Q4 2022 Shawcor Ltd Earnings Call
Speaker 1: The conference will begin shortly. To raise and lower your hand.
Speaker 2: Good day, and thank you for standing by. Welcome to the Shaw Core Q4 and 4-year 2022 results webcast and conference call. At this time, all participants are in a listen-only mode.
Speaker 2: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone.
Speaker 2: You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Megan McEachern, Director of External Communications and ESG.
Speaker 3: Please go ahead.
Speaker 4: 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 shock or statement on forward-looking information is included in the description.
Speaker 4: I will now turn it over to Shockworth President and CEO Mike Reed.
Speaker 5: Good morning and thank you for joining Shorecore's fourth quarter conference call. Today Megan and I are joined by our CFO Tom Holloway.
Speaker 5: 2022 was a year of significant transformation for Schuylkill.
Speaker 5: The company completed substantial progress against our portfolio optimization commitments, against our ESG ambitions, and against our financial expectations.
Speaker 5: to deliver 10% annual revenue growth, adjusted EBITDA growth in excess of 20%.
Speaker 5: dramatically lower net debt leverage and expand our total backlog, while completing multiple divestitures, preparing to rebrand the company and rebuilding our organic and inorganic growth capabilities has taken an enormous degree of focus, energy and commitment from every member of the Bachelor court tcee.
Speaker 5: And I offer my heartfelt thanks to every employee of this unique organization.
Speaker 5: Looking more closely at the fourth quarter.
Speaker 5: All three of our operating segments reported meaningful revenue growth and margin expansion during the quarter when compared to the prior year quarter.
Speaker 5: Our industrial and infrastructure focused businesses continue to benefit from significant global investment in transportation, low emissions energy, communications and water related infrastructure.
Speaker 5: while our energy-oriented businesses are experiencing rising market demand, with sales of larger-diameter composite pipe products accelerating and a step up in offshore pipeline coating activity during the quarter.
Speaker 5: signaling the beginning of an anticipated multi-year upcycle.
Speaker 5: Revenues from businesses serving industrial and infrastructure end markets contributed 43% of total sales during the fourth quarter, similar to the same quarter last year.
Speaker 5: Throughout the course, the company continued to execute additional elements of its strategy to unlock stakeholder value and deliver long-term profitable growth by tightly focusing capital on the core elements of its composite systems and automotive and industrial segments.
Speaker 5: In November , Showcore divested its oilfield asset management business, which historically formed part of the composite system segment.
Speaker 5: securing $20 million in total gross proceeds for this business, which contributed $44.3 million of revenue and $6.2 million of adjusted EBITDA in 2022 prior to its sale.
Speaker 5: Shorecore retains ownership of a Western Canadian real estate portfolio historically utilized by the OAN business and has the potential to realize additional proceeds from the possible future sale of these assets.
Speaker 5: In December , Shorecore divested its socoterm Americas subsidiary, which provides pipe coating services to the Argentine market.
Speaker 5: securing $6.6 million in total gross proceeds for this business, which contributed $23.7 million of revenue and $4.7 million of adjusted EBITDA in 2022 prior to its sale.
Speaker 5: In recent years, and consistent with our previously communicated strategy, Surecall has focused heavily on the optimization and simplification of its portfolio.
Speaker 5: selling non-core business lines and other assets.
Speaker 5: generating substantial cash proceeds, and reducing net debt. These actions are important elements of the company's continuing transformation into a high-value materials technology provider, enabling responsible, sustainable renewal and enhancement of critical infrastructure.
Speaker 5: In this process, we are more closely aligning our focus and capital allocation to our core competencies.
Speaker 5: positioning the organization to fully benefit from favorable long-term macroeconomic trends and will lower overall volatility while elevating the company's full cycle margin, cash flow and return on invested capital profiles.
Speaker 5: During the second half of 2022, the favorable impacts of this strategy started to become more visible, both in company performance and related share price appreciation.
Speaker 5: While our strategic review process is ongoing for the remaining components of the pipeline and pipe services segment.
Speaker 5: The progress already achieved has better positioned Schuylkor to invest in support of accelerated high margin growth.
Speaker 5: Consequently, during the fourth quarter, the company took action to supplement its industrial and infrastructure product offering via the acquisition of KANATA Electronic Services.
Speaker 5: which specializes in premium connector technology.
Speaker 5: Operating from a facility close to Shorecore's existing Toronto footprint, KINATA has been incorporated into the ShoreFlex wire and cable business and enables our combined team to provide a full wire and connector solution.
Speaker 5: moving up the value chain and expanding Shoreflex's reach into premium nuclear, aerospace and other industrial markets.
Speaker 5: Subsequent to the quarter, Chalko moved to enhance its stormwater solutions offering, acquiring the assets of Triton Stormwater Solutions, which have now been incorporated into the company's Xerxes business.
Speaker 5: part of our composite systems reporting segment.
Speaker 5: This acquisition brings in-house a portfolio of unique composite-based infiltration chambers, which are a crucial component in many stormwater management systems.
Speaker 5: We expect this transaction to enhance margins in our stormwater business, provide access to markets beyond our current North American core, and position ShoreCorps to significantly increase chamber manufacturing output, enabling an accelerated growth profile in this key market sector. While we will continue to pursue strategically aligned, attractively valued acquisition.
