Q3 2023 Shawcor Ltd Earnings Call
Okay.
Good day and thank you for standing by welcome to the major third quarter 2023 results webcast and conference call.
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I would now like to hand, the conference over to your speaker today, making the Cochrane director of external communications and E. S. G. Please go ahead.
Good morning, before we begin this morning's conference call I would like to take a moment to remind all listeners that today's call includes forward looking statements that involve estimates judgments risks and uncertainties that may cause actual results to differ materially.
From those projected the complete text of matters statement on forward looking information included inspection work, we know of the third 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 via webcast you may follow the visual presentation that accompanies this call I'll now turn it over to matters, President and CEO, Mike Reed.
Good morning, and thank you for attending our third quarter conference call today, Megan and I are joined by our senior Vice President of Finance and CFO Oh Boy.
The third quarter 2023, so a massive.
Move closer to concluding our strategic review process with the announcement that most of our pipe coating business will be acquired by <unk>.
This is the last significant step in our transformation into an infrastructure products provider delivering high value differentiated solutions used in harsh environments on our customers around the world as they expand and renewed critical infrastructure.
Turning to operational performance.
The company delivered robust total operating results in Q3.
Renew to commit capital to high return potential organic growth opportunities and accelerated share repurchase activity.
Total consolidated adjusted EBITDA was $128 million during the quarter with adjusted EBITDA margins of 25% a substantial increase from the prior year and the prior quarter.
Our continuing operations, which exclude the business components now held for sale <unk> and reported as discontinued operations deliver.
<unk> delivered adjusted EBITDA of $41 million in the third quarter a.
Our significant accomplishments in the context of an unfavorable shift in several market conditions.
I'll speak more about these conditions later, but note that we believe them to be transient in nature and unlikely to dissipate over the first half of 2024.
Despite these conditions continuing operations adjusted EBITDA margins exceeded 18% in the quarter.
Testament to the organization's ongoing commitments to tight cost control and efficiency improvements.
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 potential capital allocation strategy.
Balance sheet share buybacks with investments in high margin growth opportunities to generate elevated reserves.
Consistent with our previously shared full year capital guidance range. During Q3. The company continued its substantial growth investments into its composite from connection technologies segments.
These investments into four new operating suites will enhance production capacity efficiency and proximity to key markets.
By footprint optimization flexibility and lower risks by providing increased production redundancy.
They are expected to accelerate to mid and long term revenue growth elevate margin profiles and deliver attractive overall returns.
We continue to believe the intrinsic value of our business represents an excellent investment opportunity and consequently, the company increased its stock repurchase activity under its normal course issuer bid during the third quarter.
In addition to organic growth opportunities, we remain alert to strategically aligned attractively valued acquisition with <unk> and.
And believe the current interest rate environment creates an opportunity for masco to utilize its balance sheet strength.
Slightly less competitive M&A landscape.
Subsequent to the third quarter, we completed the sale of our <unk>, Italy facility for gross proceeds of $6 million.
We also continue to evaluate opportunities to divest a small western Canadian real estate portfolio.
Our process, we believe could deliver gross proceeds of approximately $10 million over the coming quarters.
Looking at each of our segments.
During Q3 composite technologies delivered revenue growth was 5% when adjusting for the $13 6 million delivered in the comparative period by OEM, which was divested in the fourth quarter of 2022.
The second also expanded adjusted EBITDA margins by 140 basis points compared to the same period last year.
Sequentially segment revenue moved down from the second quarter of 2023 by approximately 7% as sales of the company's global composite flex quite products moved lower in the face of roughly 10% quarterly declines in North American onshore drilling and completion activity and a slight step down in international.
<unk>.
In parallel the Companys Xerxes fuel and water management business was impacted by project delays as our customers continue to face extended state and local climate issuance timelines.
It's important to look a little deeper into these market dynamics, we have confidence both the relatively short lift and need that changes on favorable mid and long term outlook for the composite technology segments.
In the North American onshore oilfield market, we have seen customers trim activity levels throughout the third quarter to remain within full year capital spending budgets.
Prior to Q3 these activity reductions have largely not affected our core business in the Permian basin.
But the basin saw approximately 12% fewer rigs operating at the end of the quarter than at the start and impact that lowered overall demand for our flex pipe products. Despite another record sales quarter for our newly released six inch product.
We anticipate north American onshore oilfield activity levels will be 5% to 10% lower on average in Q4 when compared to Q3.
Normal year end slowly overlays and activity baseline that we believe has stabilized.
However, with commodity prices expected to remain in a truck.
<unk> window for the foreseeable future.
We anticipate the onset of a new annual capital budgeting cycle at the beginning of 2024.
We'll then cause gradually increasing activity as we move through the first two quarters of next year.
In our <unk> business are predominantly north American customer base starts to absorb a slowdown in the pace of new convenience store construction permits during the second quarter.
Underlying drivers for this pattern include understaffed permitting offices in many local jurisdictions and generally lower processing efficiency as many issuing agencies attempt to navigate post pandemic remote working approaches and regions.
Having reached the conclusion that extended permitting timelines represents a new new customers.
Customers have indicated that they have substantially modified permit submission approach significantly increasing the volume of permits Stacey and submitting applications further in advance of anticipated construction commencement then they would historically.
We believe that these changes will ensure that the flow of permit approvals will begin to move closer to prior expectations. During the first half 2024.
Customer demand for <unk> fuel tanks, and water management products to support permitted new sites remains elevated.
The slowed pace of construction during Q2 has led to a build in customer owned tank inventory, which we believe will take approximately two quarters to return to typical levels.
Sequentially, we anticipate the normal seasonal slowing of the CS business during Q4, and Q1 driven by ground conditions is likely to be more pronounced than in recent years with lower production activity and modest costs related to new production facilities dragging on margins. During this period before recovering in the second quarter of next year.
In the face of this anticipated brief market slowly the composite technologies team continues to embrace tight cost controls and to pursue further optimization of their operating activities.
This focus on operational efficiency continues to also drive further reductions in total emissions.
The composite technologies production center in Calgary is in the process of completing the installation of a solar panel already.
Led lighting retrofits, which are both expected to be completed during the first quarter of 2024.
This investment will be almost entirely funded by government and landlord incentives.
When completed this is anticipated to lower the site's annual energy expenses by hundreds of thousands of dollars and significantly reduce scope to greenhouse gas emissions.
A favorable long term outlook for the market served by composite technologies underpins, our ongoing investments to increase capacity improve efficiency and enhanced proximity to key customers, including our commitment to establish two new production sites in the U S. One for flex pipe and one for <unk>.
For our announced earlier this year and are on track for first production during the second half of 2024.
With a healthy long term demand outlook across the flex pipe <unk> portfolio. We believe our composite technology segment is well positioned to recommence. Its prior growth profile. Once you move past these near term market challenges.
During Q3, the connection technologies segment reported very similar revenue and adjusted EBITDA to the same quarter of 2022, while moving down sequentially, reflecting delivery completion during Q2 of a large high margin aerospace order supplemented the first half of 2023.
While north American industrial and infrastructure and demand for the company's harsh environments wire cable and heat treat products remains intact.
<unk> performance during Q3 was achieved despite continuing economic weakness in Europe.
Impacts from North American auto sector strikes and a significant pullback in ordering by Canadian wire and cable distributors.
Worked aggressively to lower inventory levels in the face of higher interest rates.
This distributor behavior has created an opportunity for the segments to lever lower lead times and capture incremental share in North America utility markets, particularly in the U S. A trend that we believe can be sustained and capitalized not moving forward.
We believe the inventory destocking by wire and cable distributors that would typically occur at year end and normally causes Q4 to be the lowest activity quarter of the year for connection technologies as largely already been completed.
Consequently, the company expects connection technologies revenue in the fourth quarter to be similar to Q3.
With adjusted EBITDA modestly lower as revenue mix is slightly less favorable and the business continues to incur costs related to its ongoing north American production facility relocation and expansion.
Overall, we maintained a favorable view of the long term market trends, which impacted the Shaw flex and DSG <unk> businesses, and we will continue to invest growth capital to enhance our product offerings improve our manufacturing capacity.
Elevate our production efficiency and lower lead times, including the ongoing commitments to bifurcate expand and modernize our north American production footprint, which is on schedule to be fully completed during the first half of 2025.
Combined our continuing operations total backlog was $393 million at the end of Q3.
Down approximately $40 million from the prior quarter as revenue generation in each business modestly exceeded new order capture in part, reflecting the previously discussed market dynamics.
