Q1 2024 Mattr Corp Earnings Call
Yeah.
Operator: Good day, and thank you for standing by. Welcome to MATTERS' first quarter 2024 results 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'll need to press star 1 1 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Meghan MacEachern, Vice President, External Communications and ESG.
Speaker Change: Good day and thank you for standing by welcome to matters first quarter 2024 results conference call.
Speaker Change: At this time all participants are in a listen only mode.
Speaker Change: The speaker's presentation, there will be a question and answer session.
Speaker Change: To ask a question during the session you will need to press star one one on your telephone.
Speaker Change: You will then hear an automated message advising your hand is raised.
Speaker Change: Withdraw your question. Please press star one again.
Speaker Change: Please be advised that today's conference is being recorded.
Speaker Change: I would now like to hand, the conference over to Megan to checkered Vice President external communications and E. S. G.
Megan: Please go ahead.
Meghan MacEachern: 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 MATTER's statement on forward-looking information is included in section 4.0 of the first quarter 2024 earnings press release in the MD&A that's available on CDAR plus and on the company's website at matter.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 Reeves.
Megan: 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 matter statement on forward looking information is included in section four Plano.
Megan: One of the first quarter 2024 earnings press release in the MD&A, that's available on SEDAR and on the company's website at night or Dot com.
Megan: 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.
Michael E. Reeves: Good morning, and thank you for attending our first quarter conference call today. Megan and I are joined by our senior vice president of finance and CFO, Tom Holloway.
Mike Rencheck: Good morning, and thank you for attending our first quarter conference call.
Mike Rencheck: Today, Megan and I are joined by our senior Vice President of Finance and CFO Tom Holloway.
Michael E. Reeves: During the first quarter of 2024, MATA's consolidated results included $224 million of revenue, $30 million of adjusted EBITDA, and adjusted earnings per share of $0.16. With our teams around the globe working efficiently to navigate normal seasonal slowness while preparing for an expected rise in second and third quarter activity. Customer buying patterns were largely aligned with expectations across all business lines, and new order capture rates during the quarter continue to support our belief that financial performance will improve in Q2 and again in Q3, with full year revenue and underlying profitability exceeding the levels delivered in 2020.
Speaker Change: During the first quarter of 2024 matters consolidated results included $224 million of revenue $30 million of adjusted EBITDA and adjusted earnings per share of <unk> 16.
Speaker Change: With our teams around the globe working efficiently to navigate normal seasonal slowness, while preparing for an expected rise in second and third quarter activity.
Speaker Change: Customer buying patterns were largely aligned with expectations across all business lines and new order capture rates during the quarter continue to support our belief that financial performance will elevate in Q2 and again in Q3 with full year revenue and underlying profitability exceeding the levels delivered in 2023.
Michael E. Reeves: Our Manufacturing Modernization, Expansion, and Optimization, or MEO, program has made considerable progress since year end, 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.
Speaker Change: Our manufacturing modernization expansion and optimization or <unk> program has made considerable progress since year end 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.
Michael E. Reeves: These investments are expected to enhance production capacity, efficiency, and proximity to key markets, provide added footprint optimization flexibility and lower risk by strategically establishing U.S. domestic manufacturing capabilities while providing increased production redundancy. Additionally, they are expected to accelerate mid and long-term revenue growth, elevate margin profiles, and deliver attractive overall returns. 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.
Speaker Change: Yeah.
Speaker Change: These investments are expected to enhance production capacity efficiency and proximity to key markets provide added footprint optimization flexibility and lower risk by strategically establishing U S domestic manufacturing capabilities, while providing increased production redundancy.
Speaker Change: They are expected to accelerate mid and long term revenue growth elevate margin profiles and deliver attractive overall returns.
Speaker Change: The hard work of recent years to strengthen our balance sheet and our cash generation profile.
Speaker Change: <unk> us to continue pursuing a flexible but disciplined capital allocation strategy.
Michael E. Reeves: In addition to completing our 2024 Organic Growth Investment Initiatives, we remain alert to strategically aligned accretive acquisition opportunities which have the potential to further accelerate our growth trajectory. Finally, we continue to believe the intrinsic value of our business represents an excellent investment opportunity and consequently anticipate renewing our normal course issuer bid late in Q2 when regulatory rules permit.
Speaker Change: In addition to completing our 2020 for organic growth investment initiatives, we remain alert to strategically aligned accretive acquisition opportunities, which have the potential to further accelerate our growth trajectory.
Speaker Change: Finally, we continue to believe the intrinsic value of our business represents an excellent investment opportunity and consequently anticipate renewing our normal course issuer bid late in Q2, when regulatory rules permits.
Michael E. Reeves: Looking at each of our segments, in Q1, composite technologies delivered modestly higher sequential revenue as growth in North American and international flex pipe sales was partially offset by seasonal declines in North American Xerxes fuel and water products. Within the FlexPipe business, continued share gains in the US and Canadian onshore markets, primarily driven by large diameter product adoption, drove first quarter North American revenue to grow sequentially by nearly 10%, significantly outpacing total North American onshore rig count, which rose approximately 2% in the same period. In addition, international FlexBike revenue during the first quarter alone was greater than 50% of full year 2023 international sales.
Speaker Change: Looking at each of our segments in Q1 composite technologies delivered modestly higher sequential revenue as growth in North American and international Flex pipe sales were partially offset by seasonal declines in north American Xerxes fuel and water product sales.
Speaker Change: Within the flex pipe business continued share gain in the U S and Canadian onshore markets, primarily driven by large diameter product adoption.
Speaker Change: Drove first quarter, North American revenue to grow sequentially by nearly 10% significantly outpacing total north American onshore rig count, which rose approximately 2% in the same period.
Speaker Change: In addition international Flex might revenue during the first quarter alone was greater than 50% of full year 2023 International sales.
Michael E. Reeves: Rising significantly versus the prior quarter as the company began to deliver against the orders secured and announced last December. As previously discussed, freight costs associated with the movement of larger diameter products from our Calgary production site into U.S. and international markets are substantial and weigh on margins during the year. This is one of several drivers for the ongoing investment to establish a second manufacturing facility in Texas, which remains on schedule to commence production around mid-year and is expected to yield measurable freight cost reductions as its output volumes rise during the second half of 2024.
Rising significantly versus the prior quarter as the company began to deliver against the orders secured in announced last December.
Speaker Change: As previously discussed freight costs associated with the movement of larger diameter products from our Calgary production site into U S and international markets are substantial and weighed on margins during the quarter.
Speaker Change: This is one of several drivers for the ongoing investment to establish a second manufacturing facility in Texas, which remains on schedule to commence production around mid year and is expected to yield measurable freight cost reductions as its output volumes rise during the second half of 2024.
Michael E. Reeves: Within the Xerxes business, we observed a more typical and pronounced degree of seasonal slowness during Q1, after several years where post-COVID supply chain challenges had extended lead times, driven changes in customer buying patterns, and reduced the observed impact of this seasonal cycle. As expected, customers across much of North America limited receipt of Xerxes fuel and water products as they faced ground and weather conditions unfavorable to construction and installation activities
Speaker Change: Within the <unk> business, we observed a more typical and pronounced degree of seasonal slowness. During Q1 after several years, where post COVID-19 supply chain challenges had extended lead times driven changes in customer buying patterns and reduce the observed impact of this seasonal cycle.
Speaker Change: As expected customers across much of North America limited receipt of <unk> fuel and water products as they faced ground and weather conditions unfavorable to construction and installation activity.
Michael E. Reeves: The timing of specific projects and customer orders meant the mix of tanks invoiced during Q1 was more heavily weighted than normal towards smaller and less complex units, which unfavorably impacted margins. However, we do not believe this is a longer-term trend, and our current water backlog supports our expectation that a more normal mix of tank sales will likely prevail for the remaining quarters of 2024. As previously communicated, the Xerxes business slowed production in the fourth quarter of 2023 and the first quarter of 2024 to carefully manage finished tank inventory levels.
Speaker Change: The timing of specific projects and customer orders and the mix of tanks Invoiced. During Q1 was more heavily weighted than normal towards smaller and less complex units, which unfavorably impacted margins we.
Speaker Change: We do not believe this is a longer term trend and current order backlog supports our expectation that a more normal mix of tank sales will likely prevail for the remaining quarters of 2024.
Speaker Change: As previously communicated the Xerxes business slowed production in the fourth quarter of 2023, and the first quarter of 2024 to carefully manage finished tank inventory levels.
Michael E. Reeves: I can confirm that the anticipated ramp-up in production entering Q2 has occurred, but our first quarter results were impacted by lower absorption of fixed plant costs as a result of the actions taken. In combination, and as expected, these factors led to Xerces revenue moving sequentially lower with accompanying margin compromise.
Speaker Change: I can confirm that the anticipated ramp back up in production entering Q2 has occurred but our first quarter results were impacted by lower absorption of fixed costs as a result of the actions taken.
Speaker Change: In combination and as expected. These factors led to <unk> revenue moving sequentially lower with accompanying margin compression.
Michael E. Reeves: Looking forward, the composite segment is expected to deliver substantially stronger sequential results in Q2 and also in Q3, as Xerces production and shipments of liquid fuel and water products increase in response to expected seasonal demand expansion. Additionally, with virtually all customers continuing to indicate that they have in hand the permits necessary to support their 2024 site construction plan. As already noted, we also expect a return to more normal tank size and complexity distribution in the second quarter and beyond.
Speaker Change: Looking forward. The composite segment is expected to deliver substantially stronger sequential results in Q2 and also in Q3 as <unk> production and shipments of liquid fuel and water products elevate in response to expected seasonal demand expansion with virtually all customers continuing to indicate that they have in hand.
Speaker Change: And the permits necessary to support a 2020 for site construction plans.
Speaker Change: As already noted we also expect to return to more normal tank size and complexity distribution in the second quarter and beyond.
Michael E. Reeves: In addition, domestic sales of FlexPipe are anticipated to rise further in the second quarter, driven by the timing of specific US projects and continued new customer onboarding, while international deliveries remain strong. A number of incremental FlexPipe International orders originally anticipated to be delivered during Q2 now seem more likely to occur in Q3. Consequently, instead of a revenue peak in Q2, we believe FlexBike will deliver similar results in the next two quarters, both healthfully above Q1. The one-time costs associated with commissioning new sites under the segment's MEO program will be elevated during the second quarter before lowering to a nominal level in the second half of the year.
Speaker Change: In addition, domestic sales of flex by far are anticipated to rise further in the second quarter driven by the timing of specific U S projects and continued new customer Onboarding, while international deliveries remained strong.
Speaker Change: A number of incremental flex five international orders originally anticipated to be delivered during Q2 now seem more likely to occur in Q3.
Speaker Change: Consequently, instead of a revenue peak in Q2, we believe flex fight will deliver similar results in the next two quarters, both healthily above Q1.
Speaker Change: The onetime costs associated with commissioning new sites under the segments <unk> program will be elevated during the second quarter before lowering to a nominal level in the second half of the year.
Michael E. Reeves: In combination, these factors lead us to expect segment-adjusted EBITDA to rise significantly in the second quarter before moving further upwards in the third. The last 12 months have been challenging for the Xerces business, as our convenience store customers navigated permit issuance delays, which impacted the quantity of new store construction projects throughout much of 2023. As previously noted, while the underlying inefficiencies within the permitting process persist.
Speaker Change: In combination these factors lead us to expect segment adjusted EBITDA to rise significantly in the second quarter before moving further upwards in the third quarter.