Speaker 6: more about this later.
Speaker 5: We remain on track to rename the company from Shorecore to Matter in mid-2023, establishing a new, exciting brand that more fully reflects our capabilities and our purpose. Later in the year, we will release our annual Environmental, Social and Governance report, which will reveal further progress towards our long-term greenhouse gas emissions reduction.
Speaker 5: during the quarter and with strong operating cash flow expectations.
Speaker 5: The company remains active under its previously launched normal course issuer bid.
Speaker 5: The hard work completed across Shorecore in the last few years to substantially strengthen our balance sheet and our cash generation profile positions us to pursue a broad capital allocation strategy, investing organically and inorganically on a selective basis to drive profitable growth while also returning cash to our shareholders.
Speaker 5: Looking a little closer at each of our businesses, our composite system segment revenue climbed 34% and adjusted EBITDA margins rose 370 basis points versus the prior year same period.
Speaker 5: North American sales of spoolable composite pipe remain robust, with further acceleration of large diameter product adoption and continued share gain in multiple operating basins, overcoming a lower level of international shipments when compared to Q3.
Speaker 5: Demand for high-specification underground storage tanks in the liquid fuel market also remained high, while sales of tanks and other products into water applications reached another new quarterly record high. With completion of the previously mentioned Triton acquisition early in 2023, the company
Speaker 5: We believe our water-oriented business is well positioned to continue its recent trend of significant annual growth.
Speaker 5: Overall segment revenue in Q4 was modestly lower than the prior quarter, almost entirely due to the sale of the segment's oilfield asset management business during the quarter.
Speaker 5: With this sale complete, there are no further business divestitures currently contemplated from within the competence segment.
Speaker 5: Demand for our pipe, tanks and water related products is expected to remain strong in the coming year and provides an opportunity to deliver healthy year over year segment growth.
Speaker 5: We anticipate normal, modest seasonal slowing in Q1 tank revenue when North American ground conditions are unfavorable for installation activity, and likely a minor impact to pipe revenue in Q2 as spring break-up causes Canadian oilfield activity.
Speaker 5: to temporarily slow. Notwithstanding these normal fluctuations, our highly favorable outlook for composite systems primary market underpins significant ongoing investment in support of organic growth initiatives across the same with a particular focus on technology development, manufacturing efficiency and capacity enhancement.
Speaker 5: including for the recently acquired stormwater chamber product.
Speaker 5: Continued strong North American industrial and infrastructure baseline demand, coupled with specific deliveries into utility and nuclear end markets.
Speaker 5: enabled the automotive and industrial segment to deliver 21% revenue growth and 160 basis point adjusted EBITDA margin expansion versus the same quarter last year. This performance demonstrates the strength of underlying demand for the company's highly engineered wiring cable and heat shrink products.
Speaker 5: despite inflation and normal year-end customer desocking patterns.
Speaker 5: The continued targeted growth of sales into industrial and infrastructure applications led to these end markets representing approximately 72% of segment revenue during the quarter, with automotive representing the remaining 28%.
Speaker 5: We expect normal customer restocking and continued strong underlying demands to drive a robust rebound in first quarter 2023 revenue.
Speaker 5: have made good early progress to integrate KANATA into our ShoreFlex business.
Speaker 5: Over time we are confident the additional products, capabilities, qualifications and customer relationships that KANATA brings will enable Sureflex to access new attractive subsectors of the nuclear and aerospace markets, accelerating both revenue and margin profile growth within the business.
Speaker 5: We remain vigilant to the potential impacts of energy cost and availability in Germany and other parts of Western Europe and are actively taking steps to lower the company's near and midterm risks tied to this possible issue.
Speaker 5: Overall, we maintain a constructive view of the market trends which impact this business, and we will continue to invest growth capital to enhance our product offering and improve our manufacturing capabilities.
Speaker 5: including the previously announced intent to relocate, expand and modernize our Toronto production site.
Speaker 5: Lastly, our pipeline and pipe services segment saw revenue rise by 28% compared to the fourth quarter of 2021.
Speaker 5: delivering an adjusted EBITDA margin of nearly 10% compared to a loss in the prior year quarter.
Speaker 5: Sequentially, segment revenues rose by 23%, despite the absence of contribution from the Lake Superior Consulting business, which was sold during the third quarter, and the sale of Sacramento Inc. was sold in West Palm Beach transgender business, which was owned in Detroit.
Speaker 5: The meaningful uptick in activity was primarily driven by commencement of coating operations on several previously awarded projects, including the Scarborough project in Asia, and continued strength in the Canadian small diameter pipe coating market.
Speaker 5: The pipe coating business secured several additional project commitments during Q4, including five in the Latin American region, one of which will utilize the company's proprietary ultra insulation coating technology.
Speaker 5: the second use of this technology in the region following very successful introductions into other geographies.
Speaker 5: These awards and others drove a substantial increase in 12 months and total backlog.
Speaker 5: During Q1, the business will commence a multi-year campaign to apply its unique Lotus Flow internal coating to downhole tubulars for use in Brazilian pre-salt applications.
