Q3 2024 Mattr Corp Earnings Call
Good day and thank you for standing by welcome to the matter of third quarter 2024 results webcast conference call. At this time, all participants are in listen only mode.
After the Speakers' presentation, there'll be a question and answer session.
I ask a question. During this session you will need to press star one on our telephone you didn't hear an automated message you're back in your hand, it's race to withdraw your question. Please press star one again.
Be advised that today's conference is being recorded and like to hand, the call back over here to your first speaker today, making Mccann VP of external communications and ESG. Please go ahead.
Mccann: Good morning, before we begin this morning's conference call I would like to take a moment to remind all listeners that today's call includes forward looking statements that involve estimates judgments risks and uncertainties that may cause actual results to differ materially from those projected.
The complete text of matters statement on forward looking information is included in section four point all of the third quarter of 2024 earnings press release, and the MD&A that's available on SEDAR and on the <unk>.
Mccann: Company's web site at matter.
Speaker Change: 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 right.
Mike right: Good morning, and thank you for attending our third quarter conference call.
Mike right: Megan and I are joined by our senior Vice President of Finance and CFO Tom Holloway.
Mike right: The third quarter saw a massive continue to progress favorably against its key strategic objectives, while navigating mixed market conditions.
Mike right: 'twenty 'twenty four is a year of operational transformation and we remain on track to enter 2025 with that transformation substantially complete.
During the quarter match delivered consolidated results, including Brazil, which is now reported through discontinued operations of $250 million in revenue.
Mike right: $37 million and adjusted EBITDA and adjusted earnings per share of 23.
In parallel we completed the establishment and initial production with.
Mike right: Two new manufacturing sites in our composite technology segments.
Mike right: <unk> upgraded an additional legacy composite technologies production sites.
Mike right: Remained on schedule to complete both new manufacturing sites within our connection technologies segment.
Mike right: Announced the pending sale of our last remaining pipe coating business.
Mike right: Subsequent to the quarter announced the planned acquisition of Ammar cable and a transaction expected to be immediately and materially accretive while positioning our connection technologies segment for even more robust mid and long term growth across the north American highly engineered wire and cable markets.
Mike right: During the third quarter, North American and critical infrastructure demand remained broadly elevated and industrial demand moved upwards with matches 2025 outlook for these two sectors continuing to strengthen.
Mike right: As expected continued weakness was observed in the North American onshore oilfield market eurozone industrial sector and increasingly the global automotive market.
Mike right: The company generally expects weakness in these sectors to linger into and potentially throughout 2025.
Mike right: While we are confident in our ability to continue capturing market share across our product lines, regardless of underlying customer activity. We are acting quickly to lower costs tied to these specific end markets by approximately $20 million annually.
Mike right: We continue to believe that our investments in technology operational efficiency and enhanced production capabilities will support our ambition to double revenue by 2030, while driving EBITDA margins above 20% and once closed our acquisition of Ammar cable will serve to accelerate our progress towards these goals.
Mike right: I encourage any investor seeking to better understand the Amor cable business and how we believe it was favorably impacted later to review the November 8th transcript of our conference call on this topic.
Mike right: Finally, we continue to believe the intrinsic value of our business represents an excellent investment opportunity and consequently, we remained active under our normal course issuer bid throughout Q3 and expect to remain so moving forward.
Mike right: Looking at each of our segments.
Mike right: In the third quarter composite technologies saw sequential revenue moved out as expected.
This decline was driven by flex by <unk>, which was impacted by U S. Onshore oilfield completion activity will be seasonally lower.
Mike right: And by reduced sequential international revenue, which is tied to the specific timing of orders and deliveries.
Mike right: This was partially offset by <unk>, where fuel tank demand remained strong and our water products business set a new quarterly revenue record.
Mike right: Flex pipes continued share gains within its U S and Canadian onshore markets, including further large diameter product adoption.
Drove revenue in the third quarter associated with ultimate customers and end users in North America to move modestly higher year over year.
Mike right: Outperforming the average North American drilling rig count, which fell approximately 6% in the same period in <unk>.
Mike right: North American well completions, which fell nearly 11%.
Mike right: We currently anticipate a continued lowering of U S drilling rig count and well completion activity during the fourth quarter of 2024 as several customers are expected to face budget exhaustion before year end.
Mike right: While predicting go forward commodity prices is particularly challenging in a volatile geopolitical environment. We currently expect U S customer activity in early 2025 to move modestly above Q4 levels as new annual capital budgets come into effect.
Overall, we currently estimate north American onshore drilling rig and well completion activity levels in 2025 will on average be approximately 10% lower than the full year average of 2024.
Mike right: Our demonstrated ability to outperform key market activity indicators gives us confidence that the substantial investments made in flex by technology training and domestic operational infrastructure over the past several years have positioned the business well for the future despite near term industry headwinds.
Mike right: Within the Xerxes business Q3 revenue was modestly higher sequentially and virtually unchanged year over year. Despite September impacts to customer fuel and water project activities. Following hurricane damage in the southeastern U S.
Mike right: Sales of water management products reached a new quarterly high during Q3 as customer adoption of matches water storage and treatment solutions continues to rise and demand remains strong for very large diameter water storage and backup fuel techs in the U S data center markets.
Mike right: Fuel tank shipments were strong during the quarter, although customer mix was slightly less favorable sequentially and year over year as activity skewed to our largest customers, who generally attract a highest discounts resulting in year over year revenue and margin compression.
Mike right: This mix is likely to remain similar over the next two quarters before moving to a more typical and favorable ratio entering the Q2 2025 construction season.
Mike right: Our retail fuel customer base continues to demonstrate an ability to navigate underlying permitting challenges and continues to signal their desire to further elevate fuel station construction activity levels in 2025 and beyond.
Mike right: Of note over 711, and Murphy have offered bullish public updates in recent weeks supporting our belief that the industry remains in a secular growth cycle.
Mike right: We expect fuel tank shipments and related revenue to follow a normal weather and ground condition driven seasonal cycle.