Speaker Change: The last 12 months have been challenging for the <unk> business as a convenience store customers navigated permit issuance delays, which impacted the quantity of new store construction projects throughout much of 2023.
Speaker Change: As previously noted while the underlying inefficiencies within the permitting process persist customer adaptation of application quantities and timelines means we now expect and are so far seeing a return to more normal patterns of convenience store construction activity in 2024.
Michael E. Reeves: Customer adaptation of application quantities and timelines means we now expect and are so far seeing a return to more normal patterns of convenience store construction activity in 2020. Several of our customers have publicly highlighted the increases in their projected construction activity this year, and in some cases for the next several years, which further cements our confidence that Xerxes will deliver year-over-year growth in 2024 and beyond. While taking action to mitigate the temporary slowing of tank demand, we have also used this last year to invest in our business, enhancing production equipment at several existing sites, exiting our aging Anaheim location, and nearing the completion of our first new production facility in more than three decades.
Speaker Change: Several of our customers have publicly highlighted the increases in that projected construction activity. This year and in some cases for the next several years, which further cements our confidence that <unk> will deliver year over year growth in 2024 and beyond.
Speaker Change: While taking action to mitigate the temporary slowing of tank demand. We've also used this last year to invest in our business enhancing production equipment in several existing sites exiting our aging Anaheim location and nearing the completion of our first new production facility in more than three decades.
Michael E. Reeves: Our Blythewood, South Carolina site is expected to commence production around mid-year and is a state-of-the-art composite tank manufacturing facility, incorporating automation and a layout optimized for large, complex tanks to enable significant production efficiency gains which are expected to enhance overall business margins over time.
Speaker Change: Our Blythe with South Carolina site is expected to commence production around mid year and as a state of the art composite tank manufacturing facility, incorporating automation and to lay out optimized for large complex tanks to enable significant production efficiency gains, which are expected to enhance overall business margins over time.
Michael E. Reeves: I spoke last quarter about the unique and favorable tank demand profile tied to interstate travel center or truck stop site construction, which is rising at an accelerating pace. In addition, the added capacity for complex, larger tanks that our South Carolina location will provide is particularly relevant to the emerging and growing demand tied to data center construction. As noted in several prominent publications recently, the volume of new data center construction in North America is substantial and rising.
Speaker Change: I spoke last quarter about the unique and favorable tank demand profile tied to Interstate travel center or truck stop site construction, which is rising at an accelerating pace.
In addition, the added capacity for complex larger tanks that are South Carolina location will provide is particularly relevant to the emerging and growing demand tied to data center construction.
Speaker Change: As noted in several prominent publications recently, the volume of new datacenter construction in North America is substantial and rising driven primarily by accelerating demand for artificial intelligence capabilities and cloud storage solutions.
Michael E. Reeves: This growth is primarily driven by accelerating demand for artificial intelligence capabilities and cloud storage solutions. While typically served by grid electrical power, virtually every data center also incorporates liquid fuel generator backup power and substantial underground or surface fuel tank batteries to ensure uninterrupted operation, even in the face of extended grid disruption. A single data center utilizing underground storage will require between 8 and 15 very large composite fuel tanks. In addition, many data centers will require an incremental 5 to 10 large tanks to store water and other fire protection system fluids.
Speaker Change: While typically served by grid electrical power virtually every data center also incorporates liquid fueled generator backup power solutions and substantial underground ore surface fuel tank batteries to ensure uninterrupted operation even in the face of extended grid disruption.
Speaker Change: A single data center utilizing underground storage will require between eight and 15 very large composite fuel tanks.
Speaker Change: In addition, many datacenters will require an incremental five to 10 large tanks to store water and other fire protection system fluids.
Michael E. Reeves: In combination, this drives the total potential Xerxes tank demand from a single data center construction project to two to five times the demand from a single new fuel station. While not yet a material component of Xerxes revenue, we believe the growing data center construction market will provide an added source of revenue and margin expansion for our tank business during the year. Turning to connection technologies, as expected, the segment reported higher sequential revenue and adjusted EBITDA during Q1. This was despite the non-recurrence of a large aerospace order, which contributed materially to the first quarter of 2023.
Speaker Change: In combination this drives the total potential xerxes tank demand from a single data center construction project.
Speaker Change: To be two to five times the demand from a single new fuel station site.
Speaker Change: While not yet a material component of <unk> revenue, we believe the growing data center construction market, who will provide an added source of revenue and margin expansion for our tank business in the years to come.
Speaker Change: Turning to connection technologies as expected the segment reported higher sequential revenue and adjusted EBITDA during Q1.
Speaker Change: Despite the non recurrence of a large aerospace order, which contributed materially to the first quarter of 2023.
Michael E. Reeves: This year's first quarter results were only slightly below the prior year period, with strong cost control across the segment, continued North American utility demand in the shoreflex business, and improving margins in the DSG canoosa business, yielding segment-adjusted EBITDA margins above 19%. During the quarter, we observed continued strong demand across the segment's portfolio in the North American infrastructure and industrial market. And for DSG Canusa's heat shrink and cold applied products in the automotive sector across all regions.
Speaker Change: This year's first quarter results were only slightly below the prior year period with strong cost control across the segment continued north American utility demand in the short flex business and improving margins in the DSG Coosa business, yielding segment adjusted EBITDA margins above 19%.
Speaker Change: Within the quarter, we observed continued strong demand across the segments portfolio in the North American infrastructure, and industrial markets and for DSG, <unk> heat shrink and cold applied products in the automotive sector across all regions.
Michael E. Reeves: While U.S. battery electric vehicle sales have recently shown signs of slowing, we currently believe the diverse and differentiated DSG Canoosa portfolio, which serves all engines, is likely to continue experiencing healthy demand from automotive customers, and consequently, MATA currently does not anticipate a measurable near-term impact from lower U.S. EV adoption. Canadian wire and cable distributor customers continue to tightly manage inventories and limit purchases of stock products, a pattern we expect to prevail until the Bank of Canada is able to provide greater certainty regarding interest rates.
Speaker Change: While U S battery electric vehicle sales have recently showed signs of slowing we currently believe the diverse and differentiated DSG <unk> portfolio, which serves all engine types is likely to continue experiencing healthy demand from automotive customers and consequently, matto currently does not anticipate a measurable.
Speaker Change: Near term impact from lower U S EV adoption rates.
Canadian wire and cable distributor customers continued to tightly manage inventories and limit purchases of stock products. A pattern, we expect to prevail until the bank of Canada is able to provide greater certainty regarding interest rate reductions.
Michael E. Reeves: This is likely to eventually present an incremental driver of growth for the segment, but in the near term, we have redirected resources to address U.S. utility end markets and continue to drive expansion within this strategically important sector. I'll speak more about this in a moment.
Speaker Change: This is likely to eventually present, an incremental driver of growth for the segment, but in the near term we have redirected resources to address U S utility end markets and continued to drive expansion within this strategically important sector.
I'll speak more about this in a moment.
Michael E. Reeves: The segment continues to execute the relocation, expansion, and modernization of its North American production activities into two new sites, with its Vaughan, Ontario, and Fairfield, Ohio facilities progressing on time and on budget. First production from both sites 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. The company currently expects Connection Technologies revenue in the second quarter to move modestly upwards sequentially, primarily resulting from continued demand growth in infrastructure and automotive markets.
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.
Speaker Change: First production from both sides as expected during the second half of 2024 with final site completion occurring in the first half of 2025.
Speaker Change: Enabling connection technologies to maintain and accelerate its north American growth trajectory.
Speaker Change: The company currently expects connection technologies revenue in the second quarter to move modestly upward sequentially, primarily resulting from continued demand growth in infrastructure and automotive markets.
Michael E. Reeves: While strategic investments in research and development combined with slowly rising MEO expenses are likely to yield second quarter adjusted EBITDA similar to the first, as we evaluate the mid and long-term growth opportunities for connection technologies, we're particularly excited by the significant long-cycle investment required to renew and expand North American electrical power and utilities. According to an October 2023 International Energy Agency report, annual investment in electric grids will need to double by 2030 for countries to achieve stated carbon emission and energy security priorities.
Speaker Change: While strategic investments in research and development combined with slowly rising <unk> expenses are likely to yield second quarter adjusted EBITDA similar to the first quarter.
Speaker Change: As we evaluate the mid and long term growth opportunities for connection technologies, we're particularly excited by the significant long cycle investment required to renew and expand north American electrical power and utility grids.
Speaker Change: According to an October 2023 International Energy Agency report.
Speaker Change: Annual investment in electric grids will need to double by 2034 countries to achieve stated carbon emission and energy security priorities.
Speaker Change: While addressing decarbonization goals utilities are also focusing on reliability efficiency and resilience to meet changing consumer demands.
Michael E. Reeves: While addressing decarbonization goals, utilities are also focusing on reliability, efficiency, and resilience to meet changing consumer demands. Today, our connection technology segment participates in the North American transmission and distribution market through the sale of low and medium voltage cables, accessories, and connection protection products for electrical substation applications. In Canada, we are proud to already be a significant provider in this space, while in the U.S., we are currently a relatively small but growing participant, with a meaningful portion of our ongoing R&D investment intended to enable accelerated growth within an addressable U.S. market that's approximately nine times larger than. We believe the U.S. marketplace to be a potentially compelling growth opportunity, not only due to its current scale. But this is due to the aging nature of its electrical grid assets and the rapidly growing demand for electrical power from a wide variety of sources, including the data centers I spoke of earlier.
Speaker Change: Today, our connection technologies segment participates in the North American transmission and distribution market by the sale of low and medium voltage cables accessories and connection protection products into electrical substation applications.
Speaker Change: In Canada, we are proud to already be a significant provider in this space while in the U S. We are currently a relatively small but growing participant with a meaningful portion of our ongoing R&D investment intended to enable accelerated growth within an addressable U S market Thats approximately nine times larger than in Canada.
Speaker Change: We believe the U S marketplace to be a potentially compelling growth opportunity.
Speaker Change: Not only due to its current scale.
Speaker Change: But by the aging nature of its electrical grid assets and the rapidly growing demand for electrical power from a wide variety of sources, including the data centers I spoke of earlier.
Michael E. Reeves: 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 to increase our production efficiency and lower leaks. We also continue to evaluate accretive acquisition opportunities to further expand our product offering and geography. Lastly, our Brazilian pipe coating operations, which are reported as part of our financial, corporate, and other segments in our financial statement.
Speaker Change: 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.
Speaker Change: Elevate our production efficiency and lower lead times.
Speaker Change: We also continue to evaluate accretive acquisition opportunities to further expand our product offering and geographic presence.
Speaker Change: Lastly, our Brazilian pipe coating operations, which are reported as part of our financial corporate and other segment in our financial statements continued to execute safely and efficiently during the quarter delivering revenue and adjusted EBITDA modestly above the prior year period.
Michael E. Reeves: The company continued to execute safely and efficiently during the quarter, delivering revenue and adjusted EBITDA modestly above the prior year period. The company continues to explore options to divest this business, and while we do not anticipate Brazilian financial results to be material to the organization, the business is fully booked into mid-2025 and expected to deliver increased full year 2024 financial performance when compared to 2035. Tom will now walk you through the company's first quarter financial results.
Speaker Change: The company continues to explore options to divest this business and while we do not anticipate Brazilian financial results to be material to the organization. The business is fully booked into mid 2025 and expect it to deliver increased full year 2024 financial performance when compared to 2023.