Speaker 5: The timing of this and other coating projects will drive operational activity in the first two quarters of 2023 to remain similar to, but slightly below, the level observed in Q4, before rising to a substantially higher level in Q3 and Q4, driven primarily by the commencement of revenue generating activities on the Southeast Gateway Pipeline project in Mexico.
Speaker 5: which will then continue for approximately 12 months. Consequently, we anticipate profitability in the segment to reach previous peak cycle levels during the second half of 2023.
Speaker 5: The combination of a substantial high quality backlog, growth in the volume of budgetary coating activity, favorable energy fundamentals, and continued successful new technology adoption support our belief that our pipe coating business will experience elevated activity levels for several years to come.
Speaker 5: Turning to consolidated 12 month backlog, at the end of Q4, the company's committed backlog of work to be completed within the next 12 months was just over 1.2 billion dollars.
Speaker 5: an increase of $220 million or 22% when compared to the prior quarter.
Speaker 5: Strong order intake prevailed across our composites and auto and industrial segments, while the PPS segments secured multiple new pipe coating projects.
Speaker 5: These new projects, coupled with revenue movement from previously awarded pipe coating projects into the forward 12-month window, caused the PPS segment to now represent a majority of the company's 12-month backlog balance.
Speaker 5: We anticipate the consolidated 12-month backlog will rise further during the first half of 2023 as a greater proportion of secured pipe coating work moves into the 12-month window, before declining in the second half of 2023 as pipe coating activity rises substantially, particularly driven by the SGP project in Mexico.
Speaker 5: Total backlog, which includes committed work beyond 12 months, remained relatively unchanged from the prior quarter at just under $1.5 billion. Shorecore's bid number reflects the value of work where the company has issued a firm price.
Speaker 5: with proposed contract terms against an explicit scope of work with a defined timeline for execution.
Speaker 5: At the end of Q4, the bid balance was $793 million, a decrease of $167 million when compared to the prior quarter as several Latin American pipe coating projects were awarded and moved from bid to backlog.
Speaker 5: Bidding activity levels remain strong and are a clear indicator that customers are committed to moving forward with new and previously contemplated offshore pipeline projects in the face of elevated commodity prices and growing global demand for natural gas.
Speaker 5: The quarter-end bid number included $150 million of conditional awards pending final investment decision, up from $11 million at the end of Q3.
Speaker 5: will cause budgetary number reflecting the value of indicative pricing submitted to allow customers to build a project budget ahead of formal procurement activities was $2.1 billion at quarter end, up from $1.3 billion in the prior quarter as new budgetary quoting substantially exceeded the movement of several products.
Speaker 5: balances are attributable to the PPS segment.
Speaker 5: Tom will now walk through the company's fourth quarter financial highlights.
Speaker 7: Thanks, Mike.
Speaker 7: As mentioned, 2022 was a year of transformation and strong execution which resulted in robust, sequential and year-over-year growth in revenue, gross profit, operating cash flow, and backlog.
Speaker 7: The fourth quarter's consolidated revenue was $345 million, 30% higher than the $266 million in the fourth quarter of 2021.
Speaker 7: Adjustity VDAW was $38.4 million, a 91% increase from the prior year fourth quarter, primarily attributed to a healthy demand for products in all three of our segments, with particular strength in both the composite underground storage tank and composite pipe businesses.
Speaker 7: along with the expected ramp up in type coding projects. Consolidated results for the fourth quarter included non-recurring items outside the company's normal course of business.
Speaker 7: The current quarter included a loss on the sale of our Argentina pipe coating business of $77.5 million related to a non-cash foreign currency translation adjustment required for accounting purposes, and a loss on the sale of the oil field asset management business of $1.3 million, both of which were completed as part of our ongoing portfolio optimization strategy.
Speaker 7: The current quarter also included $4.9 million of net restructuring costs, largely attributed to the share price movement on certain severance obligations for previously executed restructuring actions.
Speaker 7: During the quarter, our selling, general, and administrative expenses were impacted by significantly increased share-based incentive compensation accruals.
Speaker 7: In total, the company recognized $16.6 million of share-based incentive compensation costs during the quarter, largely driven by a share price increase of 61%, from $8.54 at the end of September to $13.74 at the end of December . In addition to the share price movement, the company also recognized $16.6 million of share
Speaker 7: the company surpassed its financial and operational internal targets for the year which impacted short and long-term incentive compensation costs.
Speaker 7: The company continues to perform actions to improve shareholder returns, which have generated over $600 million in market cap increases since the beginning of 2022. As actions continue, further impacts may be recognized. Also included in the results for the quarter, the company recorded a one-time record of a total of 4,000 results.
Speaker 7: $29.6 million, a 34% increase compared to the fourth quarter of 2021, and adjusted EBITDA was $24.6 million, a 70% increase from the prior year fourth quarter, despite the sale of its oilfield asset management business partway through the quarter and the absence of the global poly product line. These results reflect continued strong order activity for composite pipe products.
Speaker 7: management systems, the latter of which experienced another record quarter. Automotive and industrial segment revenue was $74.4 million, a 21% increase compared to the fourth quarter of 2021, and adjusted to the top was $12.5 million, a 33% increase from the prior year fourth quarter.
