Q4 2023 Mattr Corp Earnings Call
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[music].
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Good day and thank you for standing by welcome to the matter fourth quarter 2023 results webcast and conference call. At this time all participants are in a listen only mode.
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I would now like to hand, the conference over to your speaker today Mega Mccaghren, Vice President external communications and ESG. 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.
Just a matter of statement on forward looking information is included in section four of.
The fourth quarter and full year 2023 earnings press release.
In the MD&A that is available on SEDAR and on the company's website at Matador.
For those joining via webcast.
May follow the visual presentation that accompanies this call I'll now turn it over to <unk>, President and CEO, Mike Reed.
Good morning, and thank you for attending our fourth quarter conference call today, Megan and I are joined by our senior Vice President of Finance and CFO Tom Halloween.
In 2023 matches continuing operations delivered year on year, adjusted EBITDA growth of over 16%.
<unk> adjusted EBITDA margins by 140 basis points compared to 2022 and set new record levels of annual financial performance in both our composite and connection technology segments.
These robust financial outcomes were accomplished while also executing a fundamental business transformation rebranding our company completing our strategic review process and building a year end cash balance of over $330 million.
Our technology investments continued to drive growth.
With our <unk> water large diameter flex by <unk>, and Shaw flex nuclear product lines, each reaching new heights.
During 2023, we also repurchased nearly four 5 million shares under our normal course, issuer bid and deployed over $75 million of organic growth capital into our manufacturing modernization expansion and optimization program with all four of our new North American production facilities remaining on budget.
And on schedule to commence production between mid 2024 and early 2025.
We exited the year as a tightly focused critical infrastructure products provide us with the balance sheet strength to continue investing in organic opportunities and share repurchases, while also considering meaningful acquisitions to accelerate value creation for all stakeholders.
Over these past 12 months the employees with masks that have achieved a long list of extraordinary outcomes and have done so while setting a new safety performance record and further lowering our greenhouse gas emissions I could not be prouder of this organization and the many talented creative and committed people who work.
Turning to the fourth quarter.
The company delivered robust total operating results continued to progress its significant organic growth program and accelerated its share repurchase activity.
Total consolidated adjusted EBITDA was $137 million during the quarter with adjusted EBITDA margins of 29% a substantial increase from the prior year and the prior quarter.
Our continuing operations, which exclude the business components now sold to <unk> and reported as discontinued operations.
<unk> delivered adjusted EBITDA of $33 million in the fourth quarter the.
A significant accomplishment given normal seasonal slowing and the previously anticipated unfavorable market dynamics, which impacted our composite technologies segment towards year end.
Continuing operations adjusted EBITDA margins exceeded 15% in the quarter, a testament to the organization's ongoing commitments to tight cost control and efficiency improvements.
During the fourth quarter, we sold the majority of our pipe coating business reported as discontinued operations to generics.
Prior to its sale the business delivered significant revenue adjusted EBITDA and cash flow, primarily as a result of stronger than previously expected execution and margins on the southeast gateway pipeline projects.
Massive benefited from this significant generation of cash, but we'll have some working capital adjustment liability as a consequence.
We anticipate the combination of pre closing cash generation the contractual purchase price net of transaction fees and expenses and the currently estimated working capital adjustments, we will deliver total net cash proceeds to matter of nearly $280 million.
Tom will share additional details on this transaction later.
The hard work of recent years to strengthen our balance sheet and our cash generation profile positions us to continue pursuing a flexible but disciplined capital allocation strategy.
Balancing share buybacks with investments in high margin growth opportunities to generate elevated returns in the coming years.
During Q4, the company continued its substantial growth investments within its composite in connection technologies segments.
These investments, including four new operating licenses are.
<unk> are expected to enhance production capacity efficiency and proximity to key markets provide added footprint optimization flexibility and lower risk by providing increased production redundancy.
They are expected to accelerate.
Term revenue growth elevate margin profiles and deliver attractive overall returns.
We remain alert to strategically aligned accretive acquisition opportunities, which have the potential to accelerate our organic growth trajectory.
With our strategic review completed and a substantial cash balance of established we now have the capacity to consider both tuck in and more meaningful acquisition targets.
Finally, we continue to believe the intrinsic value of our business represents an excellent investment opportunity and consequently, the company further increase its stock repurchase activity under its normal course issuer bid during the fourth quarter.
Looking at each of our segments.
Composite technologies delivered new annual records for revenue and adjusted EBITDA in 2023.
With Xerxes water product sales is setting a new high watermark and sales of <unk> fuel storage tanks, rising 7% compared to 2022.
Despite the previously discussed customer permitting delay challenges.
In addition share gains in our flex <unk> business enabled revenue expansion despite year over year contraction in North American oilfield activity.
Of particular note sales of our larger diameter flex bike products rose nearly 70% when compared to 2022.
The composite technologies team has demonstrated agility creativity and a strong commitment to customer service over the last 12 months, while successfully navigating some particularly challenging market conditions later in the year.
I deeply appreciate their efforts.
Despite a new quarterly record for Xerxes water product sales. These previously discussed lithia market conditions, including further reduced north American oilfield activity normal seasonal slowing of underground fuel storage tank installation activity and the first of two quarters, where underground fuel storage tank production.
<unk> was curtailed to lower finished goods inventory balances led.
Led to a sequentially lower fourth quarter revenue and adjusted EBITDA.
Entering 2024 market conditions have evolved largely as expected.
North American oilfield drilling activity has remained in line with the prior quarter a trend. We believe is likely to continue for at least the first half of the year in the face of flat oil price lower natural gas prices and substantial customer consolidation.
However earlier customer ordering patterns continue to indicate ongoing flex fight share gains, particularly in larger diameter products with normal seasonal increases in U S completion activity expected to drive a substantial rise in flex pipe revenue moving into the second quarter.
In addition, recently captured international orders, including large diameter product orders will modestly enhance first quarter revenue before becoming more impactful in Q2 and beyond.
And our <unk> business ground conditions during the first quarter are typically the least favorable for fuel and water system installations.
And so far in 2024 has followed this historic auction.
In parallel our fuel customer base has been working hard since early 2023 to modify that permitting strategies to secure a more consistent supply of approved permits and are communicating a greater degree of confidence that 2020 for convenient store construction and renewal projects will move forward as planned.
Consequently, the first quarter of 2024 is expected to be the final quarter in which the business tempus production activity.
Okay.
Given the continued rise of U S Interstate commerce and truck traffic.
And the lower applicability of electrification to this market sector our.
Our fuel customers continue to display a rising focus on expanding their interstate travel center or truck stop networks.
We are generally seeing older smaller convenient stores being retired and replaced by larger convenience stores with 20% to 25% or more of these being travel centers.
For context of.
Our travel center will typically require seven or more newsweek's. These fuel storage tanks, often of our largest configurations.
Whereas our non travel center will typically require three to four times.
