Q1 2022 Shawcor Ltd Earnings Call
Good day and thank you for standing by. Welcome to the shock cor first quarter 2022 results conference call.
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I'd now like to hand the conference over to making the ckeran Director of external communications and ESG.
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 to differ materially from those projected. The complete text of shockwor' statement on forward-looking information is included in section four of the first quarter 2022 earnings press release and in the mdna that available on SEDAR and on the company's website at shackor comfor those that have tuned in viaa webcast, you may follow the visual presentation that accompanies this call. I'll now turn it over to shockwor's President and CEO , mke readeds.
Good morning and thank you for joining shrea's first quarter conference call today. Megan and I are joined by our CFO , gas anttana, and our Chief accounting Officer on holloway.
I'd like to begin by once again recognizing the commitment to customer engagement, innovation and creativity of shorecause employees around the world. Their ability to safely and sustainably deliver infrastructure technology our world needs, despite the ongoing pandemic, supply chain disruptions and inflationary challenges, is a testament to the teamwork and culture of this organization.
Turning to business, 2022 has already seen further benefit from the company's continued strategy of simplifying our portfolio while investing to accelerate growth in less volatile industrial and other critical infrastructure markets.
Our industrial and infrastructure-focused businesses are benefiting from the expansion of global investment in communications transportation, low emissions, energy and water-related infrastructure.
These tailwinds helped elevate revenues from businesses serving industrial and infrastructure end markets to 49% of total sales during the first quarter, But from 36% in the prior year quarter.
In parallel, our onshore oilfield-related businesses are experiencing higher demand as oil and gas operators seek to capitalize on elevated commodity prices, and our offshore pipeline coating and inspection businesses, which are laterat cycle and have weathered several quarters of low activity, are poised to see activity rise over the remaining quarters of 2022 and the years that follow, as new offshore pipeline construction ramps up.
These variables combined to underpin our confidence that a multiyear upcycle is evolving across shoreca's primary markets.
As we position the company to generate maximum stakeholder value in this environment. We also remain committed to our 2030 greenhouse gas emissions reductions goals, continuing to identify and execute opportunities to lower overall energy consumption and improve energy efficiency across the company.
During the quarter. This included progress to eliminate energy consumption tied to excess infrastructure and advancements of programs to install on-site renewable solutions, such as solar, at several production locations.
We will release our 2021 ESG report in the third quarter, which will provide a more complete update on progress towards our ambitions.
Looking a little closer at each of our business segments, our composite system segment operational performance was modestly better than expected for the quarter, with revenue climbing 50% versus the prior year as North American oilfield consumption of spollable composite pipe continued to rise and demand for high specification underground storage tanks in the water and retail fuel markets remain robust.
In addition to growing overall market demand for spollable composite pipe, shoortco five -inch product line, which was launched in 2021, has been very well received, with adoption accelerating during the first quarter.
We also remain on track to launch a six -inchvariant in mid- 2020. -two.
It's important to remember that the second quarter of each GC's Canadian onshore oilfield activity drop due to soft ground conditions.
Excluding this effect, our outlook for the rest of 2022 remains favorable for growth in composite pipe demand across North America land.
Our Flexpipe team have worked tirelessly to meet their customers' needs in recent months and are very well positioned to capture share as we move forward.
Moving to competite tanks. Order intake remain elevated and we are bullish on both fuel station and storm mortar system construction activity in the coming years.
The quarter once again saw thermoset resin availability limit our manufacturing output, although deliveries were more stable and predictable than in late 2021 and good progresses in made to qualify additional sources of supply.
Consequently, we still anticipate incrementally higher resin availability and tank production as we move into the second half of this year with a robust backlog providing strong demand visibility for the rest of 22 and much of next year.
Our automotive and industrial segment traditionally benefits from seasonal customer inventory restocing during the first few months of each year, and this annual pattern continued in both our wire and cable and heat shrink tubing businesses during Q1.
Including stronger-than-expected demand from North American nuclear and industrial customers for shoreco's market-leading wiring and cable products.
This segment continues to improve the trajectory of its revenue EBITDA, gross margin and backlog profiles, with new record set for revenue, EBITDA and backlog this quarter.
While the availability of microchips has shown modest improvement year-to-date, effects from the ongoing War in Ukraine and, more recently, significant COVID-19 -driven lockdowns in China continue to present challenges to our automotive customers, with some vehicle production sites idled during the quarter and broader supply chains disrupted.
These disruptions have so far had nominal impacts on our business, with growth in industrial markets, which represented 70% of total revenue during the quarter, offsetting deferral of automotive revenues, and we currently believe our outlook appropriately reflects the likely impacts to this market for the remainder of 2020. -two.
Despite this, we remain vigilant and are engaged with our automotive customer base, ready to quickly respond to either further disruption or an acceleration of demand, should disruption fees.
Overall the automotive and industrial segment's first quarter performance causes us to have a slightly higher full year outlook for the segment and a constructive view of the mid- and long-term market trends which impact this business.
We will continue to invest growth capital to enhance our product offering and improve our manufacturing capabilities, including the previously announced intent to relocate, expand and modernize our Toronto production site, enabling profitable growth for the next decade.
Lastly, our pipeline and Pipe Services segment, while delivering an EBITDA loss for the quarter, performed better than originally expected, as our teams successfully captured incremental onshore coating work in Western Canada, while accelerating the execution of several offshore pipe coating projects that were originally scheduled for later in 2020. -two.
This pulled forward of activity helped to limit the EBITDA losses within the segment during a quarter which saw a normal seasonal slowdown in our growth. Weld inspection and engineering services businesses tooupled with the lowest level of offshore pipeline coating activity in many years.
While steel cubulular supply challenges poseed some risk to new project FID time lines, we expect the ppps segment to experience sequential business growth moving through 2022, with second half activity substantially higher than the first half, as several offshore coating projects currently in backlog, including Scarborough, move into the execution phase.
Backlog within the ppps segment grew during Q1 with the capture of several smaller projects, and we expect further backlog growth over the course of 2020. -two.
A combination of the expected 2000 and twotwenty-two year-end activity run rate and a healthy backlog mean this segment is positioned for meaningful year-over-year earnings growth in 2000 and twenty-three, while substantial offshore project quoating, driven by increased energy demand, continues to indicate a multiyear up cycle in offshore pipeline construction and coating activity.
Turning to consolidated 12 month backlog, at the end of Q1, the company's committed backlog of work to be completed within the next 12 months stood at $702 million, an increase of one hundred and thirteen million dollars 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.
Total backlog, including committed work beyond 12 months, also rose in Q1, reaching $804 million versus the prior quarter level of $744 million.
shockcor's 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 time line for executution.
At the end of Q1, the bid balance was $946 million, an increase of one hundred and three million when compared to the prior quarter, despite movement of several projects from bid into backlog.
This expansion primarily reflects continued growth in bidding activity for offshore pipeline coating projects, as customers move forward with new and previously contemplated projects in the face of elevated commodity prices and growing needs for more efficient movement of natural gas.
Included in the bid number is $56 million of conditional awards pending the client's final investment decision, unchanged from the prior quarter.
shockcor's budgetary number reflecting the value of indicative pricing submitted to allow customers to build a project budget ahead of former procurement activities remain relatively unchanged versus the prior quarter at $1.5 billion.
This further supports our expectations that pipe coating activity will continue to rise in 2023 and beyond.
Finally last year, we announced gason's decision to step down from the company at the end of May 2022, after transitioning his CFO responsibilities to Tom.
This extended, thoughtful executive succession plan is progressing as expected and is consistent with showcare's long-held practices, ensuring minimal disruption to the organization's tactical and strategic initiatives.
This will lead Gaston's last earnings call with shoreor and, on behalf of the entire team, I wish him the very best in his postshorecoor enavors and than you for his tireless work to create value for all shoreor stakeholders.
Tom and gason will now walk through showcor's first quarter financial highlights.
Thanks Mike. Operational results were stronger than previously expected as a result of increased demand for higher-margin wire and cabableling products and composite pipe products in accelerated timeline for pipe coating proproducts and a foreign exchange gain partially offset by legal and other professional fees.
The first quarter's consolidated revenue was $268 million. A 4% decrease compared to the first quarter of 2021 adjusted EBITDA was $2 million an 8% increase from the prior year first quarter primarily on stronger demand for composite pipe products and ffrp tanks in the retail fuel and water markets coupled with higher revenue and profitability for wire and cabling products from increased infrastructure spend partially offset by lower pipe coating and Earth weld inspection services activity. The company expects its quarterly normalized sdna run rate will remain at approximately $5 million throughout 2020. Two.