Speaker Change: Tom will now walk through the company's first quarter financial highlights.
Thomas R. Holloway: Thanks, Mike. The first quarter's consolidated revenue from continuing operations was $224.5 million, 6% lower than the $238.7 million in the first quarter of 2023. The decrease of $14.2 million from the first quarter of 2023 is reflective of a decrease of $13.3 million in the composite technology segment and a decrease of $3.9 million in connection technologies, partially offset by an increase of $2.9 million in the operating entities being reported under financial, corporate, and others.
Thomas R. Holloway: Thanks, Mike the first quarter's consolidated revenue from continuing operations was $224 5 million.
Thomas R. Holloway: 6% lower than the $238 $7 million in the first quarter of 2023.
Thomas R. Holloway: A decrease of $14 $2 million from the first quarter of 2023 is reflective of a decrease of $13 3 million in the composite technology segment and a decrease of $3 9 million in connection technologies, partially offset by an increase of $2 $9 million and the operating entities.
Thomas R. Holloway: Being reported under financial corporate and others.
Thomas R. Holloway: Adjusted EBITDA from continuing operations was $30.1 million, a 25.7% decrease from the prior year first quarter. This decrease of $10.4 million is primarily attributed to lower revenue and product mix, along with higher selling general and administrative costs of $2.7 million related to our MEO growth activities during the quarter. While these MEO costs are slightly below our expected spend rate, the lower spend represents cash preserved during the first quarter, which will be spent in the second quarter of 2024. All MEO projects remain on time and on budget.
Thomas R. Holloway: Adjusted EBITDA from continuing operations was $30 1 million.
Thomas R. Holloway: 25, 7% decrease from the prior year first quarter.
Thomas R. Holloway: This decrease of $10 4 million is primarily attributed to lower revenue and product mix, along with higher selling general and administrative costs of $2 $7 million related to our MTO growth activities during the quarter.
Speaker Change: While these costs are slightly below our expected spend rate a lower spend represents cash preserved during the first quarter, which will be spent in the second quarter of 2024.
Speaker Change: Paul <unk> projects remain on time and on budget.
Thomas R. Holloway: During the first quarter, the company also recognized a $3.2 million restructuring charge primarily for severance costs related to its decision to close the Xerces manufacturing facility in Anaheim, California. Share-based incentive compensation during the quarter resulted in an expense of $7.6 million compared to a nominal recovery of $40,000 during the previous quarter, reflecting the relative share price movements during those periods. Turning to segment results, the composite technology segment revenue was $119.3 million, a 10% decrease compared to the first quarter of 2023, and adjusted EBITDA was $15 million, a 43.9% decrease from the prior year first quarter.
Speaker Change: During the first quarter. The company also recognized a $3 2 million restructuring charge, primarily for severance costs related to his decision to close the <unk> manufacturing facility in Anaheim, California.
Speaker Change: Share based incentive compensation during the quarter resulted in an expense of $7 6 million.
Speaker Change: Compared to a nominal recovery of $40000 during the previous quarter, reflecting the relative share price movements during those periods.
Turning to segment results. The composite technologies segment revenue was $119 3 million.
Speaker Change: A 10% decrease compared to the first quarter of 2023, and adjusted EBITDA was $15 million.
Speaker Change: At 43, 9% decrease from the prior year first quarter.
Thomas R. Holloway: This revenue decrease was primarily attributable to lower production and shipment of Xerces FRP tanks in response to pronounced seasonal market activity reductions as customers faced unfavorable ground conditions for fuel station construction. However, this was partially offset by increased international flex pipe sales. The adjusted EBITDA reduction was due to a combination of the drop in revenue coupled with a 4.7 percentage point decrease in gross margin. The decrease in gross margin is attributed to an unfavorable mix of product sales within the quarter and lower utilization rates at the tank manufacturing facilities, which impacted overhead absorption rates. As Mike previously noted, early second-quarter demand for tanks has risen as expected, and production activity across the Xerces network has been elevated in response.
Speaker Change: This revenue decrease was primarily attributable to lower production and shipment of Xerxes FRP tanks in response to pronounced seasonal market activity reductions as customers faced unfavorable ground conditions for fuel station construction.
Speaker Change: This was partially offset by increased international flex pipe sales.
Speaker Change: The adjusted EBITDA reduction was due to a combination of the drop in revenue coupled with a four seven percentage point decrease in gross margin.
Speaker Change: The decrease in gross margin is attributed to an unfavorable mix of product sales within the quarter and lower utilization rates at the tank manufacturing facilities, which impacted overhead absorption rates.
Speaker Change: As Mike previously noted early second quarter demand for tanks has risen as expected.
Speaker Change: And production activity across the <unk> network has been elevated in response.
Thomas R. Holloway: Finally, MEO costs of $2.3 million related to the two new facilities in this segment were recorded during the first quarter of 2024. Connection Technology Segment revenue was $90.8 million, which was 4.2% lower than the first quarter of 2023, and Adjusted EBITDA was $17.6 million, which was $0.7 million lower than the prior year first quarter. The decrease in segment revenue was a result of lower wire and cable product shipments to Canadian industrial market distributors and the non-repetition of a substantial aerospace order, which contributed to the prior year period. However, this was partially offset by stronger demand in the automotive and infrastructure market.
Speaker Change: Finally, <unk> costs of $2 $3 million related to the two new facilities. In this segment were recorded during the first quarter of 2024.
Speaker Change: And next in Technology segment revenue was $90 8 million, which was four 2% lower than the first quarter of 2023, and adjusted EBITDA was $17 6 million, which was zero point $7 million.
Lower than the prior year first quarter.
Speaker Change: The decrease in the segment revenue as a result of lower wire and cable product shipments to Canadian industrial market distributors and the non repetition of a substantial aerospace order, which contributed to the prior year period.
Speaker Change: This was partially offset by a stronger demand in the automotive and infrastructure markets. Additionally.
Thomas R. Holloway: Additionally, selling general and administrative costs attributable to MEO costs related to the two new facilities in this segment were $0.4 million during the first quarter of 2024. As discussed during our March earnings call, during the fourth quarter of 2023, the company completed the sale of the majority of its pipe coating business, or PPG, to Tenerife for a total gross proceeds of $241.2 million, which included the agreed-upon purchase price and an initial working capital estimate.
Speaker Change: Additionally, selling general and administrative costs attributable to EMEA costs related to the two new facilities in this segment or zero point $4 million.
Speaker Change: During the first quarter of 2024.
Speaker Change: As discussed during our March earnings call during the fourth quarter of 2023. The company completed the sale of the majority of its pipe coating business or PPG.
Speaker Change: Two scenarios and received total gross proceeds of $241 2 million, which.
Speaker Change: Which included the agreed upon purchase price and an initial working capital estimate.
Thomas R. Holloway: The final net cash proceeds received by the company in satisfaction of the contractual purchase price for the sale of the PPG business remain subject to completion of a customary final true-up of the estimated working capital calculation as provided in the definitive purchase and sale agreement for the transaction. The company now expects its net cash outflow to settle the working capital adjustment to be approximately $37.4 million, and therefore, in the first quarter of 2024, the company recorded an incremental $5.4 million loss from the sale of PPG and discontinued operations.
Speaker Change: The final net cash proceeds received by the company in satisfaction of the contractual purchase price for the sale of the PPG business remains subject to completion of a customary final true up of the estimated working capital calculation as provided in the definitive purchase and sale agreement for the transaction.
Speaker Change: The company now expects its net cash outflow to settle the working capital adjustment to be approximately $37 4 million and therefore in the first quarter of 2024, the company recorded an incremental $5 $4 million loss from the sale of PPG and discontinued operations.
Thomas R. Holloway: The company expects the parties to finalize the networking capital adjustment by the third quarter of 2024. Turning to cash flow, cash provided by operating activities in the first quarter was $10.5 million compared to cash used by operating activities from continuing operations of $6.6 million in the prior year's first quarter. This result reflects a lower level of working capital investment in the first quarter of 2024, which is partially offset by lower net income from continuing operations.
Speaker Change: The company expects the parties to finalize the networking capital adjustment by the third quarter of 2024.
Speaker Change: Turning to cash flow cash provided by operating activities in the first quarter was $10 5 million <unk>.
Speaker Change: Compared to cash used by operating activities from continuing operations of $6 6 million.
Speaker Change: In the prior year first quarter.
Speaker Change: This result reflects a lower level of working capital investment in the first quarter of 2024, which is partially offset by lower net income from continuing operations.
Thomas R. Holloway: Cash used in investing activities in the first quarter was $28.5 million, reflecting a total of $30.4 million of capital spending on property, plant, and equipment, primarily MEO projects, offset by $2.1 million in net proceeds from the disposal of property, plant, and equipment. During the first quarter, cash used in financing activities was $2.6 million, primarily comprised of lease payments. Net cash used in the first quarter of 2024 was $18.1 million. As of March 31st, 2024, we had a cash balance of $316 million, debt of $145 million, and $26.7 million of standard letters of credit. As of the end of the quarter, the company's net debt to adjusted EBITDA ratio was negative 0.23 times, significantly below our ceiling of 2.0 times.
Speaker Change: Cash used in investing activities in the first quarter was $28 5 million, reflecting a total of $34 million of capital spending on property plant and equipment, primarily MTO projects offset by $2 1 million in net proceeds from the disposal of property plant and equip.
Speaker Change: Right.
Speaker Change: During the first quarter cash used in financing activities was $2 6 million.
Speaker Change: Primarily comprised of lease payments.
Speaker Change: Net cash used in the first quarter of 2024 was $18 1 million.
Speaker Change: As of March 31, 2024, we had a cash balance of $316 million debt of $145 million and $26 $7 million of standard letters of credit.
Speaker Change: As of the end of the quarter the company's net debt to adjusted EBITDA ratio was negative 0.2 to three times significantly below our ceiling of two point over time.
Michael E. Reeves: Subsequent to the end of the first quarter, the company refinanced its senior notes with an extended seven-year term at a significantly lower interest rate of 7.25% versus the old notes at 9%. Additionally, we extended our credit facilities to April 2028, with additional flexibility included in the covenant. With the strategic review process now substantially complete and debt instruments extended and refinanced, the company is in a strong liquidity position. We continue to expect sufficient cash flow generation and continued access to our credit facilities subject to covenant limitations to fund our operations, working capital requirements, and capital programs, including MEO costs related to the new facilities, inorganic investments, and shareholder return initiatives in the form of a normal course issuer bid.
Speaker Change: Subsequent to the end of the first quarter the company refinanced its senior notes with an extended seven year term at a significantly lower interest rate of 725% versus the old notes at 9%. Additionally.
Speaker Change: Additionally, we extended our credit facilities to April 2028, with additional flexibility included in the covenants.
Speaker Change: With the strategic review process now significantly complete and debt instruments extended and refinanced the company is in a strong liquidity position.
Speaker Change: We continue to expect sufficient cash flow generation and continued access to our credit facilities subject to covenant limitations to fund our operations working capital requirements and capital programs, including EMEA costs related to the new facilities inorganic investments and shareholder return initiatives in the form of a normal course.
Speaker Change: Issuer bid.
Michael E. Reeves: Capital expenditures in the quarter were $24.8 million, including outstanding payments to suppliers, of which $23.1 million were related to growth expenditures for continuing operations. These were mostly related to MEO projects, which are intended to increase production capacity and efficiency within both sectors. We continue to expect capital spending for 2024 to be in the range of 90 to 100 million dollars. MEO projects for composite technologies are expected to begin production around mid-year, with connection technologies projects expected to begin production late in the year. All projects remain on time and on budget. I'll now turn it back to Mike for some final comments.