Mike right: Slowing in mid Q4, and remaining subdued until late Q1 before stepping up as ground conditions.
Q3 saw the commencement of production at the new flex pipe large diameter product manufacturing site in Rockwall, Texas, and the new Xerxes large tank manufacturing site in Black switch South Carolina.
Mike right: Each of these locations will gradually elevate output over that first four quarters of operation and are expected to reach efficient levels of utilization around midyear 2025.
Mike right: During this ramp up period, we anticipate both sites will have a temporary unfavorable impact on the segment's margin profile.
Mike right: With this impact lessening each quarter.
Mike right: This segment will strategically balanced flex pipe production between its legacy Calgary and newly established Rockwell sites in this period of uncertain demand.
Mike right: And ensure the related cost basis, and both sites are appropriately managed.
Mike right: In Q3, the segment also experienced margin impacts associated with lower efficiency as a legacy Xerxes tank production sites, while undergoing a meaningful equipment upgrade which is scheduled to be completed during Q4.
Mike right: The segment incurred modest severance expenses during the third quarter as it adjusted its fixed cost base to reflect near term market conditions.
Mike right: And as expected to incur greater severance expense during the fourth quarter as it completes these actions.
Mike right: With production network upgrades in fixed cost reduction actions expected to be completed by year end.
Our strong 2025 outlook, xerxes fuel and water product demand.
Mike right: <unk> demonstrated ability to consistently capture market share in the flex pipe business, we expect composite technologies to regain revenue and margin momentum as we move beyond the seasonally slow fourth and first quarter period.
Mike right: Turning to connection technologies the segment set a new Q3 revenue record delivering modestly higher sequential revenue and nearly 10% higher year over year revenue.
Mike right: Sequential improvement was primarily driven by rising demand from the North American industrial sector and market share gains with industrial and automotive customers, partially offset by slowing total automotive unit production and as expected lower shipments into infrastructure applications based on project timing.
Mike right: During Q3, the segments sure flex highly engineered wire and cable business experienced an anticipated rise in demand stopped industrial products, primarily from its Canadian distributor customers, who are gradually rebuilding inventory levels as interest rates move lower in industrial activity trends.
Mike right: Hi.
Mike right: As expected sales of these stock products came at below average margins, which caused overall margins within the business to move sequentially lower.
Mike right: Since mid year. The business has also observed a gradually rising volume of quoting and ordering for nonstop higher margin industrial products tied to specific projects and is beginning to rebuild our backlog of such orders although related deliveries are unlikely to commence before the first quarter of 2025.
The segment's DSG <unk> premium heat shrink tubing business delivered year over year revenue growth in Q3, as a secured new customers and capture incremental market share in the North American industrial and both North American and European automotive markets.
Mike right: These gains were partially offset by a modest slowing of total vehicle production activity late in Q3.
Mike right: As several customers took corrective action in the face of profitability challenges, particularly related to electric vehicles.
Mike right: We currently anticipate this trend will linger into at least the first half of 2025 and consequently, the segment is taking action to adjust its cost base to align with these expectations.
Mike right: Looking forward the company would expect revenue in the connection technology segment to follow typical seasonal patterns modestly slowing during the fourth quarter before rebounding in the first quarter of 2025.
Mike right: The building momentum in North American industrial activity compounding already robust demand from infrastructure projects leads the company to have a favorable view of its opportunities within these sectors in 2025.
Mike right: This favorable view of industrial and infrastructure markets is enhanced by the pending acquisition of Ammar cable and the cross selling potential we believe will exist following an initial on boarding period.
Mike right: I encourage any investor seeking to better understand the cable business and how we believe it will favorably impact.
Mike right: To review the November 8th transcript of our conference call on this time.
Mike right: The successful capture of market share and utility nuclear and non stock industrial markets is a crucial component to the segments longer term growth and profit expansion strategy and a key driver behind our substantial ongoing investment to modernize and expand and bifurcate the segments North American production footprint.
Mike right: Progress on both of the segments New production sites remains on time and on budget with first production from our new DSG produce a heat treat factory in Fairfield, Ohio expected before year end and first production from our new Shaw Flex wire and cable factory in Vaughan, Ontario likely to occur around year end.
Mike right: Lastly, our Brazilian pipe coating operations.
Mike right: Following our announcement of its pending sale to valor <unk> is now reported as discontinued operations continued to execute safely and efficiently during the quarter delivering sequentially higher revenue and adjusted EBITDA.
Mike right: The business is fully booked into mid 2025 and based on the sequencing of project activity is currently expected to deliver revenue and adjusted EBITDA in Q4 that is similar to its level of performance in the first quarter of this year.
Mike right: We remain confident this business will yield full year 2024 financial performance, which is higher in 2023.
Tom Holloway: Tom will now walk through the company's third quarter financial highlights.
Tom Holloway: Thanks, Mike.
Speaker Change: As Mike just mentioned during the third quarter, a definitive agreement was entered into to sell the company. Its subsidiaries thermo tight its final remaining pipe coating business.
The transaction under which <unk> will acquire 100% of the shares of a thermo tight legal entity is subject to customary closing conditions and Brazilian antitrust review and approval.
Speaker Change: The company will retain all earnings from the business until the transaction closes and upon closing expects to receive the gross proceeds.
Speaker Change: Approximately $24 million.
Speaker Change: Or U S $17 5 million.
Speaker Change: So we're at 31 2024 exchange rates on our Caf III debt free basis subject to normal working capital adjustments.
Speaker Change: The regulatory approval for this transaction and subsequent closing is expected to conclude by mid 2025.
Thermo tight which was previously accounted for under the financial and corporate section when it was referred to as financial corporate and other is now accounted for as held for sale and its financial reporting is reflected as discontinued operations.
Speaker Change: Accordingly prior period information has been retrospectively revised to reflect this and continuing operations now excludes the results of the Brazil business.
Speaker Change: The third quarter's revenue from continuing operations was $226 2 million.