Although it is subject to movement, depending on overall business performance and related incentive-based compensation costs, as well as any emana opportunities.
Consolidated results for the first quarter included nonrecurring items outside the company's normal course of business.
The current quarter included $1.2 million of net restructuring costs, reflecting cost savings initiatives completed or committed, which included additional headcount reductions and the sale of assets related to recent site closures.
Subsequent to the quarter, the company also completed the sale of its previously closed high cooding facility in adria, Italy.
Turning to segment results, the composite systems segment revenue was $106 million, a 50% increase compared to the first quarter of 2021, and adjusted EBITDA was $14.7 million, a 72% increase from the prior year first quarter.
These results reflect improved demand for composite PPE from an increase in drilling and completion activities in the Permian Basin and Western Canada and continued solid demand in the North American retail fuel and water markets for the ffrp tanks.
Additionally, the segment's improved results also reflect higher activity in the tubular management service business in Western Canada and a rollout of price increases to help offset the increase in raw material and labor costs in all businesses.
Lastly, during the first quarter, the segment recorded approximately $2 million related to legal and professional fee costs.
Automotive and industrial segment revenue was $78 million, a 23% increase compared to the first quarter of 2021, and adjusted EBITDA was $16 million, a 27% increase from the prior year first quarter.
These results reflect increased shipments and profitability for wire and cable products, continued strong demand for heathstreing tubing products in the North American industrial sector and a rollout of price increases to help offset the increase in raw material and labor costs.
Pipeline and Pipe Services segment revenue was $84 million, a 42% decrease compared to the first quarter of 2021, and adjusted EBITDA was a negative $7.5 million, a 286% decrease from the prior year first quarter.
These results reflect lower levels of pipe coating activity in emmar, Latin America and asia- Pacific, and the absence of revenue attributable to the sheaccor inspection services. Business sold in December 2021.
Despite the decrease in revenue and adjusted EBITDA, the company's cost reduction and site optimization initiatives have substantially lowered fixed expenses for the segment, which in turn partially offset the lower activity levels in the quarter. I will now turn it over to Gaston to walk through cash flow.
Thanks Tom. Turning to cash flow in the quarter, cash fs andoperating tivities for the first quarter was 12.8 million, reflecting a 22.7 million investment in working capital, excluding impact of restructuring liability. This investment in working capital was driven by an increase in accounts receiable from increased activity and the timing of billions in collection, an increase inventories in operation for higher business activity in the coming quarters and the impact of higher raw material costs, partially offset by an increase to accounts pay mar related to the timing of purchases and payments.
Cash used and investment deies in the first quarter was nine point four million, reflecting 10.4 million of capital expenditures partially offset by one point one million in proceeds from the disposal of property planned equipment.
During the first quarter, cash use and finance activities was 17.3 million, reflecting one million and long-term debt reppayments, four point seven million of lease payments and a two point six million payment of financecing costs related to the company's credit facility renewal and senior notes issuance.
Net cash used in the fourth quarter of 2022, with thirty-eight point sevent million. Based on the actions completed, our diversified business and the confidence in our outlook, we expect to generate sufficient cash flow and have continued access to our credibility to fund our operation.s, working capital requirement and capital program.
As at March thirty-first 2022, we have cash balance of 85.8 million, debt of 278.6 million and 56.8 million of standard letters of credit.
Our liquidity position has benefited from initiatives undertaken since 2020, with a continued focus on reducing our offering cost base, as well as repayment of 153.5 million about a net long-term debt since the start of 2020. one overall, the company's net debt has decreased by 42% since the start of 2020. bring our net debt to adjusted EBITDA to two point two nine x at the end of the quarter. The company' continues to focus on the repayment of withoutstaying credibility to reduce overall net debt and will target a net debt to adjusted EBITDA ratio of one a half times.
In the middle of the year we will form a closeed depending sale and leaseback of our current torontal foprint, a transaction that will yield at least $45 million of net proceeds, which will be used to further lower debt.
As mentioned earlier, the company spent 10.4 million of capital expenditures, of which three point two million related to growth expenditures to increase production capacity in our automotive industrial segment and improved production processes and equipment in our composite systems and type and Pipe Services segments. Our capital spending guidance Ring is unchanged at 40 to five million for the year. We will continue to prioritize capital expan to drive growth in our most differentiated high-value and material based solution in support of our industrial and critical infrastructure and market.
We above. Strategic actions and others that will evolve over the coming 12 to 18 months are intended to enhance over time the company's margin operating cash flow profile.
Lower overall volatility and drive greater full-cycle value to all stakeholders, as our market-leading technologies enable responsible sustainable renewal enhancement of critical infrastructure.
I will now turn it back to Mike for some final comments.
Thanks Gaston.
In summary, the underlying trends for each of shore co's primary businesses are favorable and expected to remain So for several years, with particular near-term opportunities in the North American industrial infrastructure and onshore energy markets and longer-term opportunities in the offshore oil and gas pipeline market.
With modestly improved full year expectations for our Automotive and industrial business and continued cautiousness regarding the impacts of geopolitical events, tovid 19 and broader supply chain risks. Our full year adjusted EBITDA outlook is now slightly above 2021, but the second half of 2022 substantially stronger than the first.
Q1 is expected to be our lowest quarter of the year.
In this environment, we remain committed to tightly controlling fixed costs, optimally deploing capital, lowering net debt and securing full, fair value for our differentiated material-based products and services.
Our strategic approach to portfolio management is unchangcked. We believe opportunities will exist to make strategic acquisitions that move shorecourse composites and automotive and industrial segments further up the value chain and improve our ability to enable responsible, sustainable renewal and enhancement of critical infrastructure.
With substantially improved financial flexibility. We stand ready to take advantage of these opportunities at the appropriate moment.
Our commitment to enhance over time the company's margin and operating cash flow profile, lower volatility and deliver greater full cycle value to all stakeholders is paramount, and we will continue to carefully evaluate appropriate options for any element of our current portfolio which is poorly aligned to this commitment.
I'll now turn the call over to the operator and open it up for any questions you may have for myself. gast on Tom or Meghan.
If you'd like to ask a question at this time, Please press the star, then the number one P on your touchone telephone.
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Our first question comes from Tim monicelo, with aatv capital markets.
Thank you more.
First off I that guast on on the last acconference role here. Thanks for your guidance throughout the year year.
Second it's one time with the visibility in the business because the guidance came basically 80% through the quarter that the quarter was going to be down.
50% quarter-over-quarter, and then the result comes in basically flat.
Is there a structural issue in, I guess, internally invisibility, or was there just somethingping that to happen right at the end of the quarter that changed the outlook?
And I'm just trying to you know with that in mind, and there's been some, I guess.
Earnings risk on the story and some variability quarter-to-quarter and I think if that's largely an impact of the operating leverage and perhaps the sort of cyclical lows that we've been at but.
I guess how much.
How big is the range on your view for 2022 and how much could slp?
So thanks for the questionions, St. I appreciate the.
The candid nature So if we start with the first part I think.
The ability to understand what's happening in this business.
Is it's very solid.
What changed in the quarter was.
The the tail end over the quarter, the month of March.
Turned out to be a faralmore robust.
Month then we.
Envision at the time that we provided.
Guidance and, as we've noted in the materials, there are really three drivers there.
We were able to pull forward and deliver and recognize revenue.
On some Pi codating activity that was scheduled for later in the year.
There is, there's not always a guarantee that customers will access.
Early delivery, So at the time of the guidance.
We were uncertain whether we were going to be able to recognize.
That revenue So obviously.
Guidance on what we felt with appropriate.
That point in time the second piece was.
The incremental performance of the automotive industrial business.
Which primarily was driven by the shorelex wiir cable business.
We had some requests for early delivery.
That we had not.
expectto receive, but the product was in hand and we were.
Will can make those deliveries So again.
Not something that.
Was fully visible to us of the.
Time but well within the range of variance that you mighthave.
Expect for a business of this time. Then the third piece was foreign exchange movement, which obviously you know, these things.
Can can shift without.
Any warning.
And those three elements combined led to the delta.
Between guidance and actual So I think we.
From a percentage perspective obviously the delta was quite large in dollar terms for a.
Billion dollar organization.
The dollars were not that significant.
And I think know having some upward and downward range on the delta.
Actual and expectations is normal for any organization. So I think we are.
Well positioned to provide reasonable guidance.
But we live in a world where things do shift quickly.