Consequently, while total active convenient store count is projected to remain approximately flat.
Demand for premium Xerxes products continues to rise and is the primary driver behind our investment to upgrade expand and optimize the <unk> manufacturing network.
With a strong outlook for the second quarter and beyond the.
The segment has been intensely focused on advancing its manufacturing modernization expansion and optimization strategy.
At year end, its new flex fight production sites in Rockwall, Texas and user exceeds production site in <unk> South Carolina.
And on budget and scheduled for first production around mid year.
Commissioning of the Rockwell sites will lower manufacturing concentration risk in our flex by business.
Alleviate rising capacity challenges in our Calgary facility and enable substantially more efficient production of larger diameter flex byproducts.
In addition, its location will significantly reduce freight costs associated with products sold into West, Texas and two international destinations.
The <unk> site will be the first new tank production facility commissioned in 35 years.
Incorporating modern manufacturing processes to significantly enhance efficiency and configured to optimize output on logistics, which continue to rise as a proportion of total demand.
It's large diameter production capacity will be approximately four times that of our recently shifted Anaheim site.
And its impending addition to the <unk> footprint with the planned trigger for the company to exit Anaheim.
Location, which was among the oldest in our network and was exposed to the particular risk factors associated with the state of California.
The shutdown of Anaheim is expected to be completed by yearend and anticipated to yield at least $2 $5 million of annualized fixed cost savings once completed.
Exiting Anaheim does not alter our previously shared revenue growth potential and related returns expectations tied to the new composite technologies production sites.
The onetime costs associated with ongoing actions commissioned two new sites and exit Anaheim will be elevated during the first two quarters of 2024 before moving down significantly in the second half of the year.
In combination these factors lead us to expect a modest sequential decline in segment adjusted EBITDA during the first quarter before rising significantly in the second quarter.
Turning to connection technologies the segment delivered new annual records for revenue and adjusted EBITDA During 2023.
With sales of harsh environment wire cable and heat shrink tubing into infrastructure applications rising substantially compared to the prior year.
This outcome.
While running at near full capacity in our Toronto wire and cable production sites is a testament to the creativity and teamwork of the connection technologies segments employees.
During Q4, the connection technologies segment reported revenue and adjusted EBITDA slightly lower sequentially, but modestly above the prior year period as expected.
Within the quarter, we observed continued strong demand for the segments products and North American infrastructure markets, which largely offset a modest impact from U S automotive labor disruption and ongoing interest rate driven slowness in the Canadian distribution Center.
Reduced Canadian wire and cable distributor activity throughout the second half of 2023 has enabled the segment to redirect capacity and capture incremental share in North American utility markets, particularly in the U S. A trend that continued in the fourth quarter and we believe is sustainable moving forward.
As anticipated, we did not see meaningful inventory destocking by wire and cable distributors that would typically occur at year end and do not expect to see the seasonal restocking that would typically occur in the first quarter.
Despite this the company expects connection technologies revenue in the first quarter to move upwards and to be similar to the levels seen in Q1 of 2023 before moving further upwards in the second quarter as continued demand growth and share gain in the North American infrastructure market compounds have returned to pre strike levels of <unk>.
Most of the production activity.
The segment continues to execute the relocation expansion and modernization of its north American production activities into two new sites with it's Vaughan, Ontario, and Fairfield, Ohio facilities progressing on time and on budget.
First production from both science is expected during the second half of 2024 with final site completion occurring in the first half of 2025.
Enabling connection technologies to maintain and accelerate its north American growth trajectory.
Overall, we maintain a favorable view of the long term electrification communication and transportation trends, which impact this segment and will continue to invest in the development of new technologies and to improve our manufacturing capacity elevates, our production efficiency and lower lead times.
We also continue to evaluate accretive acquisition opportunities to further expand our product offering and geographic presence.
Lastly, our discontinued operations, which were sold at the end of November.
Over $100 million and adjusted EBITDA with an adjusted EBITDA margin of almost 40% in Q4, driven by very strong operational execution, particularly on the southeast Gateway pipeline project.
Pipe coating employees performed at an extraordinary level throughout 2023, particularly given the added distraction of a sale process.
They are an incredible team of passionate people, we will miss them and we wish them, a very successful future as part of <unk>.
Tom will now walk through the company's full year and fourth quarter financial highlights, including greater detail on our completed pipe coating sale transaction.
Thanks, Mike.
Fourth quarter consolidated revenue from continuing operations was $210 8 million.
Six 6% lower than the $225 $8 million in the fourth 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 decreased by $8 8 million.
Or 4% from the fourth quarter of 2022 reflective of a decrease of $29 million in the composite technologies segment, partially offset by an increase of $9 2 million.
In Brazil pipe coating business being reported under the financial corporate and other segment.
Increase of $2 9 million and the connection technology segment.
Adjusted EBITDA from continuing operations was $32 8 million or 28% decrease from the prior year fourth quarter adjusting.
Adjusting for the oilfield asset management sale this decrease of $7 7 million.
Or 19, 1% decrease from the prior year fourth quarter.
Modernization expansion and optimization costs related to our growth initiatives in the fourth quarter of 2023 or $1 $7 million with the rest of the difference is primarily attributed to lower composite technologies revenue during the quarter.
During the fourth quarter, the company recognized a $17 $6 million impairment charge.
Intangible assets related to air permits and a zero point $9 million impairment charge on property plant and equipment as a result of its decision to close the aging Xerxes manufacturing facility in Anaheim, California.
Additionally, a gain of $1 7 million was recorded during the quarter, primarily related to a true up of the value related to royalty payments due on the Triton acquisition.
Restructuring costs resulted in an expense of $2 $5 million during the quarter, primarily due to a true up of a share based incentive costs for departed executives.
Turning to segment results. The composite technology segment revenue was $112 5 million or 19, 4% decrease compared to the fourth quarter of 2022, and adjusted EBITDA was $18 8 million.
At 31, 1% decrease from the prior year fourth quarter.
This revenue decrease was partially attributable to the absence of the oilfield asset management business, which was sold during the fourth quarter of 2022 and generated $6 $2 million of revenue during the prior year fourth quarter.
Additionally, modernization expansion and optimization costs related to the two new facilities. In this segment were $1 5 million during the fourth quarter of 2023.
The balance of the difference was primarily related to lower demand for the Companys flex pipe product line due to lower drilling and completion activity levels by North American oil and gas operators and lower production and shipments of FRP takes due to normal seasonal slowing and.
<unk> execution.
Connection technologies segment revenue was $79 million, which was three 9% higher than the fourth quarter of 2022, and adjusted EBITDA was $14 $7 million, which was relatively in line with the prior year fourth quarter.
Modernization expansion and optimization costs related to the relocation of our segments North American footprint during the quarter were zero point $2 million.
Our gross profit from the increase in revenue was partially offset by increased selling general and administrative costs due to higher compensation costs to drive segment growth initiatives.