Lastly on discontinued operations, so revenues rise by 186% compared to the third quarter of 2022, delivering an adjusted EBITDA margin of over 30% compared to a loss in the prior year quarter.
Sequentially revenue in adjusted EBITDA from the pharma pipeline and pipe services segment move substantially upwards as a result of very robust quoting activity and all operating regions.
Particularly related to the STP and Scarborough projects in Mexico, and Indonesia, respectively.
Assuming the sale of <unk> does not close prior to year end. We currently anticipate Q4 revenue and adjusted EBITDA from discontinued operations will be modestly above Q3 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 reach peak levels during the fourth quarter.
At the end of the third quarter. The company had recognized approximately 40% of total expected SGP project revenue and given operational efficiencies observed to date the company still expects project coating and revenue recognition will largely be completed during Q1 of 2020.
Tom will now walk through the company's third quarter financial highlights.
Thanks, Mike.
During the third quarter the company entered into a definitive agreement subject to regulatory approval and other customary conditions.
Sell a substantial part of its pipeline performance group our PPG.
<unk>, which was previously reported under the pipeline in type services or PPS segment, two scenarios or $166 million or approximately $230 million in Canadian dollars at October 31, 2023 exchange rates.
This transaction is subject to normal working capital adjustments is currently expected to close by the middle of the first quarter of 2024, and largely completes the companys portfolio transformation and strategic review process.
Consequently, the company is now reporting those elements of the PPG business covered by this agreement as held for sale and their results as discontinued operations. While the remaining active businesses are reported as continuing operations.
Accordingly prior period information has been retrospectively revised to reflect continuing operations and discontinued operations.
The third quarter's consolidated revenue from continuing operations was $225 4 million.
Three 8% lower than the $234 2 million in the third quarter of 2022.
Excluding the impact of the oilfield asset management business, which was sold in the fourth quarter of 2022 consolidated revenue from continuing operations increased by $4 8 million or two 2% from the third quarter of 2022.
Adjusted EBITDA from continuing operations was $41 1 million.
A five 3% decrease from the prior year third quarter.
Adjusting for the oilfield asset management sale. This decrease is zero point $5 million or a 1% decrease from the prior year third quarter, primarily attributed to modest selling general and administration costs related to our divestment rebrand and growth activities during the quarter.
During the quarter the company recorded an impairment charge of $8 $7 million related to certain western Canadian real estate assets.
As marketing of the assets began it became apparent that carrying values were above what could be recovered in a sale process due to a variety of market driven variables.
Additionally, a gain of $1 9 million was recorded during the quarter related to the wind down of our Canadian defined benefit plan.
Share based incentive compensation during the quarter resulted in a gain of $2 9 million, reflecting the downward movement in the share price since the prior quarter.
Turning to segment results. The composite technologies segment revenue was $140 1 million.
A five 3% decrease compared to the third quarter of 2022, and adjusted EBITDA was $32 4 million as 0.6% increase from the prior year third quarter.
This revenue decrease was largely attributable to the absence of the oilfield asset management business, which was sold during the fourth quarter of 2022.
Demand for our composite pipe products slowed slightly as north American onshore rig counts declined by over 10% during the quarter.
Cognizant technology segment also observe a modest decline in underground fuel tank shipments driven primarily by permitting delays for customer installations.
Connection technologies segment revenue was $81 8 million, which was relatively consistent compared to the third quarter of 2022, and adjusted EBITDA was $15 2 million zero point $6 million or three 8% decrease from the prior year third quarter.
The decrease was driven primarily by increased selling general and administrative costs due to higher compensation and modest relocation expenses to support the growth initiatives in the business.
And the wire and cable business. The segment was impacted by earlier destocking activity from its Canadian distributors during the third quarter.
This decrease was offset by leveraging shorter lead times to capture increased sales into Canadian and U S utility market.
Deliveries into the segments automotive markets were also impacted slightly by the United Auto workers strike in North America.
Discontinued operations, which consist primarily of the businesses, formerly reported under the pipeline and pipe services segment reported revenue of $288 6 million, an increase of 186, 3% compared to the third quarter of 2022, primarily resulting from the kantar.
Successful execution of pipe coating activity, including the <unk> project and the Altamira Mexico facility.
Adjusted EBITDA was $87 4 million, which compared to negative adjusted EBITDA of <unk> 5 million recorded in the prior year third quarter, reflecting the aforementioned higher revenue a 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 third quarter was $24 $3 million, reflecting strong operational performance.
This cash generation included an investment in working capital related primarily to prepayments on capital expansion project.
Cash used in investing activities in the third quarter was $26 $7 million, reflecting $29 2 million of capital spending on property plant and equipment slightly offset by proceeds from the disposal of property plant and equipment and other of $2 5 million.
During the third quarter cash used in financing activities was $26 $1 million, including $9 million in debt repayments, seven $2 million and lease payments and $9 $9 million in share repurchases under the company's normal course issuer bid.
Net cash used in the third quarter of 2023 was $26 6 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 programs, including share buybacks.
As of September 32023, we had a cash balance of $98 million that.
Debt of $174 million and $64 $9 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 $259 8 million of outstanding net long term debt since the start of 2021, including $9 million paid in the third quarter.
As of the end of the quarter the company's net debt to adjusted EBITDA ratio was 0.5 times significantly below our ceiling of one five times.
Subsequent to the close of the third quarter the company repaid an additional $30 million on the credit facility, bringing that balance to zero.
We also continue to purchase shares under our normal course, issuer bid and repurchased 535000 common shares during the quarter, a significantly higher number of shares than in the prior quarter.
Total capital expenditures for the entire company in the quarter were $39 $6 million, including outstanding payments to suppliers of which $23 $8 million were related to growth expenditures for continuing operations.
These are mostly related to infrastructure improvements to increase production capacity and efficiency in the composite technologies and connection technologies segment.
The capital expenditures for discontinued operations were $12 $4 million and were largely spent to support the SGP project.
Looking ahead the company expects full year 2023, capex spend to be on the lower end of the $160 million to $180 million range previously communicated.
During the previous 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 the current North American footprint.
The investments in these lower risk high return potential opportunities are expected to create further annual revenue generating capacity of approximately $150 million and further expand adjusted EBITDA margins. Once these facilities are brought online and approach efficient utilization levels.
We will.
<unk> to prioritize organic 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 overtime its margin and operating cash flow profile, lower overall volatility manage risk 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, the company has successfully divested multiple non core lower margin businesses and other assets.
These efforts have generated over $207 million of cash proceeds with the disposed business is generating an average trailing 12 month adjusted EBITDA margin of 6% significantly strengthening our balance sheet and margin profile, while lowering organizational complexity and risks.
The announcement of the sale of the majority of the PPG business brings to the strategic review process and near to completion.
Once that sale is completed we will have generated approximately $442 million from the strategic review exercise, enabling significant debt reduction investments in the organic growth of the remaining business and modest acquisitions, while also beginning to return capital to shareholders through our NTIC.
We look forward to focusing on the remaining core businesses getting the capital program completed and organic growth investment capacity expansion is running efficiently and continuing to evaluate potential strategic acquisitions.
And investments to grow the business.
I'll now turn it back to Mike for some final comments.
Thank you Tom.
Over the last three years, we have taken significant steps to simplify our organization increased average margins.
Our operational and financial 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 pipe coating business sale and optimally deploying capital to drive high return growth.
We have substantially reduced outstanding debt or returning capital to shareholders and leaning into high 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.
I would like to specifically thank the thousands of master employees globally, who have worked so hard to achieve these outcomes.
Normal seasonal cycles and transient market movements will continue to drive some variation quarter to quarter. However.
However, the underlying long term trends for each of Messrs primary businesses are favorable and expected to remain so for several years.
Long duration, North American critical infrastructure activity remains robust and.
And demand for our core products is expected to persist.
We remain vigilant towards the potential impact of geopolitical events supply chain risks inflationary impacts and higher interest rates.
We continue to take steps designed to minimize our exposure to rising international trade friction and our portfolio of high value differentiated products has limited exposure to consumer discretionary spending.
Which we believe provides resilience in the face of recessionary forces.
We expect consolidated adjusted EBITDA in Q4, 2023 to move modestly higher than Q3, driven by continued significant pipe coating activity.
Continuing operations adjusted EBITDA will move down a short lift market conditions, and our composite technology segment overlay normal seasonal cycles.
I will now turn the call over to the operator and open it up for any questions. You may have for myself Tom for Megan.
Thank you.
Winder, if you have a question at this time. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile our Q&A roster.