And I think that's the one thing I would encourage you to to.
Remember as we look forward, here we've got.
three operating segments, with really businesses that fall into two categories: those that are in industrial.
And infrastructure focused, and then those that are oiling.
Gas and focus.
And the oil and gas piece.
Particularly the offshore project-oriented piece of oil and gas.
Can have some movement quarter-to-quarter, depending on a variety.
Of factors So if we turn to the second part of your question and the outlook that we provided here for the rest of the year which is now modestly above the.
The of 2021. I think the range of outcomes there is.
We have more upside than downside is how I would.
Describe it the timing of specific projects commencing.
Will determine exactly where.
Pipe coating business lands this year, but I think we've taken a conservative approach to that in the guidance that we offred.
iting and LL work very hard to try to accelerate.
Things beyond that. So there is some range, but I think we've factored in those things that are likely to drive us to the low side.
And have tried to be appropriately conservative with those things that may.
Drive us to the upside, So hopefully that provides you some visibility of how we're viewing things.
Here no no, that was very helpful. I appreciate it. I guess that there was a little bit of commentary and perhaps part of the reason that it was stronger in the first quarter than been expected was that you know. You mentioned that there was some some request for early delivering a I segment and then some.
Early revenue recognition, earlier than expected revenue addition in the PPS segments. So does that mean that Q2 is going to be lower than you had originally expected?
No I think we feel confident about.
To the.
The magnitude of the pull forward on the pipeline coating side.
Was was not.
Material with approximately $3 million of EBITDA impact and it we think that the segment remains at roughly the same level of full year performance that we.
Generally anticipated in the automotiiveve industrial business while we pulled a little bit forward into the quarter. We've also secured incremental.
Purchase orders. You've seen a record backlog report.
For that segment. So we think that is.
The now will perform at a higher level than we would have previously.
Anticipated, So I don't. My expectation is as we have guid.
A first quarter is our lowest performman.
Quarter of the year.
That we see a step-up as we move.
From the first half to the second half.
Very excited by the opportunities for all three of these businesses.
For 2023. okay, UM's a good say way, cause it's.
The automotive industrial segments saw probably a record quarter of there: $78 million of revenue.
How should we be thinking about that business for 2022 on a quarterly basis? Can you put some book-ins on? We might expect revenue to come in.
Yes I think obviously we try not to put too much detail out there in a world where.
Can change. But just to remind you that that business is two components. It is the shore Flex wire cable piece of.
The business which serves non-automotive.
Markets entirely: industrial and infrastructure markets like.
Communication power generation, etc.
And then we have the dsg.
heatrink tubing business that serves both industrial and automotive.
Markets, So both of those businesses tend to have.
Higher Q1's than the average quarter as our customers stock up for the year, and they both tend to have lower Q4 than the average Q.
Quarter as our customers destock.
For their year-end. So I would generally tell you that, that we would expect that pattern to unfold through the rest of.
This year but, as you've seen know, year over year, Q1 was substantially higher than.
Last year's Q1.
And we would certainly anticipate.
The business continues to out perform.
Prior year quarters, even though there will be.
This this movement he wanted to keepute.
two Q3. I me down in Q4 most likely.
Ok.
Good.
With that.
And then the last question. I had to just read on supply chain. n't der to go through sort of an update on how supply chain issues across the businesses are progress.ing? ferared where they were at the end of the year.
Yes So if we start with the Composites business, we talked ad nausesium about the challenge of thermostset resin which is used in the tanks side of that business. So, as noted in the prepared comments, what we've seen is that supplies of that material have certainly become more consistent, more predictable. In total volume they haven't changed very much from where we were at the tail end of last year, but we are moving through the final stages of qualifying additional vendors.
And we would expect as we commented.
Several times that as we move closer to the middle of the year and then into the second half of the year.
But not only will we see this.
This consistency of delivering.
But we will start to see a higher bow.
Of delivery, which will allow us to move much closer to unconstrained production.
The tank side and there's a strong backlog there to fill So.
That's encouraging. At this point we are not constrained by supply chain on the pipe side of our composites business.
But of course continuing to work very hard to sure.
That stays the case.
Freight transit times.
General availability continues to be.
A point of friction across almost all raw materials.
On the automotive and industrial side at this point we are not envisioning being supply chain constrained.
We keep a close eye on our largest single component part, which is copper.
Obviously we've seen price fluctuation there, but availability has generally continued.
Be good. And then on the pipeline of Pi services side, the biggest raw materials we consume there are.
bethe components that make up cement.
And then polymers and again while we've seen fluctuation in pricing we have not seen.
Any substantial risk.
In terms of availability. So I don't see our internal supply chain.
Disrupting us at this point But I would cave at that that if we see.
A much, much larger impact of COVID-19.
Team lockdowns in China as we progress through the year, or if they were.
A substantial shift.
In the impacts of the Ukraine Russia conflict then we would have to.
You know, continue to take close look and there may be some impact.
But hopefully that gives you a review of where we are at this point in time.
It does that. Thank you much for turn number.
Our next question comes from David o'campo, with coremark Securities.
Thank you, good morning everyone and congratulations. Got to stop. It's been very helpful of weworking going to do for every loss a little bit. I just want to zero back in on Tim's questions relating to automotive and industrial you. When I take a look at the quarter and the revenues are up North 20%. I guess I'm just trying to break down how much of that is from rising raw material price and how much of that is from from volumes.
So generally, I'd say David, that that is mostly the result, ofall.
The impact of raw material price movement was was modest.
Okay and then, kind of just looking further ahead you, you guys, do seem a little bit of capacity to trained in REX pale, you know, is that volume growth that we can expect over the next you know two or three years where you can, you know, grow a certain percentage and then you can capap that that three year Mark or you going to be, you know, hitting capacity constraints in a year's time from the.
A great question. So what I'd tell you is that that obviously one of the drivers for the sale- leasebackpro.
That we're nearing completion on is to ensure that we are not capacity.
Constrained in the longer term for.
The AI segment.
But.
What I tell you is that this coming period while we 're.
Being through the sale lease back.
I'm confident that we will not be constrained in our ability.
To serve our customers in the high end wiring cable.
It's important to remember that the mix in.
This business is currently includes some lower margin element.
And in a perfect world we would choose to have all of our production activ.
Is directed to the, the high end of our product spectrum.
And when those opportunities arise and they will as we move through the.
Coming three years we will redirect our production activity.
Those higher end products.
And see less of the lower-end products in.
Portfolio and the revenue mix. So I don't believe that we will.
The rexale footprint viaa constraint to continueif.
Improvement in the ha and I business and certainly we will ensure.
That when we relocate from rexdale to a new sitethat we have contemplated the required.
Growth in the years that follow. I guess all that. You take a look at the margins in the quarter on and I it's quite strong and feel if I look back, even three or four years, the margin profile is just pretty generally stable. So that is that the mix that you're alluding to, just moving to higher end products and should that continue going forward.
So yes, that's the impact. I think are two things that impact margins during the quarter. one is the mix.
Of product tenet and the base margins.
Associated the second is volume and the impact on.
Absorption in manufacturing sites. So obviously, with Q1 pending to be our most robust quarter, we.
Would anticipate that it's where we get the biggest volume impact.
So that element.
Be will beary quarter-to qut of, depending on.
Volume But as we think about the portfolio mix.
During Q1 we had a healthy.
Degree of the portfolio skewed towards the higher end of the margin rangech.
Nuclear deliveries, some communications deliveries. There's going to be fluctuation quarter-to-quarter in the margins of that business.
It just depends on exactly what we are delivering during a quarter.
But I was very pleased to see that segment get to.
This level of margin, I think.
Reflects the hard work of the team and the very.
Explicit strategiesthat.
They are pursuing to grow the highend.
Of their portfolio and I think.
It's probably not reasonable to believe that we will see that level.
Margin every single quarter, but it does demonstrate the capability of that business, as we.
Grow okay that's, that's fair helpful. ha pattern the you guys. Thank you so much.
Our next question comes from Aaron mcneill, with Tv Securities.
He morning. All thanks for taking my questions.
All the best guest on.
I don't know if I want to put to find a point on this but.
In terms of the the guidance for the year.
Are you essentially just suggesting that we?
Flow through the entire Q1 B.
On the original guidance.
Or is there some additional?
To your Q2 expectations.
Just given. You know that you had previously.
That it might be subdued. Are there offsets in the other direction that we should?
Be thinking about, even if it's.
ecdotal. Maybe you could just give us a sense of some of the put and takes when you think about.