This continued operations, which consisted primarily of the business is formerly reported under the pipeline and type services segment reported revenue of $265 1 million.
An increase of 121, 5% compared to the fourth quarter of 2022, primarily resulting from the continued successful execution of pipe coating activity, including the SGP project and the Altamira Mexico facility.
Adjusted EBITDA was $104 9 million.
Which compared to adjusted EBITDA of $15 million recorded in the prior year fourth quarter, reflecting the higher revenue a more profitable pipe coating project mix and the impact of higher activity on manufacturing absorption.
It is also worth noting that these results were achieved over only two months of activity in the fourth quarter of 2023.
During the fourth quarter and prior to the completion of the sale to <unk> in November of 2023, Ppt business generated significant revenue adjusted EBITDA and cash from operating activities for the company.
The company benefited from the significant generation of cash, but consequently. This has resulted in the incurrence of related income tax and other liabilities for the PPG business, which will require settlement with generic as part of <unk>.
Normal customary working capital adjustment process.
The company expects the parties to finalize the networking capital adjustment during the second quarter of 2024, and the company currently anticipates its net cash outflows to settle the working capital adjustment will be approximately $32 million.
Turning to cash flow in the quarter cash provided by operating activities in the fourth quarter was $101 4 million, reflecting strong operational performance.
Cash generated by investing activities in the fourth quarter was $215 million, reflecting a total of $230 million in net proceeds primarily from the sale of eqt's assets offset by $15 million of capital spending on property plant and equipment.
During the fourth quarter cash used in financing activities was $78 6 million.
Including $30 million in debt repayment $6 $7 million in lease payments and $41 $9 million in share repurchases under the.
<unk> normal course issuer bid.
The company purchased approximately $2 9 million shares in the fourth quarter and maxed out the allowed share repurchases under its currently active NCI.
We intend to renew the program in June 2024 weren't allowed.
Net cash generated in the fourth quarter of 2023 was $236 $1 million.
Based on the actions completed a planned its diversified business and confidence in the outlook the company expects to generate sufficient cash flow and have continued access to its credit facilities subject to covenant limitations to fund its operations working capital requirement.
<unk> capital program, including share buybacks.
As of December 31, 2023, we had a cash balance of $334 million.
Debt of $144 million and $57 $7 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 the repayment of $291 5 million of outstanding net long term debt since the start of 2021, including $30 million paid in the fourth.
<unk>.
As of the end of the quarter the company's net debt to adjusted EBITDA ratio was negative 0.26 times.
As we continue to execute our modernization expansion and optimization activities lease liabilities are expected to increase reflecting the net effect of signing for new production facility leases, partially offset by exiting our sites in <unk>, Ontario in Anaheim, California.
With total lease liabilities growing the company is comfortable.
Operating within a net debt to adjusted EBITDA ratio of two times, reflecting the increase in lease liabilities.
This does not reflect the desire to carry more external debt.
Capital expenditures for continuing operations in the quarter were $27 $7 million, including outstanding payments to suppliers of which $24 $5 million were related to growth expenditures for continuing operations.
These were primarily related to infrastructure improvements to increase production capacity and efficiency in the composite technologies and connection technologies segment.
The company's total full year 2023, Capex spend came in at $148 4 million, which was lower than the $160 million to $180 million range previously communicated due to the timing of approximately $15 million of cash flows which rolled over at year end.
Consequently capital spending for 2024 is expected to be in the range of $90 million to $100 million.
10% to $15 million of this is expected to be maintenance capex with the balance tied to growth primarily related to the company's ongoing modernization expansion and optimization projects.
All previously announced growth initiatives remain on time and on budget.
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 market.
Since early 2020, the company has successfully divested multiple non core lower margin businesses and other assets. These efforts have generated significant cash proceeds enhance the margin profile of our continuing operations and significantly strengthened our balance sheet, while lowering organizational complexity and risk.
With the sale of our PPG business. The company no longer believes that backlog measures are useful as such backlog reporting is being discontinued.
With the strategic review process materially complete.
We look forward to focusing on the remaining core businesses, completing our north American production footprint modernization expansion and optimization program and continuing to evaluate potential strategic acquisitions and investments to grow the business.
2023, it was a year of transformation with strong execution, resulting in robust sequential and year over year growth in revenue gross profit and operating cash flow from our continuing operations.
Consolidated revenue in the year with $925 3 million seven 4% higher than the $861 8 million.
In 2022.
Adjusted EBITDA from continuing operations was $165 1 million.
A 16, 4% increase from the prior year, primarily attributed to continued healthy demand for our products.
Consolidated results for the year included nonrecurring items outside the company's normal course of business.
The year included a loss of $111 million on the sale of our PPG and sharp pipeline services businesses.
This continued operations results.
This loss reflects the comparison of the net book value of the businesses and cumulative translation adjustments at the time of the sale to the proceeds generated directly from the sale and.
In the case of PPG, a cash of approximately $82 million that was generated between signing and closing of the deal is not reflected as proceeds for the purposes of the calculation of the law.
This fact, along with the transaction costs associated with the sale or the largest factors in the last generation.
The year also included a gain on sale of land and other of $1 $7 million.
Primarily for the true up of royalty payments due on the Triton acquisition.
Additionally, the year included $27 $2 million of impairment charges, $3 9 million of net restructuring costs and a gain of $1 $9 million related to the wind down of our Canadian defined benefit plan.
Turning to cash flow in the year cash provided by operating activities was $124 $6 million, reflecting $75 8 million from continuing operations and $48 8 million from discontinued operations.
Cash provided by investing activities in the year was $109 $8 million, reflecting $23 $7 million in proceeds from the disposal of property plant and equipment at $217 5 million and proceeds from the sales of businesses throughout the year.
This was partially offset by $122 7 million of capital expenditures paid in cash and $8 $1 million purchase price paid in cash to acquire Triton storm water solutions.
During the year cash used in financing activities was $161 8 million.
Reflecting $69 million and debt repayments of $29 $5 million of lease payments and $64 $5 million in share repurchases under the company's normal course issuer bid.
Net cash generated in 2023 was $71 million.
The past year showed matter advanced further its transformation to become a more profitable less volatile business focused on the deployment and delivery of differentiated high value materials based solutions in support of industrial and critical infrastructure end markets.
With our transformation now complete we are proud to report strong financial results from our continuing operations to our stakeholders. These results include an increase of $63 $5 million in revenue and $23 $5 million and continuing operations adjusted EBITDA from businesses aligned.
Closely with our materials technology competencies and best positioned to benefit from favorable long term macroeconomic trends.
We've enhanced and strengthened our balance sheet with an additional $70 million in cash and debt reductions of $69 million.
Bringing the credit facility balance to zero, all while returning capital to shareholders through our normal course issuer bid or.
Our balance sheet is well positioned to fuel profitability expansion and accelerate M&A activity.
Now I'll turn it back to Mike for some final comments.