Speaker Change: Capital expenditures in the quarter were $24 $8 million, including outstanding payments to suppliers of which $23 $1 million were related to growth expenditures for continuing operations.
Speaker Change: These were mostly related to EMEA projects, which are intended to increase production capacity and efficiency within both segments.
Speaker Change: We continue to expect capital spending for 2024 to be in the range of $90 million to $100 million.
Speaker Change: EMEA projects for composite technologies are expected to begin producing around midyear with connection technologies projects expected to begin production late in the year.
All projects remain on time and on budget.
Speaker Change: I'll now turn it back to Mike for some final comments.
Mike: Thank you Tom.
Michael E. Reeves: With the transformation of our portfolio completed, MATTER is now focused on a narrow range of high-growth, critical infrastructure-oriented businesses. We have built a strong cash balance and are approaching the completion of several high-value organic growth investments. Positioning the company to take full advantage of our unique technology portfolio and strong long-term customer demand to deliver elevated returns over the year. However, normal seasonal cycles and transient market movements will continue to drive some variation quarter to quarter. However, the underlying long-term trends for each of MATA's primary businesses are favorable and expected to remain so for several years.
Mike: With the transformation of our portfolio completed matter is now focused on a narrow range of high growth critical infrastructure oriented businesses.
Mike: We have built a strong cash balance and are approaching the completion of several high value organic growth investments positioning the company to take full advantage of our unique technology portfolio and strong long term customer demand to deliver elevated returns over the years to come.
Mike: Normal seasonal cycles in transient market movements will continue to drive some variation quarter to quarter.
Mike: However, the underlying long term trends for each of matches primary businesses are favorable and expected to remain so for several years.
Operator: Long duration North American critical infrastructure activity remains robust, and demand for our core products is expected to persist. Our focus remains on technology development, efficient delivery of quality products, careful cost management, and completion of our North American MEO program, with three of our four new production sites expected to be substantially complete by year end. 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.
Mike: Long duration, North American critical infrastructure activity remains robust and demand for our core products is expected to persist.
Mike: Our focus remains on technology development efficient delivery of quality products careful cost management and completion of our North American <unk> programs with three of our four new production sites expected to be substantially complete by year end.
Mike: 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.
Operator: We remain vigilant to the potential impacts of geopolitical events, supply chain risks, inflationary impacts, and interest rate movements and continue to take steps designed to minimize our risks related to rising international trade. The company views any potential future action by central banks to lower interest rates as favorable, likely to drive an increase in broad industrial and infrastructure demand for the company's products, particularly from smaller customers and distributors. Typical improvements in weather and ground conditions across much of North America during Q2 are expected to drive a substantial increase in operational activity within our composite technology sector.
Mike: We remain vigilant towards the potential impacts of geopolitical events supply chain risks inflationary impacts on interest rate movements and continued to take steps designed to minimize our risks related to rising international trade friction.
Mike: The company views any potential future action by central banks to lower interest rates as favorable.
Mike: Likely to drive an increase in broad industrial and infrastructure demand for the companys products, particularly from smaller customers and distributors.
Mike: Typically improvements in weather and ground conditions across much of North America. During Q2 are expected to drive a substantial increase in operational activity within our composite technology segment.
Operator: While the most likely timing of some international FlexPike order deliveries has adjusted from Q2 to Q3. Consequently, we now anticipate the segment will see sequential growth in Q2 and again in Q3. Second quarter MEO project costs are expected to move up from the prior quarter as site commissioning activity accelerates, and we currently believe Q2 adjusted EBITDA, excluding the impact of MEO expenses, will be similar to the same period of 2023. We remain confident that MATA's full year 2024 revenue and underlying profitability will rise by high single-digit percentages when compared to 2020. I'll now turn the call over to the operator and open it up for any questions you may have for myself, Tom, or Meghan.
Mike: While the most likely timing of some international flex bike order deliveries have adjusted from Q2 to Q3.
Mike: Consequently, we now anticipate the segment will see sequential growth in Q2 and again in Q3.
Mike: Second quarter <unk> project costs are expected to move up from the prior quarter as site commissioning activity accelerates and we currently believe Q2 adjusted EBITDA, excluding the impact of <unk> expenses will be similar to the same period of 2023.
Mike: We remain confident that matters full year 2020 for revenue and underlying profitability will rise by high single digit percentages when compared to 2023.
Speaker Change: I'll now turn the call over to the operator and open it up for any questions. You may have for myself, Tom or Megan.
Operator: As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. Our first question comes from David Ocampo with Cormark Securities.
Speaker Change: As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced.
Speaker Change: To withdraw your question. Please press star one again.
Speaker Change: Please standby, while we compile the Q&A roster.
Speaker Change: Our first question comes from the line of David Ocampo with <unk> Securities.
David Ocampo: Thanks. Good morning, everyone.
Hi, Thanks, Good morning, everyone. Good morning Laurie.
Michael E. Reeves: Yeah, look, it's nice to see market share gains continue for your large diameter pipe product. I'm just curious, how are you guys competing with your main competitor? Are you guys doing it mainly on price, or is quality a factor there? And then maybe, probably most importantly, has your entry into the market put downward pressure on pricing, where the margin profile that you may have conceived 12 months ago is entirely different, more or less?
David Ocampo: Yes look it's nice to see market share gains continue for your large diameter pipe products I'm. Just curious how are you guys competing with your main competitor or are you guys doing mainly on price or is quality of factor there and then maybe probably most importantly, as their entry into the market put downward pressure on pricing.
Speaker Change: A margin profile that you may have conceived 12 months ago is entirely different or more or less the same.
Michael E. Reeves: So we're certainly very pleased with the pace at which we're being able to capture customers and demonstrate our value in the larger diameter product offering. Certainly, whether it's sequential or year over year, when we assess our North American revenue results versus North American rig count, we've exceeded the market in both measurements. So we're happy with that.
Speaker Change: So we're certainly very pleased with the pace at which we're being able to capture customers and demonstrate our value in the larger diameter product offering.
Speaker Change: Sydney, whether its sequential year over year.
When we assess our north American revenue results versus North American rig counts, we've exceeded the market in both measurements. So we're happy with that I would say that the last variable that comes into our commercial activity on any front is pricing.
Michael E. Reeves: I would say that the last variable that comes into our commercial activity on any front is pricing. We believe that our products, including the larger diameter flex pipe product, have certain technical and operational benefits, whether it's speed of installation or performance under certain conditions. And that's really at the core of how we address opportunities in the marketplace. I would say that, based on our view of the market, we do not believe that there has been any meaningful shift in the pricing structure for larger diameters.
Speaker Change: We believe that our products, including the larger diameter flex byproduct have certain technical and operational benefits, whether it's speed of installation or performance under certain conditions and that's really at the core of how we address opportunities in the marketplace.
Speaker Change: <unk>.
I would say that based on our view of the market. We do not believe that there has been any meaningful shift in the pricing structure for larger diameter products.
Michael E. Reeves: And Mike, maybe you can comment on your development phase of the 7 and 8 inch product, in terms of timelines on when that potentially could get launched.
Speaker Change: And Mike maybe you can comment on your development phase of the <unk> products.
Mike: Terms of timelines on when that potentially could get launched.
Michael E. Reeves: Yes, I think I mentioned during the last quarter that as we look at those two products, first, we do believe that there is a substantial market for products larger than 6-inch and are fully committed to achieving the technical development and then the commercial introduction of those products. I think late 2025 is the beginning of the window where we may start to be able to offer a product to the marketplace. But in terms of having a full year of activity, it's more likely 2026 that you should start.
Mike: Yes, I think I mentioned during the last quarter that as we look at those two products first we do believe that there is a substantial market for.
Products larger than six inch and are fully committed to achieving the technical development and then the commercial introduction of those products I think late in 2025 is the kind of at the beginning of the window, where we may start to be able to offer a product to the marketplace.
Mike: But in terms of having a full year of activity. It's more likely 2026 that you should start to see that.
Michael E. Reeves: And then, you know, a ton of cash on the balance sheet, and you guys touched a little bit on the U.S. expansion of your wire and cable business, and it's actually featured quite prominently in your deck. So if we fast forward to year end, do you expect an acquisition to be completed? And then, if so, can you talk to us about how much capital can be deployed there? Are you guys thinking a large, you know, chunky-sized deal as your initial entry into the U.S., or are you guys thinking, you know, smaller tokens?
Speaker Change: Okay, and then kind of cash on the balance sheet and you guys touched a little bit on the U S expansion of your wire and cable business and it's actually featured quite prominently in your deck. So if we fast forward to year end do you expect an acquisition to be completed.
Speaker Change: And if so can you talk to us about how much capital can be deployed there are you guys thinking of large chunky sized deal to share initial entry into the U S or are you guys thinking smaller tuck ins.
Michael E. Reeves: Yeah, maybe I'll address some of that and then pass it to Tom to talk about some numbers. M&A is a part of running a business where you don't have total control of the process. Obviously, there has to be a willing seller to match with a willing buyer. I would describe us as a willing but disciplined buyer, very, very focused on finding the right fit to add to the existing wire cable business.
Speaker Change: Yes, maybe I'll address some of that and then pass it to Tom to talk about some numbers.
Speaker Change: Obviously.
Thomas R. Holloway: M&A is.
Speaker Change: As a part of running a business, where you don't have total control of the process. Obviously, there has to be a willing seller.
Thomas R. Holloway: <unk> with a willing buyer I would describe us as a willing but disciplined buyer very very focused on finding the right fit to add to the existing wire and cable business.
Michael E. Reeves: I would hope very much that we have secured a meaningful acquisition by the end of this year. There are a number of potentially interesting opportunities in the market, or are likely to be in the market between now and year end. I think there is potential, but you can never be certain.
I would be hope I would say I would hope very much that we have secured a meaningful acquisition by the end of this year.
There are a number of potentially interesting opportunities in the market or we're likely to be in the market between now and year end. So I think there is the potential that you can never be certain what I'll tell you is that there is no lack of effort.
Thomas R. Holloway: What I'll tell you is that there is no lack of effort going into finding and securing the right opportunity there. When it comes to scale, as we've said, we look across the spectrum, but obviously, there tends to be a similar amount of effort going into an M&A transaction regardless of how big it might be. We're certainly very open to something of scale to give us a more meaningful presence, particularly in the US. Talk a little bit about capital.
Thomas R. Holloway: In finding and securing the right opportunity there.
Thomas R. Holloway: And when it comes to scale as we've said.
Thomas R. Holloway: We look across the spectrum.
Thomas R. Holloway: But obviously it tends to be a similar amount of effort going into an M&A transaction, regardless of how big it might be.
Thomas R. Holloway: So we're certainly very open to something of scale to give us some more meaningful presence, particularly in the U S talk a little bit about capital yes.
Thomas R. Holloway: Yeah, you know, as Mike said, we're active in this area, and our pipeline is quite full. So we're working aggressively to make something happen. Despite the fact that we don't have control of the timelines, I would say to you that the sizes of the deals, you know, range probably from 50 to a couple hundred million dollars and maybe even north of that, depending on which one we refer to. So it's a pretty wide range of what we could get done here.
Thomas R. Holloway: Yes, as Mike said, we were.
Speaker Change: We're active in this area and our pipeline is quite full so we're working at.
Speaker Change: Aggressively to make something happen.