How you prepared your guidance this quarter versus last quarter. Yes here, and it's Tong.
Thanks for the comments, So what I'd say is, I think your initial comment- offflowing through the current quarter is about right- is a full year. As Mike said, the shoplex business is very strong for the year. We expect that to.
Flow through to the year. We expect the kind of the pipeline segment to be about flat, to where we expect it it to come in and then the effect. Of course we don't forecast FX to come.
Every quarter So.
Generally speaking, I'd say that's correct.
You think you know, just take, take that, add it into the full year and that gets you to.
Where we're thinking we come in. I would say, on the Q2 question, Mike already have addressed it, Q1 being the lowest point of the year. So we see some growth in Q2 and significant movement upward in the second half of the year.
So I mean we're not really changing a whole lot. For the rest of the year. We do see robust demand and we also are making sure that we're being prudent around potential supply chain issues that could arise So.
Again just that go what Mike said. I think you're seeing a prudent forecast, but we believe.
Will be about that one million ish number of.
Understood in terms of.
Facility footprint and cost rationalization, Med measures. Obviously you mentioned the adriot.
Italy facility and your prepared remarks but could you give us a sense of if you're sort of satisfied with the steps you've taken to todayate or.
There's more to go and.
How you're thinking about. You know your footprint to the rest, the context.
risising activity levels particularly ergyse yeah I think generally speaking we're pretty satisfied with the exercise we went through last year and the year before to get our cost in line. There are always things we're looking at doing. So we're looking at efficiencies in the.
In the real estate area as we.
As we're talking about rexdale, we're looking at other things that we could consolidate or be more efficient.
Across the portfolio, But in general I think.
The large exercise of cost reduction and optimization is completed and now we're kind of working around the edges to get more efficient in various product lines.
I no, I think you.
What I'd say is: our ability to produce is probably about where it needs to be. We look.
The portfolio. I think exactly what we do where.
There's still some room to be more.
And to enable our businesses to deliver incremental improvement.
Understood.
Given the expectation for growth in the back half of the year, what should we be thinking about?
In terms of working captoital builds over the coming quarters. Yes, there air and I'll take that one through. So, working capital, we saw the building Q1, really in anticipation of a strong second half of the year, I think. Q2, q3- we see that on wind a bit- and perhaps Q4, there's a little more pressure as we move up. You know, on the on the revenue side of things.
But in general I think the large build has happened for the year and we'll work that down over the course of the year.
Understood maybe you'll sneak one more- and you mentioned the lockdowns in China and your prepared remarks. How are you thinking about them in terms?
Of a time at your facility in the country yes. So other that won our facility hasn't actually been directly impacted during the.
Quarter we were not in an area that was subject to lockdowns. The facility in China is focused on the production of heat rink to the.
We have three facilities globally.
one here in Toronto.
one in Germany and.
In China the one of China tends to be the smallest of the three in terms of its.
Production output, although it certainly has the capacity.
To grow and the products that we make in China are consumed, or could be consumed, in multiple sites are.
Around the world. So even though our direct customers in China were definitely impacted by longdown.
During Q1. Now production activity in.
Was relatively unchangcked.
The product was simply redirect.
To alternative induses.
Both in terms of going to industrial end markets.
Instead of automotive in some.
Or just simply going outside of China or even outside of the Asia Pacific region.
And being consumed any the Europe or the Americas, So impact to China was nominal for us.
Understood that's all for me and guested on again, swushing me all the bestthank you.
Our next question comes from Keith MacKey with RBC capital markets.
Keeping maybe on mute.
yess very much for taking my questions here. Just curious about the pipe services segment within your outlook for a more constructive second half relative to first. When approximately should we be expecting that segment to sort of pass the EBITDA neutral point throughout the year?
Yes Hey keepeps the strongp So I our forecast show is turning likely close to breakeveneven in Q2 and then positive from there plus or minus a bitid in Q2 depending on projects but.
Generally breakkeven in Q2.
Kind of appreciate that. And just can you remind us on the timing of the Scarborough project, when you expect that to hit along, how long it should take, and maybe an updated revenue estimate, if if there has been any change with respect to inflation and so forth on that project?
Yes So in terms of the revenue side, we're not in a position to be explicit in terms of.
The revenue type of scoa, other than to continue to tell you.
It is classified.
A large pipe co creat project for us which as you know.
It is at least one million in revenue. The the timing of commencement there is in the latter portion of this year. So.
E late Q3 to early Q4.
Time frame and the total coating activity will last about 12 months.
Perfect Ok, that's it for me. Thanks very much, you welcome.
Our next question comes from Michael Robertson, with National Bank.
Good morning's taking my questionions volall in gas. Congrats on your upcoming endeavors.
Just wanted to follow up. Maybe gi, given some the inflationary pressures out there and supply chain challenges, I guess in general how do you feel about the margin profile security of the opportunities that you've got in both the backlog in the bed book?
yeah good morning, Michael Ed. We feel, we feel good about that particular aspect.
And that's really because I think in all of our businesses.
We are in a position.
Convey inflationary elements through.
In our pricing to our customers for those items that are relatively short cycle we obviously are requoting on a constant basis and incorporate.
ting expected costs, So we can ensure that we're not caught between raising.
And our selling price, and then, in the longer cycle businesses, which is primarily the in the pipe coodating and Pipe Services segments.
The pipe coating piece, all of the contracts we signed there.
Are either fixed price with fixed.
Cost or floating price with.
Costs So it's.
It ensures that we have, I'd say, a very good view of.
Margins and I believe we're taking all the right actions to ensure that we protect those margins as we roll through.
You thought it got it. That's a very helpfulof color. I appreciate that. Just just one more from me. I seem to remember you guys have pretty good insight on the sort of field levels of inventory for the schoolable pipe, given that you track, like the schools itself. Well, what are your sort of thoughts on that right now? What do you see it out there and you know which way do you see that trending, I guess?
yeah So.
North America. Obviously activity in the oilfield space has risen, risen a little faster in the U's than it.
In Canada, but across the Board.
Onshore North American new well construction is up and we think it.
Continues to trend upwards in the spollable pipe sector there was significant inventory on the grounds certainly in the.
The second half of last year that started to on.
And at this point I would say there is very limited.
incre excess inventory.
The system probably certain.
Sizes and types there's a little bit of inventory but largely.
Orders that are received now are being met with newprodu.
And I think that's across the industry So.
Lead times obviously.
How have some potential to stretch in that environment?
And we are starting to see.
You know backlog in that.
Of the business build, which is what you would anticipate.
This point in cycle got it again super helpful color. Appreciate you taking my questions. We'll turn it back the minmoment.
As a reminder, that is star than 1, if you'd like to ask a question.
Our next question comes from Matthew weeks with I capital markets.
Good morning. Thanks for taking my question. I think I just have 1- and it's a bit of a macro question- seeing some kind of improving sentiment on nuclear power a little bit, just globally, given everything that's happening in the world and the need for more baseload clean energy. A lot of countries that that 'were previously talking about, you know, maybe reducing the f- now talking about refurbishing, building new reactors. I'm just wondering how, how you're seeing that play out over the media in and long term for your, for your industrial business and sort of capturing that, that higher-margin business going forward.
yeah thanks, Matthew soir.
Again great question. I think certainly we view that as a favorable.
For the shore Flex.
Arm of our Automotive and industrial.
Segment I think we are uniquely positioned.
To provide.
Extremely high quality product into.
Nuclear industry. We've got a long history of doing that.
Here in the Canadian market.
You know slowly growing history of doing that.
Outside Canada, So I think we're well positioned to see a benefit from that. Obviously it depends on exactly.
Where and what style of nuclear reactor is being constructed or.
furbished we are qualified for some but.
For all, although working to be qualified for more and more.
As we roll forward here. So difficult to quantify at this point in time but certainly a favorable trend and one that we think will benefit the business over the.
Years Ok thanks, that's everything for me. '. I'll turn it back and congratulations. Guess on. Thank you.
I'm showing no further questions in queue at this time. I'd like to turn the call back to Mike reedves for closing remarks.
Well Thank you for joining us this morning for the first quarter earnings call. We appreciate your interest, certainly appreciate the questions and look forward to getting together in.
Another three months to talk about the second quarter earnings at that time.
And have a great day to everybody.
This concludes today's conference call. Thank you for participating. You may now disconnect.
And.
No.
Good day and thank you for standing by. Welcome to the shock War. First quarter 2022 results conference call.
At this time, all participants are in listen-only mode.