Thank you Tom.
Over the last three years, we have successfully executed a fundamental transformation simplifying our organization.
<unk> average margins lowering operational and financial volatility.
<unk> cash flow and concentrating on a narrow range of high growth critical infrastructure oriented businesses.
We have built a strong cash balance have returned capital to shareholders and have initiated multiple high value organic growth investments positioning the company to take full advantage of our unique technology portfolio and strong long term customer demands to deliver elevated returns over the years to come.
Normal seasonal cycles in transient market movements, we will continue to drive some variation quarter to quarter. However.
However, the underlying long term trends for each of matches primary businesses are favorable and expect it to remain so for several reasons.
Long duration, North American critical infrastructure activity remains robust and demand for our core products is expected to persist.
Moving into 2024.
Our focus remains on technology development efficient delivery of quality products careful cost management and substantial completion of our north American manufacturing modernization expansion and optimization programs.
We continue to evaluate tuck in and more substantial accretive strategically aligned acquisitions and are fully committed to continuing the return of capital to shareholders.
We remain vigilant towards the potential impacts of geopolitical events supply chain risks inflationary impacts and interest rate movements and continued to take steps designed to minimize our exposure to rising international trade friction.
The company views any potential future action by central banks to lower interest rates is favorable.
Likely to drive an increase in broad industrial and infrastructure companies.
The company's products, particularly from smaller customers and distributors.
We anticipate first quarter revenue to move slightly up sequentially.
While modernization expansion and optimization project costs also move up from the prior quarter, our site commissioning activity accelerates.
Consequently, adjusted EBITDA in Q1 is expected to move down as our composite tank business navigates its normal seasonal low points on our final quarter of limited production output.
Excluding the impact of modernization expansion and optimization project costs underlying adjusted EBITDA for continuing operations is expected to be modestly below Q4.
Typical improvements in weather and ground conditions across much of North America. In Q2 are expected to drive a substantial increase in operational activity within our composite technologies segments and we currently expect matches adjusted EBITDA in the second quarter to be similar to the same period of 2023, despite the impact of continued modernization.
<unk> expansion and optimization project costs.
We remain confident that matches full year 2020 for revenue and underlying profitability will rise by high single digit percentages when compared to 2023.
I will now turn the call over to the operator and open it up for any questions you may have to myself Tom format.
Thank you as a reminder to ask a question. Please press star one on your telephone away for your name to be announced.
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Okay.
Our first question comes from the line of David Ocampo with core Mark Your line is now open.
David Ocampo with core Mark Your line is now open please check your mute button.
Thanks for taking my questions everyone.
When I look at your commentary and you alluded to this in your prepared remarks.
Financial profitability should be up year over year and I assume that doesn't include any of the startup costs that you guys have been talking about it and it does seem like that could be around 20 or $25 million give or take a few.
But if that's the case and I strip those cost out it does imply that you guys are going to grow north of 10% in 2024.
And that's without having the capacity left from your new plants that are coming online.
Customers, giving us strong indications that give you confidence in hitting those targets.
I'm just curious how much visibility you guys have for 'twenty four.
Good morning, David.
I think your assessment of 2020 for us.
Notably consistent with ours in the right ballpark on everything you just said.
At this stage in the year, we have.
A range of visibility in terms of customer orders it depends on the business line.
But I would say those businesses that tend to have longer term visibility Arthur Xerxes, tanked, and Shaw flex wire and cable businesses and we continue to have confidence based on our customers' ordering patterns there.
Our shorter visibility tends to be in the flex pipe and DSG <unk> businesses and while.
Orders in those businesses tend to be 60 to 90 days in advance I can tell you the commentary from customers certainly gives us the confidence that we need to build production plans in support of the kind of activity levels you've described.
Gotcha and then the other one that I wanted to touch on briefly here.
M&A potential because you guys called out opportunities of meaningful scale in it I think that is a little bit of a deviation from at least what I thought you guys were looking at tuck in acquisitions exclusively.
Just curious does that change how you guys are looking at it from.
From a multiple of our IRR hurdle rate.
So what I would say is that our M&A strategy continues to evolve, which I think is a healthy thing for any organization.
As we went through 2022 2023, you are correct. We were very focused on things tuck in in nature.
As we have successfully integrated two transactions over the course of the last 12 or so months Michael.
My confidence in our ability to look at things slightly bigger.
And clearly our balance sheet has evolved as well so I think it's appropriate that we are.
Looking at acquisitions through a slightly wider aperture than perhaps we were 12 months ago.
Certainly nothing has changed in our view of what it takes to be excited about M&A opportunities or in fact any capital deployment opportunities. We continue to hold ourselves to a 20% after tax IRR return rates.
And obviously, we would assess anything of any substance against other alternative uses of that same capital so share returned to.
To our shareholders being the obvious baseline comparison.
So as we sit here today no no changes in our expectations of returns from capital deployed.
A slightly wider aperture through which we're looking at M&A.
Okay, and then last one for me the seven 8% lift in large diameter pipe.
Meaningful curious what that represents.
In terms of overall percentage for flex pipe and maybe you can give us some update on the launch of the 77 inch and eight inch products.
Yes. So we were certainly very pleased with the progress made in 2023 on the large diameter products as you recall.
That's five inch and six inch which respectively were launched in mid 'twenty, one and mid 'twenty two so still fairly early in the lifecycle of those products, but seeing very very good customer acceptance and growth of the business.
Most of that being in North America during 2023, but as I noted in the prepared remarks youll start to see an international elements of growth there as we roll through the first half of 2024.
We are a very long way from having a mature market share position in the five inch and six inch products. When we launched them we noted that.
In combination the approximately doubles the addressable market of the business and you can tell we havent yet come close to doubling the size of the revenue and EBITDA from that segment, so still lots of brokers to come there.
Seven inch and eight inch of the next obvious targets and once those are introduced we will have added.
Another 50% to our current addressable market.
I think you should expect that 2024 is not the year, where we see revenue contributions from seven inch and eight inch but a lot of work happening in the background to ensure the 25.
I think all in all we view what is a relatively flat north American oilfield activity environment as one in which we can still grow quite substantially and particularly with the large diameter and while the percentage of large diameter of flex by suddenly varies quarter to quarter.
We have now had more than one quarter, where it's represented greater than 20% of the total revenue set up that particular business.
Perfect. That's it for me and I'll hop back in the queue.
Thank you.
And our next question comes from the line of.
Monticello with ATB capital markets. Your line is now open.
Hey, good morning, everyone.
Good morning.
In terms of the <unk> costs.
Yes, the cadence of those for the year.
Hum.
Can you put some bookends on what you're expecting in terms of total cost near or has that changed materially since Q3.
It really hasn't changed at all.
Still I think most people are thinking 'twenty to 'twenty five and that's about the number we would align with so relatively evenly spread across the year.
With a weighting of competence in the early part of the year, the first half and connections in the second half.
