Q2 2023 Shawcor Ltd Earnings Call
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Good day, and thank you for standing by and welcome to the matter of second quarter 2023 results webcast and conference call. At this time all participants are in a listen only mode. 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 one on your telephone you hold.
Here, an automated message advising you that your hand is raised to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded there is a presentation that you can guide yourself true during the call I would now like to hand, the conference over to your speaker today, making the Catlin director of external communications and E.
S. G. Please go ahead.
Good morning, before we begin this morning's conference call I'd like to take a moment to remind all listeners that today's call includes forward looking statements that involve estimates judgments risks and uncertainties that may cause actual results to differ materially from those projected to complete.
Text of matters statement on forward looking information is included in section four point out of the second quarter 2023 earnings press release, and the MD&A that is available on SEDAR and on the company's website at matter dotcom for those joining us joining via webcast. You may follow the visual presentation that accompanies this call.
Now I'll turn it over to matters, President and CEO , Mike Reeves.
Good morning, and thank you for attending our second quarter Conference call.
Today, Megan and I are joined by our senior Vice President of Finance and CFO Tom Holloway.
During the second quarter. The company completed the process of rebranding itself as matter, establishing a new corporate image that more fully reflects our capabilities our purpose and our future.
We now trade under the <unk> ticker symbol MAA T R and I'm delighted to welcome you to our first earnings release under this new company Brian .
The second quarter of 2023 store Master continue to execute on its commitments to elevate margins lower volatility and focus resources on high growth opportunities, serving industrial and critical infrastructure end markets.
We moved closer to concluding the strategic review of our pipeline and pipe services segment.
Completing the sale of several smaller businesses during Q2.
The broader process continues to receive significant focus and while we are not yet positioned to announce a transaction for our core pipe coating business unit favorable progress continues to be made and we will provide further details when there are material developments to report.
Turning to the second quarter performance. The company delivered strong operating results across all segments committed capital to high return organic growth opportunities and continued share repurchase activity.
All three of our operating segments reported meaningful revenue and adjusted EBITDA growth during the quarter when compared to the prior year.
Our industrial and infrastructure focused businesses continue to benefit from significant global investment in transportation lower emissions energy electrification communications and water related infrastructure.
Our energy focused businesses are also experiencing rising market demand with domestic and international sales of larger diameter composite pipe expanding and pipe coating activity accelerating as offshore pipeline infrastructure expansion continues its multiyear up cycle.
In parallel we made further progress towards our 2030, environmental social and governance explorations and we will release, our 2022 ESG report later in the third quarter.
You will see in this report that we continue to successfully deliver emissions reduction.
One example of this is our run bank facility in Germany.
Recently implemented a heat recovery system.
Capturing heat from our hot water and compressor systems and using that to heat the building.
<unk> is now heated exclusively through this recovered energy approach lowering energy consumption, lowering emissions and reducing our exposure to potential future European energy price volatility.
The hard work of recent years to substantially strengthen our balance sheet and our cash generation profile positions us to pursue a disciplined high return capital allocation strategy.
I'm seeing share buybacks with investment in high margin growth to generate elevated returns for all stakeholders.
Consistent with our previously shared full year capital guidance. During Q2, the company communicated additional details of its substantial growth capital investments into its composite in connection technologies segments.
These investments into four new operating sites will enhance production capacity efficiency and proximity to key markets lower risks by providing increased network redundancy and are expected to accelerate to mid and long term revenue growth.
Great margin profiles and deliver attractive overall returns.
The company also continued to be active hundreds previously launched normal course, issuer bid, which had extended and expanded later in Q2.
During the quarter our team made good progress on the integration and growth of both cannot electronic services, which our connection technologies segment acquired late in 2022.
And Triton storm water solutions, which are composite technology segment required during Q1 of this year.
With these businesses performing as expected we remain alert to additional strategically aligned attractively valued acquisition opportunities and have expanded our corporate development team in anticipation of a gradual increase in highly disciplined inorganic value creation.
Moving to our previously announced strategic review process late in Q2, the company completed the sale of its short pipeline services non destructive testing business and.
And its UK specialty coating business.
While entering into a definitive agreement to sell its facility in pipe coating facility.
Sale that is expected to close in Q3.
All of these businesses have previously been reported within the PPS segment and in consolidation. These transactions will deliver gross proceeds of approximately $16 million. The businesses that together contributed $55 million of revenue and an adjusted EBITDA loss of $3 5 million over the prior 12 month period.
Looking a little closer at each of our segments.
During Q2 composite technologies, which was previously called composite systems and houses are flex pipe Xerxes businesses.
Delivered revenue growth of 11% and expanded adjusted EBITDA margin by 600 basis points compared to the same period last year, reaching new record levels of quarterly performance for the segments.