After the presentation, there will be a question-and-answer session.
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I'd now like to hand the conference over to maicking M ckeron, Director of external communications and ESG.
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 to differ materially from those projected. The complete text of shockwor' statement on forward-looking information is included in section four of the first quarter 2022 earnings press release and in the ndna that available on SEDAR and on the company's website at shockor comfor those that have tuned in viaa webcast, you may follow the visual presentation that accompanies this call. I'll now turn it over to shockwor's President and CEO , mke readeds.
Good morning and thank you for joining sharea's first quarter conference call today. Megan and I are joined by our CFO gast, ant tana, and our Chief accounting Officer on holloway.
I'd like to begin by once again recognizing the commitment to customer engagement, innovation and creativity of shorecause employees around the world. Their ability to safely and sustainably deliver infrastructure technology our world needs, despite the ongoing pandemic, supply chain disruptions and inflationary challenges, is a testament to the teamwork and culture of this organization.
Turning to business, 2022 has already seen further benefit from the company's continued strategy of simplifying our portfolio while investing to accelerate growth in less volatile industrial and other critical infrastructure markets.
Our industrial and infrastructure-focused businesses are benefiting from the expansion of global investment in communications transportation, lower emissions, energy and water-related infrastructure.
These tailwinds helped elevate revenues from businesses serving industrial and infrastructure end markets to 49% of total sales during the first quarter, But from 36% in the prior year quarter.
In parallel, our onshore oilfield-related businesses are experiencing higher demand as oil and gas operators seek to capitalize on elevated commodity prices, and our offshore pipeline coating and inspection businesses, which our latest cycle and have weathered several quarters of low activity, are poised to see activity rise over the remaining quarters of 2022 and the years that follow, as new offshore pipeline construction ramps up.
These variables combined to underpin our confidence that a multiyear upcycle is evolving across shoreca's primary markets.
As we position the company to generate maximum stakeholder value in this environment. We also remain committed to our 2030 greenhouse gas emissions reductions goals, continuing to identify and execute opportunities to lower overall energy consumption and improve energy efficiency across the company.
During the quarter. This included progress to eliminate energy consumption tied to excess infrastructure and advancements of programs to install on-site renewable solutions, such as solar, at several production locations.
We will release our 2021 ESG report in the third quarter, which will provide a more complete update on progress towards our ambitions.
Looking a little closer at each of our business segments, our composite system segment operational performance was modestly better than expected for the quarter, with revenue climbing 50% versus the prior year as North American oilfield consumption of spollable composite pipe continued to rise and demand for high specification underground storage tanks in the water and retail fuel markets remain robust.
In addition to growing overall market demand for spollable composite pipe, shoortco five -inch product line, which was launched in 2021, has been very well received, with adoption accelerating during the first quarter.
We also remain on track to launch a six -inchvariant in mid- 2020. -two.
It's important to remember that the second quarter of each GC's Canadian onshore oilfield activity dropped due to soft ground conditions.
Excluding this effect, our outlook for the rest of 2022 remains favorable for growth in composite pipe demand across North America land.
Our Flexpipe team have worked tirelessly to meet their customers' needs in recent months and are very well positioned to capture share as we move forward.
Moving to competite tanks. Order intake remains elevated and we are bullish on both fuel station and storm mortar system construction activity in the coming years.
The quarter once again saw thermoset resin availability limits our manufacturing output, although deliveries were more stable and predictable than in late 2021 and good progresses in made to qualify additional sources of supply.
Consequently, we still anticipate incrementally higher resin availability and tank production as we move into the second half of this year with a robust backlog providing strong demand visibility for the rest of 22 and much of next year.
Our automotive and industrial segment traditionally benefits from seasonal customer inventory restocing during the first few months of each year, and this annual pattern continued in both our wire and cable and heat shrink tubing businesses during Q1.
Including stronger-than-expected demand from North American nuclear and industrial customers for shorecor's market-leading wiring and cable products.
This segment continues to improve the trajectory of its revenue EBITDA, gross margin and backlog profiles, with new record set for revenue, EBITDA and backlog this quarter.
While the availability of microchips has shown modest improvement year-to-date, effects from the ongoing War in Ukraine and, more recently, significant COVID-19 -driven lockdowns in China continue to present challenges to our automotive customers, with some vehicle production sites idled during the quarter and broader supply chains disrupted.
These disruptions have so far had nominal impacts on our business, with growth in industrial markets, which represented 70% of total revenue during the quarter, offsetting deferral of automotive revenues, and we currently believe our outlook appropriately reflects the likely impacts to this market for the remainder of 2020. -two.
Despite this, we remain vigilant and are engaged with our automotive customer base, ready to quickly respond to either further disruption or an acceleration of demand, should disruption fees.
Overall the automotive and industrial segment's first quarter performance causes us to have a slightly higher full year outlook for the segment and a constructive view of the mid- and long-term market trends which impact this business.
We will continue to invest growth capital to enhance our product offering and improve our manufacturing capabilities, including the previously announced intent to relocate, expand and modernize our Toronto production site, enabling profitable growth for the next decade.
Lastly, our pipeline and Pipe Services segment, while delivering an EBITDA loss for the quarter, performed better than originally expected, as our teams successfully captured incremental onshore coating work in Western Canada, while accelerating the execution of several offshore pipe coating projects that were originally scheduled for later in 2020. -two.
This pulled forward of activity helped to limit the EBITDA losses within the segment during a quarter which saw a normal seasonal slowdown in our growth. Weld inspection and engineering services businesses tooupled with the lowest level of offshore pipeline coating activity in many years.
While steel cubulular supply challenges poseed some risk to new project FID time lines, we expect the ppps segment to experience sequential business growth moving through 2022, with second half activity substantially higher than the first half, as several offshore coating projects currently in backlog, including Scarborough, move into the execution phase.
Backlog within the ppps segment grew during Q1 with the capture of several smaller projects, and we expect further backlog growth over the course of 2020. -two.
A combination of the expected 2000 and twotwenty-two year-end activity run rate and a healthy backlog mean this segment is positioned for meaningful year-over-year earnings growth in 2000 and twenty-three, while substantial offshore project quoating, driven by increased energy demand, continues to indicate a multiyear up cycle in offshore pipeline construction and coating activity.
Turning to consolidated 12 month backlog, at the end of Q1, the company's committed backlog of work to be completed within the next 12 months stood at $702 million, an increase of one hundred and thirteen million dollars when compared to the prior quarter.
This improvement was the result of new order capture exceeding backlog burned in all three reporting segments, with backlogs in our composite system and automotive and industrial segments reaching new record levels.
Total backlog, including committed work beyond 12 months, also rose in Q1, reaching $804 million versus the prior quarter level of $744 million.
shockcor's 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 time line for executions.
At the end of Q1, the bid balance was $946 million, an increase of one hundred and three million when compared to the prior quarter, despite movement of several projects from bid into backlog.
This expansion primarily reflects continued growth in bidding activity for offshore pipeline coating projects, as customers move forward with new and previously contemplated projects in the face of elevated commodity prices and growing needs for more efficient movement of natural gas.
Included in the bid number is $56 million of conditional awards pending the client's final investment decision, unchanged from the prior quarter.
shockcor's budgetary number reflecting the value of indicative pricing submitted to allow customers to build a project budget ahead of former procurement activities remain relatively unchanged versus the prior quarter at $1.5 billion.
This further supports our expectations that pipe coating activity will continue to rise in 2023 and beyond.
Finally last year, we announced gason's decision to step down from the company at the end of May 2022, after transitioning his CFO responsibilities to Tom.
This extended, thoughtful executive succession plan is progressing as expected and is consistent with showcare's long-held practices, ensuring minimal disruption to the organization's tactical and strategic initiatives.
This will lead gason's last earnings call with shoreor and, on behalf of the entire team, I wish him the very best in his postshoreor enavors, and than you for his tireless work to create value for all shore or stakeholders.
To and gason will now walk through showcor's first quarter financial highlights.
Thanks Mike. Operational results were stronger than previously expected as a result of increased demand for higher-margin wire and cabableling products and composite pipe products in accelerated timeline for pipe coating projects and a foreign exchange gain partially offset by legal and other professional fees.
The first quarter's consolidated revenue was $268 million. A 4% decrease compared to the first quarter of 2021 adjusted EBITDA was $2 million an 8% increase from the prior year first quarter primarily on stronger demand for composite pipe products and ffrp tanks in the retail fuel and water markets coupled with higher revenue and profitability for wire and cabling products from increased infrastructure spend partially offset by lower pipe coating and Earth weld inspection services activity. The company expects its quarterly normalized sdna run rate will remain at approximately $6 million throughout 2020. Two.