Speaker Change: 2% higher than the $221 9 million in the third quarter of 2023.
The increase of $4 $3 million from the third quarter of 2023 is reflective of an increase of $8 1 million and the connection technology segment, partially offset by a decrease of $3 8 million in the composite technology segment.
Speaker Change: Total consolidated adjusted EBITDA from operations, which includes discontinued operations was $36 7 million.
Speaker Change: However, adjusted EBITDA from continuing operations was $29 3 million.
Speaker Change: The 26, 9% decrease from the comparative period in the prior year.
This decrease of $10 $8 million is primarily attributed to a decline of $11 5 million and gross profit related to changes in product and customer mix.
Speaker Change: Higher legacy warranty costs and lower utilization in the composite technologies segment manufacturing facilities and the related impact on overhead absorption rates.
Speaker Change: We also recorded $3 $1 million related to our <unk> growth activities during the quarter with $2 $7 million included in selling general and administrative costs and <unk> 4 million and gross margin.
Speaker Change: While these <unk> costs are slightly below our expected spend rate the lower expense represents deferred spending during the third quarter, which will be spent in the fourth quarter of 2024 and the first half of 2025.
Speaker Change: All EMEA projects remain on time and on budget with initial production occurring on the timelines noted by Mike earlier.
Speaker Change: During the quarter the company recorded $2 $8 million lower short term incentive accruals and one $4 million lower legal and professional cost when compared to the comparative period of the prior year.
These movements were partially offset by $1 8 million in severance costs associated with organizational changes and right sizing the company's workforce.
Turning to segment results. The composite technologies segment revenue was $136 4 million.
Speaker Change: At two 7% decrease compared to the third quarter of 2023, and adjusted EBITDA was $20 3 million.
37, 5% decrease from the prior year third quarter.
Speaker Change: This revenue decrease was primarily attributable to decreased international flex type sales in the third quarter of 2024 compared to the same period in 2023.
Speaker Change: The adjusted EBITDA reduction was due primarily to a decrease in gross profit of $10 6 million.
Speaker Change: This was driven by a reduction in revenue and a $6 nine percentage point decrease in gross margin compared to the third quarter of 2023 attributed to a less favorable mix of product sales and lower overhead absorption within the segments manufacturing network.
Speaker Change: Third quarter 2024, adjusted EBITDA also includes $1 5 million and non capitalized EMEA cost within the segments reported selling general and administrative expenses.
Speaker Change: Connection technologies segment revenue was $89 $9 million, which was nine 9%.
Speaker Change: Higher than the third quarter of 2023, and adjusted EBITDA was $12 million, which was $2 6 million.
Speaker Change: Lower than the prior year third quarter.
Speaker Change: The increase in segment revenue was a result of higher demand for stock industrial products from Canadian distributors and increased sales and automotive markets in North America, and EMEA, reflecting market share gains.
Speaker Change: This was partially offset by lower sales in U S and Canadian infrastructure markets due to specific project timing.
Speaker Change: The lower adjusted EBITDA was driven by a reduction of three nine percentage points in gross margin, primarily due to a less favorable product mix within the starplex business together with $1 6 million of costs related to the two new facilities.
Speaker Change: In this segment.
Speaker Change: Discontinued operations, which currently consist primarily of the pipe coating operations in Brazil reported revenue of $23 6 million a.
Speaker Change: A decrease of 91, 9% compared to the third quarter of 2023, primarily resulting from the absence of revenue from the operations sold to generics and the fourth quarter of 2023.
Speaker Change: Included in the results of the comparative period.
Speaker Change: Adjusted EBITDA was $7 $5 million, which compared to the $88 $3 million recorded in the prior year third quarter, reflecting the aforementioned lower revenue and the impact of the operations previously sold.
Speaker Change: As discussed during our August earnings call. The final true up of the working capital calculation related to the sale to generic was reached during the third quarter of 2024.
Speaker Change: The final agreed upon cash outflow to settle the working capital adjustment of $10 $8 million was dispersed in the third quarter of 2024.
Speaker Change: Turning to cash flow cash provided by operating activities in the third quarter was $4 6 million compared to cash provided by operating activities from continuing operations of $24 3 million.
Speaker Change: In the prior year third quarter.
This result reflects the decline in operational results and a slightly higher investment in working capital during the quarter.
Speaker Change: Cash used in investing activities in the third quarter was $45 9 million.
Speaker Change: Reflecting the aforementioned settlement of working capital related to the PPG sale and a total of $35 3 million of capital spending on property plant and equipment, primarily EMEA projects.
Speaker Change: During the third quarter cash used by financing activities was $24 7 million.
Speaker Change: <unk> driven by $21 $9 million in share repurchases under the company's normal course, issuer bid and $2 9 million and lease liability payments, excluding the imputed interest on leases.
Speaker Change: Net cash used in the third quarter of 2024 was $67 6 million.
Speaker Change: As of September 32024, we had a cash balance of $186 million.
Net of $166 2 million.
Speaker Change: And $34 $8 million of standard letters of credit.
As of the end of the quarter the company's net debt to adjusted EBITDA ratio was 0.59 times.
Speaker Change: Lease liabilities remained relatively flat during the third quarter at $165 $8 million.
Speaker Change: As a reminder, we will be funding the <unk> cable transaction through a mix of balance sheet cash and our existing credit facility, which is expected to temporarily increase our leverage above our normal course target of two times.
Speaker Change: Pro forma for this transaction and based on the results from this quarter, our trailing 12 month net debt to adjusted EBITDA ratio at September 32024 would have been approximately two nine times or two times if lease liabilities were excluded.
As previously discussed we remain committed to returning to our normal course ratio of two times or below.
Speaker Change: As noted in the conference call regarding Ameren cable, we remind investors that since the beginning of 2021 to the middle of 2024, and including the expected capital outflow to acquire <unk> cable matter is deploying nearly $1 billion of.
Speaker Change: Under our all of the above strategy, while maintaining strict balance sheet discipline.