Sales of the company's Foldable composite flex byproducts move sequentially higher with further acceleration of large diameter product adoption and new customers on boarded and multiple operating basins.
Second quarter flex by performance benefited from above normal sales into international markets, primarily the middle east, which more than offset the impact of breakup conditions in Canada.
Shipments of <unk> underground fuel storage tanks, and a full range of storm water management products were robust during the second quarter stepping up from Q1 as ground conditions seasonally improved across much of North America, enabling our customers to accelerate installation activity.
Hello, and the acquisition of <unk> and filtration product line late in Q1, the company's water related product line reached a new record level of quarterly revenue in Q2.
Our favorable long term outlook for the market served by composite technologies underpins our growth capital investments to increase capacity improve efficiency and lower lead times, including our commitment to establish two additional production sites in the U S onshore flex, Mike and one for <unk>.
Which were announced earlier this year and are now well underway.
Further details of these investments may be found in the Companys press release issued on April 26.
Third quarter segment revenue is likely to be similar to the second quarter as ground conditions remained favorable for xerxes product installation and flex type sales growth in North America offsets international sales returning to more normal levels.
As is typical for the segment, we would expect revenue to move modestly down in the fourth quarter driven by seasonal effects.
With a healthy long term demand outlook across the flex pipe and Xerxes portfolio. We believe our composite technology segment is well positioned to continue its recent trend of delivering growth versus prior year periods.
In connection technologies segment, formerly called automotive and industrial and housing are sure flex and DSG Colusa businesses delivered a particularly robust quarter with 12% revenue growth versus the same quarter last year, and adjusted EBITDA margins approaching 24%, a new segment record.
In addition to continued strong north American industrial and infrastructure demand across the segments product portfolio and stable deliveries of heat shrink products into the European automotive market.
The quarter benefited substantially from shipments of premium wiring cable into nuclear projects, and a particularly significant aerospace delivery, which is unlikely to recur this year.
We continue to anticipate year over year business growth across industrial and infrastructure markets for both Shaw Flex and DSG can do said, particularly in North America as long cycle infrastructure investment continues spurred in part by U S and Canadian government policies.
Our outlook for DSG <unk> automotive demand during the second half of 2023 remains similar to the first half as more favorable energy dynamics in Europe are offset by the impacts of higher interest rates.
The company expects connection technologies revenue in the third and fourth quarters to be higher than the same quarters of 2022.
Q3 revenue is likely to move down from Q2, reflecting non recurrence of the large aerospace related wire and cable delivery, which occurred during the first half of the year.
Fourth quarter revenue is likely to move modestly further down as normal year end inventory lowering occurs within our distributor network.
The company expects the remaining quarters of 2023 to yield segment adjusted EBITDA similar to the same quarters of 2022 as revenue expansion is offset by incremental costs incurred to spur future growth acceleration.
<unk> costs recognized in advance of North American production facility relocation investment and expansion.
We remain vigilant to the potential impacts of European energy costs approaching the winter heating season, and continued to take steps, which lower the company's energy needs and risk tied to this possible issue.
Overall, we maintain our constructive view of the long term market trends, which impacted the Shaw flex in DSG can use of businesses and we will continue to invest growth capital to enhance our product offering improve our manufacturing capacity elevate our production efficiency and lower lead times, including the recently announced.
Commitments to bifurcate expand and modernize our north American production footprint.
Further details of these investments may be found in the company's press release issued on June 28.
Firstly and despite multiple business divestitures over the last 12 months, our pipeline and pipe services segment saw revenue rise by 73% compared to the second quarter of 2020 to deliver.
Delivering an adjusted EBITDA margin of nearly 11% compared to a loss in the prior year quarter.
Sequentially segment revenue and adjusted EBITDA moved up compared to our previous expectation of modest declines.
This strength was the result of very robust coating activity in our western Hemisphere organization, which delivered particularly high operational efficiency.
Accelerating activity on the yellow tailed project in Veracruz, Mexico, and commencing coating operations slightly earlier than previously anticipated on the STP projects and ultimate on Mexico.
We are particularly pleased to see the benefits of substantial business optimization activity over the last three years become increasingly visible in the adjusted EBITDA leverage to the bit by a pipe coating operations as revenues rise.
Pipeline and pipe services segment revenue and adjusted EBITDA. During the second half of 2023 is expected to be substantially higher than Q2, reaching prior cycle peak margin levels.
This outlook is driven by the timing of specific pipe coating projects, and particularly impacted by coating activity and related revenue recognition on the SGP project, which will accelerate during the third quarter and reached peak levels during the fourth quarter.
At the end of the second quarter. The company had recognized approximately 5% of total expected SGP project revenue.
And given operational efficiencies observed to date the company now expects SGP project coating and revenue recognition will largely be completed by the end of Q1 2024.
The combination of a substantial high quality backlog elevated volumes of bid and budgetary quoting activity favorable energy fundamentals and continued successful new technology adoption.