Speaker 7: Quarterly segment revenue reflected strong project-based activity in industrial markets, particularly for highly engineered wire and cable products, along with continued strong demand for heat shrink tubing products across all regions despite normal year-end de-stocking patterns.
Speaker 7: Pipeline and pipe services segment revenue was 131.2 million dollars. A 28% increase compared to the 4th quarter of 2021. Primarily resulting from the expected higher levels of type coding activity across all geographic regions.
Speaker 7: partially offset by the absence of revenue associated with the Shawcore inspection services, the Lake Superior Consulting, and the Sockatherm Argentina businesses, which were sold prior to or during the fourth quarter. Adjusted EBITDA was $12.7 million compared to a loss of $3 million in the prior year fourth quarter.
Speaker 7: reflecting the aforementioned higher revenue with a more profitable project mix and the impact of higher activity on manufacturing absorption.
Speaker 7: Turning to cash flow in the quarter, cash provided by operating activities in the fourth quarter was $163 million, reflecting a $125.1 million reduction in working capital, excluding the impacts of restructuring liabilities.
Speaker 7: This reduction in working capital is largely driven by the increase in contract liabilities related to cash advances from customers for projects currently in our backlog and awaiting execution.
Speaker 7: Further working capital progress was made in accounts payable partially offset by an increase in contract assets and accounts receivable from the timing of billings, purchases, collections, and payments.
Speaker 7: Furthermore, additional inventory was secured to mitigate the impact of supply chain interruptions and satisfy orders for future quarters. Cash used in investing activities in the fourth quarter was $1 million, reflecting $7.2 million of capital expenditures.
Speaker 7: and $4.4 million for the purchase of Kanata Electronic Services Limited, partially offset by $9.9 million in proceeds from the sale of oilfield asset management and the Socatherm America's business.
Speaker 7: During the fourth quarter, cash used in financing activities was $30.7 million, reflecting $19 million in debt repayments, $7.3 million of lease payments, and $4.2 million in share buybacks.
Speaker 7: Net cash provided in the fourth quarter of 2022 was $139.8 million.
Speaker 7: Based on the actions completed, our diversified business, and 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 programs.
Speaker 7: As of December 31, 2022, we had a cash balance of $264 million, debt of $219 million, and $64.4 million of standard letters of credit.
Speaker 7: Our liquidity position has benefited from the initiatives undertaken since 2020 with continued focus on reducing our operating cost base. As well as repayment of 247.5 million dollars of outstanding net long term debt since the start of 2021, including 25 million dollars repaid subsequent to the end of the 4th quarter.
Speaker 7: At the end of the quarter, the company's net debt to adjusted EBITDA ratio was 0.05 times, significantly below our target of 1.5 times. We also continued to purchase shares under our normal course issuer bid. During the quarter, the company repurchased slightly over 268,000 common shares.
Speaker 7: Growth expenditures accounted for $6.3 million and included investments in facility infrastructure improvements to increase production capacity in the composites and automotive and industrial segments, as well as mobilization and re-establishment of a high-capacity concrete coating facility in Altamira, Mexico. For more information, visit www.altamira.com
Speaker 7: to support the SGP project. On a full year basis, the company has spent $54.3 million on capital expenditures, of which $32.4 million relates to growth expenditures.
Speaker 7: We will continue to prioritize capital spend to drive high return growth in our most differentiated, materials-based solutions in support of industrial and critical infrastructure in markets.
Speaker 7: The company expects to make sizable organic investments in 2023 and 2024, primarily to expand within the composite systems and automotive and industrial segments.
Speaker 7: Capital expenditures for 2023 are anticipated to be between $160 to $180 million.
Speaker 7: Approximately 40 to 45 percent of these anticipated expenditures are expected to relate to the pipeline and pipe service segment and is mostly growth capital related to customer funded mobilization activities for the Southeast Gateway project. The remaining 55 to 60 percent of 2023 capital expenditures.
Speaker 7: are anticipated to be made in the composite systems in automotive and industrial segments with planned investments deployed into high return growth opportunities including the construction of new and modernization of existing production facilities in North America.
Speaker 7: In aggregate, if completed, these planned growth capital investments are expected to result in the company creating at least $150 million per year of incremental revenue generating capacity, with margins comparable to those currently realized in the composite systems in automotive and industrial segments.
Speaker 7: These benefits are expected to be realized upon maturity of the investments, which is likely to be over the coming three to five years.
Speaker 7: The above strategic actions and others that will evolve over the coming quarters are intended to enhance over time 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.
Speaker 7: of critical infrastructure. Not only did the company have a very robust fourth quarter across all segments, the company also showed overall growth year over year on the back of strong results from its composite systems in automotive and industrial segments.
Speaker 7: Consolidated revenue in the year was $1,255,000,000, 10% higher than the $1,143,000,000 in 2021, despite the absence of revenue associated with the sole businesses previously discussed.
Speaker 7: Adjustity of the DAW was $130 million, a 23% increase from the prior year, primarily attributable to an increased demand for products in our composite systems and automotive and industrial segments. When challenging Orchard- repercussions
Speaker 7: Consolidated results for the year included non-recurring items outside the company's normal course of business.