Speaker Change: In that period, we have paid down over $260 million on our credit facility deployed over $200 million into high return organic growth initiatives and repurchased over $100 million.
Speaker Change: Our nearly 10% of our shares.
Speaker Change: Post transaction matter will retain financial flexibility and expect to adjust capital allocation priorities to emphasize debt repayment.
Speaker Change: <unk> existing growth investments and continue share repurchases under our NCI.
Speaker Change: Capital expenditures in the quarter were $26 million, including outstanding payments to suppliers, which was all related to growth expenditures.
Speaker Change: These were primarily related to <unk> projects, which are intended to increase production capacity and efficiency within both segments.
Speaker Change: We continue to expect capital spending for 2020 forward to be in the range of $90 million to $100 million.
Speaker Change: <unk> projects for our composite technologies are now online and beginning production while connection technologies projects are expected to begin production late in the year end early 2025.
Speaker Change: 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.
Mike: <unk> remains focused on a narrow range of high growth critical infrastructure oriented product lines.
Mike: We continue to balance near term business performance with execution of value enhancing strategic actions and are confident that the operational transformation commenced in late 2023 will be substantially completed by year end.
Mike: Over the course of Q3.
Mike: You completed the establishment off and initial production within two new manufacturing sites in our composite technology segment significantly upgrades and additional legacy composite technologies production sites remained on schedule to complete both new manufacturing sites within our connection technologies segment.
Mike: The pending sale of our last remaining pipe coating business and subsequent to the quarter announced the planned acquisition of <unk> cable net transaction expected to be immediately and materially accretive.
Mike: All while returning capital to shareholders under our NCIC.
Mike: Normal seasonal and market cycles will continue to drive some variation in near term activity levels. However, we believe the underlying long term trends for each of mattress primary businesses are favorable.
Mike: <unk> them to remain so for several years.
Mike: <unk> 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 MBA programs, along with timely closing of the Amor cable transaction.
Mike: We're committed to lowering our post acquisition net debt and to continuing opportune of capital to shareholders.
Mike: We remain vigilant towards the potential impact of geopolitical events supply chain risks inflationary impacts and interest rate movements and continued to take steps designed to minimize our risk related to rising international trade friction.
Mike: The company views any action by central banks to continue lowering interest rates is favorable.
Mike: Likely to further accelerate and increase in broad industrial and infrastructure demand for the companys products, particularly from smaller customers and distributors.
Mike: We also generally believed the recently confirmed the outcome of the U S election cycle is likely to have favorable consequences to the majority of our U S focused business activity.
Mike: We currently anticipate typical seasonal activity slowing across all markets and near term unfavorable macro drivers within the North American onshore oilfield in global automotive markets.
Mike: <unk> Q4 revenue to be the lowest of 2024, yielding.
Mike: Yielding full year 2020 for revenue, which is similar to or modestly below the prior year.
Fourth quarter adjusted EBITDA is expected to reflect this lower revenue level and we will also be impacted by severance expenses and the ongoing recognition of EMEA costs.
Mike: We continue to observe broadly favorable indicators of demand across the north American industrial and critical infrastructure sectors for 2025 and beyond and believe we can continue to capture market share across our portfolio, including in those businesses faced by temporary slowing of market activity.
Mike: While the early portion of 2025, we will see massive building from the lower activity based established in Q4, while carrying gradually reducing under absorption tied to our new facilities. We firmly believe the company remains well positioned to deliver on its longer term growth profitability and cash flow objectives.
Mike: We expect to update commentary on 2025, when we release full year results at which time, we would anticipate the ammo cable transaction will close on North American oilfield customers will have confirmed that 2025 capital budgets and initial policy positions from the incoming U S administration will be clearer.
Mike: I will now turn the call over to the operator and open it up for any questions. You may have for myself Tom Omega.
Speaker Change: Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to retire a question. Please press star one again please.
Speaker Change: Please standby ROI composite Q&A roster.
Speaker Change: Our first question comes from the line of David Ocampo of core Mark Your line is now open.
Speaker Change: Thanks, Good morning, everyone.
Speaker Change: Good morning.
Speaker Change: Just on the restructuring that you guys are doing do you guys expect all the cost to be wrapped up by Q4, then that $20 million of cost savings to show up in 2025.
Speaker Change: Is that the right way to think about it yes.
Speaker Change: What's the right way to think about it.
Speaker Change: Okay, and then just more specific about I mean, you guys opened up the flex pipe facility.
Speaker Change: But you are restructuring the onshore market. So is it fair to assume that the staffing reductions that you guys are doing is more on your legacy smaller plate products.
Speaker Change: Yeah, obviously, the details are not something I want to get into too much here, but I would say our focus has been largely on ensuring that our fixed cost base is appropriate and that tends to be not.
Not the shop floor employees.
Speaker Change: Although we obviously have had to be thoughtful about how we balance.
Speaker Change: <unk> and <unk>.
Speaker Change: Go forward production activity between the Calgary sites and the new sites in Texas. So our addition of incremental stock in Texas on the shop floor will be a little slower than we would have originally imagined and there will be a little less production coming out of Calgary that we would've originally imagined. So it's more of a balancing act between those two sites.
Speaker Change: The majority of our cost reduction here is really about.
So fixed cost base of the organization.
Speaker Change: Okay. That's helpful. Then maybe a last one for me before turning the call over.
Maybe Tom can answer we've seen a pretty sizable working capital build this year.
Speaker Change: I'm just curious if thats all related to the four facilities that you are opening or have opened.
Speaker Change: Do we expect the working capital to continue to be a drag into Q4 and into 2025 has those connections.
Speaker Change: Facilities start to ramp up.
Speaker Change: Yes, that's a great question, so I would say the working capital issues in Q3, if we call them issues were primarily related to one business in our flex business and they were related to some international receivables, which half of the issue has been resolved. The other half is committed by the customer.
Speaker Change: In terms of <unk>, so we feel pretty confident that resolves itself. The other piece of the issue.
<unk> is an inventory build that we've seen which we are working on that to get that inventory down. Your your direct question about Q4.