Speaker Change: Despite the fact that we don't have control of the timeline is I would say to you the sizes of deals range, probably from 50 to a couple of hundred million dollars and maybe even north of that depending on.
Which one we referred to so it's a pretty wide range of what we could get done here we are.
Speaker Change: Very aware of the fact as Mike said the.
Thomas R. Holloway: We're very aware of the fact, as Mike said, that deals of small size take a significant amount of effort, as do large deals. So in an effort to get the right deal, we'll continue to be disciplined, but we would like to do something of scale if there's something out there. So that's how I would think about it.
Deals up small size take a significant amount of effort as two large deals so.
Speaker Change: In an effort to get the right deal we will continue to be disciplined, but we would like to do something of scale. If there's something out there. So that's how I would I would think about it.
Thomas R. Holloway: And then Tom, just in terms of your return thresholds, I think you guys are looking at a 20% after tax IRR. Does that number change for the gain scale in the US, where you might be able to, or might be willing to take a little bit less than 20% to get that across the table?
Speaker Change: And then Tom just in terms of your return thresholds that I think you guys are looking at a 20% after tax IRR does that number change for the gain scale in the U S, where you might be able to.
Speaker Change: It might be willing to take a little bit less than 20% to get that across the table.
Thomas R. Holloway: I would say we still believe 20% is out there, but anything above our weighted average cost per capital, you know, kind of the mid-teens, is probably acceptable in an M&A scenario. But the really important thing here is that we test both the upside and the downside. And so as we look at these things, we make sure that we're stress testing any sort of acquisition we do at that return threshold. And then I'll just remind everyone that last quarter, we talked about the fact that we do test everything against an SIV as well.
Thomas R. Holloway: I would say, we still believe 20% is out there.
Speaker Change: Yes.
Speaker Change: Anything above our weighted average cost of capital kind of mid teens is probably acceptable in an M&A scenario, but the really important thing here is that we test both the upside and the downside and so as we look at these things we make sure that we're stress testing any sort of acquisition we do.
Speaker Change: And that return threshold and then I'll just remind everyone that last quarter, we talked about the fact that we do test everything against <unk> as well. So we would want to make sure that the deployment of capital would be more efficient than doing some sort of large return of capital to shareholders, which we believe to be the case.
Thomas R. Holloway: So we would want to make sure that the deployment of capital would be more efficient than doing some sort of large return of capital to shareholders, which we believe to be the case, but we'll continue to be disciplined around that.
We'll continue to be disciplined around that.
David Ocampo: Okay, that's perfect. Thanks so much, everyone. I'll pass the line over.
Speaker Change: Okay. That's perfect. Thanks, so much everyone ill pass the line over.
Operator: Our next question comes from the line of Ian Gillies with Stiefel.
Speaker Change: Our next question comes from the line of Ian Gillies with Stifel.
Ian Brooks Gillies: Morning, everyone. Morning. Would you be willing to confirm whether the shipments that were intended to be delivered on the flex pipe side in the second quarter are now en route to their international destination?
Ian Brooks Gillies: Good morning, everyone.
Ian Brooks Gillies: Good morning, good morning.
Ian Brooks Gillies: Would you be willing to confirm whether.
Ian Brooks Gillies: The shipments that were intended to be delivered on the flex pipe side in the second quarter.
Ian Brooks Gillies: On rote now to their international destinations.
Michael E. Reeves: Maybe I'll speak more broadly and attempt to answer your question, Ian. We made one announcement that covered multiple substantial awards of international flex pipe orders that we released in December last year. I can confirm that the products associated with those orders have either been delivered or are in the process of being delivered. Some of those components are on the water or still working their way through the factory. There are additional opportunities or orders that were not press released that, on a singular level, are smaller in scale, but in combination are meaningful.
Speaker Change: So maybe I'll speak more broadly and attempt to answer your question Ann So.
Speaker Change: We have made multiple are we met one announcement that covered multiple substantial awards of international Flex pipe orders that we press released in December last year I can confirm that.
Michael E. Reeves: That collection includes orders that are in the process of production, are either on the water, have maybe reached the end destination port, or are orders that we fully expect to receive and to work through the manufacturing process between now and the end of Q3. It's a bit of a mix, but there's a good chunk of what we expect to recognize in Q2 and expect to recognize in Q3 that is already fully committed.
Speaker Change: The products associated with those orders have either been delivered or are in the process are being delivered so some of those.
Components are on the water or still working their way through factory.
Speaker Change: There are additional opportunities orders.
Speaker Change: We're not press release that in on a singular level are smaller in scale, but in combination are meaningful.
Speaker Change: And that collection includes orders that are in the process of production are either on the water.
Speaker Change: <unk> may be reached the end destination port.
Speaker Change: Or are orders that we fully expect to receive and to work through the manufacturing process between now and the end of Q3, so it's a bit of a mix.
Speaker Change: There's a good chunk of what we will what we expect to recognize in Q2 and expect to recognize in Q3 that is already fully committed.
Michael E. Reeves: No, that's very helpful. Maybe switching gears. You've highlighted the data center opportunity and appreciated the fact that it's early days. Are you able to articulate at all how you go about winning business in that market or how you go about getting MSAs, etc., just because it will be a newer vertical?
Speaker Change: No that's very helpful and maybe switching gears I mean, you highlighted the data center opportunity.
I appreciate it and the fact that it's early days.
Speaker Change: Are you able to articulate at all how you go about winning business in that market or how you go about getting msas et cetera.
Just because it's a new <unk> it will be in a newer vertical.
Michael E. Reeves: Yeah, so it's a market where there are a variety of data points out there, but to the best of our visibility, there are an order of magnitude 5,000 data centers in the U.S. as we sit here today, and we've seen a number of data points that tell us that that number is likely to grow at something approaching between 5 and 10% CAGR. There's a big difference between those two numbers, but there's a wide range.
Speaker Change: Yes, so it's it's a market where there is a variety of data points out there, but to the best of our visibility there is order of magnitude five hammerson datacenters in the U S.
Speaker Change: Sit here today, and we've seen a number of data points that tell us that that number is likely to grow at something approaching.
Speaker Change: <unk>, 5% and 10% CAGR Theres, a big difference between those two numbers, but there is a wide range.
Michael E. Reeves: What we've generally seen is that data centers, particularly larger data centers that are built closer to urban areas where land is more expensive and more restricted in its availability, are starting to skew toward underground storage of liquids. But not every data center will store liquids underground. If they have the space, they can use above-ground tanks, and that's usually a cheaper option.
Speaker Change: What we've generally seen is that date.
Speaker Change: Data centers, particularly larger data centers that are built to closer to urban areas, where land is more expensive and more restricted and its availability are starting to skew to underground storage of liquids. So not every data data center will store liquids underground if they have the space that can use above ground tanks and thats, usually a cheaper option.
Michael E. Reeves: So our products don't apply to every data center, but a big enough portion that it's an interesting end market. There are not that many ultimate owners of data centers. It's a relatively consolidated market. And as a consequence, there are a relatively consolidated number of general contractors that actually build data centers. And most of them also build other types of construction projects. And we already have relationships with them.
Speaker Change: So our products don't apply to every data center, but a big enough portion that it's an interesting end market.
Speaker Change: There's not that many.
Speaker Change: Ultimate owners of data centers, it's a relatively consolidated markets and as a consequence, there is a relatively consolidated number of general contractors that actually build data centers and most of them also build other types of construction projects and we already have relationships with them. So our pathway into this market has.
Michael E. Reeves: So our pathway into this market has largely been through existing relationships with those general contractors. I think the history of performance and quality of our products speak for themselves, and we're a trusted provider in that space. So as we see more and more data centers being constructed, and more and more of them need underground fuel and other liquid storage, we're seeing the demand for our products rise. And as I mentioned in my prepared remarks, generally, the demand is for the very largest of our tank sizes, which obviously, the South Carolina facility will help improve our production efficiency and scale in that size range. And something that we believe will, over time, become a more material piece of the revenue for the Xerxes.
Speaker Change: Largely been through existing relationships with those general contractors.
Speaker Change: I think the history of performance and quality of our products speak for themselves and we're a trusted provider in that space. So as we see more and more data centers be constructed and more and more of them need underground fuel and other liquid storage, we're seeing the demand for our products rice and as I mentioned in.
Speaker Change: Our prepared remarks generally the demand is for the very largest of our tank sizes, which obviously the South Carolina facility will help improve our production efficiency and scale in that size range.
Something that we believe will over time become a more material piece of the revenue for the for the <unk> business.
Ian Brooks Gillies: Perfect. That's very helpful. I'll turn the call back over. Thanks for the details.
Speaker Change: Perfect. That's very helpful. I'll turn the call back over thank you for the details.
<unk>.
Operator: Our next question comes from the line of Tim Monachello with ATB Capital Markets.
Speaker Change: Our next question comes from the line of Tim Monticello with ATB capital markets.
Tim Monachello: Hey, good morning. Morning, it's a. I just wanted to kind of get a view on Q2 guidance. Are you expecting Q2 to be lower than what you were expecting before? It sounds like you've got a little bit more traction perhaps in the North American piece of the flex pipe business, but you mentioned some order shifting in Q3.
Speaker Change: Hey, good morning.
Speaker Change: It does.
Speaker Change: I just wanted to kind of get a view on Q2 guidance.
Speaker Change: Are you expecting Q2 to be lower than what you were expecting before it sounds like you've got a little bit more traction perhaps in the north American piece of the phosphate business, but also you mentioned some order shifting into Q3.
Michael E. Reeves: Yes, so I'm happy to respond to that. To be clear, our view of Q2 performance on the last quarterly earnings call was a little higher than our view of Q2 performance as we sit here today, driven by two factors. One, we are likely to see a substantially higher MEO spend during Q2, which is purely a question of timing. There's no change to the full year MEO spend expectations and no delays or changes to the project timings.
Yes so.
Speaker Change: Happy to respond to that.
Speaker Change: To be clear.
Speaker Change: Our view of Q2 performance at the last quarterly earnings call was a little higher than our view of Q2 performance as we sit here today.
Speaker Change: Even by two factors.
Speaker Change: We are.
Speaker Change: Likely to see a substantially higher <unk> spend during Q2.
Speaker Change: Which is purely a question of timing there is no change to the full year.
Speaker Change: Spend expectations, I know delays or changes to the project timings, but Q2 will have a <unk>.
Michael E. Reeves: But Q2 will have, I think, the heaviest MEO cost recognition of the year, now that we see how the sequencing is lining up, which obviously impacts reported adjusted EBITDA. And then the second component is what I've spoken about, the slight movement in timing of certain larger flex pipe international deliveries and, therefore, revenue recognition that will cause reported adjusted EBITDA in Q2 to move down from where we had originally expected. But that is just a movement from Q2 to Q3. And I'd reiterate absolutely no change to our full-year expectations of both revenue and adjusted EBITDA, as we've previously seen.
Speaker Change: I think the heaviest mbo cost recognition of the year now that we see how the sequencing as mining.
Speaker Change: Which obviously impacts our reported adjusted EBITDA and then second component is what I've spoken about the <unk>.
Speaker Change: Like movement and timing of certain larger flex pipe international deliveries and therefore revenue recognition.
Cause adjusted reported adjusted EBITDA in Q2 to move down from where we had originally expected but that is just a movement from Q2 to Q3 and I would reinforce absolutely no change to our full year expectations of both revenue and adjusted EBITDA as we've previously communicated.
Speaker Change: Okay got it.