Looking at the segments.
Okay got it so that the ramp up that you are expecting.
Is largely due to just sort of.
Improvements in the composite segment related to.
I guess primarily the.
FRP tank permitting issues subsiding and relations and capacity.
And then I guess expectations for improvement and.
In the North American part of the.
Pipe coating segment.
Concentrate segment.
And those international orders come through starting in or I guess more materially in Q2.
What do you think of it.
I think you've covered all the pertinent points for Q2, yes.
We're obviously dealing in Q1 with the normal seasonal cycle things are fairly slow on those oxy side of the business for fuel and water, which is very common this time of year.
But we are very very confident that Q2 will be a substantial step up for composite it's not just <unk>, but also flex spike as you said deliveries into North America rising despite a relatively flat north American marketplace.
<unk> already secured international shipments that will contribute a little to Q1, but much more meaningfully to Q2.
Okay got it can.
Can you talk a little bit about your expectations for 2024 regarding.
Growth with form the water solutions business.
Yeah. So obviously a business that set new annual record in 2023 set a new quarterly record in Q4 of 2023, which is rare because the ground conditions on always at their best in Q4.
So I think it's a business that we certainly expect year on year growth.
And I think as we roll through 24, we'll get into the second half of 'twenty four and into the early part of 'twenty five it starts to get to a point of materiality that we'd be more comfortable sharing more specific numbers around it but just to say I still feel very confident that that business is growing at a pace and as.
Securing customer acceptance across North America and into some international markets that.
But we still stand behind our expectation that that business rivals our fuel business in terms of its contribution to the organization and four ish years from now.
Got it.
That's helpful can you talk a little bit better I guess.
The progress in.
The strategic development of that business in terms of.
My understanding was that you go to market strategy has largely been.
Focused on your retail pure customer base.
And the growth going forward will be dependent on sort of an expansion into other industrial and commercial end markets how is that doing.
Yes, I would I would slightly.
Tweak that description what I'd say is that the business we have today.
Which has grown substantially over the last couple of years has grown with a fairly diverse customer base, including some fuel customers, but more broadly it's been small to mid sized commercial construction activities, so kind of industrial and infrastructure related.
I would say that we are still in the relatively early stages of.
Market penetration with our fuel customers. So the benefits that will come from that process are still largely to be seen.
And will be seen as we continue to roll through this year and the years to come but the team is obviously continuing to focus on a fairly broad array of customers industrial infrastructure fuel retailers et cetera, et cetera, mostly North America, but we have a position in western Europe and some other international markets.
So it's a broad strategy and.
We have existing relationships with fuel customers, which is a helpful thing, but you still have to earn the right to win their business and I would say we're in the early days of seeing that translate into the P&L impact.
Okay. Thanks for that detail and I appreciate the clarification.
And then.
I just wanted to follow up on David's question around M&A.
Okay.
I guess the.
The composition of the target.
You say youre looking at or are you just looking at larger businesses that sort of fulfill those same needs.
Yes.
Lost audio for just a second there Tim but I think I got your question.
What I would just reiterate.
We have spent now three years.
This business far more focused targeting.
The remaining businesses that have very large addressable markets, where we have technical differentiation, where we have high margins high free cash flow and the opportunity to get fundamentally bigger and more profitable. We are not going to go out and use M&A as a cost way to go backwards. So what you will see is that we are extremely strategically aligned.
There was a lot that we can do to grow our existing businesses organically and as you see we are deploying substantial capital to do exactly that there are certain scenarios and certain businesses, where we think the path to success can be accelerated through the use of M&A and we've said it before but largely that's going to be in the water.
<unk> space.
And formal materially my belief in the wire and cable space, So youre going to see us continue to focus in those two areas.
And we will not be making acquisitions of any size that make us fundamentally more complicated or lower our ability to deliver on our commitments for EBITDA margin free cash flow conversion rates and overall growth rates.
Okay.
Okay got it.
And then on that I guess.
Okay.
I guess it depends on the opportunities that youre looking at and your strategy, but are you <unk>.
<unk> I guess.
In a perfect World would you expect to see a use.
<unk> footprint for <unk>.
Acquired in 2024.
Obviously, the M&A space is one where it takes two sides of the table to to find.
<unk> that works for both so it's hard to predict but I would say personally I would be disappointed if we exit 2020 for not having a U S production footprint for sure flicks.
Okay got it and.
When you look at targets in the U S to the valuations that youre seeing today.
Do you think you can get a deal over the line they could be accretive given your current multiples you need multiple expansion.
I am confident that we can do deals that are accretive at our current multiple expansion.
Thank you I'll turn it back.
Thank you.
Our next question comes from the line of Michael <unk> with TD Securities. Your line is now open.
Can you hear me.
We don't know good morning, good morning.
Good morning. Thank.
Thank you.
First question is just about the commentary around the second quarter step up in FRP tank production.
I guess I'm just wondering if you can comment on how you see the production levels booking in Q2 versus Q1.
And is there any kind of a lag in terms of when you would realize those sales or is it pretty coincidental with the step up in production.
Yes, So I'll answer the second question first not all but the vast majority of our customers on the fuel side.
Have contractual relationships with such that we will invoice for the products at the time that we complete the manufacturing and then we may store it for them for some time at an additional charge and shipped to their location. When they are ready. So generally you should equate production activities with revenue generation.
And I would say that second quarter production activity is likely to be.
Yeah.
Not quite twice, what first quarter is but not far from it.
Alright Thats helpful. Thank you.
Second question is regarding the financial corporate and others segment.
During the fourth quarter, only a slightly negative adjusted EBITDA performance and in that area.
Can you talk about how we should expect adjusted EBITDA in that in that corporate segment to look on a quarterly basis as we move through 2024.
Yeah. So let me start with reminding everyone that Brazil is included in that because it's not a significant part of our business any longer.
Or being a segment so that is what clouds. The segment. It makes us look a little odd from time to time.
In a positive way for this quarter. So that's good news I would tell you that our probably the simplest way to think about it is our corporate cost expectations have not changed at this point so a few.
If you use those assumptions you had before.
They'll be consistent and then.
If you if.
If you assume Brazil.
Generates.
Let's call it something like three or $4 million of EBITDA per quarter, that's about what I would anticipate.
Going forward, it's going to it's a pipe coating business. So it's a little bit lumpy from time to time, so there's variability there, but that would be the expectation of building.
And is that consistent with what it produced Brasil produced in the fourth quarter or was it was at a different level in the fourth quarter.
Fourth quarter was quite robust.
Hey.
Again.
Corporate number was pretty much in line with what we've previously talked about so you you should anticipate that the difference came from Brazil being.
Double that $3 million, so around $6 million of contribution from that Brazil business in the fourth quarter.
It's a very robust fourth quarter for them.
Okay. Thanks for that and then lastly, not surprisingly when you you mentioned that total lease liabilities didn't move higher quarter over quarter.