And our first question is going to come from the line of David Ocampo with <unk> Securities. Your line is open. Please go ahead.
Hi, Thanks, good morning, everyone.
Good morning, good morning.
My first one for Tom.
On your cash flow heading into Q4 and into Q1 I think you previously called for net debt declined by year end and Thats, even before the proceeds from PPG.
But we did see an.
Uptick in net debt this quarter and if I look on your balance sheet. There is still a pretty sizable contract liability that's sitting on the PPP side of the balance sheet.
I think somewhat offset by some some contract assets and tax credits and inventory that you have on hand, so obviously theres a lot of moving parts there, but I was hoping you could walk us through your <unk>.
Cash flow expectation for the discontinued operations for Q4, and Q1 and just the overall impact it should have on the net debt profile.
Yeah. Thanks, David So so I'll start with I think our net debt actually kind of stayed flat compared to EBITDA now that's including the entire business, so including continued and discontinued or 0.5 ratio.
For the quarter.
Specifically moving to the question around Q4 impact of discontinued operations in Q3 was the last big.
Quarter of investment for the discontinued operations portion of the business, we see Q4 as being a very large cash positive from the discontinued operations portion of the business and the good result from the continuing operations I should add.
And still hold that our net debt number should come down by the end of the year. If you were to exclude leases, which did move up.
From Q2 to Q3 due to the signing of some of our new facility leases.
I think we will still be approaching zero by the end of the year, which is what I, what we've guided to before.
Going into Q1, I mean, it's going to depend on the deck.
The timing of close of that business. So I think that the STP project will continue to generate significant cash flow into Q1, but just depends on the timing of when when that sale closed out as to whether that will be ours or the acquirers.
Hopefully I answered most of your questions David.
Yes that was helpful and maybe just on the net working capital true up.
Just given your expectation that this business will now close in the middle of Q1, do you expect that to be a negative or positive headwind for the company.
Yes, so I think the way we've typically talked about this last quarter was we think the cash generated between signing and closing offset by the working capital will be.
Modestly favorable I think are the terms. We typically have used so think of that in terms of 10 ish million dollars. We still hold that view. So if we close at the end of Q4, we still anticipate that to be the result, now the timing will be we will get cash in Q4, and potentially Q1, and then we will payout.
A working capital true up in 90 days post close.
So I think we still hold that if the closed extends a little bit there'll be some additional cash coming in the working capital should move favorably in that period and those numbers might move a little bit, but generally we still hold the same view that we have.
We indicated last quarter.
Okay, that's perfect and then I will.
Last one for.
Mike.
You talked about the go forward assets.
And that should grow at a pretty favorable rate for the next few years, but when I take a look at your investments and your expectation that it should add around $150 million of revenue over three to five years, I'd say margins north of 20%.
You kind of put that altogether.
We're talking about EBITDA of around $30 million added over three to five years, that's a low single digit to mid single digit growth rate on that on a CAGR basis are we missing anything there.
A lot of your business to grow by more than that $30 million.
So certainly that is not the extent of our growth expectations.
Obviously, the large capital project commitments that we've communicated publicly you make up just a part of what we're doing to drive growth in these businesses.
I think as we've spoken about before.
Most not all but most of our existing businesses are getting a little close to their Max production capacity it varies month to month quarter to quarter, but that's generally a true statement. So it's vital that we get these new facilities up and running on the schedule that we've communicated and as noted earlier that is absolutely the case as we sit here.
Today.
So we would start to see the benefit of those facilities in the composite segments. During the second half of next year and in the connections Tech technology segment in the first half of 2025.
But around those bigger investments there are a lot of smaller investments some R&D and some are sales. Some are facility optimization upgrade of equipment introduction of automation or semi automation a variety that we havent publicly communicated because they really don't rise to a threshold that would be worthy.
Of that.
Our expectation that once we get these facilities completed.
That this business can on an average basis deliver 10% growth or more each year is absolutely still the case.
Okay, that's perfect I'll hop back in queue.
Yes.
Thank you and one moment as we move on 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.
Good morning, and thanks for taking my question.
Good morning, good morning.
Yes, Mike I, just wanted to follow up on the last line of questioning.
I understand the long term.
Growth profile.
It's very attractive, but when we think when we think about 2024.
<unk>.
There seem to be cut.
A couple of headwinds developing I mean, you mentioned the.
The capacity.
Issues until these new facilities get them.
On line.
Some softness.
And the composite segment heading into the year.
And then.
I don't know what the margin impact of those two composite.
Facilities coming online in the back half, but is it reasonable to expect 2024 is more of a I don't know call. It a transition year before we kind of hit that.
Profile you spoke about.
I think you've described it very well, yes, that's absolutely how we think of 'twenty four.
Obviously, we don't typically provide guidance beyond the coming quarter, but but what I would share is that.
First we think that the.
The pattern of the last several years for our continuing operations, where the middle two quarters are the strongest two quarters of the year is likely to be repeated in 2024.
More broadly we still believe the underlying business performance in 2024 is going to be up year over year, probably mid to high single digit percentages, but as you pointed out we will have the effect of some onetime costs that are associated with our north American facility activities.
Although we'd like it to be several million dollars in each quarter of 2024.
So when you add all those things together I think.
24 is likely to look at the bottom line.
Quite a lot like 23.
But it positions us for the slightly longer term and the ability to really accelerate the growth of this organization so transfer.
A transformation of our transition year is the right way to think about it.
I'll just add as Mike said these onetime costs will have we will call them out. So you can explicitly see what they are each quarter because I do think the underlying business will grow as Mike pointed out both topline and Bottomline. If you were to exclude these one time.
But these costs.
Several million dollars. These will be Expensed and included in your adjusted EBITDA is.
Is that right that is correct because they are of a nature that we aren't allowed to add them back.
The things like relocations.
<unk> costs getting people hired while we're transitioning plants one to another.
Startup of the plant itself. So there's a variety of things embedded in there.
That we're just not allowed to explicitly call out an add back to adjusted EBITDA, but we will give the market and I'll let.
All of our analysts that information so you can do with it.
As you as you will and you can see what the underlying business is actually doing without those costs.
Okay.
And last one for me on the permitting.
Delays I mean.
Okay strike.
Strikes me as a bit.
The unique situation, where youre seeing permitting delays across numerous.
States municipalities.
Is it is it localized in one region that you are particularly active in or just how do we think about that.
It strikes me as a bit a bit peculiar.
We're not picking that up in any other end markets that I'm looking at.
Yes, it's an interesting dynamic so we started to see.
Lets say lower than prior.
Prior year shipments to our customers work sites.
As we've worked our way through the second quarter of this year, and obviously engaged with our customers.
At the executive level and at the lower levels to make sure we understood their drivers.
David it's not a perfectly consistent.
Pattern of behavior, but I would say in many jurisdictions and particularly.
Got it.
Eastern Seaboard, which is the largest single consumption 0.4.
For fuel tanks and convenience store growth.
We are seeing a very consistent pattern, where in the face of modified working patterns. After COVID-19 in the face of budget challenges.
Many municipalities many towns and cities have had to pull back.
Their permitting staff, whether they're office based or field field based.
Inspectors and it has had a fairly substantial effect on the pace at which permits are getting issue. So we're seeing it in water projects, we're seeing it in fuel projects.
What I would say as I think I've said in the prepared remarks.
Our customers lifeblood is the ability to put new convenience store footprints on the ground.
And they are 100% committed to continuing to do so so we have seen them change their behavior. They did so in the second quarter and we're continuing to see it go forward. So they've acquired increasing parcels of land. So that they can apply for more permits than they would historically have applied for and they are applying.
For them earlier in the construction cycle than they would ordinarily have done so we actually saw shipments of tanks in the third quarter pick up considerably and moved much closer to a normal level.
Which I think is evidenced that.
The permits that should have been issued and allowed construction in Q2 actually got issued and allowed construction in Q3.
So at this point I think.
Now I'll turn a permit issuance is no longer a substantial issue. It has been addressed by our customers behavior and we've got through that brief period when permits just want the issue.
The challenge we have to navigate here is that during that period, where permits being issued and we wanted to shipping tanks.
We built an inventory of customer owned tanks as a reminder, when in almost every case, we invoice our customers for our tanks at the point that we complete the production.
They will then hold them at our sites and we will charge them.
Our holding fee for that but.
But we have seen a fairly significant increase in customer owned inventory built over the course of Q2.
And we need to let it come down a little bit which is why you have seen us or heard us talk about lowering fuel tank production activity as we roll here into the fourth quarter.