Speaker 7: In addition to the already discussed loss on sale of our Argentina pipe coating business and the oilfield asset management business, the year also included an additional loss of $5.9 million on the sale of our Lake Superior Consulting business.
Speaker 7: The total loss on sale of operating units and subsidiaries was $84.8 million. The year also included a gain on sale of land and other of $43 million for the completed sale and lease back of our rec sale facility in Toronto. And the sale of assets related to the composite system segment global poly product.
Speaker 7: As mentioned before, our selling general and administrative expenses were impacted by significantly increased share-based incentive compensation accruals driven by a share price increase of 180%, resulting in the company recognizing just over $31 million of share-based incentive compensation costs in the year.
Speaker 7: In addition to the share price improvement, the company surpassed its financial and operational internal targets for the year, which impacted short and long term incentive compensation costs.
Speaker 7: Also, the company recorded a $9.7 million gain from foreign currency movements primarily due to the strengthening of the U.S. dollar since the beginning of the year. As we continue to progress our strategic alternative review process, we note that the removal of the pipeline and pipe services segment will substantially lower selling, general and natural resources into the industry.
Speaker 7: timing issue, we still anticipate that during this transition, the selling general and administrative costs for the company, measured as a percentage of revenue, will decline.
Speaker 7: Turning to segment results, the composite system segment full year revenue was $529.2 million, a 41 percent increase from 2021, and adjusted EBITDA was $93.2 million, a 71 percent increase from the prior year.
Speaker 7: Those results reflect growth in demand for both the composite pipe and tank products as a result of the aforementioned market share gains, including commercialization of its large diameter pipe products and record water related revenues.
Speaker 7: Automotive and industrial segment revenue was $313.1 million, a 19 percent increase compared to 2021, and adjusted EBITDA was $59.3 million, a 31 percent increase from the prior year. These results reflect increased demand for high margin wire and cable products to support utility and nuclear end markets.
Speaker 7: and Europe , Middle East and Africa regions, coupled with the absence of revenue from the vested businesses, which include Chalkboard Inspection Services, Lake Superior Consulting, and Sockatherm Argentina.
Speaker 7: This was partially offset by increased activity levels in Western Canada that generated robust demand for small diameter coating solutions.
Speaker 7: Adjusted EBITDA was $2.7 million, an 87% decrease from the prior year, reflecting the aforementioned lower revenue and a less profitable pipe coating project mix.
Speaker 7: Turning to cash flow for the year, cash provided by operating activities was $211.1 million, reflecting a $101.7 million reduction in working capital.
Speaker 7: This reduction in working capital is largely driven by the already discussed increase in contract liabilities related to the cash advances from customers for projects currently in our backlog and awaiting execution.
Speaker 7: Offsetting this, additional inventory was secured to mitigate the impact of supply chain interruptions and satisfy orders in the future quarters.
Speaker 7: Cash provided by investing activities in the year was $19.5 million, reflecting $58.2 million in proceeds from the disposal of property, plant and equipment. And $15.8 million in proceeds from the sales of businesses throughout the year. This was partially offset by $50.1 million of capital expenditures paid by the year.
Speaker 7: of lease payments and $5.2 million in share buybacks.
Speaker 7: Total net cash provided during the year was $139.5 million.
Speaker 7: During the past year, Shaw Core further advanced its transformation to become a more profitable, less volatile business focused on the development and delivery of differentiated high-value materials-based solutions in support of industrial and critical infrastructure in markets. While our transformation is ongoing, we are proud to report strong financial results to our stakeholders.
Speaker 7: that from favorable long-term macroeconomic trends.
Speaker 7: We finished the year with a strengthened balance sheet, which includes an additional $140 million in cash and an additional reduction in debt of $79 million, all while returning capital to shareholders through our share buyback program. We are positioned to fuel profitability expansion through infrastructure investments.
Speaker 7: $241 million step up in secured backlog, we are well positioned to realize continued stakeholder value throughout 2023.
Speaker 5: I'll now turn it back to Mike for some final comments. Thank you Tom. Since the start of 2020, we have taken significant steps to increase average margins, lower volatility, and elevate cash flow. We remain committed to tightly controlling fixed costs, optimally deploying capital, and increasing our capacity to reduce our risk of
Speaker 5: and completing the strategic review of our remaining PPS segment businesses. We have substantially reduced outstanding debt, are returning cash to shareholders, and leaning into high value organic growth opportunities, taking advantage of our unique technology portfolio and strong economic growth opportunities.
Speaker 5: long-term customer demand to deploy significant growth capital and deliver elevated returns for our stakeholders. The underlying trends for each of short-cause primary businesses are favorable and expected to remain so for several years. Long duration North American critical infrastructure activity remains robust.
Speaker 5: consumer discretionary spending, and we believe has resilience in the face of recessionary forces.
Speaker 5: Surecore's disciplined approach to portfolio management is unchanged.
Speaker 5: We believe further opportunities will exist to make attractively valued strategic tuck-in acquisitions that move the company's composites and automotive and industrial segments further up the value chain, accelerate our profitable growth, and improve our ability to enable responsible, sustainable renewal and enhancement of critical infrastructure.