<unk> the pipe coating business well for the current up cycle.
Turning to consolidated 12 month backlog at the end of Q2, the company's committed backlog of work to be completed within the next 12 months was just under one $1 6 billion, a decrease of $152 million when compared to the prior quarter.
The PPS segment secured several new Latin American pipe coating projects during Q2 however.
However, these new awards and the movement of expected revenues from previously awarded pipe coating projects into the forward 12 month window were more than offset by the elimination of backlog tied to the Sps business, which was sold during Q2 and an increased volume of pipe coating activity executed during the quarter <unk>.
Including the Scarborough project, and our <unk> Bill Indonesia facility, the Yellowtail project in our Veracruz, Mexico facility and the SGP project and Altamira Mexico.
Total backlog, which includes committed work beyond 12 months also moved down modestly at the end of Q2 versus the prior quarter to $133 billion.
As execution of the STP project accelerates during Q3, and then continues throughout Q4 and Q1 of 2024, we anticipate the TPS segment and overall company 12 month and total backlog values will lower further.
Although strength in bidding activity likely drives a return to backlog growth as we move through 2024.
Matters bid number reflects the value of work, where the company has issued a firm price with proposed contract terms against an explicit scope of work with a defined timeline for execution.
At the end of Q2, a bit balance was nearly $1 billion, an increase of $150 million when compared to the prior quarter. Despite the removal of bids related to the divested SBS business as the volume of new bidding activity in our composite technologies and Pts segments more than offset the movement of projects from bid into backlog during the.
Quarter.
Bidding activity remains strong across the energy spectrum and is a clear indicator that customers are committed to moving forward with new and previously contemplated onshore and offshore field developments in the face of favorable commodity prices and growing global demand for natural gas.
The quarter end bid number included $8 million of conditional awards pending final investment decision down from $168 million at the end of Q1 are several projects cross the final investment decision thresholds during Q2 and moved into backlog.
Matt as budgetary number reflecting the value of indicative pricing submitted to allow customers to build a project budget ahead of formal procurement activities was just over $2 $1 billion at quarter end down from $2 $5 billion in the prior quarter.
Sps related budgetary quotes for removed and the movement of projects from budgetary into bid slightly exceeded new budgetary quoting during the quarter.
This substantial budgetary number further supports our expectations that energy related activities will remain elevated for several years to come.
It is important to note that the majority of matches 12 month backlog total backlog bid and budgetary balances are attributable to the PPS segment.
Tom will now walk through the company's second quarter financial highlights.
Okay.
Thanks, Mike the second quarters consolidated revenue was $406 million.
35% higher than the $307 million in the second quarter of 2022.
Adjusted EBITDA was $67 3 million.
A 105, 8% increase from the prior year second quarter, primarily attributed to demand growth experienced across the company's three reporting segments, including the commencement of load in in pipe coating activity for the STP project further enhanced by continued margin expansion arising from favorable product.
Project mix.
And the divestiture of lower margin businesses.
Turning to segment results the composite technology segment revenue was $150 4 million.
And 11% increase compared to the second quarter of 2022, and adjusted EBITDA was $34 8 million a.
A 50% increase from the prior year second quarter.
Both revenue and adjusted EBITDA were record quarterly results for this segment.
These results reflect growth in demand for our composite pipe products in North America and internationally.
Including growth in demand for the Companys larger diameter pipe products.
Additionally, this segment continues to experience robust demand for our underground fiberglass reinforced plastic tanks for liquid fuel and water management systems.
Connection technology segment revenue was $88 $7 million at 12% increase compared to the second quarter of 2022, and adjusted EBITDA was $21 million or 29% increase from the prior year second quarter.
The increase was driven by elevated demand for wire and cable products from North American industrial markets stemming from ongoing infrastructure spending including shipments into the aerospace and nuclear markets.
Additionally continued demand for the Companys heat shrink tubing products and industrial markets and within the automotive sector further solidify the segment strong performance.
Pipeline impact services segment revenue was 161.
$6 million or 73.
3% increase compared to the second quarter of 2022, primarily resulting from the successful execution of pipe coating project activity, including the Scarborough project in the Copier Indonesia facility.
Hello tail project in the Veracruz, Mexico facility and the commencement of load in in pipe coating of the STP project in the Altamira Mexico facility.
This was partially offset by lower activity in the Canadian facilities and the absence of revenue associated with the SBS business sold mid quarter and the Lake Superior consulting business sold in August of last year, adjusted EBITDA was $17 1 million, which.
Which compared to negative EBITDA recorded in the prior year second quarter, reflecting the aforementioned higher revenue and more profitable pipe coating project mix and the impact of higher activity on manufacturing absorption.
Turning to cash flow in the quarter cash provided by operating activities in the second quarter was $30 5 million.