Can you talk about how those are expected to evolve from from where they were at the end of the year as we move again through 2024.
Yes. So they are in the mid eighties right now at the end of the year I would anticipate those moving up into the low hundreds by midyear and staying around that point so consider that.
Maybe 100 Twentyish million.
Not going above that number.
And that's why we that's why we're comfortable moving the net debt to adjusted EBITDA leverage ratio, which does not indicate an and.
Opportunity to increase external debt, it's simply a mathematical calculation due to the leases that we've entered into for our modernization expansion and optimization program.
Got it.
I will leave it there thank you.
Okay.
Thank you. Our next question comes from the line of Zachary <unk> with National Bank Financial Your line is now open.
Good morning, everyone persons named calling in for Zach.
Thank you for taking my questions just wondering.
With having some issues on the call can you hear me all right.
Yes, Sir good morning, yes, good morning.
Okay, perfect. So you've dealt into some great color.
Regarding Q1 and Q2 four.
Hey.
Can you give some more color and dive into the.
The magnitude of step up expected in Q2 regarding your connection.
Segment, especially because of the full year outlook Hasnt changed.
Yes, the connection techno technology segments are very interesting.
Situation.
They historically have had a fairly substantial proportion of their business tied to sales of product to Canadian distributors and as we've discussed at length that particular customer segment.
Ben perhaps hardest hit by the elevation of interest rates and the rising cost of capital. So they work very hard to lower their inventory balances starting mid 'twenty three and.
Well, while ordering patterns have improved modestly towards year end I think they are in a kind of a sustainment scenario and likely to stay there for most of 2024 and as we see a meaningful move down in interest rates. So what the segment has done is take the incremental capacity that became available through.
That change in customer behavior and direct it.
<unk> an interesting segment that we've always struggled to serve because we just couldnt get enough capacity and get low enough lead times to be competitive now we can.
So what you saw is instead of.
Fairly quiet Q4, which is the normal cycle Q4 was very similar to Q3 and it's because of the continued success of our team in capturing work in particularly the U S infrastructure wire and cable marketplace.
We continue to see them have success, there and despite the fact that we're not going to see a step up in distributor orders in Q1, we've set the expectation that the segment will rise quite meaningfully from Q4 and it is primarily driven by continued success in <unk>.
<unk> share capture in the U S infrastructure market, so utilities and other types of infrastructure.
We expect to see that continue so.
Certainly the movement from Q1 to Q2 will not be as robust as it is from Q4 to Q1.
But it generally looks like it's going to trend upwards and I think what we still expect for the year with connections is that Q4 of 24 is likely to be their slowest quarter. It almost always is the slowest quarter for the business.
But I think we'll see less seasonality this year than we do in most.
And as we look at it I think it is a business where.
Not just the wire and cable side of it but the heat shrink tubing business can actually protection products are continuing to gain traction, particularly in north American infrastructure end markets. So a business that I think can perform very well in 'twenty for the one on unfavorable item, there and I would remind people.
We talked at length that we had a fairly substantial EBITDA contribution in the first half of 'twenty three that came from.
Let's say an unusually large aerospace order, we're not going to see that order repeats in 2024. So for this segment to deliver something approaching 2023 levels of performance. Despite the lack of that order I think is really a testament to the team and the success that we're having in the infrastructure.
Markets in North America.
Thank you provided great color.
My next question is regarding the Anaheim crusher so.
<unk> was this closure part of the original plan when composite investments were announced.
Further.
The company still has a presence in Bakersfield, California are there any implications there.
So yes.
Yes. This was part of our original plan and as I'm sure. You can understand why we were comfortable communicating the intention to put new facilities on the ground publicly.
The thing about exiting a facility before we got a chance to engage with the local workforce was not appropriate. So unfortunately, we couldnt signal. This ahead of time other than to indicate that we were engaged in optimization activities for our manufacturing footprint.
We do not as an organization have a physical presence in California beyond the Anaheim sites. So you may be looking at a slightly aged.
Graphics listing I believe we have a bakersfield facility in one of our pipeline inspection businesses that we sold in either 'twenty, one or 'twenty, two depending on which business.
Thank you.
Tom.
Our next question.
Yeah.
Go ahead Mike.
One second.
Sorry, our next question comes from the line of Ian Gillies with Stifel. Your line is now open.
Good morning, everyone. Good morning, good morning.
Okay.
Going on the California plant closure.
Are you still able to service that market from other locations.
Just because I would presume that California is going to be a reasonably important geography given.
What's going on from a population population size standpoint, and the like.
So short answer is yes, we can we the product that we're able to produce across our network is in finding suitable for the Canadian for the California market.
I would tell you that we are able to produce those products at lower costs EBIT, including some incremental shipping expense.
From outside California, then we were able to produce inside California.
Yeah.
Okay.
With respect to the flex pipe Division I mean, if you had your druthers would you rather sell a dollar of similar pipe into the north American market or into the international market.
So yes.
Okay.
Yeah, the margin profile tends to be of the <unk> better in North America that internationally.
But the international orders tend to be secured with greater.
And greater scale, so they bring enormous benefit to the manufacturing facility and our ability to plan and be efficient under that works. So.
Honestly I think.
You put a gun to my head I, probably rather sell it into the U S market, but it's a very close call in and we are now in a position where we will have the ability to aggressively attack the north American and international markets, which is really the right answer.
Yes, no that's fair enough and then last one from me with respect to the tanks business.
Talked about securing customer commitments into the second quarter, and perhaps even looking into the third quarter at this point.
Our customers interested or have you secured any commitments for any of the new product that and that you expect to come out of the South Carolina facility or is it is it still too early to be thinking about that.
So many of our customers just asked us to deliver a product to a certain location within a certain timeframe and have very little concern about where it is made so what I'd tell you is that we have orders in the backlog now that I am.
Really confident we'll be actually produced in South Carolina.
But we are not actively out there.
Promoting south Carolina as the source of production that will come once we have completed commissioning of the equipment in that facility, which we're not far from now.
But we will see production come out of South Carolina during the third quarter.
Okay. That's helpful and sorry, I know were getting late but I'm going to squeeze one last one in here.
Obviously, the NTIA has done.
You want to use in all of the above approach. So maybe just want to address where your mind frame is at with respect to a substantial issuer bid given.
The strength of the balance sheet.
Yes, I think Mike did a good job of saying that we look at every investment opportunity against an asset so what what does one look like against the other and what is the best use of capital for our investors not only in the short term, but in the long term.
I would tell you that that analysis at least today tells us that we still believe we have better uses of capital growing the business organically and Inorganically.
So I would I would point you to our intent to renew the <unk>.
In June when we have the opportunity.
But unlikely we approach an <unk> type of.
Type of transaction.
Okay.
Thanks, very much I appreciate all the detail.
Thank you.
Our next question is a follow up from Nathan <unk> with National Bank Financial Your line is now open.