Tim Monachello: Okay, got it. And then just following up on Ian's question there, you mentioned some additional, I guess, touch points for data centers within the connection technologies business. Can you talk a little bit more about what you think potential revenue might be for the entire company for data centers? You were able to get, you know, connection technologies orders and, and Opposite technologies orders.
Speaker Change: And then just following up on <unk> question there.
Speaker Change: And you mentioned some additional I guess touch.
Speaker Change: <unk> clients are data centers within the connection technologies business.
Speaker Change: Can you talk a little bit more about like what you think a potential revenue.
Speaker Change: <unk>.
Speaker Change: Penetration might be for the entire company for data centers, and we were able to get.
Speaker Change: Cash and technologies.
Speaker Change: Orders and.
Speaker Change: Opposite technologies orders.
Michael E. Reeves: Yeah, I can give you a range. Obviously, there's a fairly broad spectrum of scale when you talk about data centers. I think on the low end, it may be a couple of hundred thousand square feet of coverage, and at the high end, it's a million square feet, and they require very different degrees of products. Today, on the connection technology side, we sell a range of wire and cable solutions that are incorporated into the construction of data centers.
Speaker Change: Yes, I can give you a range obviously, there's a fairly broad spectrum of scale. When you talk about data centers I think on the low end. It may be a couple hundred thousand square feet of coverage and at the high end, it's 1 million square feet.
Speaker Change: Require very different degrees of product.
Speaker Change: Today on the connection technology side, we sell.
Michael E. Reeves: And then, as a byproduct of the addition of data centers, we're seeing incremental demand for utility network expansion, and, obviously, we sell into the utility network expansion marketplace as well. I'd say when we look at a single data center of average size, if we were to secure everything we can possibly secure from a wire and cable and connection protection side as well as the underground tanks, the per site revenue stream could be well north of $2 million and considerably higher than that with a larger data center. And then the related revenue that comes from supporting the expansion of utility networks is a bit harder to measure on a per data center scale, but it's definitely there.
Speaker Change: A range of wire and cable solutions that are incorporated into the construction of data centers and then as a byproduct of the addition of data centers, we're seeing incremental demand for utility network expansion and obviously, we sell into the utility expansion marketplace as well I'd say when we look at a single data center of avid.
Speaker Change: Average size, if we were to secure.
Everything we can possibly secure from our wire and cable in connection protection side as well as the underground tanks, certainly that the first sites revenue stream could be well north of $2 million.
Speaker Change: Considerably higher than that with a larger data center and then.
Speaker Change: The related revenue that comes from supporting the expansion of utility networks is a bit harder to measure on a per data center.
Speaker Change: Scale, but it is definitely there.
Tim Monachello: Do you have any data center orders in your backlog today? Yeah.
Speaker Change: Do you have any data center orders in your backlog today.
Michael E. Reeves: Yes, we have a substantial backlog for the production equipment that supports the very largest of the tank sizes, which is what data centers tend to consume. We have a very robust backlog.
Speaker Change: Yes, we have a substantial backlog for the production equipment that supports the very largest of the tank sizes, which is what datacenters tend to consume.
Speaker Change: We have a.
Speaker Change: A very robust backlog.
Tim Monachello: Okay. And then I was wondering if you could just provide an update on how the stormwater management business is going.
Speaker Change: Got it okay.
Speaker Change: And then wondering if you can just provide an update on how the storm water management business is going.
Michael E. Reeves: Yes, it is, as with most things that get buried, a bit of a seasonal business. So Q1, as it usually is, was a fairly slow quarter, but we continue to see market penetration, and see our products get qualified for use in new geographies and new customers. And we've been investing in that business in terms of adding to the commercial structure, the leadership structure, and we fully expect that it will continue its recent trend of delivering substantial year-over-year returns. Okay, we'll turn it back on, thank you.
Speaker Change: Yes.
It is as with most things that get buried a bit of a seasonal business. So Q1 as it usually is was a fairly slow quarter, but.
Speaker Change: We continue to see market penetration see our products get qualified for use in new geographies and new customers.
Speaker Change: And we've been investing in that business in terms of adding to the commercial structure of the leadership structure.
Speaker Change: We expect that it will continue its recent trend of delivering substantial year over year growth.
Tim Monachello: Okay, we'll turn it back on. Thanks, guys.
Speaker Change: Okay.
Speaker Change: Turn it back thanks, guys.
Speaker Change: Okay.
Operator: Our next question comes from a line from Zachary Evershed with National Bank Financial.
Thank you.
Speaker Change: Our next question comes from the line of Zachary Eversheds with National Bank financial.
Zachary Evershed: Good morning. Thanks for taking my questions. Good morning. So just a quick one on the working capital trope accounting. Do you see any risk to incremental outflows versus the $37.4 million?
Zachary Evershed: Good morning, Thanks for taking my questions good morning.
Zachary Evershed: So just a quick one on the working capital trip accounting do you see any risk to.
Speaker Change: Incremental outflows versus the $37 4 million.
Thomas R. Holloway: Yeah, so I think this is a case of at the end of the year, we had just gotten the results or the response from our counterparty, and we recorded our best estimate. Now we've had time to work through it. We think that this is the most reasonable estimate we have today. I would say, and I think we said in the documents, that there are potential movements up or down. But we don't think it's material at this point. We think we've reached a point where we're pretty close, as with all negotiations, you know. But, as we said today, that's our best estimate, and we would hope to settle at that range.
Yes. So I think this is this is the case.
Speaker Change: <unk>.
End of the year, we had just gotten the results are the response from our counterparty recorded our best estimate now we've had time to work through it we think.
As the most reasonable.
Speaker Change: Estimate we have today and I would say and I think we said in the documents that theres potential movements up or down but.
Speaker Change: But we don't think it's material. That's why we think we've reached the point, where we're pretty close.
Speaker Change: As with all negotiations are subject to change, but as we've said today, that's our best estimate and we would hope to settle up that range.
Zachary Evershed: Good color. Thanks. And then, regarding DSG Canusa being mentioned, demand in Europe, can you share some details about how you're currently penetrating that market and faring within that competitive landscape?
Speaker Change: Okay. Good color. Thanks.
Speaker Change: And then for DSG can you just have being mentioned.
Speaker Change: And in Europe can you share some details about how you are currently penetrating that market and ferring within that competitive landscape.
Michael E. Reeves: Yes, we haven't talked that much about DSG Canoosa over the last several quarters, which is unfair to that business and the people within it because they've been performing at a very, very good level. And as I mentioned on the call, the margin profile for that business continues to move upwards as we develop and introduce new and better products to serve higher and higher temperature applications, amongst other things. And while total automotive production activity hasn't been rising at a substantial pace, I'd say that our ability to continue to win new vehicle platforms from our customers based on the quality, consistency, and customer service that we offer is being shown every day.
Speaker Change: Yes, so we havent talked that much about DSG <unk> over the last several quarters, which is unfair to that business and the people within it because they are performing at a very very good level and as I mentioned on the call. The margin profile for that business continues to move upwards, as we develop and introduce new and better products.
Speaker Change: To serve higher and higher temperature applications amongst other things.
Speaker Change: Total automotive production activity Hasnt been rising at a substantial pace I would say that our ability to continue to win new vehicle platforms from our customers based on the quality consistency and customer service that we offer is being shown every day. So the growth that we're seeing in Europe.
Michael E. Reeves: So the growth that we're seeing in Europe is a mix of automotive and industrial. We are less fully penetrated in the European industrial markets than we are in North American industrial markets. So we have a blueprint to follow from our North American success, and the European team is executing very, very well as they implement that blueprint. And as we've seen, there's been a modest slowdown in electric vehicle demand and, consequently, production, but it's largely been offset by an increase in hybrid vehicle demand and production, which is an even more interesting opportunity for us given the complexity of a hybrid vehicle and the sheer quantity of product from our business that is required to serve that vehicle type.
<unk> is a mix of automotive and industrial.
Speaker Change: We are less fully penetrated in the European industrial markets and we are in the North American industrial markets. So we have a blueprint to follow from our North American success and the European team are executing very very well.
Speaker Change: They implement map blueprint.
Speaker Change: And as we've seen there's been a modest slowdown in electric vehicle demand and consequently production, but it's largely been offset by an increase in hybrid vehicle demand and production, which is an even more interesting opportunity for us given the complexity of a hybrid vehicle and that sheer quantity of product.
Michael E. Reeves: So it's a mix of vehicle type change and capture of share in both the automotive and industrial sectors. And I would tell you that we believe we are a very long way from having a fully mature market share in the European industry. Great color, thank you. Ninjas.
Speaker Change: From our business that is required to serve that vehicle types. So it's a mix of vehicle type change.
Speaker Change: Capture of share in both automotive and industrial and I would tell you that we believe we are a very long way from having a fully mature market share on the European industrial side.
Zachary Evershed: Great color, thank you.
Speaker Change: Great color. Thank you.
Speaker Change: Andrew.
Speaker Change: Okay.
Zachary Evershed: Zachary, could you restate your question?
Speaker Change: Patrick could you restate your question.
Zachary Evershed: Of course. What is the biggest challenge you're seeing to selling the Brazilian operations?
Patrick: Of course.
Patrick: What is the biggest challenge you are seeing to sell in the Brazilian operations.
Michael E. Reeves: So I would really say that there's no challenge. It's a process that we didn't really commence until the early part of this year. It's proceeding as I would have expected. There are multiple parties that have expressed an interest, and certainly, our intention is to move as rapidly through this exercise as we can. So if things continue at their current pace, I would hope that, certainly, by the early part of Q3, we've got something to communicate.
Speaker Change: So I would say really that Theres no challenge.
Speaker Change: It's a process that we didn't really commence until the early part of this year.
Speaker Change: It's pursuing are proceeding as I would've expected there are multiple parties that have expressed an interest in.
Speaker Change: And suddenly our intention is to move as rapidly through this exercise as we can so.
Speaker Change: If things continue on their current pace I would hope that certainly by the early part of Q3, we've got something to communicate and then it will be a question of working through regulatory approval in Brazil, which is a little harder timeline to predict but.
Michael E. Reeves: And then it will be a question of working through regulatory approval in Brazil, which is a little harder timeline to predict, but if things go reasonably well, we ought to be able to transact by the end.
Speaker Change: If things go reasonably well, we ought to be able to transact by the end of the year.
Speaker Change: Got you thanks.
Zachary Evershed: Last one for me before I turn it over: are you seeing any impact from the high interest rate environment pressuring customers on the economic decision between steel storage tanks versus FRP?
Speaker Change: Just one from me before I turn it over.
Speaker Change: Any impact from the high interest rate environment pressuring customers on the economic decision.
Speaker Change: Steel storage tanks versus FRP.
Michael E. Reeves: We have not seen that particular variable come into play. What I'd say is that we've seen relative stability in interest rates now for multiple quarters. I think the pain that some of our customers, and particularly smaller customers, felt as those interest rates rose is now baked into the baseline of our business, and we've not seen any further variation. What we've generally seen is that they are choosing to defer investment in new fuel station construction or upgrades of existing fuel stations where they possibly can while their cost of capital is at an elevated level.
Speaker Change: We have not seen that particular variable comp.
Speaker Change: Come into play what I'd say is that we've seen relative stability in interest rates now for multiple quarters I think the the <unk>.
Speaker Change: Pain that some of our customers and particularly smaller customers.
Speaker Change: As those interest rates rose is now baked into the baseline of our business and we've not seen any further variation.