Speaker Change: I've said, it before and I stand by our Q4 is tends to be our best working capital quarter of the year and we are committed to making that happen. This year as well. So I would not expect Q4 to continue to see working capital build.
I would actually expect it to start to release, some working capital on that to be our best best working capital quarter of the year. So that's how we're thinking about it.
Speaker Change: Okay. That's helpful I'll hop back in the queue.
Speaker Change: Thanks, David.
Speaker Change: Thank you our next question.
Speaker Change: Our next question comes from the line of Arthur <unk> of RBC. Your line is now open.
Speaker Change: Hey, good morning.
Speaker Change: Oil.
Speaker Change: So it sounds like your commentary is indicating that.
Speaker Change: It is possible that the composite technologies facility ramp ups I guess to run rate revenue could take longer than previously expected I guess just.
Speaker Change: Given the operating backdrop.
Speaker Change: Is there anything that we should consider here or anything that you would call out.
Okay.
Speaker Change: Hi.
You may have cut off the tail end, there, but I think I understood. The question is yes.
So obviously when the market activity levels surrounding our business change and they certainly have changed for the onshore North American oilfield market, which impacts our flex pipe business. Then you have to be thoughtful about how much production do you want to push through a site, whether it's new or old.
Speaker Change: So we've certainly taken I think an appropriate position on the pace of ramping of production and the new flex pipe facility in Texas, we are ramping production there, it's not quite as fast as we would've expected.
Speaker Change: That is a conscious decision just based on the number of active rigs and our outlook for the near term.
Speaker Change: Performance of customers so.
Speaker Change: But we are seeing the benefits of fundamentally more efficient manufacturing on a per meter basis in that site. We are seeing the benefits are fundamentally less expensive transportation to our west Texas operations from that site. So our general view of the economics of that site has not changed but I do think we.
Speaker Change: We will see less product come out of it in its first 12 months of activity than we would've thought standing here 12 months ago, just purely because of the activity levels in the market in terms of the new sites for <unk> in South Carolina. The market has absolutely not wavered in demand for large diameter fuel and water.
Speaker Change: So I don't believe that that ramp up will be any different than we would've originally anticipated. We've always said it would ramp over its first four quarters of activity and Thats still our expectation.
Speaker Change: Okay.
You called out the two hurricanes, making landfall late in the quarter how material of an impact is that expected to be in Q4, and do you expect any of that spill over into 2025.
Speaker Change: I think the areas that were most heavily impacted by those weather events are likely to be dealing with those consequences for several quarters.
Speaker Change: Fortunately they were not massively dispersed geographically so I think the impact in Q4 is likely to be.
Speaker Change: Nominal, but there's a small impact there we had some.
Speaker Change: Some of the projects that our customers are planning to execute late in Q3 that were impacted by this and in certain parts of that environment. Once you get into Q4.
Speaker Change: Difficult to execute and they tend to get pushed into the next construction season, which means they go out into the second quarter of next year, but I wouldn't call that.
Speaker Change: A material impact.
Speaker Change: Thanks.
Speaker Change: Okay, and then on Zurich seeds.
Speaker Change: And one of your major fuel tank customers recently indicated that they might be looking to close.
Speaker Change: Quite a number of stores across North America do.
Speaker Change: Do you expect this to have any impact on your business.
Speaker Change: How are you thinking about that so far no. So I.
Speaker Change: I agree with you I think.
Speaker Change: Many of our larger customers in the fuel business are private so they don't speak openly but I think you would find that those who have been in the business for an extended period of time are constantly reviewing and closing some sites and then constructing and opening new sites.
Speaker Change: You should expect I would expect that that particular customer will continue to follow the pattern that <unk> described here recently.
Speaker Change: For us it's the new construction of sites that really drives our business went out when I an existing site is shut down for any reason.
Speaker Change: The tanks that were buried when it was originally constructed.
Speaker Change: Tend to get excavated and then disposed off if they don't get reused anywhere so really the metric that matters for US is the quantity of new stores that are planned to be built and opened the scale of those stores and therefore, the quantity and size of tanks that they will consume and I would tell you that almost within.
Speaker Change: Our next section our customer base in the fuel business in the U S.
Speaker Change: Is very strongly signaling their desire to build more stores and 25% and they built in 'twenty four and the relative ratio of large stores or truck stops.
Speaker Change: <unk> continues to move up so I think that bodes well for demand in the <unk> fuel business broadly and really.
Speaker Change: Finding factor on what 25 looks like for <unk> and the fuel domain will be our ability to ramp production across our network to meet that customer's needs.
Speaker Change: Okay, and then last one for me here.
Speaker Change: Just given the outcome of the U S election.
Speaker Change: What kind of an impact would you expect kind of a broad import tax to have on your business.
Speaker Change: I think you called out in your prepared remarks that you expect the net positive impact overall in the U S election outcome. So I was just wondering if you can walk us through the puts and takes there. Thank you.
Speaker Change: Yes, it has been our opinion that almost regardless of the specific individual in the white house that the U S.
Speaker Change: As for several years been leaning.
Speaker Change: Consistent the more against trade with China.
Speaker Change: So we have for multiple years had a decoupling exercise in place were internally supplied products from our Chinese footprint into other parts of our.
Speaker Change: Heat shrink tubing business have effectively drops to zero and we found ways to make those products within the boundaries of North America and externally sourced Chinese made products have been.
Speaker Change: Reduced and we have found north American alternative sources or non Chinese alternative sources, with which we can replace when and if necessary. So I think we are positioned well to navigate whatever may occur in terms of tariffs, particularly on Chinese made products.
Speaker Change: Broadly speaking I don't think anything happens quickly in politics, but we would expect the inbound administration to seek to find ways.
Speaker Change: To make the permitting process, which impacts everything from oil and gas to new transmission and distribution lines for electrical utilities to power generation sites to LNG export footprints simpler it will take some time, but I think if they can be successful with those policies then we will find higher.