Okay.
And then just following up on <unk>.
Where you are.
M&A process, so the tone on acquisition service.
<unk> more aggressive, especially now and matching technologies can you share any color on where you are in your search anything regarding diligence discussions exclusivity things of that nature.
I can't be that explicit Nathan what I can say is that we've been building a very.
Strategically focus funnel of M&A opportunities for three years.
We've been cultivating relationships, particularly with private and family owners and obviously, we've been working through the usual networks with investment banks to ensure that we're in deal flow that might be appealing to us.
Just tell you that there are opportunities that are either in the market now or do we believe will come to market during 2024.
Could be really interesting.
But that's probably as much as I can say.
Thank you very much I'll turn it over.
Yes.
Thank you.
Our next question comes from the line of Arthur <unk> with RBC. Your line is now open.
Okay.
Hey, good morning, good morning.
Just wanted to touch base on the.
The automotive end market specifically.
Just curious what youre seeing.
Within connection technologies there.
And kind of how that's trending maybe in 2024.
Yes. So the first thing I'd say is that we saw a modest but noticeable effect from the U S auto workers strike impacts in Q4.
And as we rolled into the first quarter, we effectively seen buying patterns from our U S customers returned to pre strike levels. So we consider that an hour an issue of the past.
I think most pundits are suggesting the total global automotive production in 'twenty four is likely to be quite similar to 'twenty three.
That's certainly what we have assumed is we've thoughtfully constructed our own plans.
But as we talked about multiple times over the last several years, we continue to see customers generally put more electronic content into each vehicle, which means they are buying incrementally more of a product per vehicle and we think that trend will continue.
We've also talked about the fact that while the type and quantity of components that we sell into an electric vehicle or different than an internal combustion engine vehicle. They generally generate a little more revenue in a little more margin per unit. So while total sales of the evs are starting to flatten a little.
We still expect a higher percentage of total vehicles produced in 2004 to Evs and then it was in 2023, which is generally good for us.
Yes.
Got it.
Just wanted to ask one follow up question on your current footprint.
Just given the.
Facility closure in California.
Are you evaluating.
Any other aspects of your current footprint or are you comfortable.
With where you stand today.
I guess with.
With respect to the organic growth targets you have out there specifically.
I think good organizations are always evaluating their footprint and looking for ways to be as efficient as the cost will be Ken.
So I would say, we will always be evaluating.
So it would certainly not be prudent for me to say that will never be another change in our footprint.
What I can tell you is that.
Any changes that we may choose to make here would be very thoughtfully considered.
And we will absolutely not impact the financial returns associated with the investments that we've made.
So all my questions. Thank you. Thank you.
Thank you I'm showing no further questions at this time I'd like to hand, the call back over to Mike <unk> for closing remarks.
So thank you for joining us this morning and for your interest in the company and we certainly appreciate it and we look forward to talking with you again next quarter and have a great day everybody.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
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Good day, and thank you for standby and welcome to the matter fourth 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.
Ask a question during this session you will need to press star one on your telephone.
Then here an automated message revising your hand this phrase.
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 Mega Mccaghren, Vice President external communications and ESG. Please go ahead.
Good morning Safari 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 they complete Jeff does matter statement on forward looking information is included.
In section four.
The fourth quarter and full year 2023 earnings press release in the MD&A that is available on SEDAR and on the call.
Company's web site.
For those joining via webcast you may follow the visual presentation that accompanies this call I will now turn it over to Matt as President and CEO, Mike <unk>.
Good morning, and thank you for attending our fourth quarter conference call today, Megan and I are joined by our senior Vice President of Finance and CFO Tom Holloway.
In 2023, Macs as continuing operations delivered year on year, adjusted EBITDA growth of over 16%.
<unk> adjusted EBITDA margins by 140 basis points compared to 2022 and set new record levels of annual financial performance in both our composite and connection technology segments.
These robust financial outcomes were accomplished while also executing a fundamental business transformation rebranding our company completing our strategic review process and building a year end cash balance of over $330 million.
Our technology investments continued to drive growth.
With our <unk> water large diameter flex pipe and Shaw flex nuclear product lines, each reaching new heights.
During 2023, we also repurchased nearly four 5 million shares under our normal course, issuer bid and deployed over $75 million of organic growth capital into our manufacturing modernization expansion and optimization program with all four of our new North American production facilities remaining on budget.
And on schedule to commence production between mid 2024 and early 2025.
We exited the year as a tightly focused critical infrastructure products provide us with a balance sheet strength to continue investing in organic opportunities and share repurchases, while also considering meaningful acquisitions to accelerate value creation for all stakeholders.
Over these past 12 months the employees that matter have achieved a long list of extraordinary outcomes and have done so while setting a new safety performance record and further lowering our greenhouse gas emissions I could not be prouder of this organization and the many talented creative and committed people who work here.
Turning to the fourth quarter. The company delivered robust total operating results continued to progress significant organic growth program and accelerated share repurchase activity.
Total consolidated adjusted EBITDA was $137 million during the quarter with adjusted EBITDA margins of 29% a substantial increase from the prior year and the prior quarter.
Our continuing operations, which exclude the business components now sold to <unk> and reported as discontinued operations.
Delivered adjusted EBITDA of $33 million in the fourth quarter, a significant accomplishment given normal seasonal slowing and the previously anticipated unfavorable market dynamics, which impacted our composite technologies segment towards year end.
Continuing operations adjusted EBITDA margins exceeded 15% in the quarter, a testament to the organization's ongoing commitments to tight cost control and efficiency improvement.
During the fourth quarter, we sold the majority of our pipe coating business reported as discontinued operations to generics.
Prior to its sale the business delivered significant revenue adjusted EBITDA and cash flow, primarily as a result of stronger than previously expected execution and margins on the southeast gateway pipeline projects.
Massive benefited from this significant generation of cash, but we will have some working capital adjustment liability as a consequence.
We anticipate the combination of pre closing cash generation the contractual purchase price net of transaction fees and expenses and the currently estimated working capital adjustments will deliver total net cash proceeds to matter of nearly $280 million tomo.
Tom will share additional details on this transaction later.
The hard work of recent years to strengthen our balance sheet and our cash generation profile positions us to continue pursuing a flexible but disciplined capital allocation strategy.
Balancing share buybacks with investments in high margin growth opportunities to generate elevated returns in the coming years.
During Q4, the company continued its substantial growth investments within its composite in connection technologies segments.
These investments, including four new operating.
Are expected to enhance production capacity efficiency and proximity to key markets provide added footprint optimization flexibility.
And lower risk by providing increased production redundancy.
They are expected to accelerate mid and long term revenue growth elevate margin profiles and deliver attractive overall returns.
We remain alert to strategically aligned accretive acquisition opportunities, which have the potential to accelerate our organic growth trajectory.
With our strategic review completed and a substantial cash balance accomplished.