Speaker 5: Our hard-earned balance sheet strength ensures we stand ready to take advantage of those opportunities at the appropriate moment. Despite continued cautiousness regarding the impacts of geopolitical events, supply chain risks, and higher interest rates, we remain confident our momentum will continue.
Speaker 5: We expect to adjust to DPDAR in the first two quarters of 2023 to be similar to the fourth quarter of 2022, before rising very substantially in the second half of the year as pipe coating activity steps up, including elevated margin contributions from the Southeast Gateway Pipeline project.
Speaker 5: I will now turn the call over to the operator and open it up for any questions you may have for myself, Tom or Megan.
Speaker 2: Thank you. As a reminder, to ask a question, you will need to please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
Speaker 2: Please stand by while we compile the Q&A roster. Our first question comes from the line of Erin McNeil from TD Securities.
Speaker 7: Hey, morning all. Thanks for taking my questions. I found your comments on the $8 million of corporate costs currently included.
Speaker 7: In pipe coating, they'll be absorbed in other segments. A little curious, I guess, and maybe I'm reading too much into this, but it sort of hints at the potential that you might be close to a transaction. So,
Speaker 7: Again, could you maybe give us any additional commentary on the progress of the review and what we should expect in the near term? Good morning Aaron. Tom may have some additional comments here but I'll just start by saying...
Speaker 5: What we were attempting to do in the comments around the 8 million of corporate costs was just to set some realistic expectations.
Speaker 5: Those costs won't disappear the second the transaction closes, but they also won't remain forever. There will be a transitionary period and just trying to set some realistic expectations there. In terms of the transaction or the strategic review process.
Speaker 5: Unfortunately, I'm not in a position to share a great deal more color with you. Obviously, we publicly announced that process in September and have been working diligently through that process since then and will certainly communicate at the moment where we have something of substance that we should be communicating.
Speaker 7: but I just reiterate what was communicated in the prepared remarks that the process is generally following the direction and the timeline that we had anticipated when we started. Yeah, Aaron, the only other thing I would say is we communicated that to try to give a little bit of a guide on what the corporate costs might look like and also communicating that, you know, despite having to absorb some, which might be covered by a transition services agreement in fairness.
Speaker 8: mentioned it in your prepared remarks and can completely appreciate that a project like this one with such high throughput will generate very good margins, but can you speak to your expectations for sort of the full cycle cash flow of the project when you incorporate the capital component as well? Yes, so I'll start here and then Tom will provide a little extra.
Speaker 5: mid-year.
Speaker 5: As we said when we announced the award, we would expect the project to be cash flow positive at all moments through those two periods. And that has proven to be the case and we still expect it will be the case.
Speaker 5: There are certain activities in the mobilization phase that reach the criteria to require them to be reported as capital expenditures but the cash that is used to fund those capital expenditures has been prepaid by our customer.
Speaker 5: So again, from a cash flow perspective, we remain in a net positive position throughout the process and those capital assets, once fully constructed, will then be depreciated over the period of the coating project itself. So Tom, do you want to comment there?
Speaker 7: Yeah, and the only other thing to add is this is probably a good place for me to talk about the accounting treatment of the project a little bit and just reminding everyone that the way the accounting works is we don't recognize revenue and therefore profit until we actually start coating the pipes. And so that will be in this Q2 at the earliest.
Speaker 7: into Q3 potentially, and then it will commence those earnings and that will occur over the remaining roughly year period, perhaps a little longer depending on the schedule there. So that's why we signaled a move up in the back half on the outlook and also, to Mike's points just a minute ago, also signaled that
Speaker 7: the margins in that business will be significant. You're kind of top of cycle because of the cash having already come in, the pipe coating activity occurring and the capital having already been committed. So if you think about the accounting there, Aaron, the capital will go into a different place. And so our EBITDA will be a little bit elevated due to that capital being.
Speaker 7: in our PB&E. So hopefully that's helpful.
Speaker 8: Maybe I'll just sneak one more in. Again, maybe I'm reading too much into this, but it seems to be that there's a bit of slippage in the timeline for Southeast Gateway relative to the initial press release.
Maybe I'll just sneak one more in. And again, maybe I'm reading too much into this, but it seems to be that there's a bit of slippage in the timeline for Southeast Gateway relative to the initial press release. Again, is that... Directions of the
Am I thinking about that the right way or how would you characterize that? Yeah, I'd say we're generally aligned with the original expectations. I can't recall exactly what the language was when we first announced, but I think we anticipated that coating activity would commence in the second quarter of 2023. And I think as we sit here today.
that's still a true statement. It'll probably be towards the very end of the second quarter, but largely in line certainly, you know, our work with our customer and our key vendors there has followed the project schedule as laid out and agreed between all parties. So I think we're in we're in good shape, things are progressing well and as I said coding activity will commence mid-year and once it does.
you will see a very, very substantial impact to the income statement of the organization. That's it. Thanks. I'll turn it over. Thanks Aaron.
Thank you. One moment for our next question. Our next question comes from the line of David Ocampo from Coremark Securities.