Although it is subject to movement, depending on overall business performance and related incentive-based compensation costs, as well as any emaa opportunities.
Consolidated results for the first quarter included nonrecurring items outside the company's normal course of business.
The current quarter included $1.2 million of net restructuring costs, reflecting cost savings initiatives completed or committed, which included additional headcount reductions and the sale of assets related to recent site closures.
Subsequent to the quarter, the company also completed the sale of its previously closed high coing facility in adria, Italy.
Turning to segment results, the composite systems segment revenue was $106 million, a 50% increase compared to the first quarter of 2021, and adjusted EBITDA was $14.7 million as 72% increase from the prior year first quarter.
These results reflect improved demand for composite pipe from an increase in drilling and completion activities in the Permian Basin and Western Canada and continued solid demand in the North American retail fuel and water markets for the fp tanks.
Additionally, the segment's improved results also reflect higher activity in the tubular management service business in Western Canada and a rollout of price increases to help offset the increase in raw material and labor costs in all businesses.
Lastly, during the first quarter, the segment recorded approximately $2 million related to legal and professional fee costs.
Automotive and industrial segment revenue was $78 million, a 23% increase compared to the first quarter of 2021, and adjusted EBITDA was $16 million, a 27% increase from the prior year first quarter.
These results reflect increased shipments and profitability for wire and cable products, continued strong demand for heathstreing tubing products in the North American industrial sector and a rollout of price increases to help offset the increase in raw material and labor costs.
Pipeline and Pipe Services segment revenue was $84 million, a 42% decrease compared to the first quarter of 2021, and adjusted EBITDA was a negative $7.5 million, a 286% decrease from the prior year first quarter.
These results reflect lower levels of pipe coating activity in emmar, Latin America and asia- Pacific, and the absence of revenue attributable to the shocor inspection services business sold in December 2021.
Despite the decrease in revenue and adjusted EBITDA, the company's cost reduction and site optimization initiatives have substantially lowered fixed six expenses for the segment, which in turn partially offset the lower activity levels in the quarter. I will now turn it over to Gaston to walk through cash flow.
Thanks Tom. Turning to cash flow in the quarter, cash's andoperating tivities for the first quarter was twelve point million, reflecting a 22.7 million investment in working capital, excluding impact of restructuring liability. This investment in wor capital was driven by an increase in accounts receiable from increased activity and the timing of billions in collection, an increase in inventories in operoration for higher business activity in the coming quarters and the impact of higher raw material costs, partially offset by an increase to accounts payable related to the timing of purchases and payments.
Cash used and investment dididities in the first quarter was nine point four million, reflecting 10.4 million of capital expenditures partially offset by one point one million in proceeds from the disposal of property planned equipment.
During the first quarter, cash usees and finance activities was 17.3 million, reflecting one million in long-term debt reppayments, four point seven million of lease payments and a two point six million payment of financecing costs related to the company's credit facility renewal and senior notes issuance.
Net cash used in the fourth quarter of 2022, with thirty-eight point sevent million. Based on the actions completed, our diversified business and the confidence in our outlook, we expect to generate sufficient cash flow and have continued access to our credibility to fund our operation.s, working capital requirement and capital program.
As at March thirty-first 2022, we have cash balance at 85.8 million, debt of 278.6 million and 56.8 million of standard letters of credit.
Our theliquidity position has benefited from initiatives undertaken since 2020, with a continued focus on reducing our offering cost base, as well as repayment of 153.5 million about a net long-term debt since the start of 2020. one overall. The company's net debt has decreased by 42% since the start of 2020. bring our net debt to adjusted EBITDA to two point two nine x at the end of the quarter. The company' continues to focus on the repayment of outstaying credibility to reduce overall net debt and will target a net debt to adjusted EBITDA ratio of one a half times.
In the middle of the year we will form a close, the pendn sale and leaseback of our current torontal footprint, a transaction that will yield at least $45 million of net proceeds, which will be used to further lower debt.
As mentioned earlier, the company spent 10.4 million of capital expenditures, of which three point two million related to growth expenditures to increase production capacity in our automotive industrial segment and improved production processes and equipment in our composite systems and tyipe and Pipe Services segments. Our capital spending guidance rning, is unchanged at 40 to five million for the year. We will continue to prioritize capital expan to drive growth in our most differentiated high-value and material based solution in support of our industrial and critical infrastructure and market.
We above. Strategic actions and others that will evolve over the coming 12 to 18 months are intended to enhance over time the company's margin operating cash flow profile.
Lower overall volatility and drive greater full-cycle value to all stakeholders, as our market-leading technologies enable responsible sustainable renewal enhancement of critical infrastructure.
I will now turn it back to Mike for some final comments.
Thanks Gaston.
In summary, the underlying trends for each of shore co's primary businesses are favorable and expected to remain So for several years, with particular near-term opportunities in the North American industrial infrastructure and onshore energy markets and longer-term opportunities in the offshore oil and gas pipeline market.
With modestly improved full year expectations for our Automotive and industrial business and continued cautiousness regarding the impacts of geopolitical events, tovid 19 and broader supply chain risks. Our full year adjusted EBITDA outlook is now slightly above 2021, but the second half of 2022 substantially stronger than the first.
Q1 is expected to be our lowest quarter of the year.
In this environment, we remain committed to tightly controlling fixed costs, optimally deploing capital, lowering net debt and securing full, fair value for our differentiated material-based products and services.
Our strategic approach to portfolio management is unchanged. We believe opportunities will exist to make strategic acquisitions that move shorecourse composites and automotive and industrial segments further up the value chain and improve our ability to enable responsible, sustainable renewal and enhancement of critical infrastructure.
With substantially improved financial flexibility. We stand ready to take advantage of these opportunities at the appropriate moment.
Our commitment to enhance over time the company's margin and operating cash flow profile, lower volatility and deliver greater full-cycle value to all stakeholders is paramount, and we will continue to carefully evaluate appropriate options for any element of our current portfolio which is poorly aligned to this commitment.
I'll now turn the call over to the operator and open it up for any questions you may have for myself Gaston, Tom or Meghan.
If you'd like to ask a question at this time, Please press the star, then the number one P on your touchone telephone.
To withdraw your question, press the pound key.
Again that is star than 1, if you'd like to ask a question.
Our first question comes from Tim monicelo, with atv capital markets.
Thank you more everyone.
First off I that guas on on last acconference RO here. Thanks So for your guidance throughout the year year.
Second it's one time with the visibility in the business because the guidance came basically 80% through the quarter that the quarter was going to be down.
50% quarter-over-quarter, and then the result comes in basically flat.
Is there a structural issue in, I guess, internally invisibility, or was there just something that happened right at the end of the quarter that changed the outlook?
And I'm just trying to you know with that in mind, and there's been some, I guess.
Earnings risk on the story and some variability quarter-to-quarter and I think if that's largely an impact of the operating leverage and perhaps the sort of cyclical lows that we've been at but.
I guess how much.
How big the range on your view for 2022 and how much could slp?
So thanks for the questionions, St. I appreciate the.
The candid nature So if we start with the first part I think.
The ability to understand what's happening in this business.
Is it's very solid.
What changed in the quarter was.
The the tail end over the quarter, the month of March.
Turned out to be a faralmore robust.
Month then we.
Envisioned at the time that we provided.
Guidance and, as we've noted in the materials, there are really three drivers there.
We were able to pull forward and deliver and recognize revenue.
On some pipe coodating activity that was scheduled for later in the year.
There is, there's not always a guarantee that customers will access.
Early delivery, So at the time of the guidance.
We were uncertain whether we were going to be able to recognize.
That revenue So obviously.
Guidance on what we felt with appropriate.
That point in time the second piece was.
The incremental performance of the automotive industrial business.
Which primarily was driven by the shre Lex wiir cable business.
We had some requests for early delivery.
That we have not.
expectto receive that the product was in hand and we were.
Will can make those deliveries So again.
Not something that.
Was fully visible to us of the.
Time but well within the range of variance that you might.
Expect for a business of this size. And the third piece was foreign exchange movement, which obviously you know these things.
Can can shift without.
Any warning.
And those three elements combined led to the delta.
Between guidance and actual So I think we.
From a percentage perspective. Obviously the delta was quite large in dollar terms fora.
Billion dollar organization.
The dollars were not that significant.
And I think know having some upward and downward range on the delta.