Speaker Change: What I, what we generally seen is that they are choosing to defer investments in new fuel station construction or upgrades of existing fuel stations, where they possibly can.
Speaker Change: All their cost of capital is at an elevated level. So we haven't seen a skewing of market share. We've just seen a slowing of overall activity from the smaller independent fuel station operators and fully expect that there'll be pent up demand from that population.
Michael E. Reeves: We haven't seen a skewing of market share. We've just seen a slowing of overall activity from the smaller independent fuel station operators and fully expect that there will be pent-up demand from that population that will start to have an impact on our business when, and hopefully soon, interest rates start to move in a more favourable direction.
Speaker Change: That will start to have an impact on our business win and hopefully soon interest rates start to move in a more favorable direction.
Zachary Evershed: Very helpful. Thanks. I'll turn it over.
Very helpful. Thanks, I'll turn it over.
Operator: Our next question comes from the line of Michael Tupholme with TD Securities.
Speaker Change: Our next question comes from the line of Michael <unk> with TD Securities.
Michael Tupholme: Thank you. Just with respect to the MEO expenses, it sounds like you think the full year impact is unchanged, but maybe not as heavy in Q1 as you were expecting. So can you help us understand how we should think about MEO expenses in Q2.
Michael E. Reeves: Thank you.
Michael E. Reeves: With respect to the <unk>.
Speaker Change: Fences it sounds like you think the full year.
Speaker Change: The full year impact is unchanged, but but maybe not as heavy in Q1 as you were expecting so can you help us understand.
Speaker Change: How we should think about <unk> expenses in Q2.
Thomas R. Holloway: Yeah, so I think the full year is still 20 to 25, the first quarter came in a little lighter. I'll remind you that the first half is skewed towards composites, and in the second quarter, we would expect effectively what wasn't spent in the first quarter to be spent in the second quarter. So you think of that number in the eight to nine million dollar range. And then for the back half of the year, we expect it to be skewed towards the connection technologies business, and there is no change at this point to our expectation there. So that's five to six million a quarter, which is what we've talked about. I would point you to those numbers remaining intact.
Speaker Change: Yes, so I think the full year is still that said 20 to 25.
Speaker Change #100: First quarter came in a little lighter.
Speaker Change #101: I'll remind you that the first half is skewed towards composite.
Speaker Change #101: And in the second quarter, we would expect effectively what wasn't spent in the first quarter to be spent in the second quarter. So we think of that number in the $8 million to $9 million range and then for the back half of the year, we expect it to be skewed towards the connection technologies business again, no no change at this point to our expectation there so.
Speaker Change #102: $5 million to $6 million a quarter is what we've talked about I would point you to those numbers remaining intact.
Michael Tupholme: Okay, and then I appreciate the fact that the first half is heavier toward composite and the back half toward connection. For connection in Q2, is that likely to be similar to what we saw in Q1, or does it step up at all?
Speaker Change #103: Okay and then.
Speaker Change #104: I appreciate the fact that first half is heavier toward composite in back half toward connection but.
Speaker Change #105: For connection in Q2 is that likely to be similar to what we saw in Q1 or does it step up at all.
Thomas R. Holloway: Very modest step up. I'd say it's still a small number in the grand scheme of things. The bulk of that, you know, eight to nine million, sits in the company. In the second.
Speaker Change #106: Very modest step up I'd say, it's still it's still a small number in the Grand scheme of things the bulk of that $8 million to $9 million sits in the call.
Speaker Change #106: In the second quarter.
Michael Tupholme: Okay, perfect. And then you were just asked about the Brazilian pipe coating operations, and it sounds like we could see something in terms of an announcement at some point during the next quarter or so, quarter two. But it does sound like those operations are likely to be with you probably through the balance of the year. So when we look at the corporate and other segments, what's the best way to think about the costs that you're likely to see moving forward on a quarterly basis?
Okay perfect.
Speaker Change #107: And then you were just asked about the Brazilian pipe coating operations and it sounds like we could see something in terms of an announcement at some point.
Speaker Change #107: Over the next quarter or so quarter, two but it does sound like Theyre likely those operations are likely with you probably through the balance of the year. So when we look at the corporate and other.
Speaker Change #107: Segments.
Speaker Change #108: What's the best way to think about the costs that youre likely to see moving forward on a quarterly basis. They were a little lower than I expected in Q1.
Thomas R. Holloway: Yeah, so I think Q1 our Brazil business performed slightly better than we had expected it to because of just the timing of pipe coating, which I would say means Q2 is probably slightly lower than we had expected it to be. So it's a bit of a shift.
Speaker Change #109: Yes, So I think Q1, our Brazil business performed slightly better than we had expected it to just timing of pipe coating, which I would say it means Q2s, probably slightly lower than we had expected it to be so it's a bit of a shift.
Michael Tupholme: If you assume normal corporate expenses and what we've guided to before, which is six to seven million a quarter. And then I think last quarter we talked about Brazil being roughly three million a quarter from an EBITDA perspective. There is a bit of variability in that number, as pipeline-type coding businesses have. So I think Q2 is slightly below that, Q3 is above that, and then Q4 is roughly in line with that three-ish million number. So hopefully, that gives you a little bit more color.
Speaker Change #109: If you assume normal corporate expenses and while we've guided to before which is 6% to $7 million a quarter.
Michael Tupholme: That is helpful. Thank you.
Speaker Change #109: And then I think last quarter, we talked about Brazil, being roughly $3 million a quarter from an EBITDA perspective, there is a bit of variability in that number is as pipeline pipe coating businesses have.
Speaker Change #109: So I think Q2 slightly below that Q3's above that in Q4 roughly in line with that three ish million numbers. So hopefully that gives you a little bit more color.
Michael Tupholme: And then, just lastly, on data centers, just so I'm clear, it sounds like you see opportunities really across the business. You're already serving that market through both segments, but you simply see an opportunity for a step up in activity as the market grows, or do you think you can? further penetrate. I'm just kind of trying to understand the growth opportunity and where it's coming from, if it's simply that the market is growing, or you think there's actually an opportunity for you to accelerate. Your penetration and, I guess, the question maybe to follow on from all that would be when you will likely see that step up in revenues.
Speaker Change #110: That is helpful. Thank you and then just lastly on the data centers.
Speaker Change #111: Just so I'm clear I mean, it sounds like you see opportunities really across the business.
You are already serving that market through both segments, but you simply see an opportunity for a step up in activity as the market grows or you think you can.
Speaker Change #111: Further penetrate them just kind of trying to understand the.
Speaker Change #111: The growth opportunity and where it's coming from if it's if it is simply that market is growing or you think there is actually an opportunity for you to accelerate your.
Speaker Change #112: Penetration and I guess the question maybe to follow on from that would be when when you'd likely see that step up in revenues.
Michael E. Reeves: Yeah, so I think there's three variables here that are in play. The first is the pace of data center construction, which I'm not sure we necessarily see that accelerating, but we certainly see it persisting and being fairly slow. The second is the type, size, and location of data center construction. If you can build a data center in the middle of a very large field, and you have no restriction on the land, then your cheapest way to build it is with above-ground tanks, which we don't make or sell.
Speaker Change #113: Yes. So I think there is three variables here that are in play. The first is the pace of data center construction, which I'm not sure we necessarily see that.
Speaker Change #113: Accelerating, but we certainly see it persisting and being fairly meaningful.
Second is the timing size and location of data center construction. If you can build a data center in the middle of a very large field and you have no restriction on the land then your cheapest way to build it as with above ground tanks, which we don't make ourselves, but if you need to be.
Michael E. Reeves: But if you need to be closer to a source of electrical power and you're starting to move into spaces where you are restricted or the cost of land is just outrageous, then you start to plan your data center with underground storage of liquids because it allows you to do everything on a smaller footprint.
Speaker Change #113: <unk> to a source of electrical power and Youre starting to move into spaces, where you are restricted or the cost of land is just outrageous then you start to plan your data center with underground storage of liquid because it allows you to do everything on a smaller footprint and we are starting to see a trend in that direction, which.
Michael E. Reeves: And we are starting to see a trend in that direction, which clearly grows the addressable market for an organization like ours on the tank side. And then, of course, our ability to deliver very large composite tanks because, you know, data center construction timelines tend to be very rigid, and they are not willing to delay that construction activity waiting for a tank. And if I can't get them a large tank array in time, then they will use steel.
Speaker Change #113: Clearly grows the addressable market for an organization like ours on the tank side.
Speaker Change #113: And then the third variable of course is our ability to deliver very large composite tanks, because data center construction timelines tend to be very rigid and they are not willing to delay that construction activity waiting for tanks, and if if I cant get them a large tank array in time, then they will use.
Speaker Change #113: Steel.
Speaker Change #113: We have a limited production capability in the very largest tank size today.
Michael E. Reeves: We have a limited production capability in the very largest tank size today. But obviously, as the South Carolina site comes online, it will bring with it incremental production capacity, which we believe will allow us to take a growing share of that. In terms of seeing the impact on the business, I think you will start to see the impact as you start to see the impact of the South Carolina facility coming online, which will be a ramp-up over the course of the second half of this year and into the first half of next year.
Speaker Change #113: But obviously as the South Carolina site comes online it will bring with it incremental production capacity, which we believe will allow us to take a growing share of that growing market.
Speaker Change #114: In terms of seeing the impact in the business I think you will start to see the impact as you start to see the impact of the South Carolina facility coming online, which we.
Speaker Change #114: A ramp up over the course of the first half of this year sorry, the second half of this year and into the first half of next.
Michael Tupholme: Perfect. That's very helpful. Thank you.
Speaker Change #115: Perfect. That's very helpful. Thank you.
Operator: As a reminder, that is Star 1-1 to ask a question. Our next question comes from the line of Arthur Nagorny with RBC.
Speaker Change #116: As a reminder, that is star one one to ask a question.
Speaker Change #117: Our next question comes from the line of Arthur <unk> with RBC.
Hey, good morning.
Arthur Nagorny: I just wanted to touch on the international flex pipe side of the business. So I think you mentioned in your prepared remarks that international revenue growth was above 50%. And Q1, can you just talk about the runway here and maybe how you're competing in international markets kind of going forward? Yes.
Speaker Change #118: Good morning.
Arthur Nagorny: Just wanted to touch on the international Flex pipe.
Speaker Change #120: Out of the business. So I think you mentioned in your prepared remarks that.
International revenue growth was above 50%.
Speaker Change #121: In Q1 can you just talk about the runway here and maybe how you are competing in international markets kind of going forward yes.
Michael E. Reeves: So to be clear, what I said was that our Q1 international revenues for FlexPipe were greater than 50% of all of the revenue we recognized for international FlexPipe in 2023, so really indicating that we have a runway growth there that is roughly 50% year over year. International is a market where most commercial engagements go through a fairly protracted coaching process, and then customers will issue orders against a one, two, or three-year commitment, and they tend to be lumpy.
Speaker Change #120: Yes.
Speaker Change #122: To be clear what I said was that our Q1 international revenues for flex pipe, we're greater than 50% of all of the revenue we recognized for international flex by <unk> in 2023, so really indicating that we have.
Speaker Change #122: Our run rate growth as it is.
Speaker Change #122: Roughly 50% year over year.
Speaker Change #122: International is a market where most commercial engagements go through a fairly protracted.
Michael E. Reeves: So there is some variability quarter to quarter, as we're seeing here, which will persist. And we should all have realistic expectations that there's unlikely to be a perfectly flat and upward line on international flex pipe revenue.