Reflecting strong operational performance. This was offset by an investment in working capital, which reflects the increased activity throughout the company, including increases in inventory required for the Scarborough project in Indonesia, and the STB project in Mexico.
Cash used in investing activities in the second quarter was $48 2 million.
Reflecting $55 6 million of capital expenditures offset by $6 5 million received in cash from the $8 $9 million sale price from the divestiture of the sharp pipeline services business.
During the second quarter cash used in financing activities was $17 $3 million, including $5 million in debt repayments $7 $8 million and lease payments and $5 $5 million in share repurchases under the company's normal course issuer bid.
Net cash used in the second quarter of 2023 was $37 $5 million.
Based on the actions completed and planned its diversified business current order backlog and confidence in the outlook. The company expects to generate sufficient cash flows and have continued access to its credit facilities subject to covenant limitations to fund its operations working capital requirements and capital program, including share.
Buybacks.
As of June 32023, we had a cash balance of $124 5 million.
Debt of $182 million and $64 $1 million of standard letters of credit.
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 $252 $5 million of outstanding net long term debt since the start of 2021, including $5 million paid in the second quarter.
As of the end of the quarter the company's net debt to adjusted EBITDA ratio was 0.54 times significantly below our ceiling of one five times.
We also continue to purchase shares under our normal course, issuer bid and repurchased 405000 common shares during the quarter.
As mentioned earlier, the company spent $55 $6 million in cash on capital expenditures.
Including $4 $1 million of outstanding payments to suppliers total capital expenditures in the quarter were $59 7 million of which $56 $4 million were related to growth expenditures.
These are mostly related to infrastructure improvements to increase production capacity and the composite technologies and connections technologies segments.
And spend to support the SPP projects.
Looking ahead to the remainder of the year the company still expects to spend the $160 million to $180 million of capital expenditures as previously communicated.
During the quarter the company announced further details on this expected capital spend including two new composite technologies production facilities in the U S as well as a new facility in the greater Toronto area and one in the U S for the connection technologies segment.
Which will expand and replace its current north American footprint.
The investments in these lower risk high return opportunities are expected to create further revenue generating capacity of approximately $150 million and further expand adjusted EBITDA margins. Once these facilities approach efficient utilization levels.
We will continue to prioritize capital spend to drive growth in our most differentiated high value materials based solutions in support of industrial and critical infrastructure end markets, while ensuring that sufficient capacity is available to execute on our pipe coating projects in our backlog.
The company continues to execute on the strategic actions that are intended to enhance over time.
Margin and operating cash flow profile, lower overall volatility and deliver greater full cycle value to all stakeholders as our market, leading technologies enable responsible sustainable renewal and enhancement of critical infrastructure.
Since early 2020, and the company has successfully divested multiple noncore lower margin businesses and other assets, including the sales of the Sps business in the UK specialty pipe coating business that occurred in the second quarter.
These efforts have generated over $220 million of cash proceeds with the disposed businesses generating an average trailing 12 month adjusted EBITDA margin of 6% significantly strengthening our balance sheet and margin profile, while lowering organizational complexity.
In September of 2022, we announced our intention to achieve maximum stakeholder value from a sale or other transaction of our pipeline performance group that currently farms the entirety of the Companys pipeline and pipe services reporting segment.
We have made great progress on the strategic review process through our successful rebrand and through the sales of our Lake Superior consulting oilfield asset management, and soccer Therm, Argentina businesses as well as our specialty coating facility in Scotland.
We remain fully committed to this initiative and are focused and actively working towards its completion.
Proceeds generated by this transaction will be utilized to strengthen the company's balance sheet organically and inorganically accelerate the profitable expansion of our higher margin less volatile composite and connection technology segments.
To return capital to shareholders as conditions permit.
While the expected future removal of the pipeline and pipe services segment from our portfolio will substantially lower selling general and administrative costs for the company as previously communicated approximately $8 million of financial and corporate expenses that are currently being allocated to this segment are expected.
To be absorbed back into the organization at that time.
Upon closing the transaction these costs would likely be partially offset by proceeds from a transition services agreement for several quarters and the company will work to reduce its total corporate cost base, reflecting its simpler business portfolio over time.
I'll now turn it back to Mike for some final comments.
Thank you Tom.
Over the last three years, we've taken significant steps to simplify our organization increase average margins lower volatility elevated cash flow and concentrate on a narrow range of high growth critical infrastructure oriented businesses.
We remain committed to tightly controlling fixed costs completing the strategic review of our PPS segment, and optimally deploying capital to drive high return growth.
We have substantially reduced outstanding debt or returning cash to shareholders and leaning into hanmi value organic and inorganic growth opportunities taking advantage of our unique technology portfolio and strong long term customer demand to deploy significant growth capital and deliver elevated returns for our stakeholders.