Speaker Change: Bridge levels of infrastructure construction activity, which bodes well for our businesses.
Speaker Change: I would say, while we've heard the mantra drill baby drill out of several mounts in the political world. The reality is that oil and gas companies in North America are not government controls they will make good prudent economic decisions and until they see macro trends that lead them to believe.
Speaker Change: With oil prices and natural gas prices gas prices are likely to rise and remain at higher levels. I think you should expect that their activity levels will continue to be muted certainly our own expectation.
Speaker Change: Thank you Mohammad our next question.
Speaker Change: Sure.
Speaker Change: Our next question comes from the line of 10 managed a lot of TB capital markets. Your line is now open.
Speaker Change: Hey, good morning, everyone.
Speaker Change: Great.
Speaker Change: Mike I think you provided some details in the prepared commentary but.
Speaker Change: Just trying to.
Speaker Change: Get a little bit better.
Speaker Change: Clarity on the Q4 guidance across the.
Speaker Change: The business line. So I'm wondering if you can just talk about.
Speaker Change: Your expectations on a business line basis or a segment basis.
Speaker Change: Excluding <unk> and severance costs, and perhaps some year over year sequential basis.
Yes.
Speaker Change: I'll do my best and then I will pass the microphone to Tom.
The hard part.
Tom Holloway: So I think from a revenue perspective, as we said in the prepared remarks.
Tom Holloway: We would expect both segments to move lower Q3 to Q4, which is fairly typical pattern.
Seasonal effects that are either greater or smaller depending on which business, but generally are there across all businesses.
Tom Holloway: We expect the seasonal slowing in composites.
Tom Holloway: Will be more pronounced than normal because we do think that we're likely to see a slowing of north American onshore oilfield activity, particularly in the U S. As we get into the very late stages with November and into the month of December.
Tom Holloway: All of our customers have indicated that likely to reach the conclusion of their budgeted spend before year end.
Tom Holloway: On the connection technology side again seasonal slowing.
Tom Holloway: More pronounced I think thats that degree of incremental.
Tom Holloway: Change is going to be smaller in that segment than it is in composites, but it's going to be there because we are definitely seeing indications from automotive customers, particularly in Europe to a lesser degree, but still there in North America.
Tom Holloway: May consider.
Tom Holloway: Longer than normal.
Tom Holloway: Christmas shutdowns facilities as they try to better balance their costs and their inventories. So we think we will see the impact of those.
Tom Holloway: Slowing effect in the fourth quarter. So as I said I think revenue will be the lowest of the four quarters of 2024 as a consequence of those behaviors and excluding the impacts that you listed we would expect EBITDA to move generally in line with that revenue, but but those items are there. So of course the pump talk.
Speaker Change: Yes, so just just around round that out I know you said, excluding certain things I'm going to include them for a minute just said that there's clarity for how you should expecting solar so the other piece of what Mike was referring to is and you talked about a little bit before is the ramp curve on some of our composite facilities is has been a little.
Speaker Change: Less linear than we would've liked it to be we still expect production to come up to speed in the second half of next year as expected, but we do anticipate some incremental under absorption costs in the fourth quarter, probably on the order of <unk>.
Speaker Change: Mid single digit millions $3 million to $4 million or so.
Speaker Change: And then of course I would be remiss not to just to remind you <unk> costs of $4 million to $5 million in the quarter, primarily sitting in the connection technology segment.
And severance cost of six to eight.
Speaker Change: Million in the fourth quarter.
Speaker Change: Evenly split across the two segments. So those are kind of a big moving pieces to get us to a number and then the last thing I'll just we haven't talked about it we said it in the prepared remarks, but reminder, that Brazil is now part of discontinued operations. So going forward you will see that removed from the continuing operations number so.
Speaker Change: A lot of moving pieces I know theres a lot of noise this quarter, but I wanted to try to provide that clarity.
Okay. That's helpful. Those under absorption costs that youre expecting to be elevated in Q4 can you provide some visibility on what that would've looked like in Q3, and when you think that those rule.
Speaker Change: Certainly on the rise.
Speaker Change: Yes, so I'd say in Q3 as I said that they were not linear so there were slightly more than the three to four but not material.
Speaker Change: We're kind of $4 million to $5 million of under absorption in those facilities in the third quarter and I think you can expect that to continue to come down pretty quickly as we get into next year. So first and second quarter, putting aside the revenue comment because of course, we are revenue coming down in some of those periods.
Speaker Change: But.
The under absorption itself will start to correct it.
Speaker Change: As we get into next year so.
Speaker Change: Hopefully I answered your question.
Okay, that's great.
Speaker Change: I apologize if I missed it but how should we be thinking about capex for the full year.
Speaker Change: Turning to her.
Speaker Change: Yes, so we're still holding to our $90 million to $100 million of Capex guidance range, I think where we're likely to be probably towards the top end of that this year in terms of spend there will be some there's always some timing as you get closer to your new year, some might slide into next year and so we'll see where we end up but I think we're going to be very close to that that range.
Speaker Change: And no reason to change it at this point.
Speaker Change: Okay.
Speaker Change: And then.
Speaker Change: On the international side.
Speaker Change: How are you expecting that in.
Speaker Change: 2025, I'm just trying to.
Speaker Change: I guess.
Speaker Change: Bridging the gap between lower.
Speaker Change: Sort of right sizing the flagship business likely muted.
Speaker Change: Muted, but probably largely flat activity in North America, and 25 versus <unk> 24, and what your expectation is for international on.
Speaker Change: On a year over year basis, yes, maybe I can just talk more broadly about flex fight and try to make sure that you have everything you need.
Speaker Change: Obviously.
Speaker Change: We will cross from.
Speaker Change: 24 into early 'twenty five operating at a considerably lower level than we were crossing from 'twenty three 'twenty four north American activity levels, particularly in the U S will be considerably lower than they were 12 months ago.
Speaker Change: As we said on the call I think average to average.
The activity drivers that are really applicable to our business in North America are going to be about 10% lower on average and 25 than they have been in 'twenty four.