That will mean, we will produce fewer tanks since we invoice on production, we will see lower revenue and lower EBITDA from that part of our business.
And we will lower the customer owned inventory in that process I think that exercise continues into the first quarter.
And then we resume normal activity levels as we roll into the second quarter that is our current expectation.
Total.
Our customer demand for fuel tanks to be shipped to new sites in 2024.
Clearly well above what it has been in 2020, so I have no concerns about the underlying demand for the product or the behavior pattern of our customers I think they've navigated an interesting set of situations quite well, but we now need to make sure we get inventory into the right level.
Very helpful. Thanks, you're welcome.
Thank you and one moment as we move on to our next question.
And our next question is going to come from the line of Aaron Macneil with TD Cowen. Your line is open. Please go ahead.
Thanks for taking my questions good morning.
I can appreciate youre not going to want to get into specific details here, but I'm, just hoping to better understand some of the puts and takes in the composite segment.
Obviously.
Revenues are down year over year, you mentioned the OEM sale in the prepared remarks, but can you give us a sense of.
Like how much of the legacy smaller diameter flex pipe was down how much of that was sort of backfill by the larger diameter stuff and.
What was the order of magnitude in terms of the permitting delays on the FRP tank business.
Yes, maybe I can give some big picture and then I'll see if Tom wants to add some more detail here. When you when you remove the effect of the OEM business, which was with US for all of Q3 last year, but was sold in Q4.
The revenue and the EBITDA for the composite segment was actually up year over year.
It was down very modestly quarter to quarter.
And I'd say that the.
The downward movement quarter to quarter was roughly evenly split between the flex pipe business and the services business.
So not a material dollar value of movement in Q2 to Q3.
Within flex pipe as I mentioned, another record quarter for our <unk> product.
The larger diameter products make up now something slightly north of 20% of the revenue of that segment and a year ago that would've been in single digits.
The old for how things are shifting a little bit within that portfolio.
And as I mentioned in my.
So just a moment ago to <unk> question.
The effect on the <unk> fuel business. During Q3 of this permitting issue was relatively limited towards the tail end of Q3, we started to lower production activity, which is why you saw a little bit of a movement down quarter over quarter. We.
We will see more of a pronounced effect here in Q4 now that we've got production levels down to what we think is the appropriate level to allow customer inventory to unwind this quarter and next.
Tom anything you'd add.
I think you covered it well I mean I think.
It's really really the OEM businesses, where you kind of get clouded up here.
That there was growth in slight growth, but there was some growth in that.
Composite technology segment.
That makes perfect sense. Thanks.
I am sorry to skipping ahead to the next thing here, but you've got the Investor day coming up.
I guess I'm wondering what do you think could be better understood by analysts and investors what types of new disclosures can we expect.
What sort of takeaways do you hope the investment community will ultimately come away with Dr. Meghan to comment there.
And for.
For Investor Day, we're really focused on getting a little bit more visibility into our longer term view for the organization what we expect for this.
This business to look like in the next three 510 years.
I think that'll be.
Something new for investors to wrap their arms around.
In addition to that just a little bit more color on the water opportunity and the growth opportunities within both the composite technologies and the connection technologies segments.
Great I'll turn it back thanks.
Thanks.
Thank you and one moment as we move on to our next question.
And 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. Good morning.
Yes.
Building on the commentary in your prepared remarks, and the answers to your in Aaron's question, just hopping on the constant technology bandwagon.
At both flex pipe and tank sale.
What's been the pace of sales thus far in Q4.
Versus the year ago period and versus Q3, this year and is that comparing well to your expectations for the quarter as a whole.
So maybe I can offer some perspective on Q4 broadly.
As we sit here I think.
As I mentioned in the prepared remarks, if we include the pipe coating business, which is clearly discontinued ops, where we are.
Still thinking that Q4 has higher adjusted EBITDA in Q3, but if we if we move discontinued ops off the table I think continuing ops adjusted Ebitdas probably down.
Somewhere in the order of 20% to 30% sequentially. So Q4 versus Q3 of this year.
Some of that the minority of that.
The effect on our flex by business of an average rig count in North America land. During Q4 that we believe will be somewhere between five and 10% lower than in Q3.
The bigger effect is the topic that we've discussed a couple of times here already the fact that we need to get customer owned inventory down to a manageable level in the <unk> business, we can control when and how we do that and we're doing it.
By lowering production activity in our in our sites here in Q4.
That's going to be by far the most substantial driver of movement Q3 to Q4 in the business.
I would say as we sit here today.
The business activity across all segments. All businesses is very much largely in line with what I've just shared with you.
Yes.
The only thing I would add is just just a reminder, and we didn't say it in the remarks and in the MD&A that connection systems will also be down our connection technologies will also be down in Q4 from a profitability perspective, just on mix primarily.
That's very helpful. Thanks.
And then if we look at capital allocation opportunities. Your stock has pulled back from the recent highs or how are you evaluating share repurchases.
Especially with the revolver now fully paid off any plans to move out the repayment of the high yield notes.
Yes.
One at a time so in CIB I think if you look at our SEDAR filings for October you will note, we did accelerate our.
Our spend in that area, because we do see this as a good opportunity.
If prices stay in this range Youll see us continue that activity I think you can use Q3 as a general proxy for what we plan to do going forward. It will ebb and flow of course, it won't be exactly that number some up some down depending on share price movement, but we will remain active there on the high yields.
I would say R. R.
Story, Hasnt really changed we we still think that having a level of debt that is long term in nature around one turn of EBITDA at least at the current business is run rate is is not a bad thing. So likely you will see us look to refinance that when the time is right and the time will be driven by.
Market conditions interest rates and a variety of things. So we'll take a look at that as we get into the to the new year I don't think you should expect us to.
C C December as our first call period, and immediately act, we will be opportunistic and take action when the market conditions are appropriate.
Great color, Thanks, I'll turn it over.
Thanks, Ed.
Thank you and again, if you would like to ask a question at this time. Please press star one on your Touchtone telephone one moment for our next question.
Okay.
And our next question is going to come from the line of Ian Gillies with Stifel. Your line is open. Please go ahead.
Good morning, everyone.
Okay.
Tanks have been topical today again.
My question is somewhat been answered, but I want to frame it a bit of a different way.
As you look at the tanks business today and demand like is there any evidence that you see in the business set there is a meaningful pull forward of demand.
Reincorporated in the period shortly thereafter, COVID-19 from population migration or.
Is that.
Here that you don't think most need to worry about.
Firstly, I don't think anybody needs to worry about that no I think had we not had this.
<unk> and <unk>.
Very brief interruption from this permits delay issue you would've seen.
Very healthy year over year growth.
And I am very confident you will see very healthy year over year growth as we roll forward.
The appetite of our customer base, particularly the larger many cases privates.
We need store operators, who use their own balance sheet to drive their investments they are agnostic to interest rates.
Their level of aggression to grow out.
Large footprint convenient stores, particularly on interstate highways across the country, particularly eastern Seaboard is unabated, we are very confident in that business.
That's that's helpful. And then the other part I suppose that hasnt been touched on much in this call and I guess the only so much can be said is around M&A.
As you look through your pipeline of opportunities are you seeing seller expectations reset in such a way given the current interest rate environment.
Youre feeling better about.
The opportunities you have in front of you at more reasonable prices or are you still in a wait and see mode. As you move into 2024.
I definitely think that the elevated interest rates plays favorably into the hands of an organization like ours that has cash and can move forward with M&A without needing to put that in place to do so so I do think that the level of buyer interest has moved down a little.
Particularly for those that would lever acquisitions heavily.
I think seller expectations take a little while to adjust.
Markets that move so I'm not yet at a place where I would tell you that seller expectations have changed but I do think they will.
And we have a fairly robust funnel, we're obviously engaged.
And a variety of areas, where we think theres real strategic value to be secured.
Certainly believes that we will be in a position to communicate things over the coming quarters, where we have secured.
Practice valuations and can bring real value to the organization.
Okay. Thank you very much I appreciate the detail.
Absolutely. Thank you.
Thank you and I would now like to hand, the conference back over to Mike <unk> for any closing remarks.
Thank you very much for joining us this morning and for your continued interest in matter.
Look forward to speaking with everybody again next quarter, but until then wish everybody a safe and successful week. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Good day and thank you for standing by welcome to the major third 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 a press star one one on your telephone you will then hear 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 I would now like to hand the conference over.
To your speaker today, making Mccaghren director of external communications and E. S. G. Please go ahead.