Actual and expectations is normal for any organization. So I think we are.
Well positioned to provide reasonable guidance.
But we live in a world where things do shift quickly.
And I think that's the one thing I would encourage you to to.
Remember as we look forward, here we've got.
three operating segments, with really businesses that fall into two categories: those that are in industrial.
And infrastructure focused, and then those that are oiling.
Gas and focus.
umand the oil and gas piece.
Particularly the offshore project-oriented piece of oil and gas.
Can have some movement quarter-to-quarter, depending on a variety.
Of factors So if we turn to the second part of your question and the outlook that we provided here for the rest of the year which is now modestly above the.
The of 2021. I think the range of outcomes there is.
We have more upside than downside is how I would.
Describe it the timing of specific projects commencing.
Will determine exactly where.
Pipe coating business lands this year, but I think we've taken a conservative approach to that in the guidance that we arered.
ingand we LL work very hard to try to accelerate.
Things beyond that. So there is some range, but I think we've factored in those things that are likely to drive us to the low side.
And have tried to be appropriately conservative with those things that may.
Drive us to the upside, So hopefully that provides you some visibility of how we're viewing things.
Here no no that was very helpful. I appreciate it. I guess that there was a little bit of commentary and perhaps part of the reason that it was stronger in the first quarter than than expected was that you know you mentioned that there was some some requests for early delivering in a I segment and then some.
Early revenue recognition, earlier than expected revenue addgition in the PPS segments. So does that mean that Q2 is going to be lower than you had originally expected?
No I think we feel confident about.
To the.
The magnitude of the pull forward on the pipeline coating side.
Was was not.
Material with approximately $3 million of EBITDA impact and it we think that the segment remains at roughly the same level of full year performance that we.
Generally anticipated in the automotive industrial business while we pulled a little bit forward into the quarter. We've also secured incremental.
Purchase orders. You've seen a record backlog report.
For that segment. So we think that is.
The now will perform at a higher level than we would have previously.
Anticipated, So I don't. My expectation is as we have guided.
First quarter is our lowest performman.
Quarter of the year.
That we see a step-up as we move.
From the first half to the second half.
Know very excited by the opportunities for all three of these businesses.
2023 okay, which's good, say way, cause its.
The automotive industrial segments saw probably a record quarter of there: $78 million of revenue.
How should we be thinking about that business for 2022 on a quarterly basis? Can you put some book ins on? We do not expect revenue to come in.
Yes I think obviously we try not to put too much detail out there in a world where things.
Can change. But just to remind you that that business is two components. It is the shore Flex wire cable piece of.
The business which serves non-automotive.
Markets entirely: industrial and infrastructure markets like.
Communication power generation, etc.
And then we have the dsg.
heatrink tubing business that serves both industrial and automotive.
Markets, So both of those businesses tend to have.
Higher Q1's than the average quarter as our customers stock up for the year, and they both tend to have lower Q4 than the average Q.
Quarter as our customers with destock.
For their year-end. So I would generally tell you that we would expect that pattern to unfold through the rest of.
This year but, as you've seen know, year over year, Q1 was substantially higher than.
Last year's Q1.
And we would certainly anticipate.
The business continues to out perform.
Prior year quarters, even though there will be.
This this movement he wanted to keepute.
two Q3 are ent down in Q4 most likely.
Ok.
Good.
With that.
And then the last question I had to just read on supply chains. n't der to you go through sort of an update on how supply chain issues across the businesses are progressing compared to where they were at the end of the year?
Yes So if we start with the Composites business, we talked adnausesium about the challenge of thermost, that resin which is used in the tanks side of that business. So, as noted in the prepared comments, what we've seen is that supplies of that material have certainly become more consistent, more predictable. In total volume they haven't changed very much from where we were at the tail end of last year, but we are moving through the final stages of qualifying additional vendors.
And we would expect as we commented.
Several times that as we move closer to the middle of the year and then into the second half of the year.
But not only will we see this.
This consistency of delivering.
But we will start to see a higher boltk.
Of delivery, which will allow us to move much closer to unconstrained production.
The tank side and there's a strong backlog there to fill So.
That's encouraging. At this point we are not constrained by supply chain on the pipe side of our composites business.
But of course continuing to work very hard tosure.
That stays the case.
Freight transit times.
General availability continues to be.
A point of friction acrosss almost all raw material.
On the automotive and industrial side. At this point we are not envisigioning, being supply chain constrained.
We keep a close eye on our largest single component part, which is copper.
Obviously we've seen price fluctuation there, but availability has generally continued.
Be good. And then on the pipeline of P services side, the biggest raw materials we consume there are.
bethe components that make up cement.
And then polymers and again while we've seen fluctuation in pricing we have not seen.
Any substantial risk.
In terms of availability. So I don't see our internal supply chains.
Disrupting us at this point But I would cave at that that if we see.
A much, much larger impact of COVID-19.
19 lockdowns in China as we progress through the gear, or if they were.
A substantial shift.
In the impacts of the Ukraine Russia conflict then we would have to.
You know, continue to take close look and there may be some impact.
But hopefully that gives you a review of where we are at this point in time.
It does that. Thank you much for turn Goodbye.
Our next question comes from David o'campo, with coremark Securities.
Thank you, good morning everyone and congratulations. Got to stop. It's been very helpful of we're going to do for every loss a little bit. I just want to zero back in on on Tim's questions relating to automotive and industrial. You know, when I take a look at the quarter and the revenues are up North 20%, I guess I'm just trying to break down how much of that is from rising raw material price and how much of that is from from volumes.
So generally I'd say David that that is mostly the result of.
The impact of raw material price movement was modest.
Okay and then, kind of just looking further ahead you, you guys, do seem a little bit. Capacity is trained in rexdale, you know, is that volume growth that we can expect over the next you know two or three years where you can, you know, grow a certain percentage and then you can capap that, that three year Mark are you going to be, you know, hitting capacity constraints in a year's time from the?
A great question. So what I'd tell you is that that obviously one of the drivers for the sale lease, backpro.
That we're nearing completion on is to ensure that we are not capacity.
Constrained in the longer term for.
The AI segment.
But.
What I tell you is that this coming period while we 're.
Moving through the sale lease back.
I'm confident that we will not be constrained in our ability.
To serve our customers in the high end wiring cable.
It's important to remember that the mix in.
This business is currently includes some lower margin element.
And in a perfect world we would choose to have all of our production activ.
Is directed to the, the high end of our product spectrum.
And when those opportunities arise and they will as we move through the.
Coming three years we will redirect our production activity.
Those higher end products.
And see less of the lower-end products in.
Portfolio and the revenue mix. So I don't believe that we will.
The rexale footprint beiaa. Constraint to continueif.
Improvement in the ha and I business and certainly we will ensure.
That when we relocate from rexdale to a new site that we have contemplated the required.
Growth in the years that follow. I guess on that you know, and you take a look at the margins in the quarter on and I it's quite strong and feel, if I look back even three or four years, the margin profile is just pretty generally stable. So that is that the mix that you're alluding to, just moving to higher end products and should that continue going forward.
So yes, that's the impact. I think are two things that impact margins during the quarter. one is the mix.
Of product tenet and the base margins.
Associated the second is volume and the impact on.
Absorption in manufacturing sites. So obviously, with Q1 pending to be our most robust quarter, we.
Would anticipate that it's where we get the biggest volume impact.
So that element.
Be will beary quarter-to quar, depending on.
overvolume. But as we think about the portfolio mix.
During Q1 we had a healthy.
Degree of the portfolio skewed towards the higher end of the margin rangech.
Nuclear deliveries, some communications deliveries. There's going to be fluctuation quarter-to-quarter and the margins of that business.
It just depends on exactly what we are delivering during a quarter.
But I was very pleased to see that segment get to.
This level of margin? I think it.
Reflects the hard work of the team and the very.
Explicit strategiesthat.
They are pursuing to grow the high.
Of their portfolio and I think.
It's probably not reasonable to believe that we will see that level.
Margin every single quarter, but it does demonstrate the capability of that business, as we.
Grow okay that's, that's fair, helpful Ho pattern, if you guys. Thank you so much.
Our next question comes from Aaron mcneill, with Tv Securities.
Hey morning. All thanks for taking my questions.
All the best guest on.
I don't know if I want to put to find a point on this but.
In terms of the the guidance for the year.
Are you essentially just suggesting that we?
Flow through the entire Q1 B.
On the original guidance.
Or is there some additional?
To your Q2 expectations.