Speaker Change: We are still gaining market share, particularly in our larger diameter products in North America.
Speaker Change: And I think there is a reasonable chance that that market share gain can offset that declined year over year and activity, but obviously hard to predict with perfection, but.
In and around a similar number in North America seems reasonable to believe.
Speaker Change: And I think internationally.
Speaker Change: We benefited from particularly large order internationally in the first half of 'twenty four we press released it in December of 'twenty three.
Speaker Change: I don't have in hand, right now.
Speaker Change: So for something that is a material project internationally. So hence you havent seen any additional follow up press releases, but we have a constant and gradually rising undercurrent of small to mid sized projects internationally.
Speaker Change: So at this point I think it would be prudent to consider that the revenue and the flex pipe business. All in all is likely to be very similar in 'twenty five to 'twenty for maybe a little lower maybe a little higher if we can capture some larger international projects, but I don't have anything in my pocket just yet.
Speaker Change: Okay. That's really helpful. I'll turn it back I appreciate the detail.
Speaker Change: Thanks, Kevin.
Speaker Change: Thank you our next question.
Speaker Change: Our next question comes from the line of <unk> ever set of National Bank Financial Your line is now open.
Speaker Change: Good morning, everyone.
Speaker Change: Good morning.
Speaker Change: So you mentioned the cost savings from more targeted at the fixed cost base could you go back into that and give us maybe just a bit more color around that rationalization. The split between factory workers versus salespeople and more specifically what kind of flexibility or capabilities do you think are being sacrificed.
Speaker Change: To reduce that cost and can you scale back up quickly.
<unk> groups.
Speaker Change: Those are all great questions I'll be able to answer some of them.
Speaker Change: Yes.
Speaker Change: So.
Speaker Change: When you when you lower production activity there is an impact on the factory floor. So there is unquestionably a portion of this cost savings that comes out of the factory floor.
Speaker Change: But.
Speaker Change: The majority and in fairness, when you think about the relative cost of employees in different roles.
Speaker Change: Employees, who are not on the factory floor tend to cost more.
Speaker Change: And then those who are.
Speaker Change: We have made some moves to rationalize leadership positions.
We have made similar moves to rationalize kind of middle management positions there.
Speaker Change: There have been some certain roles that we've chosen to eliminate in this process, but broadly speaking I would say we have worked very hard to execute.
Speaker Change: Our cost savings program here in a manner that.
Speaker Change: <unk>, our ability to deliver on market share gain to deliver high quality on time products safely in both of our production sites.
Speaker Change: To ensure that the momentum we have on the development of new technology, particularly the next size ranges up seven inch and eight inch is not impaired at all.
Speaker Change: So I feel very confident that if we were wrong and the market springs back more aggressively at some point in 'twenty five and we are currently predicting we will be in a position to take full advantage of that.
Speaker Change: And while you can never.
Speaker Change: Snap your fingers and replace really talented people I do think that we will have the ability to recruit individuals into key roles. If we need to refill them at some point in 'twenty five.
Speaker Change: That's helpful. Thanks and.
Speaker Change: And then if we're looking at the renewed demand for stock products.
Speaker Change: How long do you think that takes to start dry driving strengthening prices or is it just a complete mismatch between <unk>.
Speaker Change: Client demand.
Speaker Change: I think as I think I said on the last conference call I don't think were going to see a substantial movement in pricing for stock products. This year.
Speaker Change: Only because there is still.
Speaker Change: A few more participants in that market than there used to be and there are some organizations, who I think would consider that core business to be.
Speaker Change: Construction related housing why are things of that nature, who can make some of these stock products and when housing market slowed a little bit.
Speaker Change: Found their way into this sector.
Speaker Change: And hopefully soon the housing and other construction activities start to rise I'm sure. We will see them move back into their core markets, which would bode well, but I think the more important thing about margin profile generally for sure flex is getting back into a more normal rhythm of infrastructure project.
Speaker Change: Execution as I said on the last earnings call just the way the calendar is full in the second half of this year, we've had fairly modest nuclear activity fairly modest communication network activity.
Speaker Change: And we've had some just the timing of deliveries into specific utility customers have been a little lower in the second half than in the first half.
Speaker Change: I think getting back into a more normal.
Speaker Change: Ratio of those infrastructure products too.
Speaker Change: Rising industrial stock product demand will help margins in the right direction ensure flex as we move into 2025.
Speaker Change: Thank you very much and just one last one if we don't see Capex spillover from 2024 into 2025 do you think you're still on track for a 30 ish 50 ish million dollar spend next year.
Speaker Change: Yes, I'd say were probably on the upper end of that next year.
Speaker Change: 50 ish, maybe maybe a little more because I do anticipate probably a little spillover, but.
Speaker Change: Short answer is yes, we're probably on the upper end of it in two.
Towards the tail end of our significant organic.
Speaker Change: Investments.
Speaker Change: Thank you very much I'll turn it over.
Speaker Change: Thank you Barbara for next question.
Speaker Change: Our next question comes from the line of Gary Link of Canaccord Genuity. Your line is now open.
Gary Link: Hey, good morning, everyone.
Gary Link: What just as we think about 2025.
What <unk> expenses should we expect next year.
Speaker Change: Yes, I think with with Q3 being a little below some of that shifting into Q4, so $4 million to $5 million in Q4, we anticipate eight to nine next year now so it kind of shifts a little bit probably pretty evenly spread across the first two quarters I would say that the total total spend if you add up this year in <unk>.
Speaker Change: Next year is still in line with what we had anticipated but.
Speaker Change: Little bit higher next year, so there'll be a little bit lower this year.
Speaker Change: Okay and.
Speaker Change: What's the what's a good guess for the impact of the.
Speaker Change: Inefficient absorption of overhead on the connect connection technologies facilities that will be ramping up next year.
Speaker Change: I think we're going to be the impact will be materially less than we are seeing in composites.
Speaker Change: As a reminder.
Speaker Change: These are not net.