Good morning, before we begin this morning's conference call I would like to take a moment to remind all listeners that today's call includes forward looking statements that involve.
<unk> estimates judgments risks and uncertainties.
May cause actual results to differ materially from those projected the complete text of matters statement on forward looking information included inspection work, we know of the third quarter 2023 earnings press release in the MD&A that is available on SEDAR and on the company's website at <unk> Dot com.
For those joining via webcast you may follow the visual presentation that accompanies this call I'll now turn it over to matters, President and CEO, Mike Reed.
Good morning, and thank you for attending our third quarter conference call.
Today, Megan and I are joined by our senior Vice President of Finance and CFO Homeboy.
The third quarter 2023, so a massive move closer to concluding our strategic review process with the announcement that most of our pipe coating business will be acquired by <unk>.
This is the last significant step in our transformation into an infrastructure products provider delivering high value differentiated solutions used in harsh environments.
Customers around the world as they expand and renewed critical infrastructure.
Turning to operational performance.
The company delivered robust total operating results in Q3 continued to commit capital to high return potential organic growth opportunities and accelerated share repurchase activity.
Total consolidated adjusted EBITDA was $128 million during the quarter with adjusted EBITDA margins of 25% a substantial increase from the prior year and the prior quarter.
Our continuing operations, which exclude the business components now held for sale <unk> and reported as discontinued operations deliver.
<unk> delivered adjusted EBITDA of $41 million in the third quarter the significant accomplishments in the context of an unfavorable shift in several market conditions.
I'll speak more about these conditions later, but note that we believe them to be transient in nature and unlikely to dissipate over the first half of 2024.
Despite these conditions continuing operations adjusted EBITDA margins exceeded 18% in the quarter, a testament to the organization's ongoing commitments to tight cost control and efficiency improvements.
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 potential capital allocation strategy balancing share buybacks with investments in high margin growth opportunities to generate elevated residents.
Consistent with our previously shared full year capital guidance range. During Q3. The company continued its substantial growth investments into its composite from connection technology segments.
These investments into four new operating suites will enhance production capacity efficiency and proximity to key markets.
My footprint optimization flexibility and lower risks by providing increased production redundancy there.
They are expected to accelerate to mid and long term revenue growth elevate margin profiles and deliver attractive overall returns.
We continue to believe the intrinsic value of our business represents an excellent investment opportunity and consequently, the company increased its stock repurchase activity under its normal course issuer bid during the third quarter.
In addition to organic growth opportunities, we remain alert to strategically aligned attractively valued acquisition <unk>.
I believe the current interest rate environment creates an opportunity for Maxwell to utilize its balance sheet strength.
Slightly less competitive in today's landscape.
Subsequent to the third quarter, we completed the sale of our <unk>, Italy facility for gross proceeds of $6 million.
We also continue to evaluate opportunities to divest a small western Canadian real estate portfolio.
The process, we believe could deliver gross proceeds of approximately $10 million over the coming quarters.
Looking at each of our segments.
During Q3 composite technologies delivered revenue growth of 5% when adjusting for the $13 6 million delivered in the comparative period by OEM, which was divested in the fourth quarter of 2022.
The second also expanded adjusted EBITDA margins by 140 basis points compared to the same period last year.
Sequentially segment revenue moved down from the second quarter of 2023 by approximately 7%.
As sales of the Companys global composite flex quite products moved lower in the face of roughly 10% quarterly declines in North American onshore drilling and completion activity and a slight step down in international shipments.
In parallel the Companys Xerxes fuel and water management business was impacted by project delays as our customers continue to face extended state and local climate issuance timelines.
It's important to look a little deeper into these market dynamics, we have confidence both the relatively short lift and need the changes on favorable mid and long term outlook for the composite technology segments.
In the North American onshore oilfield market, we are seeing customers trim activity levels throughout the third quarter to remain within full year capital spending budgets.
Prior to Q3 these activity reductions have largely not affected our core business in the Permian basin.
But the basin saw approximately 12% fewer rigs operating at the end of the quarter than at the start and impact that lowered overall demand for our flex pipe products. Despite another record sales quarter for our newly released six inch product.
We anticipate north American onshore oilfield activity levels will be 5% to 10% lower on average in Q4 when compared to Q3.
Normal year end slowly overlays and activity baseline that we believe has stabilized.
However, with commodity prices expected to remain.
Window for the foreseeable future.
We anticipate the onset of a new annual capital budgeting cycle at the beginning of 2024.
We'll then cause gradually increasing activity as we move through the first two quarters of next year.
In our <unk> business are predominantly north American customer base starts to observed a slowdown in the pace of new convenience store construction permits during the second quarter.
The underlying drivers for this pattern include understaffed permitting offices in many local jurisdictions.
Generally lower processing efficiency as many issuing agencies attempt to navigate post pandemic remote working approaches and arrangements.
Having reached the conclusion that extended permitting timelines represents a new <unk>.
Customers have indicated that they have substantially modified that permit submission approach significantly increasing the volume of permits Stacey and submitting applications further in advance of anticipated construction commencement then they would historically.
We believe that these changes will ensure that the flow of comment approvals will begin to move closer to prior expectations. During the first half of 2024.
Customer demand for <unk> fuel tanks, and water management products to support limited new sites remains elevated.
The slowed pace of construction during Q2 has led to a build in customer owned inventory, which we believe will take approximately two quarters to return to typical levels.
Consequently, we anticipate the normal seasonal slowing of the CS business during Q4, and Q1 driven by ground conditions is likely to be more pronounced than in recent years with lower production activity and modest costs related to new production facilities dragging on margins. During this period before recovering in the second quarter of next year.
In the face of this anticipated brief market slowly the composite technologies team continues to embrace tight cost controls.
We see further optimization of their operating activities.
This focus on operational efficiency continues to also drive further reductions in total emissions.
The composite technologies production center in Calgary is in the process of completing the installation of a solar panel array.
Led lighting retrofits, which are both expected to be completed during the first quarter of 2024.
This investment will be almost entirely funded by government and landlord incentives.
When completed this is anticipated to lower the site's annual energy expenses by hundreds of thousands of dollars and significantly reduce scope to greenhouse gas emissions.
A favorable long term outlook for the market served by composite technologies underpins, our ongoing investments to increase capacity improve efficiency and enhanced proximity to key customers, including our commitment to establish two new production sites in the U S. One for flex pipe and one for <unk>.
Our announced earlier this year and are on track for first production during the second half of 2024.
With a healthy long term demand outlook across the flex pipe and Xerxes portfolio. We believe our composite technology segment is well positioned to recommence. Its prior growth profile. Once you move past these near term market challenges.
During Q3, the connection technologies segment reported very similar revenue and adjusted EBITDA to the same quarter of 2022, while moving down sequentially, reflecting delivery completion during Q2 of a large high margin aerospace order supplemented the first half of 2023.
While north American industrial and infrastructure and demand for the company's harsh environments wire cable and heat treat products remains intact.
<unk> performance during Q3 was achieved despite continuing economic weakness in Europe.
Impacts from North American auto sector strikes and a significant pullback in ordering by Canadian wire and cable distributors.
Worked aggressively to lower inventory levels in the face of higher interest rates.
This distributor behavior has created an opportunity for the segments to lever lower lead times and capture incremental share in North America utility markets, particularly in the U S. A trend that we believe can be sustained and capitalized not moving forward.
We believe the inventory destocking by wire and cable distributors that would typically occur at year end and normally causes Q4 to be the lowest activity quarter of the year for connection technologies as largely already been completed.
Consequently, the company expects connection technologies revenue in the fourth quarter to be similar to Q3.
With adjusted EBITDA modestly lower as revenue mix is slightly less favorable and the business continues to incur costs related to its ongoing north American production facility relocation and expansion.
Overall, we maintained a favorable view of the long term market trends, which impacted the short clips and DSG <unk> businesses, and we will continue to invest growth capital to enhance our product offerings improve our manufacturing capacity elevate our production efficiency and lower lead times include.
The ongoing commitments to bifurcate expand and modernize our north American production footprint, which is on schedule to be fully completed during the first half of 2025.
Combined our continuing operations total backlog was $393 million at the end of Q3.
Down approximately $40 million from the prior quarter as revenue generation in each business modestly exceeded new order capture in part, reflecting the previously discussed market dynamics.
Lastly on discontinued operations, so revenues rise by 186% compared to the third quarter of 2022, delivering an adjusted EBITDA margin of over 30% compared to a loss in the prior year quarter.
Sequentially revenue in adjusted EBITDA from the former pipeline and pipe services segment move substantially upwards as a result of very robust quoting activity and all operating regions.