Thanks. Good morning, everyone. Morning, Dave. Good morning. Tom, I appreciate all the commentary that you gave on the 2023 CapEx, but you guys pointed to an elevated CapEx cycle in 2024. Maybe you guys can kind of triangulate where that could end up.
because I appreciate both of that are in 2023 is related to the pipe coating contract. So can we see that 55% or 50% of the 170 million continuing to 2024? Yes, I think if you, without giving guidance on 2024 at this.
time, if you think about what we said, roughly at a midpoint, 70 million of CapEx in the PPS segment, 100 million in the rest of the business, right? So you just take on a midpoint and apply those percentages.
I think 24 is perhaps slightly lighter than that, but it is the completion of those projects. So it's still a pretty heavy investment year on the. 100 million number. I think it's perhaps below that, but it's in the ballpark of that.
to complete those projects, which will, as we said, generate substantial growth for the organization. So just so I'm understanding that correctly, the $150 million of potential revenue factors in the capex in 2014 to complete those projects.
It does. It requires completion in 2024 to go online and then eventually get to a mature state to generate those 150 million of residents. If I may just add one comment there David. Some of the capital we would expect to deploy in 2024 would be to complete projects started in 2023.
there would be some incremental growth projects in 2024 that would not be captured in that 150 number that we guided to in terms of incremental revenue tied to 2023 project initiation.
Got it. That makes sense. And then maybe just a last one for clarification, Tom. When I look at the share-based compensation, how should we be thinking about that on a quarterly run rate basis and maybe perhaps provide a sensitivity on what a $1 increase in the stock goes to that total number?
Yeah, good question. So if you think about our share-based comp, a couple things to say there. There's two factors, two primary factors. One is the share price itself.
which obviously moved up significantly. The second is the total shareholder return, which is compared to a group of peers, which was elevated in 2022 based on our performance.
Where we sit today, we would expect annual bust in the stock-based comp to be around $10 million.
That's assuming no share price movements and a TSR of one kind of at the midpoint. So the last piece to your question is a sensitivity, rough numbers using a $1 share price move generally increases shareholder value by $70 million on the capital.
market cap side, but our cost is about $2 million. So that's the sensitivity I'd be able to give you. Just keeping in mind the CSR is a little harder to navigate, so we'll have to give more on that as we have more information.
That's very helpful. I'll hop back into the queue. Thanks, David. Thank you. One moment for our next question.
Tim Monicello from ATV Capital.
Tim Monicello from ATV Capital. Hey, good morning everyone.
from ATV Capital. Hey, good morning everyone. Good morning.
My first question here is just on the prepayment that you guys received in the quarter. Looks like the contract liability increased by about $149 million. And that's, I assume that that's related to the SGP project and sort of the upfront payment, just on capital and the fact that you guys have talked about it at the end.
known for them it's coming in in 2023.
So I'll take the last one first and then I'll kind of work my way back. So more milestones come over the course of the project. So the short answer to that is yes. There are more milestone payments coming and they will keep us cash flow positive for the project as Mike has said.
From an overall cash and debt perspective, I think what we kind of signaled in our end DNA is that we expect cash to come down a bit in Q1 and Q2 as those milestones are spent on the project. What I would guide you to is I don't expect net debt to go above one and maybe stay below that. So that's.
how I would think about that. I still think 2023 is a very positive cash flow year for us, but you can see all the uses of cash we've got on the SGP project and the capital expenditures as well. Staying below one is probably a good guide.
Okay, got it. And then let's say you sell the PPS business midway through 2023. You've got a bunch of pre-payments on your balance sheet.
How would that cash be allocated to the PPS segment and to to Shockor? You know given a sale. So I'll offer a comment just just to kind of go back to the previous item though Tom was talking about our net debt.
rising modestly from where it was at year end, staying below a one times level during the first half of the year. And we would expect very, very healthy free cash flow generation in the second half of the year that would again drive it in a downward direction. So just to clarify that. Obviously, negotiations with any potential buyer for the PPS segment will include.
you know, a thoughtful evaluation of cash that's been received ahead of time. But as we've said multiple times, we believe this is a business where any realistic buyer is building a forward model of cash flow generation, understanding what may already have been received and what would still be out there to be harvested.
and applying their thoughtful evaluation of what they should pay for that forward cash flow stream. So I would encourage you not to jump to the conclusion that prepaid milestones would necessarily net against.
purchase price if this business
closes a sale transaction. So I think that's probably the best way to describe it. Obviously, there's any number of transaction structures that could ultimately play out.
So I think that's probably the best way to describe it. Obviously there's any number of transaction structures that could ultimately play out, but hopefully that gives you some indication.
No, that's really helpful. Okay. And I appreciate the cadence of the net debt comment. That's also helpful. The other question that I had was on the CAPEX deployment, kind of a follow-up on David's question and just a clarification. So you've given some good detail around how much revenue run rate that could generate. I would be remiss if David did that, actually.
