputs or increased storage are you thinking about that and is that part of your capital plans as you go forward.
So generally our vertical integration down to kind of raw material production is not part of our strategic plan.
We have in select cases made those decisions in the past. So for example, we are the owners of Caribbean, which is a.
Three dimensional carbon fiber material manufacturing facility in the Netherlands, which is a key contributor contributing component to our underground tank production.
But outside of that what we can see them as raw materials, we tend to be a.
Relatively small percentage of the total sales of our vendors and I think it would be a substantial step away from our strategic areas of focus and probably a distraction from our core business for us to head in that direction.
Third we rely on continuing to expand and improve relationships at all levels of our key vendors to ensure that we get what we need from them in a timely manner and manage carefully cost escalation that may occur and those raw materials. So you you you should not expect to see us deploy.
Capital to vertically integrate into raw material manufacturer.
Well a little bit on the storage front can you just increased storage you have or how much inventory you carry it.
So I think our inventory levels are appropriate for where we sit today. There was some modest expansion in terms of days of inventory that we hold in a couple of key products over the course of the last 12 months to ensure that that sheer sheer shipping time does not create an issue for us I think we have relatively short.
Supply chains for most of our raw materials.
And we are we're probably carrying a little more raw material in almost every category than we would have been.
Two or three years ago, because of the supply chain concerns.
I don't expect a substantial step up we've talked about working capital probably being consumed this year and it's far more to do with just the nature of sequencing in activity levels from the front of the year to the end of the year than it is about any strategic expansion of inventory measured in days of inventory on hand.
Okay, and then last one for me.
Look a little bit in your prepared remarks, but the six inch flexible pipe replacement.
The distinct length.
Well Budd.
And my if my memory serves me.
Sort of like slow.
It was going to be or at least the larger diameter pipe was going to be a core product line. When you move into the middle East what are the plans can you update me on the plans there.
In the Middle East.
Yes, so the middle East continues to be an area of interest for us in fact, I'm headed there next week.
We have a large contract that we are delivering flex pipe against in Oman, and there are number of other large contracts that are up for tender as we speak for flexible pipe.
At this point in time.
Clearly because we've made the decision to move out of the flexible product line we.
We do not believe that the demand level for the discrete link composite pipe.
Justifies that product line continuing to be an active area of investment for us instead.
Instead as technology has evolved including our own.
Those markets that needed larger diameter pipe are now capable of being served by Spooling pipe in most cases, and that's where we are focused it is at the core of our technology capabilities.
We expect the rollout of the six inch product here as we move through to roughly the middle of the year and build upon the early success that we've had with the five inch product over the last several quarters.
Understood I appreciate all the commentary I'll turn it back.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Mike leaves for any further remarks.
Thank you very much we all appreciate the interest in this company I'd once again like to thank the employees of Shawcor for their hard work and dedication on a daily basis.
<unk> the partnership with our customers and our vendors and we will look forward to welcoming you all to the next quarterly update call in a couple of months. Thank you so much.
Yeah.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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