Normal seasonal cycles will continue to drive some movement quarter to quarter. However, the underlying trends for each of Mantas primary businesses are favorable and expect it to remain so for several years.
Long duration, North American critical infrastructure activity remains robust and fundamental energy demand drivers persist.
While we remain vigilant towards the potential impacts of geopolitical events supply chain risks and higher interest rates.
Simplified portfolio of high value materials based products has limited exposure to consumer discretionary spending and we believe has resilience in the face of recessionary forces.
We expect consolidated adjusted EBITDA in Q3, 2023 to rise substantially driven primarily by a significant increase in pipe coating activity.
Including elevated margin contributions from the southeast Gateway pipeline projects.
I will now turn the call over to the operator and open it up for any questions. You may have for myself Tom Omega.
Thank you as a reminder to ask a question at this time. Please press star one on your telephone and wait for your name to be announced.
Your question. Please press star one again, one moment, while we compile our Q&A roster.
Our first question is going to come from the line of Aaron Macneil with TD Cowen. Your line is open. Please go ahead.
Hey, good morning, Thanks for taking my questions.
I guess the first one I've got is around sort of these moving expenses in the connection technologies segment.
I'm just wondering.
How long do you expect these to persist.
Is that going to change over time and can you sort of give us.
Literally run rate.
Sure.
Good morning, Aaron.
I think the <unk>.
Way to think about that particular piece of that business is.
The facility relocation activities, which have us moving away from that.
Long term footprint in the <unk> area of Toronto, and now into two different facilities, one in Ohio and one in <unk>.
We'll certainly continue for much of 2024.
I think we would expect most of those moving expenses to be incurred suddenly by early 2025.
There'll be some fluctuation quarter to quarter at the end of the day. These are.
Reported at the time they are incurred they are not smooth over a period of quarters.
So it's difficult to give you a perfect run rates, but what I would say is that what we'll see in the second in the second half of 2023 is likely to be.
Little less than we will see in 2024, and we will do our very best to call them out as we report each quarter as we roll through Tom would you add anything there, yes, I think thats right Mike.
And I would say.
In Q3, and Q4, it's probably on the order of less than $1 million. Each and then in 'twenty four it ramps up a bit as the actual move activity increases. So those are very rough numbers.
So not hugely material.
That's how I would probably think about it right now it's moving around a little bit of course as you can imagine.
That's great that's super helpful.
In terms of.
So that pipeline performance.
Pipeline segment are there any sort of other odds and ends in there that youre looking to dispose the separate from our larger transaction.
Our idle assets within the pipeline performance group.
You'd look to sell separately and if we were to use segment book value as sort of a proxy for our potential.
Action value should we be thinking about.
Reducing that our expectation.
Kind of sold off some of the odds and ends over the last couple of quarters.
Yes.
Great question, Thanks for asking I suspect others on the call have similar interests. So.
The smaller pieces that we concluded the sale of <unk> in Q2, and I'll include there the Italian real estate footprint, which will actually close until Q3, but were under definitive agreement.
Secondly, the loss of what I'd call the peripheral pieces of that segment. So what's left in the PPS reporting segment is what we would describe as the core pipe coating business.
When I look across the broader corporation really the only other element that we're still working to divest as the real estate in Western Canada, which has multiple sites but.
Largely concentrated in this Q.
Which was leftover when we sold the oilfield asset management business in the second half of last year. So that's still ongoing.
We hope to get some proceeds from that real estate over the course of the next 12 months.
I'll turn it to Tom to talk about valuation expectations on the remaining piece of the pipe coating business, yes. So Aaron I think if you. If you look at the net book value of the PPS segment remaining.
It's almost entirely that PPG core business. So I don't think you need to reduce your expectations from a cash perspective, given the commentary we've given over the last few quarters, so that being the floor would still remain a true comment.
Or what is on the books.
Sorry.
Portioned micro is referring to on the OEM Western Canada asset is not included in that segment just to be clear. So there's no confusion as to where that sits that was on the composites segment historically.
Okay perfect.
Turn it back thanks.
Thank you Sir.
Thank you and one moment, while we move to our next question.
And our next question is going to come from the line of Yuri Lynk with Canaccord Genuity. Your line is open. Please go ahead.
Hey, good morning, and thanks for taking my question good morning, good morning.
What can we what can we infer from.
PPS not being classified as held for sale at this point.
So.
There are as you know.
They are probably pretty strict accounting rules as to when that.
Occurs and one of them tends to be it's not a hard and fast rule, but tends to be the signing of a definitive agreement. So I think the thing you can infer is.
We have not signed a definitive agreement and that's probably all you can really for at this point, but as we said, we're making really good progress still very committed to it and.
I hope to be able to say something relatively soon.
And maybe I'll add here I know that on our last earnings call.
<unk> set the expectation that we would have something to communicate here by the time of this call and it proved it.
Modestly optimistic.