Particularly related to the STP and Scarborough projects in Mexico, and Indonesia, respectively.
Assuming the sale of <unk> does not close prior to year end. We currently anticipate Q4 revenue and adjusted EBITDA from discontinued operations will be modestly above Q3 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 reach peak levels during the fourth quarter.
At the end of the third quarter. The company had recognized approximately 40% of total expected SGP project revenue and given the operational efficiencies observed to date the company still expects project coating and revenue recognition will largely be completed during Q1 of 2020.
Tom will now walk through the company's third quarter financial highlights.
Thanks, Mike during the third quarter the company entered into a definitive agreement subject to regulatory approval and other customary conditions.
Sell a substantial part of its pipeline performance group our PPG.
<unk>, which was previously reported under the pipeline type services or PPS segment, two scenarios or $166 million or approximately $230 million Canadian dollars at October 31, 2023 exchange rates.
This transaction is subject to normal working capital adjustments is currently expected to close by the middle of the first quarter of 2024, and largely completes the companys portfolio transformation and strategic review process.
Consequently, the company is now reporting those elements of the PPE business covered by this agreement as held for sale and the results of discontinued operations. While the remaining active businesses are reported as continuing operations.
Accordingly prior period information has been retrospectively revised to reflect continuing operations and discontinued operations.
The third quarter's consolidated revenue from continuing operations was $225 4 million.
Three 8% lower than the $234 2 million in the third quarter of 2022.
Excluding the impact of the oilfield asset management business, which was sold in the fourth quarter of 2022 consolidated revenue from continuing operations increased by $4 $8 million or two 2% from the third quarter of 2022.
Adjusted EBITDA from continuing operations was $41 1 million.
A five 3% decrease from the prior year third quarter.
Adjusting for the oilfield asset management sale. This decrease is zero point $5 million or a 1% decrease from the prior year third quarter, primarily attributed to modest selling general and administration costs related to our divestment rebrand and growth activities during the quarter.
During the quarter the company recorded an impairment charge of $8 $7 million related to certain western Canadian real estate asset.
As marketing of the assets began it became apparent that carrying values were above what could be recovered in a sale process due to a variety of market driven variables.
Additionally, a gain of $1 9 million was recorded during the quarter related to the wind down of our Canadian defined benefit plan.
Share based incentive compensation during the quarter resulted in a gain of $2 9 million, reflecting the downward movement in the share price since the prior quarter.
Turning to segment results. The composite technologies segment revenue was $140 1 million.
A five 3% decrease compared to the third quarter of 2022, and adjusted EBITDA was $32 4 million as 0.6% increase from the prior year third quarter.
This revenue decrease was largely attributable to the absence of the oilfield asset management business, which was sold during the fourth quarter of 2022.
Demand for our composite pipe products slowed slightly as north American onshore rig counts declined by over 10% during the quarter.
Cognizant technology segment also observed a modest decline in underground fuel tank shipments driven primarily by permitting delays for customer installations.
And next Gen technologies segment revenue was $81 $8 million, which was relatively consistent compared to the third quarter of 2022, and adjusted EBITDA was $15 2 million at.
Zero point $6 million or three 8% decrease from the prior year third quarter.
The decrease was driven primarily by increased selling general and administrative costs due to higher compensation and modest relocation expenses to support the growth initiatives in the business.
And the wire and cable business. The segment was impacted by earlier destocking activity from its Canadian distributors during the third quarter.
This decrease was offset by leveraging shorter lead times to capture increased sales into Canadian and U S utility market.
Deliveries into the segments automotive markets were also impacted slightly by the United Auto workers strike in North America.
Discontinued operations, which consist primarily of the business is formally reported under the pipeline and pipe services segment reported revenue of $288 6 million, an increase of 186, 3% compared to the third quarter of 2022, primarily resulting from the continued.
Successful execution of pipe coating activity, including the <unk> project and the Altamira Mexico facility.
Adjusted EBITDA was $87 $4 million, which compared to negative adjusted EBITDA of <unk> 5 million recorded in the prior year third quarter, reflecting the aforementioned higher revenue a 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 third quarter was $24 $3 million, reflecting strong operational performance.
This cash generation included an investment in working capital related primarily to prepayments on capital expansion project.
Cash used in investing activities in the third quarter was $26 $7 million, reflecting $29 2 million of capital spending on property plant and equipment slightly offset by proceeds from the disposal of property plant and equipment and other of $2 $5 million.
During the third quarter cash used in financing activities was $26 1 million includes.
Including $9 million in debt repayments, $7 $2 million and lease payments and $9 $9 million in share repurchases under the company's normal course issuer bid.
Net cash used in the third quarter of 2023 was $26 6 million.
Based on the actions completed and plan 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 programs, including share buybacks.
As of September 32023, we had a cash balance of $98 million debt of $174 million and $64 $9 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 $259 8 million of outstanding net long term debt since the start of 2021, including $9 million paid in the third quarter.
As of the end of the quarter the company's net debt to adjusted EBITDA ratio was zero five times significantly below our ceiling of one five times.
Subsequent to the close of the third quarter the company repaid an additional $30 million on the credit facility, bringing that balance to zero.
We also continue to purchase shares under our normal course, issuer bid and repurchased 535000 common shares during the quarter, a significantly higher number of shares than in the prior quarter.
Total capital expenditures for the entire company in the quarter were $39 $6 million, including outstanding payments to suppliers of which $23 8 million were related to growth expenditures for continuing operations.
These are mostly related to infrastructure improvements to increase production capacity and efficiency in the composite technologies and connection technologies segment.
The capital expenditures for discontinued operations were $12 $4 million and were largely spent to support the Sergipe project.
Looking ahead the company expects full year 2023, capex spend to be on the lower end of the $160 million to $180 million range previously communicated.
During the previous 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 our new facility in the greater Toronto area and one in the U S for the connection technologies segment, which will expand and replace the current North American footprint.
The investments in these lower risk high.
The return potential opportunities are expected to create further annual revenue generating capacity of approximately $150 million and further expand adjusted EBITDA margins. Once these facilities are brought online and approach efficient utilization levels.
We will continue to prioritize organic capital spend to drive growth in our most differentiated high value materials based solutions and supportive 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.
To execute on the strategic actions that are intended to enhance overtime its margin and operating cash flow profile, lower overall volatility manage risk and deliver greater full cycle value to all stakeholders as our market, leading technologies enable responsible sustainable renewal and enhancement of critical and.
Restructuring.
Since early 2020, the company has successfully divested multiple non core lower margin businesses and other assets.
These efforts have generated over $207 million of cash proceeds with the disposed business is generating an average trailing 12 month adjusted EBITDA margin of 6% significantly strengthening our balance sheet and margin profile, while lowering organizational complexity and risks.
The announcement of the sale of the majority of the PPG business brings to the strategic review process and near to completion.
Once that sale is completed we will have generated approximately $442 million from the strategic review exercise, enabling significant debt reduction investments in the organic growth of the remaining business and modest acquisitions, while also beginning to return capital to shareholders through our NCI.
We look forward to focusing on the remaining core businesses getting the capital program completed and organic growth investment capacity expansion is running efficiently and continuing to evaluate potential strategic acquisitions and investments to grow the business.
I'll now turn it back to Mike for some final comments.
Thank you Tom.
Over the last three years, we have taken significant steps to simplify our organization increased average margins lower operational and financial volatility.
<unk> cash flow and concentrate on a narrow range of high growth critical infrastructure oriented businesses.
We remain committed to tightly controlling fixed costs completed the pipe coating business sale and optimally deploying capital to drive high return growth.
We have substantially reduced outstanding debt or returning capital to shareholders and leaning into high 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.
I would like to specifically, thank the thousands of mats or employees globally, who have worked so hard to achieve these outcomes.
Normal seasonal cycles and transient market movements will continue to drive some variation quarter to quarter. However.
However, the underlying long term trends for each of Messrs primary businesses are favorable and expected to remain so for several years.
Long duration, North American critical infrastructure activity remains robust and.
And demand for our core products is expected to persist.
We remain vigilant towards the potential impact of geopolitical events supply chain risks inflationary impacts and higher interest rates.
We continue to take steps designed to minimize our exposure to rising international trade friction and our portfolio of high value differentiated products has limited exposure to consumer discretionary spending.
Which we believe provides resilience in the face of recessionary forces.
We expect consolidated adjusted EBITDA in Q4, 2023 to move modestly higher than Q3, driven by continued significant pipe coating activity.