Speaker Change #122: Coaching process, and then customers will issue orders against one or two or three year commitment and they tend to be lumpy. So there is some variability quarter to quarter as we're seeing here.
Speaker Change #122: Which will persist so we should all have realistic expectations that there's unlikely to be a perfectly flat and upward line on international flex by revenue.
Arthur Nagorny: But the fact that we are now able to offer 5-inch and 6-inch products, which have particular application in the international market, has opened doors that were not open to us before. We have a presence, we have relationships, but we didn't always have the right product. And I'd say even today, we don't have all of the right products.
Speaker Change #122: But the fact that we are now able to offer five inch and six inch products, which have particular application in the international market has opened doors that were not open to us before we have a presence we have relationships with we didn't always have the right product and I'd say still today, we don't have all of the right products.
Michael E. Reeves: Larger sizes are required to meet the full array of international opportunities, as are, in some cases, higher temperatures. And we're obviously, we've been talking about, and are working on delivering those additions to the portfolio over the course of the coming years. But we've got a big enough window now that it can start to become a more meaningful piece of our business. And I think you should continue to expect to see year over year growth, perhaps not 50% year over year every year.
Speaker Change #122: Larger sizes are required to meet a full array of international opportunities as or in some cases higher temperature capabilities and we're obviously, we've been talking about and are working on delivering those additions to the portfolio over the course of the coming years.
Speaker Change #122: But we have a big enough window now that it can start to become a more meaningful piece of our business and I think you should continue to expect to see year over year growth, perhaps not 50% year over year every year, but the opportunities are meaningful and we're investing in the organization to ensure we can pursue those at an aggressive pace.
Michael E. Reeves: But the opportunities are meaningful, and we're investing in the organization to ensure we can pursue those at an aggressive pace. On the ShawFlex side, we've seen quite a run-up in copper prices here to start the year. Can you just give us some perspective on what you're seeing from a cost perspective and maybe how you might be passing that on to your end customer?
Speaker Change #123: That's helpful and then on the <unk> side we've.
Speaker Change #124: We've seen quite a run up in copper prices here to start the year can you maybe just give us some perspective on what youre seeing from a cost perspective and may.
Speaker Change #125: How you might be passing that on to your end customer.
Arthur Nagorny: Yes, so certainly we have seen commodity prices move up on the Copper side. I'd say we perceive that to be more a reflection of some supply side issues rather than a true demand issue at this point, although I don't see any clear evidence that it's likely to move back down again in the second half of the year.
Speaker Change #126: Yes, so suddenly we have seen commodity price move up on copper side, I'd say, we perceive that to be more.
Speaker Change #126: A reflection of some supply side issues, rather than a true demand issue at this point, although I don't see any clear evidence that it's likely to move back down again in the second half of the year.
Michael E. Reeves: Our approach to the wiring cable business follows one of two pathways. For larger, particularly longer lead orders, we tend to negotiate a fixed selling price with the customer and then make a pre-purchase of the required Copper to lock in our supply costs and ensure we do not have exposure to the demand. The alternative is that we have a floating selling price with customers that is ultimately fixed on the date of delivery based on the cost of copper on that day. So in both cases, we tend to see very limited exposure to variations in commodity prices that might impact our margin dollar generation.
Speaker Change #126: Our approach on the wire and cable business follows one of two pathways.
Speaker Change #126: For larger, particularly longer lead orders, we tend to negotiate a fixed selling price with the customer and then make a pre purchase of the required copper to lock in our supply costs and ensure we do not have exposure to moving commodity prices.
Speaker Change #126: <unk> is that we have a floating selling price with customers that is ultimately fixed on the data delivery based on the cost of copper on that day. So in both cases, we tend to see very limited exposure to variations in commodity price.
Speaker Change #126: It impacts our margin dollar generation.
Arthur Nagorny: Got it. And then on the Xerces side, you talked about above ground tanks, just briefly there. I think historically, Xerces has had some exposure to above ground tanks, but maybe it sounds like you guys aren't in it today.
Speaker Change #127: Got it and then on the <unk> side.
Speaker Change #128: You talked about above ground ground tanks, which.
Speaker Change #129: Just briefly there.
Speaker Change #130: I think historically xerxes.
Speaker Change #131: <unk> had some exposure to above ground tanks, but.
Speaker Change #132: Maybe it sounds like you guys aren't in it today. So just wondering if we could get your updated thoughts on.
Speaker Change #132: This side of the business and whether there's any potential to maybe expand into above ground tanks kind of going forward in the future.
Michael E. Reeves: So just wondering if we can get your updated thoughts on, you know, this side of the business and whether there's any potential to maybe expand into above ground tanks kind of going forward. Yeah, you certainly never say never. I think if there's a good business opportunity that plays to your strengths from manufacturing and a commercial organization, it's always worth looking. But I would say over the course of the last couple of decades, we've become very focused on underground storage tanks because we believe that's where we can bring the most value to our customers. It's where we've generally specialized our manufacturing processes and our technology development efforts. So I would say you're unlikely to see us.
Speaker Change #132: Yes.
Speaker Change #133: Certainly never say never I think if there is a good business opportunity that plays to your strengths from our manufacturing and our commercial organization. It's always worth looking but I would say over the last couple of decades, we've become very focused on underground storage tanks, we believe thats, where we can bring the most value to our customers, it's where we've generally specialized manufacturing.
Speaker Change #133: <unk> and our technology development efforts. So I would say you are unlikely to see us enter the above ground the marketplace for tanks in the near term, but we're always open to new and interesting business opportunity. So we would never rule it out.
Arthur Nagorny: Above ground marketplace for tanks in the near term, but we're always open to new and interesting business opportunities, so we'd never rule it out. All for me. Thanks.
Speaker Change #134: All for me thank you.
Speaker Change #135: Thanks, Jeff.
Operator: Our next question comes from the line of Tim Monachello with ATB Capital Markets.
Speaker Change #136: Our next.
Speaker Change #137: <unk> comes from the line of Tim Monticello with ATB capital markets.
Tim Monachello: Hey, I just wanted to follow up on the plans to fill the funding facilities and when you might hit that $150 million incremental revenue. It says here in the MD&A, a three to five year period, but that's a little bit detached, I would say, from the view of doubling revenue organics. I'm curious, is that just conservative guidance for three to five years, and maybe you can provide some more tangible? level of commentary on your expectations. Yeah, so I'll certainly do my best, Tim.
Speaker Change #138: Hey, I just wanted to follow up.
Tim Monachello: On the plans to fill the funding facilities and when you might hit that $150 million incremental revenue associated in the <unk>.
Speaker Change #140: DNA, a three to five year period, but that's a little bit detached I would say from the the view doubling revenue organically through 2030, So I'm just.
Speaker Change #141: Curious is that just conservative guidance that three to five years and maybe you can provide some more tangible.
Commentary on your expectations for filling that revenue capacity.
Michael E. Reeves: Obviously, we try to be realistic with everything that we provide to the market. Remember that the capital that we are deploying now and will complete the deployment of over what's left of this year and the very early part of next is to establish the initial production capability in those four facilities. And that initial production capacity tied to the initial footprint of machinery in those sites is capable of delivering $150 million or more of incremental annual revenue.
Tim: Yes, So I'll certainly do my best Tim Obviously, we tried to be realistic with everything that we provide to the market.
Tim: Remember that the capital that we're deploying now and we will complete the deployment of over what's left of this year and the early part of next year.
Tim: Is to establish the initial production capability in those four facilities.
Tim: And that initial production capacity tied to the initial footprint of machinery in those sites.
Tim: Is capable of delivering.
Tim: $150 million or more of incremental annual revenue.
Michael E. Reeves: Getting that initial production equipment up to full utilisation, certainly 3 years is not an unrealistic expectation. It could happen sooner than that. That depends entirely on our ability to execute well. And I'd give us a good chance, but I wouldn't want to make a commitment.
Tim: Getting that initial production equipment.
Tim: Equipment up to full utilization.
Tim: Certainly three years is not an unrealistic expectation it could happen sooner than that.
And it's entirely on our ability to execute well.
Tim: Give us a good chance, but I wouldn't want to make a commitment there.
Tim Monachello: Every one of these sites has extra floor space, which will allow us to put incremental capital to work that's nowhere near on the scale of what we've deployed in 2023 and 2024. And we'll have anywhere from $2.5 to $4 of annual revenue per dollar of incremental CAPEX tied to those additional equipment investments over the course of the years that come. I think that we could reach a point where these physical facilities are fully equipped and manufacturing at their maximum possible output in 5-ish years, but I'd say it might take a little longer than that.
Tim: Every one of these sites has extra floor space, which will allow us to put incremental capital to work that's nowhere near on the scale of what we've deployed in 'twenty three and 'twenty four.
Tim: We will have.
Tim: Anywhere from two five to $4 of annual revenue per dollar of incremental capex tied to those additional equipment.
Tim: Investments over the course of the years to come I think that we could reach a point, where these physical facilities are fully equipped and.
Tim: Manufacturing at their maximum possible output.
Tim: In five ish years, but I'd say it might take a little longer than that let's see how the markets evolve and our execution goes but.
Tim Monachello: Let's see how the markets evolve and our execution goes, but there are a couple of factors there. We're most focused right now on getting the equipment in, getting the production ramped up, and getting that initial array of equipment to the point where it's delivering on that $150M of incremental revenue. And 3-5 years is a reasonable time frame. Clearly, internally, we're targeting 3 or better. Okay, so we hit the high end of that sort of five-year range. What do you think, like, is there enough growth outside of those facilities that you can still hit your doubling target?
Tim: Theres a couple of factors there. So we're most focused right now on getting the equipment.
Speaker Change #143: If the production ramp and get that initial array of equipment to the point, where it's delivering on that $150 million of incremental revenue.
Speaker Change #143: <unk> three.
Speaker Change #143: Three to five years is a reasonable envelope clearly internally, we are targeting three or better.
Speaker Change #144: Okay. So if you hit the high end of that sort of five year.
Speaker Change #144: Range.
Speaker Change #144: Inc.
Speaker Change #145: Is there enough growth outside of those facilities that you can still hit your doubling.
Cargo.
Michael E. Reeves: As we sit here today, I have absolutely no remorse in putting the doubling of revenue by 2030 number on the table. We're very comfortable with our ability to get there.
Speaker Change #146: As we sit here today I have absolutely no remorse and putting the doubling of revenue by 2013 number on the table, we're very comfortable with our ability to get there.
Tim Monachello: Okay, I got it. Thanks very much.
Speaker Change #147: Okay got it thanks very much thanks.
Michael E. Reeves: That concludes today's question and answer session. I'd like to turn the call back to Mike Reeves for his closing remarks.
Speaker Change #148: That concludes today's question and answer session I would like to turn the call back to Mike <unk> for closing remarks.
Operator: Thank you so much for taking the time to join us here this morning. We'll look forward to hosting another call in August. I wish everybody a wonderful day. Thank you very much.
Michael E. Reeves: Thank you so much for taking the time to join US here. This morning, I will look forward to hosting another call in August.
Mike <unk>: Everybody have a wonderful day.
Speaker Change #150: Thank you very much.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Michael E. Reeves: This concludes today's conference call. Thank you for participating you may now disconnect.
Michael E. Reeves: Okay.
Michael E. Reeves: [music].
Michael E. Reeves: Okay.
Michael E. Reeves: Okay.
Michael E. Reeves: [music].
Michael E. Reeves: Okay.
Michael E. Reeves: [music].