That's my fault I apologies.
But I would say that you should not infer that the lack of an announcement as we sit here at this moment in time.
Suggest that anything is wrong.
Okay, that's fair.
Just the quarter.
Obviously very strong.
And both both go forward segments.
I think you enjoyed better utilization.
Especially in composite pipe in your tank plants.
Can you just talk about.
Where utilization is versus last year.
And how much room.
There is to take it higher in these facilities because I'm just thinking is there.
Point between now and when your expansion.
Plans are completed where you might be capacity constrained in the interim.
Yes, so I think the obvious answer is clearly our utilization is higher now than it was at this point last year.
But treated in two separate buckets, so the flex pipe business, which as Youll recall.
Has historically operated from one single site in Calgary and still does.
That site certainly is more challenged when it comes to the ability to continue ramping production.
Then our tanks network, which is why we moved when we did to establish a second pipe production facility in the Dallas area, which.
Which we certainly expect will come online as we look to the middle part of next year I think between now and then.
There may be.
One or two challenges, where we bump up against production capacity in our Calgary site, but the team there have done an extraordinary job of finding ways to E count incremental production and have great confidence that they'll continue to do that.
We definitely need to get the second plant up and running in the middle part of next year to ensure that we are not constrained in the longer term.
Yes.
The other thing to remember is that we are in a I'd call. It a transformation in that business with the introduction of the larger diameter products five inch six inch.
They do take slightly different degrees of production time to make the same length.
When you compare them to smaller diameter. So we have to manage those things, but at the same time generally revenue and margin is clear for the larger diameter products than it is for our legacy four inch and smaller products. So as these larger diameter products become a bigger and bigger part of our revenue stream. Obviously, they will continue to help propel that.
<unk> upwards really on all lines of the income statement.
If we turn to the tanks business. We currently have six production sites two in Canada four in the U S and as you know we have initiated the construction of a seventh site in South Carolina, which we also expect will come online in the middle part of next year.
We still have the ability to add additional shifts in some of our existing tank production sites. So I am less concerned at our risk.
Risk of being totally maxed out on the tank side before the seventh site comes online I would say, though that labor is still tight in North America and certainly in some of the areas where our sites sit so adding shifts while it sounds simple does take quite amount of efforts and a little bit of time. So.
We're very thoughtful there and working to stay ahead of it.
Okay.
That's helpful I'll hop off the call. Thanks, guys.
Sure.
Thank you and one moment, while we move to our next question.
And our next question is going to come from the line of Adam Mcmahon with core Mark Securities. Your line is open. Please go ahead.
Good morning, guys great quarter.
Yes.
My questions have already been asked but just one on the penetration rate of some of the larger diameter piping just curious what percentage of sales since its account for currently and yes sort of.
Target or goalposts around mix or where you'd like to see that.
And somewhere down the line.
Yes, good morning, I think when we look at the North American market in particular, we think that the total addressable market for the larger diameter items are about the same as the smaller diameter items that made up our historic revenue base. So.
Do you would you would naturally assume that over time, we'd like to get to a place where our revenue stream matches the addressable markets and is roughly 50 50 with <unk>.
They are not there.
We are north of 10% of the revenue is coming from large diameter, but not substantially north of 10%.
Okay perfect. That's helpful I'll jump back into the queue. Congrats again on the quarter.
Thank you and one moment, while we move to our next question.
Yes.
And our next question is going to come from the line of Tim Monticello with ATB. Your line is open. Please go ahead.
Okay.
Thanks for taking my questions.
I guess as a follow up on that last one.
Thank you guys had said there was about 10% for the large diameter pipe.
A couple of quarters in a row here are you seeing that product line grows substantially or are you seeing the small diameter pipe growing up sort of a similar pace.
Certainly the large diameter is growing faster than the small diameter, Tim so.
Obviously, there is there is.
Certain information I'd, rather not put into the public domain for my competitors to Q1, so I have to be a little bit coy about relative.
Relative share, but what I'd say is that the relative share of our revenue large diameter to small diameter has certainly continued to grow over the last several quarters.
Is part of the reason that it's.
Only 10% because the facility. So that you have today are more gear. So the smaller diameter and we'll have a new facility.
Add incremental capacity.
Capacity.
For the large diameter in particular.
So I would say that the.
The relative share of revenue large to small diameter on the flex pipe side is driven entirely by the our commercial team and their ability to capture opportunities.
With customers.
Not governed by our manufacturing.
At the same time, there is certainly some of our production equipment in Calgary that predates the larger diameter product line and is not sized to produce that so not all of our production activity in Calgary is suitable for large diameter and certainly you kind of assume that everything that we put into the Dallas facility.
Will be sized appropriately to cover the full spectrum of our product offering.
Okay, and then just thoughts around that.
Do you still think that the five and six inch.
Diameter pipes.
Will represent.