Continuing operations adjusted EBITDA will move down a short lift market conditions, and our composite technologies segments overlay normal seasonal cycles.
I will now turn the call over to the operator and open it up for any questions. You may have for myself Tom format.
Thank you.
Winder, if you have a question at this time. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile our Q&A roster.
And our first question is going to come from the line of David Ocampo with Cormack Securities. Your line is open. Please go ahead.
Hi, Thanks, good morning, everyone.
Good morning, good morning.
My first one for Tom.
On your cash flow heading into Q4 and into Q1 I think you previously called for net debt declined by year end and Thats, even before the proceeds from PPG.
But we did see an uptick.
Uptick in this.
This quarter and if I look on your balance sheet there is still.
Sizable contract liability, that's sitting on the PPP side of the balance sheet.
Could be I think somewhat offset by some some contract assets and tax credits and inventory that you have on hand. So obviously, there's a lot of moving parts there, but I was hoping you could walk us through your cash flow expectation for the discontinued operations for Q4, and Q1 and just the overall impact that it should have on the net debt profile.
Yeah. Thanks, David So the so I'll start with I think our net debt actually kind of stayed flat compared to EBITDA now that's including the entire business, so including continued and discontinued at 0.5 ratio.
For the quarter.
Specifically moving to the question around Q4 impact of discontinued operations in Q3 was the last big.
Quarter of investment for the discontinued operations portion of the business, we see Q4 as being a very large cash positive from.
The discontinued operations portion of the business and the good result from the continuing operations I should add and still hold that our net debt number should come down by the end of the year. If you were to exclude leases, which didn't move up.
From Q2 to Q3 due to the signing of some of our new facility leases.
I think we'll still be approaching zero by the end of the year, which is what we've guided to before.
Going into Q1, I mean, it's going to depend on the.
The timing of close of that business. So I think that the STP project, we will continue to generate significant cash flow into Q1, but just depends on the timing of when that sale closed as to whether that will be ours or the acquirers.
Hopefully I answered most of your questions David.
Yes that was helpful and maybe just on the net working capital true up.
Just given your expectation that this business will now close in the middle of Q1, do you expect that to be a negative or positive headwind for the company.
Yes, so I think the way we've typically talked about this last quarter was we think the cash generated between signing and closing offset by other working capital will be.
Modestly favorable I think are the terms. We typically have used so think of that in terms of 10 ish million dollars. We still hold that view. So if we close at the end of Q4, we still anticipate that to be the result, now the timing will be we will get cash in Q4, and potentially Q1, and then we will payout.
A working capital true up in 90 days post close.
So I think we still hold that if the closed extends a little bit there'll be some additional cash coming in the working capital should move favorably in that period and those numbers might move a little bit, but generally we still hold the same view that we indicated last quarter.
Okay. That's perfect and then how often this is jennifer on for Mike.
I think you've talked about the go forward assets.
Absolutely.
Throw out a pretty favorable rates for the next few years, but when I take a look at your investments and your expectation that it should add around $150 million of revenue over three to five years, I'd say margins north of 20%.
Put that altogether and you are talking about EBITDA of around $30 million added over three to five years, that's a low single digit to mid single digit growth rate on that on a CAGR basis are we missing anything there.
A lot of your business to grow by more than that $30 million.
So certainly that is not the extent of our growth expectations.
Obviously, the large capital project commitments that we've communicated publicly you make up just a part of what we're doing to drive growth in these businesses.
I think as we've spoken about before.
Most not all but most of our existing businesses are getting a little close to their Max production capacity it varies month to month quarter to quarter, but thats generally a true statement so it.
It's vital that we get these new facilities up and running on the schedule that we've communicated and as noted earlier that is absolutely. The case as we sit here today. So we would start to see the benefit of those facilities and the composite segment. During the second half of next year and then the connections Tech technology segment in the first half of 2025.
Five.
But around those bigger investments there are a lot of smaller investments some R&D and some are sales. Some are facility optimization upgrade of equipment introduction of automation or semi automation a variety, but we haven't publicly communicated because they really don't rise to a threshold that would be worth.
<unk> of that.
Our expectation that once we get these facilities completed.
That this business can on an average basis deliver 10% growth or more each year is absolutely still the case.
Okay, that's perfect I'll hop back in queue.
Thanks.
Thank you and one moment as we move on 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.
Good morning, and thanks for taking my question.
Good morning, good morning.
Yes, Mike I, just wanted to follow up on the last line of questioning.
I understand the long term.
Growth profile is very attractive, but when we think when we think about 2024.
I mean.
There seem to be.
Couple of headwinds developing I mean, you mentioned the.
The capacity is.
Issues until these new facilities.
Get online.
Some softness.
The composite segment heading into the year.
And then.
I don't know what the margin impact of those two composite.
Facilities coming online in the back half, but is it reasonable to expect 2024 is more of a I don't know call. It a transition year before we kind of hit that.
At growth profile you spoke about.
I think you've described it very well, yes, that's absolutely how we think of 'twenty four.
Obviously, we don't typically provide guidance beyond the coming quarter, but but what I would share is that.
First we think that the pattern of the last several years for our continuing operations, where the middle two quarters are the strongest two quarters of the year is likely to be repeated in 2024.
More broadly we still believe the underlying business performance in 2024 is going to be up year over year, probably mid to high single digit percentages, but as you pointed out we will have the effect of some onetime costs that are associated with our north American facility activities.
Are we likely to be several million dollars in each quarter of 2024.
So when you add all those things together I think.
24 is likely to look at the bottom line.
Quite a lot like 23.
But it positions us for the slightly longer term and the ability to really accelerate the growth of this organization so transfer.
Transformation of our transition year is the right way to think about it.
I'll just add as Mike said these onetime costs will have we will call them out. So you can explicitly see what they are each quarter.
Because I do think the underlying business will grow as Mike pointed out both topline and Bottomline. If you were to exclude these onetime.
But these costs.
Several million dollars. These will be Expensed and included in your adjusted EBITDA is.
Is that right that is correct because they are of a nature that we aren't allowed to add them back.
The things like relocations.
Chart up costs getting people hired while we're transitioning plants one to another.
Startup of the plant itself. So there's a variety of things embedded in there.
That we're just not allowed to explicitly call out an add back to adjusted EBITDA, but we will give the market in all of our analysts that information. So you can do with it.
<unk>.
As you as you will.
And you can see what the underlying business is actually doing without those costs.
Okay.
And last one for me on the permitting delay.
Delays I mean.
Okay.
Makes me a bit.
<unk> situation, where youre seeing permitting delays across numerous.
States municipalities.
Is it is it localized in one region that you are particularly active in or just how do we think about that.
It strikes me as a bit a bit peculiar.
Picking that up in any other end markets that I'm looking at.
Yes, it's an interesting dynamic so we started to see.
Lets say lower than prior year shipments to our customers work sites.
We worked our way through the second quarter of this year, and obviously engaged with our customers.
Okay.
<unk> level and at the lower levels to make sure we understood the drivers.
David it's not a perfectly consistent.
Turn off behavior, but I would say in many jurisdictions.
Particularly.
The eastern Seaboard, which is the largest single consumption points.
For fuel tanks and convenience store growth, we are seeing a very consistent pattern, where in the face of modified working patterns. After COVID-19 in the face of budget challenges.
Many municipalities many towns and cities.
Pull back.
Their permitting staff, whether they are office based or field field based.
<unk> and it has had a fairly substantial effect on the pace at which permits are getting issue. So we're seeing it in water projects, we're seeing it in fuel projects.
What I would say as I think I've said in the prepared remarks.
Our customers lifeblood is the ability to put new convenient store footprints on the ground.
And they are 100% committed to continuing to do so so we have seen them change their behavior. They did so in the second quarter.
We're continuing to see it go forward, so they've acquired increasing parcels of land. So that they can apply for more permits than they would historically have applied for and they are applying for them earlier in the construction cycle than they would ordinarily have done so we actually saw shipments of tanks in the third quarter.
Up considerably and moved much closer to a normal level.
Which I think is evidence that.
The permits that should have been issued and allowed construction in Q2 actually got issued and allowed construction in Q3.
So at this point I think that the.
Can you turn a permit issuance is no longer a substantial issue. It has been addressed by our customers behavior and we've got through that brief period when permits just want the issue the.
The challenge we have to navigate here is that during that period, where permits being issued and we want to shipping tanks.
We built an inventory of customer owned tanks as a reminder, when in almost every case, we invoice our customers for our tanks at the point that we complete the production.