Speaker Change: New facilities in connections. These are relocations, so instead of ramping.
Speaker Change: Under new demand from zero, we will have preexisting demands that we will transition from the current site to the new sites.
Speaker Change: I think there'll be a modest but not not nowhere close to what we see with confidence.
Speaker Change: Okay. That's helpful.
Speaker Change: What does corporate EBITDA look like.
Speaker Change: Going going forward is this quarter a good a good run rate or.
I think this quarter benefited from a couple of things we called out in our in our MD&A. So there were a couple of one times.
Speaker Change: Still believe that the $6 million to $7 million a quarter is the right run rate and that's that's what you'll likely see going into next year.
Speaker Change: Okay.
Speaker Change: And then last one just.
Speaker Change: The MD&A states.
Speaker Change: Demand across most of your businesses you expect to outperform the.
Speaker Change: The kind of the headwinds on onshore onshore oilfield and global automotive headwinds can I take that to assume both.
Speaker Change: Or are kind of flattish in 2025 or how.
Speaker Change: How should I think about that statement.
Speaker Change: In those specific businesses, so flex pipe and then the automotive oriented piece of the DSG business.
Speaker Change: Flat year over year, I think is about the right way to think about it underlying market activity lowering market share gaining.
Speaker Change: Yielding roughly flat year over year in those two pieces.
Speaker Change: And the other two have more growth.
Speaker Change: Yes.
Speaker Change: We'll talk some more about what we think that scale of growth can can be but I think the underlying drivers for the <unk> business for the short flex business and for the industrial and infrastructure oriented piece of the DSG business are generally very favorable.
Speaker Change: Okay.
Speaker Change: Okay. That's helpful color I'll turn it over there. Thanks. Thanks.
Speaker Change: Thank you bottom line for our next question.
Our next question comes from the line of Michael Tom TD, Colin Your line is now open.
Speaker Change: Thank you good morning, good morning.
Speaker Change: When thinking about the $20 million of annualized cost savings I am not sure. If you've provided this or not already but how do we think about that being allocated are spread across the business in terms of.
Speaker Change: Composite connection and corporate.
Speaker Change: So I would think about it as being.
Speaker Change: Order of magnitude three quarters composite.
Speaker Change: One quarter connections and a relatively small amount in corporate.
Speaker Change: Perfect. Thank you.
Speaker Change: Question regarding the water business I don't think we've.
Speaker Change: Talked about it much on this call, but it does look like it had a.
Our strong quarter was an area of strength and I'm wondering if you can comment a little bit further on the performance of that business in the quarter and.
Speaker Change: Maybe talk about some of the drivers I think you called out strong data center demand is that the primary driver to the growth you saw was that just a contributor and you still saw growth in your more conventional.
Speaker Change: Applications.
Speaker Change: Yes, so growth across the board in the water business, but certainly.
Speaker Change: The tank piece, so we sell a variety of products in that water business, one of which is the underground storage tanks for various types of water.
Speaker Change: We have seen particularly strong demand for underground water storage tanks over the course of the 2024 construction season, so that tends to be Q2 Q3 into the early part of Q4.
It's a business obviously it has a seasonal cycle to it but this quarter as I said Q3 was the best quarter, we've ever had in that business and I think it bodes very well for next year.
Speaker Change: The demand is there.
Speaker Change: The addition of demand for very large underground water storage tanks and supportive data centers.
Speaker Change: It's something that really wasn't a huge part of our view of things at this time last year has become a much bigger parts. This year and as I've mentioned on previous calls one of our challenges in servicing that particular sub sector.
Speaker Change: Is our ability to produce very very large tanks.
Speaker Change: We don't have as much capacity in that particular sub sector as we would like to have.
Speaker Change: But as we roll from the end of this year into the first part of next year, we will.
Substantially increase that capacity, so I'm hopeful that as we move through the 2025 construction season for water that will continue to see some new record set.
Speaker Change: That's helpful. Thank you and then just.
Speaker Change: One housekeeping question in the release you highlighted.
Speaker Change: Just under $1 million of non ordinary warranty costs and the opposite technology segment.
Speaker Change: I Wonder if you can clarify what that relates to and is there any <unk>.
Speaker Change: The risk of ongoing costs of this nature in future quarters.
Speaker Change: I'm happy to cover that.
Speaker Change: There have been at times some issues related to tanks that were built sold and installed before we owned the <unk> business.
Speaker Change: <unk>.
Speaker Change: And in this quarter, we addressed some of those lingering items with customers.
Speaker Change: And therefore called it out.
Speaker Change: You can never say never.
Speaker Change: But I would hope that there is no more need to call that out in future quarters.
Speaker Change: Perfect I'll leave it there thank you.
Speaker Change: Thank you <unk> for next question.
Our next question comes from the line of Ian Gillies of Stifel. Your line is now okay.
Speaker Change: Good morning, everyone. Good morning morning.
Speaker Change: As it pertains to flex pipe.
Speaker Change: Does the range of outcomes.
Speaker Change: For potential margins to come from that business shifted lower just given the change in outlook.
Speaker Change: Given utilization may not be where you would've thought it to be at some point and I don't necessarily mean and the mean in the near term like over that over the medium term as had shifted lower.
Speaker Change: So in the medium to long term it absolutely has not shifted lower if anything we still have the expectation that in an environment where demand is.
Speaker Change: Supportive of growth that we would see margins continue to improve.
Speaker Change: Large diameter products, particularly those made in our Texas site now yield.
Speaker Change: Yield substantially higher margins than the equivalent products made in Calgary.
Speaker Change: Understood I'm acknowledging we're getting a bit long here, so I'll turn the call back over.
Speaker Change: Thanks.
Speaker Change: Thank you Im showing no further questions at this time I would now like to turn back to Mike <unk> for closing remarks.
Mike: So we appreciate everybody's interest in the company this quarter and thank you for the questions and look forward to speaking again, when we report full year results at the Middle of March next year. Thank you very much.
Speaker Change: Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Yeah.
Speaker Change: [music].