A doubling of your total addressable market and I guess does that mean that you expect to get to your 10% to grow 50% over time.
Short answer yes.
Great.
Next one I just wanted to touch on you had a comment there that the storm water management product line reached new record levels of revenue in Q2, which is great.
Alright, thank you.
I don't know how long ago. This was.
You mentioned that you had hoped that that would grow to the same size that fuel business over the next five years is that still the expectation.
It certainly is.
Okay.
And the rest of my questions have been answered so thank you very much.
Have a great day. Thank you.
Thank you and we'll move on to our next question just one moment. Please.
Our next question is going to come from the line of Zachary <unk> with National Bank Financial Your line is open. Please go ahead.
Thank you good morning, everyone and congrats on the quarter.
Hi, good morning.
First couple on connection technologies any way to position this segment to be exposed to more of those one timers and what drives us.
So I think again the short answer is yes.
The team did an extraordinary job of capturing some very attractive opportunities over the course of the last 12 months.
Nuclear is perhaps a good example, if you look back two to three years, our nuclear revenue generation was sporadic.
Necessarily material when it came from a revenue perspective, but certainly very helpful. On the margin side and here. We are two or three years later and nuclear forms certainly not a majority, but a very healthy portion of our revenue stream relatively consistent quarter to quarter still at very very nice margins and I think that.
Shows what can be done when you have the right team focused on the right things with the right resources and the right support from the corporation. So the team their connections technology have done a fantastic job on the nuclear side and we certainly expect to continue to grow in that sub sector.
Aerospace and auto space is a relatively new market for us to penetrate so we're in the early phases, where I still think.
It will be relatively sporadic revenue.
Attractive margins and overtime, we would hope that the commercial team will have exactly the same success there that they have a nuclear make it a consistent source of revenue and attractive margin generation.
We focused on that we have all the confidence in the world and their ability to get there.
That's good color. Thanks.
And then to beat the dead horse do you feel there is a risk of not selling PPS in 2023 or as it progress strong enough that it's essentially a lock for this year.
My lawyers would tell me that I cannot tell you there is a 100% certainty that we will sell that business.
I do not have any concerns none of us are losing sleep over the ability to get this transaction done.
Yes, Doug the only thing I would point to is just the closing timeline is going to be driven by regulatory approvals and we've said that several times. So it's difficult for us to assuming we sign a deal its difficult for us to give you a real exact timeline on whether it causes this year. So it's just out there so that when youre thinking about this there is.
Some risks to the timeline, but as Mike said, we're very committed to this and making progress.
Okay. Good color, thanks, and one last one on composite.
The integration of Triton hows that progressing to becoming a one stop shop within water management.
And are you looking for additional capex or maybe inorganic growth in that space right now.
Yes, so the <unk> business is a little more than a quarter full quarter under our control and I'd say, we've been very pleased with the progress that's been made.
The integration process has been smooth the team members that have joined us from that business.
Really embraced being part of our organization and the product line is performing exactly as we would've hoped at this point.
When we think about that business as part of the bigger hydro chain offering of storm water management products.
It was crucial for us to bring that into our own portfolio. So very pleased we were able to do that there are one or two other elements of that hydro <unk> offering that we still rely on third parties for so obviously continue to look for opportunities to bring those additional items into our portfolio.
I think from an organic investment perspective, Triton was not a particularly large business when we acquired it and as I've said earlier on this call and multiple times before we have very high expectations for our water business and its growth rate. So you shouldnt be surprised to see some organic growth capital go into the water business, particularly around 90 fracturing activities as we roll through.
Through the next several quarters.
Nothing specific to communicate as we sit here right now.
Thank you very much I'll turn it over.
Thank you and one moment, while we move to our next question.
Yeah.
And our next question is going to come from the line of Ann Gillis with Stifel. Your line is open. Please go ahead.
Hi, good morning, everyone. Good morning.
With respect to some of the high margin sales that occurred in the quarter that were kind of onetime in nature I am just curious these customers come back coming back here to buy these products or something that would happen every couple of years I'm just curious on how to think about that as we move through.
Our longer dated forecast period.
Yeah. That's a fair question. So the particular revenue and margin that we gained from these aerospace order that we've noted.
With spread over Q1, and Q2, although Q2 I think solve more of the benefit in Q1.
<unk> for a single customer for a single specific project I think that customer is.
Probably less frequent than once a year, but more frequently than once every three years.
There is obviously a growing population of customers that we'd be the captured business with or are seeking to capture business with and I'm sure there'll be some variations there.
Cycle time.
But as I said earlier.
What I expect as we sit here today is that the second half of the year will not have a material benefit from additional large orders.
So the one we just completed but it certainly we would expect to see 2024 have some benefits and those benefits to become more regular and more meaningful as we roll forward over the next several years.
Perfect that's helpful moving.