They will then hold them at our sites and we will charge them.
Our holding fee for that.
But we have seen a fairly significant increase in customer owned inventory that built over the course of Q2.
And we need to let it come down a little bit which is why you.
<unk> seen us or heard us talk about lowering fuel tank production activity as we roll here into the fourth quarter.
That will mean, we will produce fewer tanks since we invoice on production, we will see lower revenue and lower EBITDA from that part of our business.
And we will lower the customer owned inventory in that process I think that exercise continues into the first quarter.
And then we resume normal activity levels as we roll into the second quarter that is our current expectation.
Total.
Our customer demand for fuel tanks to be shipped to new sites in 2024.
Clearly well above what it has been in 2020, so I have no concerns about the underlying demand for the product or the behavior pattern of our customers I think they've navigated an interesting set of situations quite well, but we now need to make sure we get inventory into the right level.
Very helpful. Thanks Youre welcome.
Thank you and one moment as we move on to our next question.
And our next question is going to come from the line of Aaron Macneil with TD Cowen. Your line is open. Please go ahead.
Thanks for taking my questions good morning.
I can appreciate youre not going to want to get into specific details here, but I'm, just hoping to better understand some of the puts and takes in the composite segment.
Obviously.
Revenues are down year over year, you mentioned the OEM sale in the prepared remarks, but can you give us a sense of.
Like how much of the legacy smaller diameter flex pipe was down and how much of that was sort of backfill by the larger diameter stuff and.
What was the order of magnitude in terms of the permitting delays on the FRP tank business.
Yes, maybe I can give some big picture and then I'll see if Tom wants to add some more detail here. When you when you remove the effect of the OEM business, which was with US for all of Q3 last year, but was sold in Q4.
The revenue and the EBITDA for the composite segment was actually up year over year.
It was down very modestly quarter to quarter.
And I would say that the.
The downward movement quarter to quarter was roughly evenly split between the flex pipe business in the services business.
So not a material dollar value of movement Q2 to Q3.
Within flex pipe as I mentioned, another record quarter for our six inch product.
The larger diameter products make up now something slightly north of 20% of the revenue of that segment than a year ago that would have been single digits. So.
The old for how things are shifting a little bit within that portfolio.
And as I mentioned in my.
So just a moment ago to <unk> question.
The effect on the <unk> fuel business. During Q3 of this permitting issue was relatively limited towards the tail end of Q3, we started to lower production activity, which is why you saw a little bit of a movement down quarter over quarter. We.
We will see more of a pronounced effect here in Q4 now that we've got production levels down to what we think is the appropriate level to allow customer inventory to unwind this quarter and next.
Tom anything you'd add.
I think you covered it well I mean I think.
It's really really the OEM businesses, where you kind of get clouded up here.
<unk> that there was growth slight growth, but there was some growth in that.
Composite technology segment.
That makes perfect sense. Thanks.
I am sorry to skipping ahead to the next thing here, but you've got the Investor day coming up.
I guess I'm wondering what do you think could be better understood by analysts and investors what types of new disclosures can we expect.
What sort of takeaways do you hope the investment community will ultimately come away with.
Megan to comment now.
And for Investor Day, we're really focused on giving you a little bit more visibility into our longer term view for the organization. What we expect for this business to look like in the next three 510 years.
So I think that will be.
New for investors to that.
Im Brad.
In addition to that just a little bit more color on the water opportunity and the growth opportunities within both the composite technologies and the connection technologies segments.
Great.
Turn it back thanks. Thanks. Thanks.
Thank you and one more.
If we move on to our next question.
And 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 and good morning, everyone. Good morning.
Yes.
Building on the commentary in your prepared remarks and answers to your in Aaron's questions just hopping on the constant technology bandwagon.
At both flex pipe and tank sale.
What's been the pace of sales thus far in Q4.
Versus the year ago period and versus Q3, this year and is that comparing well to your expectations for the quarter as a whole.
So maybe I can offer some perspective on Q4 broadly.
As we sit here I think.
As I mentioned in the prepared remarks, if we include the pipe coating business, which is clearly discontinued ops were still thinking that Q4 has higher adjusted EBITDA in Q3, but if we if we move discontinued ops off the table I think continuing ops adjusted Ebitdas probably down.
Somewhere in the order of 20% to 30% sequentially. So Q4 versus Q3 of this year.
Some of that the minority of that.
The effect on our flex by business of an average rig count in North America land. During Q4 that we believe will be somewhere between five and 10% lower than in Q3.
The bigger effect is the topic that we've discussed a couple of times here already the fact that we need to get customer owned inventory down to a manageable level in the <unk> business, we can control when and how we do that and we're doing it by lowering production activity in our in our sites here in Q4.
So that's going to be by far the most substantial driver of movement Q3 to Q4 in the business.
I would say as we sit here today.
The business activity across all segments. All businesses is very much largely in line with what I've just shared with you.
Yes, and the only thing I would add is just just a reminder, and we did say it in the remarks and in the MD&A as it can.
<unk> systems will also be down our connection technologies will also be down in Q4 from a profitability perspective, just on mix primarily.
That's very helpful. Thanks.
And then if we look at capital allocation opportunities. Your stock has pulled back from the recent highs or how are you evaluating share repurchases.
Especially with the revolver now fully paid off any plans to move up the repayment of the high yield notes.
Yes.
One at a time, so and CIB I think if you look at our SEDAR filings for October you will note, we did accelerate our.
Our spend in that area, because we do see this as a good opportunity.
If prices stay in this range Youll see us continue that activity I think you can use Q3 as a general proxy for what we plan to do going forward. It will ebb and flow of course, it won't be exactly that number some up some down depending on share price movement, but we will remain active there on the high yields.
I would say are our story hasnt really changed.
We still think that having a level of debt that is long term in nature around one turn of EBITDA at least at the current business is run rate is is not a bad thing. So likely you will see us look to refinance that when the time is right and the time will be driven by market conditions interest rates.
Alrighty. Thanks, So we'll take a look at that as we get into the to the new year I don't think you should expect us to.
C C December as our first call period, and immediately act, we will be opportunistic and take action when the market conditions are appropriate.
Great color, Thanks, I'll turn it over.
Thanks, Ed.
Thank you and again, if you would like to ask a question at this time. Please press star one on your Touchtone telephone.
Our next question.
And our next question is going to come from the line of Ian Gillies with Stifel. Your line is open. Please go ahead.
Good morning, everyone.
Morning.
Okay.
Tanks have been topical today again.
My question is somewhat been answered, but I want to frame it a bit of a different way.
As you look at the tanks business today and demand like is there any evidence that you see in the business set there is a meaningful pull forward of demand during.
<unk> in the period shortly thereafter, COVID-19 from population migration or.
Is that a fear that you don't think most need to worry about.
I personally don't think anybody needs to worry about that no I think had we not had this unfortunate.
Very brief interruption from this permits delay issue you would have seen.
Healthy year over year growth.
I am very confident you will see very healthy year over year growth as we roll forward.
The appetite of our customer base, particularly the larger many cases private.
Store operators, who use their own balance sheet to drive their investments they are agnostic to interest rates.
Their level of aggression to grow out.
Large footprint convenient stores, particularly on interstate highways across the country, particularly eastern Seaboard is unabated.
Im very confident in that business.
That that's helpful. And then the other part I suppose that hasnt been touched on much in this call and I guess the only so much can be said is around M&A.
As you look through your pipeline of opportunities are you seeing seller expectations reset in such a way given the current interest rate environment Youre feeling better.
The opportunities you have in front of you at more reasonable prices or are you still in a wait and see mode. As you move into 2024.
I definitely think that the elevated interest rates plays favorably into the hands of an organization like ours.
<unk> cash and can move forward with M&A without needing to put that in place to do so so I do think that the level of buyer interest has moved down particularly for those that would lever acquisitions heavily.
I think seller expectations take a little while to adjust to the markets that move so I'm not yet at a place where I would tell you that seller expectations have changed.
But I do think they will.
And we have a fairly robust funnel, we're obviously engaged.
And a variety of areas, where we think theres real strategic value to be secured.
Certainly belief that we'll be in a position to communicate things over the coming quarters, where we have secured.
Attractive valuations and can bring real value to the organization.
Okay. Thank you very much I appreciate the detail.
Absolutely. Thank you.
Thank you and I would now like to hand, the conference back over to Mike <unk> for any closing remarks.
Thank you very much for joining us this morning and for your continued interest in matter, we'll look forward to speaking with everybody again next quarter, but until then.
Everybody is safe and successful week. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.