I If I'm reading it or if I've heard it correctly, you're not expecting much of that to happen in 2023. Is that correct? I think that's a generally correct statement the the bulk of what we're doing here has You know a year ish on the low end of lead time for execution We may see a little bit of impact in the fourth quarter
I think that's a good time to mention that there will be some startup, one-time type of cost as we get some of these plants going, some in 23, some in 24, that might impede margins a little bit. So just give that color there at this point. I think it's relevant. I think that's a good time to mention that there will be some startup, one-time type as we get some of these plants going.
Okay, that's helpful. And it's a good segue. Can you speak a little bit more specifically about the project that you're contemplating with that catfish? Yeah, okay.
I can to some degree. There's going to be appropriate public communication on some of these as we cross specific thresholds with them. But the way you should think about this is that the vast majority of the capital that's going into the A&I and the composite segments is growth. We've said it before, we'll say it again, the recurring maintenance capital requirements.
to our portfolio here recently. So, you know, when we talked about the advent of...
larger diameter flexible composite pipe and the uptake of that. Obviously, we need to be sure we can feed that opportunity with appropriate production capabilities. We've talked about the ongoing very high levels of demand for underground fuel storage tanks. We need to be able to feed that.
We've talked about the acquisition of Triton stormwater solutions and our need to be able to increase production of infiltration chambers that come to us in that portfolio and we've talked previously about the need to expand and modernize our North American production capabilities for the ANI business both Shoreflex and
Does that capital number, sounds like it includes the tuck-in of Triton, does it include any other allocation to potential tuck-ins?
It does not, but it does include what we think we need to deploy to create maximum value from the Triton acquisition.
Okay, fantastic. Thanks for the details. I'll turn it back. Thank you. One moment for our next question.
Our next question comes in the line of Zachary Evershed from National Bank Financial.
Our next question comes in the line of Zachary Evershed from National Bank Financial. Good morning everyone. Thanks for taking my questions.
Good morning, is that? There was an elevated level of share-based compensation in Q4. In that context, is the guidance for Q1 and Q2 EBITDA?
inclusive of share-based comp and what does that imply for the underlying profitability of the business? Yeah, so Zach, it's inclusive of a base level, which I referred to on an earlier question, which is about 10 million dollars annually. Anything above that is not included in our number.
Because we don't forecast share price movements, nor do we forecast FX movements. That helps. I'm sorry, just to answer the question that you asked earlier. I think the way we've...
We've tried to communicate this as the Q1 and Q2 expectation for reported adjusted EBITDA will be similar to Q4. Obviously similar to doesn't mean exactly the same as and it could signal both modestly higher or modestly lower.
That's the language that we're comfortable using at this point in time. The underlying operational business movements that cause us to provide that guidance when compared to where things stood in Q4 are also laid out in the NDNA and we're in the press release. But just to summarize,
the exact timing of specific pipe coating activity will cause the PPS segment operational activity levels to be slightly lower in the first two quarters than they were in the fourth quarter. The ANI business always has or historically has always had a ramp up from Q4 to Q1 as our customer base moved from destocking to restocking and we fully expect...
that will be moving as we roll from Q4 into Q1.
Great color, thanks.
And then could you give us a bit more around the pace of potential price hike implementation versus the rise in raw material costs? What are you guys keeping an eye on in particular? What sort of lags will you expect on recovery of margins if needed?
Yes, so I'd say that the inflationary environment for raw materials, despite inflation generally being higher at this point in 2023 than it was in this point in 2022, the pressure that we're seeing on raw material costs is not quite as intense as it was 12 months ago.
The demand for many of the raw materials that we consume is slightly lower now than it was 12 months ago. So there's still some inflationary pressures, but they have declined a little. We have…
In the most substantial exposure to raw material that we have, which is likely copper in our shore flex wire and cable business, our contractual arrangements with our customers have effectively automatic movement of pricing to modify for the movement of copper input costs.
In virtually everything else that we do, we would be issuing new bids on a regular basis and taking into account the cost of materials and labor that's incorporated into our finished goods pricing. So we have limited lag in most of our businesses if and when raw material costs move up.
Thank you very much. I'll turn it over. Thank you. One moment for our next question. Our next question comes from the line of Matthew Weeks from Industrial Alliance Securities, Inc. Thank you. Good morning. Thanks for taking my question. I was just wondering if you could – Why did you have toimpacts. Codelab.
Yeah, good morning. As we mentioned in the prepared remarks, with the step up in backlog in the pipe coding business, that business now represents a majority of that backlog. That was not the case for the majority of last year.
So it certainly has become a bigger piece. I would not describe it as the dominant piece, but it's a majority. You know, that backlog is very robust. I think one of the important points to note is that that backlog, if you were to compare it back to points in history where we've had similar levels of backlog.
On average, we believe this is a higher quality backlog. Margins, margin profile generally is higher than it has been at similar points in history. So we were very happy with the backlog where it is. Happy to see it continue to move up. Believe it will continue to move up modestly over the first half of this year. And then as we've mentioned, would fully expect that it starts to decline in the second half of the year just basically.
for closing remarks. So as always we very much appreciate your interest in the company and we are excited about where we are and where we are going and have an even stronger view of the full year 2023 at this point than we did at our last earnings call. So looking forward to doing this again in a quarter and thank you all have a great day.
This concludes today's conference call. Thank you for participating. You may now disconnect.
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