We now have the capacity to consider both tuck in and more meaningful acquisition targets.
Finally, we continue to believe the intrinsic value of our business represents an excellent investment opportunity and consequently, the company further increase its stock repurchase activity under its normal course issuer bid during the fourth quarter.
Looking at each of our segments.
Composite technologies delivered new annual records for revenue and adjusted EBITDA in 2023.
Xerxes water product sales is setting a new high watermark and sales of Xerxes fuel storage tanks, rising 7% compared to 2022. Despite the previously discussed customer limiting delay challenges.
In addition share gains in our flex <unk> business enabled revenue expansion despite year over year contraction in North American oilfield activity.
Of particular note sales of our larger diameter flex pipe products rose nearly 70% when compared to 2022.
The composite technologies team has demonstrated agility creativity and a strong commitment to customer service over the last 12 months, while successfully navigating some particularly challenging market conditions late in the year.
Deeply appreciate their efforts.
Despite a new quarterly record for Xerxes water product sales. These previously discussed lithia market conditions, including further reduced north American oilfield activity normal seasonal slowing of underground fuel storage tank installation activity and the first of two quarters, where underground fuel storage tank production.
Was curtailed to lower finished goods inventory balances.
Led to a sequentially lower fourth quarter revenue and adjusted EBITDA.
Entering 2024 market conditions have evolved largely as expected.
North American oilfield drilling activity has remained in line with the prior quarter a trend. We believe is likely to continue for at least the first half of the year in the face of flat oil price lower natural gas prices and substantial customer consolidation.
However earlier customer ordering patterns continue to indicate ongoing flex five share gains, particularly in larger diameter products with normal seasonal increases in U S completion activity expected to drive a substantial rise in flex fight revenue moving into the second quarter.
In addition, recently captured international orders, including large diameter product orders will modestly enhance first quarter revenue before becoming more impactful in Q2 and beyond.
In our <unk> business ground conditions during the first quarter are typically the least favorable for fuel and water system installations.
And so far 2024 has followed this historic past.
In parallel our fuel customer base has been working hard since early 2023 to modify that permitting apogees to secure a more consistent supply of approved permits and are communicating a greater degree of confidence that 2020 for convenient store construction and renewal projects will move forward as planned.
Consequently, the first quarter of 2024 do you expect it to be the final.
In which the business tempus production activity.
Okay.
Given the continued rise of U S Interstate commerce and truck traffic.
And the lower applicability of electrification to this market sector.
Our fuel customers continue to display a rising focus on expanding their Interstate travel center for truck stop networks.
We are generally seeing older smaller convenient stores being retired and replaced by larger convenience stores with 20% to 25% or more of these the travel centers.
For context of.
Our travel center will typically require seven or more newsweek's. These fuel storage tanks, often of our largest configurations.
Whereas our non travel center will typically require three to four times.
Consequently, while total active convenient store count is projected to remain approximately flat <unk>.
Demand for premium Xerxes products continues to rise and is the primary driver behind our investment to upgrade expand and optimize the <unk> manufacturing network.
With a strong outlook for the second quarter and beyond.
This segment has been intensely focused on advancing its manufacturing modernization expansion and optimization strategy.
At year end, its new flex site production sites in Rockwall, Texas and user exceeds production site in <unk> South Carolina.
And on budget and scheduled for first production around mid year.
Commissioning of the Rockwell science will lower manufacturing concentration risk in our flex by business.
Alleviate rising capacity challenges in our Calgary facility and enable substantially more efficient production of larger diameter flex byproducts.
In addition, its location will significantly reduce freight costs associated with products sold into West, Texas and two international destinations.
The blind to ZIP Sea site will be the first new tank production facility commissioned in 35 years.
Incorporating modern manufacturing processes to significantly enhance efficiency and configured to optimize output on logistics, which continue to rise as a proportion of total demand.
It's large diameter production capacity will be approximately four times that of our recent shuffled Anaheim site.
And its impending addition to the xerxes footprint with the planned trigger for the company to exit Anaheim.
Location, which was among the oldest in our network and was exposed to the particular risk factors associated with the state of California.
The shutdown of Anaheim is expected to be completed by yearend and anticipated to yield at least $2 $5 million of annualized fixed cost savings once completed.
Exiting Anaheim does not alter our previously shared revenue growth potential and related returns expectations tied to the new composite technologies production sites.
The onetime costs associated with ongoing actions commissioned two new sites and exit Anaheim will be elevated during the first two quarters of 2024 before moving down significantly in the second half of the year.
In combination these factors lead us to expect a modest sequential decline in segment adjusted EBITDA during the first quarter before rising significantly in the second quarter.
Turning to connection technologies the segment delivered new annual records for revenue and adjusted EBITDA During 2023.
With sales of harsh environment wire cable and heat shrink tubing into infrastructure applications rising substantially compared to the prior year.
This outcome.
While running at near full capacity in our Toronto wire and cable production sites is it.
Testament to the creativity and teamwork of the connection technology segments employees.
During Q4, the connection technology segment reported revenue and adjusted EBITDA slightly lower sequentially, but modestly above the prior year period as expected.
Within the quarter, we observed continued strong demand for the segments products and North American infrastructure markets, which largely offset a modest impact from U S automotive labor disruption and ongoing interest rate driven slowness in the Canadian distribution Center.
Reduced Canadian wire and cable distributor activity throughout the second half of 2023 has enabled the segment to redirect capacity and capture incremental share in North American utility markets, particularly in the U S. A trend that continued in the fourth quarter and we believe is sustainable moving forward.
As anticipated, we did not see meaningful inventory destocking by wire and cable distributors that would typically occur at year end and do not expect to see the seasonal restocking that would typically occur in the first quarter.
Despite this the company expects connection technologies revenue in the first quarter to move upwards and similar to the levels seen in Q1 of 2023 before moving further upwards in the second quarter as continued demand growth and share gain in the North American infrastructure market compounds have returned to pre strike levels of U S automotive.
Production activity.
The segment continues to execute the relocation expansion and modernization of its north American production activities into two new swaps with its own, Ontario, and Fairfield, Ohio facilities progressing on time and on budget.
First production from both science is expected during the second half of 2024 with final site completion occurring in the first half of 2025.
Enabling connection technologies to maintain and accelerate its north American growth trajectory.
Overall, we maintain a favorable view of the long term electrification communication and transportation trends, which impact this segment and will continue to invest in the development of new technologies and to improve our manufacturing capacity elevates, our production efficiency and lower lead times.
We also continue to evaluate accretive acquisition opportunities to further expand our product offering and geographic presence.
Lastly, our discontinued operations, which were sold at the end of November.
Over $100 million and adjusted EBITDA with an adjusted EBITDA margin of almost 40% in Q4, driven by very strong operational execution, particularly on the South Gateway pipeline project.
Pipe coating employees performed at an extraordinary level throughout 2023, particularly given the added distraction of a sale process.