Moving to the auto exposure. If there is obviously a threat of a victory auto strike coming in mid September I'm, just wondering kind of how you are preparing the business in the event that occurs and perhaps how youre thinking about managing that strategically.
Yes.
The piece of our business is exposed to automotive as the DSG colusa heat and cold shrink supply business, which is global.
And automotive makes up about a half of that revenue stream in that business.
Our orders from customers tend to come in approximately 90 days prior to fulfillment and as I sit here today, we see no variation of any substance in any part of the world.
The ordering patterns of our automotive customers, obviously things can change, but the next 90 days doesn't appear to have a lot of variation in it.
In North America, particularly we have been very successful in penetrating non automotive end markets for that particular business.
So certainly if there were to be any disruption of automotive manufacturing, we would expect to see some impact but in North America automotive makes up substantially less than 50% of our revenue stream in that business. So I think the impacts would be.
Fairly limited.
Okay. That's helpful and then.
Last one with respect to the composite technology segments.
Larry on the pipe side, one of your peers has put out some pretty lofty goals for margin expansion through the back half of the year.
Im just curious whether you think that's already embedded in your business or do you expect to see some of that some of those same trends.
Yeah, obviously.
So we wouldn't want to comment on anybody else's business I don't I don't know the details of their business as well as I know mind, what I would say is that.
We continue to expect larger diameter products to grow as a percentage of the overall revenue base for that business.
We continue to see opportunities for our total revenue in that business to move upwards.
And those two things combined.
Would lead.
Lead you to the conclusion that margins should continue to move upwards.
I certainly would not say that we are perfectly optimized we've got a very very well run business there, but there's always room for improvement and we look to find those opportunities every day so.
We are on a journey here I think the margin.
That business is likely to skew upwards, rather than downwards based on the factors I've just described.
And I think as we start to dig in more detail into our full year 2020 for budget for that business, we will start to get a little bit more confident about where those margins might be able to get to in that kind of timeframe.
That's perfect I'll turn the call back over thank you very much for your time.
Thanks.
Thank you.
And if you would like to ask a question at this time. Please press star one one on your Touchtone telephone.
Our next question.
Our next question is going to come from the line of Keith <unk> with RBC capital markets. Your line is open. Please go ahead.
Hi, Thanks, and good morning.
Just curious about the atypical strength and international composite pipe sales can you just describe a little bit more about what that was what those were and potentially how you think about international markets from here I know there is a lot already going on but.
Or what would it take for the international markets to become a compelling enough opportunity to make maybe larger investment to service some of those markets.
Yes, good morning.
International for Flex pipe, which specifically was the business impacted there the international procurement approach by our customers is a little different than that.
North America in North America, our customers will place orders on a weekly or monthly basis, depending on their outlook for their needs, whereas most of our international customers tend to work on full year or multi year tender approaches.
So it can be quite a long period of working to secure a tender win and then delivering against that tender, which is exactly what we experienced in Q2 work that had been effectively secured in prior periods was called off and we delivered it so mostly to the middle East and the timing was such that we had a little bit more rare.
And associated margin recorded in Q2 than you would perhaps expect on average.
International continues to be.
Lumpy piece of our business just inherently because of the way it's structured commercially.
It's not yet a piece of our business that is at a scale, where I think we would seriously consider an investment in something like a production facility.
But I certainly think we can get there over time.
Say I don't think Thats, a 2024 kind of.
But perhaps 25, we've got a very talented team we are adding to that team. They are having great success. The technology that we offer is increasingly.
Meeting the needs of international customers, both consensus size and temperature ratings. So as long as we can continue to execute well I think we can position ourselves for that international business to become.
A substantial part of our revenue stream.
Got it thanks for the color there and just finally for.
Tom on the buyback can you just run us through a little bit more about how we should be thinking about the level of buyback in usage for the second half of the year.
I'm guessing it might it might depend on what happens with the PPG business, but.
Like.
Steady base case, and then and then maybe a bit of a confidence interval around what we should what we should be putting in our models for buybacks over the second half.
Yeah. Good question Keith.
I think the way I would think about it is the level of spending you have been seeing in the last couple of quarters is probably about the run rate.
Keeping in mind that prices moved up a little bit so there might be a little bit of creep. If we kept volumes. The same so generally I would say use the last couple of quarters as a general guide to modeling for that perspective, we intend to stay active.
We're still very bullish of course and think there's a long runway to go here.
With or without the sale, but obviously, we're kind of get that sale done so.
And that's how I'd position it Keith.
Okay awesome, thanks very much.
Thank you and I'm showing no further questions at this time I would like to hand, the conference back over to CEO , Mike <unk> for any further remarks. Thank you very much and thank you everybody for joining us This morning and for your continued interest in meta.
We're looking forward to talking with you all again next quarter and wish everybody a great day and great weekend. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Yes.
Okay.
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