Just given. You know that you would previously.
That it might be subdued. Are there offsets in the other direction that we should?
Be thinking about, even if it's.
ecdotal. Maybe you could just give us a sense of some of the put and takes when you think about.
How you prepared your guidance this quarter versus last quarter. yeah, here and it's Tong.
Thanks for the comments, So what I'd say is, I think your initial comment- offflowing through the current quarter is about right- is a full year. As Mike said, the shoplex business is very strong for the year. We expect that to.
Flow through to the year. We expect the kind of the pipeline segment to be about flat, to where we expect it it to come in and then the effect. Of course we don't forecast FX to come.
Every quarter So.
Generally speaking, I'd say that's correct.
You think you know, just take to, take that at it into the full year and that gets you to.
Where we're thinking we come in. I would say, on the Q2 question, Mike already have addressed it, Q1 being the lowest point of the year. So we see some growth in Q2 and significant movement upward in the second half of the year.
So I mean we're not really changing a whole lot. For the rest of the year. We do see robust demand and we also are making sure that we're being prudent around potential supply chain issues that could arise So.
Again just Cho what Mike said. I think you're seeing a prudent forecast, but we believe.
Will be about that one million in number of.
Understood in terms of.
Facility footprint and cost rationalization measures. Obviously you mentioned the adriot.
Italy facility and your prepared remarks but could you give us a sense of if you're sort of satisfied with the steps you've taken to today or.
There's more to go and.
How you're thinking about. You know your footprint to the rest, the context.
ising activity levels particularly energyse yeah. I think generally speaking we're pretty satisfied with the exercise. We went through last year and the year before to get our cost in line. There are always things we're looking at doing. So we're looking at efficiencies in the.
In the real estate area as we.
As we're talking about rexdale, we're looking at other things that we could consolidate or be more efficient.
Across the portfolio, But in general I think.
The large exercise of cost reduction and optimization is completed and now we're kind of working around the edges to get more efficient in various product lines.
I I think you.
Right what I'd say is our ability to produce is probably about where it needs to be. We look.
The portfolio. I think exactly what we do where.
There's still some room to be more.
And to enable our businesses to deliver incremental improvement.
Understood.
Given the expectation for growth in the back half of the year, what should we be thinking about?
In terms of working captoital builds over the coming quarters. Yes, there air and I'll take that one through. So, working capital, we saw the building Q1, really in anticipation of a strong second half of the year, I think. Q2, q3- we see that on wind a bit- and perhaps Q4, there's a little more pressure as we move up. You know, on the on the revenue side of things.
But in general I think the large build has happened for the year and we'll work that down over the course of the year.
Understood maybe you'll sneak one more- and you mentioned the lockdowns in China and your prepared remarkshow. Are you thinking about them in terms?
Of a time at your facility in the country yes So other I want to our facility hasn't actually been directly impacted during the.
Quarter we were not in an area that was subject to lockdowns. The facility in China is focused on the production of heat rink to the.
We have three facilities globally.
one here in Toronto.
one in Germany and.
In China the one of China tends to be the smallest of the three in terms of its.
Production output, although it certainly has the capacity.
To grow and the products that we make in China are consumed, or could be consumed, in multiple sites are.
Around the world. So even though our direct customers in China were definitely impacted by longdown.
During Q1. Now production activity in.
Was relatively unchangcked.
The product was simply redirect.
To alternative induses.
Both in terms of going to industrial end markets.
Instead of automotive in some.
Or just simply going outside of China or even outside of the Asia Pacific region.
And being consumed in any the Europe or the Americas, So impact to China was nominal for us.
Understood that's all for me and sested on again swushing me all the bestthank you.
Our next question comes from Keith MacKey with RBC capital markets.
Keeping maybe on mute.
yess very much for taking my questions here. Just curious about the pipe services segment within your outlook for a more constructive second half relative to first. When approximately should we be expecting that segment to sort of pass the EBITDA neutral point throughout the year?
Yes he keepe the strongp So I our forecast show is turning likely close to breakeveneven in Q2 and then positive from there plus or minus a bit in Q2 depending on projects but.
Generally breakkeven in Q2.
Kind of appreciate that. And just can you remind us on the timing of the Scarborough project, when you expect that to hit along, how long it should take, and maybe an updated revenue estimate, if if there has been any change with respect to inflation and so forth on that project?
Yes So in terms of the revenue side, we're not in a position to be explicit in terms of.
The revenue type of scoa, other than to continue to tell you.
It is classified.
A large pipe co creat project for us which as you know.
It is at least one million in revenue. The timing of commencement there is in the latter portion of this year. So.
ebut: late Q3 to early Q4.
Time frame and the total coating activity will last about 12 months.
okfect. Ok, that's it for me. Thanks very much, you welcome.
Our next question comes from Michael Robertson, with National Bank.
Good morning. You taking my questions all in gas. Congrats on your upcoming endeavors.
Just wanted to follow up. Maybe gi, given some the inflationary pressures out there and supply chain challenges, I guess in general how do you feel about the margin profile security of the opportunities that you've got in both the backlog in the bed book?
yeah good morning, Michael at.
We feel, we feel good about that particular aspect.
And that's really because I think in all of our businesses.
We are in a position.
Convey inflationary elements through.
In our pricing to our customers for those items that are relatively short cycle we obviously are requoting on a constant basis and incorporate.
ting expected costs, So we can ensure that we're not caught between raising.
And our selling price, and then, in the longer cycle businesses, which is primarily the in the pipe coodating and Pipe Services segments.
The pipe coating piece, all of the contracts we signed there.
Are either fixed price with fixed.
Cost or floating price with.
Costs So.
It ensures that we have, I'd say, a very good view of.
Margins and I believe we're taking all the right actions to ensure that we protect those margins as we roll through the.
You thought it got it. That's a very helpful color. I appreciate that. Just just one more from me. I seem to remember you guys have pretty good insight on the the sort of field levels of inventory for the schoolable pipe, given that you track, like the schools itself. Well, what are your sort of thoughts on that right now? What do you see it out there and you know which way do you see that trending, I guess?
yeah go.
North America. Obviously activity in the oilfield space has risen, risen a little faster in the U's than it.
In Canada, but across the Board.
Onshore North American new well construction is up and we think it.
Continues to trend upwards in the spoonable pipe sector there was significant inventory on the grounds certainly in the.
The second half of last year that started to on.
And at this point I would say there is very limited.
incre excess inventory.
The system probably certain.
Sizes and types there's a little bit of inventory but largely.
Orders that are received now are being met with newprodu.
And I think that's across the industry So.
Lead times obviously.
How have some potential to stretch in that environment?
And we are starting to see.
You know backlog in thatp.
Of the business build, which is what you would anticipate.
Point in cycle. Got it again super helpful color. Appreciate you taking my questions. We'll turn it to moment.
As a reminder, that is star than 1, if you'd like to ask a question.
Our next question comes from Matthew weeks with I capital markets.
Good morning. Thanks for taking my out of question. I think I just have one it's a bit of a macro question, seeing some kind of improving sentiment on nuclear power a little bit, just globally, given everything that's happening in the world and the need for more baseload clean energy. A lot of countries that that 'were previously talking about, you know, maybe reducing the F', now talking about refurbishing, building new reactors. I'm just wondering how, how you're seeing that play out over the, the media and long term for your, for your industrial business and sort of capturing that, that higher-margin business going forward.
yeah thanks Matthew, So.
Again great question. I think certainly we view that as a favorable.
For the shore Flex.
Arm of our Automotive and industrial.
Segment I think we are uniquely positioned.
To provide.
Extremely high quality product into.
Nuclear industry. We've got a long history of doing that.
Here in the Canadian market.
You know slowly growing history of doing that.
Outside Canada, So I think we're well positioned to see a benefit from that. Obviously it depends on exactly.
Where and what style of nuclear reactor is being constructed or.
furbished we are qualified for some but.
For all, although working to be qualified for more and more.
As we movell forward here. So difficult to quantify at this point in time but certainly a favorable trend and one that we think will benefit the business over the.
Years Ok thanks, that's everything for me'. 'll turn it back and congratulations. Guess on. Thank you.
I'm showing no further questions in queue at this time. I'd like to turn the call back to Mike reedves for closing remarks.
Well Thank you for joining us this morning for the first quarter earnings call. We appreciate your interest, certainly appreciate the questions and look forward to getting together in.
Another three months to talk about the second quarter earnings of that time.
And have a great day to everybody.
This concludes today's conference call. Thank you for participating. You may now disconnect.