Q3 2025 Mattr Corp Earnings Call
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Speaker #1: And now, I'd like to introduce your host for today's program, Meghan MacEachern, Vice President, Investor Relations and External Communications. Please go ahead.
Speaker #2: 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.
Speaker #2: The complete text of matter statement on forward-looking information is included in section 4.0 of the third quarter 2025 earnings press release. In the MD&A that is available on Cedar Plus and on the company's website at matter.com.
Speaker #2: For those joining via webcast, you may follow the visual presentation that accompanies this call. I'll now turn it over to Mattr's President and CEO, Michael Reeves.
Speaker #3: Good morning and thank you for attending our third quarter conference call. Today, Meghan and I are joined by our Senior Vice President of Finance and CFO, Tom Holloway.
Speaker #3: Q3 was the first full quarter following the conclusion of matter's four-year fundamental transformation. Which included the divestiture of nine businesses, the reshaping of our North American production footprint, and the onboarding of our recently acquired Ammer Cable business.
Speaker #3: With these complex strategic activities now complete, the organization is focused on levering its high-value portfolio of critical infrastructure products to enable progressively greater free cash generation and profit expansion.
Speaker #3: During the quarter, matter delivered year-over-year revenue growth of 39% and adjusted EBITDA growth of 16%, primarily driven by the addition of Ammer Cable to our connection technology segment.
Speaker #3: The company also continued to benefit from strong demand in composite technologies, with the segment delivering further progress on key technology development and operational efficiency initiatives during the quarter.
Speaker #3: Our teams remain nimble, resilient, and cost-conscious in the face of a challenging near-term business environment, and we continue to focus on those variables we can control.
Speaker #3: Across matter, we are consistently prioritizing those actions and investments necessary to enable sustained technical differentiation, production flexibility, and progressively greater operational efficiency. Near-term business performance is likely to be impacted by continued economic weakness in certain key geographies.
Speaker #3: Which we anticipate will incrementally moderate customer buying behavior during the seasonally slow year-end period, particularly in the Canadian, European automotive, and energy extraction markets.
Speaker #3: As a consequence, we anticipate typical fourth quarter lowering of revenue and adjusted EBITDA will be more pronounced than normal. Representing a low point for the year.
Speaker #3: Consistent with our historical approach to balance sheet management, the company expects to primarily allocate capital to debt repayment in the near term. Tom will have some further comments on capital allocation later.
Speaker #3: Turning to review the performance of each segment during the recently completed quarter, connection technologies delivered year-over-year revenue and adjusted EBITDA growth of 105% and 62% respectively.
Speaker #3: Wire and cable revenue moved modestly higher sequentially, with relatively stable Ammer Cable revenue enhanced by increased ShoreFlex sales, which set a new quarterly revenue record. This was accompanied by an acceleration in the delivery of backlog from its recently relocated manufacturing site, demonstrating the new location's productive output and efficiency potential.
Speaker #3: Wire and cable margins moved sequentially lower, on a less favorable revenue mix. Primarily the result of reduced sales into Canadian mining and global oil field applications, partially offset by higher sales into data center and utility applications.
Speaker #3: In early Q3, US tariffs were introduced, which directly impacted the primary copper supply chain of both ShoreFlex and Ammer Cable. Moving quickly and creatively, matter's wire and cable team rapidly converted this supply chain from tariffed to non-tariffed sources.
Speaker #3: Although this conversion led to less favorable payment terms and an associated increase in working capital during the quarter, it avoided tens of millions of dollars in annualized tariff expense.
Speaker #3: Revenue from the segment's DSG CANUSA business was relatively flat sequentially. The business experienced sequential margin compression, driven primarily by higher freight and tariff expenses, as the finished goods inventory proactively built prior to relocation of the business's North American manufacturing footprint neared exhaustion and output from the new Ohio site required supplementation with internationally produced products.
Speaker #3: While tariff and economic impacts remain a near-term concern for the segment, our talented teams have demonstrated their ability to mitigate external effects with speed and agility.
Speaker #3: Our commercial teams continue to offset slowing Canadian mining and industrial and global oil field activity by successfully capturing additional sales in utility, data center, and international mining markets.
Speaker #3: In parallel, we continue to closely watch for incremental copper-related tariff announcements, which could impact our business. The company expects fourth quarter revenue and adjusted lower, as stronger EBITDA within the segment will move sequentially DSG CANUSA performance, driven by rising production from the Ohio site, is more than offset by significantly lower demand for wire and cable in the Canadian industrial stock and project sectors.
Speaker #3: These sectors have been hit particularly hard by the contraction of Canada's economy, with broadly lower industrial activity compounded by an aggressive inventory reduction drive from distributors serving the sectors.
Speaker #3: We anticipate Canadian industrial demand will remain similar to fourth quarter levels for several quarters. Looking past the near-term disruption of tariff-induced headwinds, we maintain our constructive long-term outlook for electrification-driven demand across the segment and are pleased with the progress of our strategic actions intended to improve operational efficiency and enhance exposure to utility, nuclear, global mining, data center, and broader US industrial end markets.
Speaker #3: Turning to composite technologies, the segment's third quarter revenue and adjusted EBITDA decreased by 4% and 2% respectively year-over-year. FlexPipe revenue and adjusted EBITDA moved lower sequentially, as underlying oil field activity levels continued to decline in the face of a depressed oil price.
Speaker #3: Mostly offsetting this weakness, FlexPipe continued to drive customer adoption of new technology, with larger diameter products nearing 50% of North American revenue generation during Q3.
Speaker #3: This continued share gain enabled FlexPipe to limit year-over-year North American revenue contraction to 3%, despite a reduction in well completion activity of 16% during the same period.
Speaker #3: Productivity expansion from FlexPipe's new Texas site remains on schedule, and the business continues to anticipate the release of additional, larger diameter products around the year-end.
Speaker #3: Expanding FlexPipe's addressable market by 50% or more over time. Xerxi's revenue in the third quarter was modestly lower sequentially, as lower than planned production from new and newly refurbished manufacturing sites during Q2, impacted the volume of tanks available for Q3 shipment.
Speaker #3: These production constraints continue to improve as workforce proficiency across Xerxi's network rises, with Q3 total tank production rising by over 10% compared to the prior quarter.
Speaker #3: Customer demand for Xerxi's market-leading solutions remains high, with orders for products serving retail fuel, data center, fire suppression, and broader infrastructure markets exceeding revenue generation throughout the first three quarters of the year.
Speaker #3: At the end of Q3, the Xerxi's order backlog stood at a new record high. During the third quarter, matter acquired an intermediary which had historically facilitated the supply of metallic components to the segment.
Speaker #3: This acquisition secures a multi-decade exclusive supply agreement with the ultimate manufacturer, significantly reducing costs, lowering tariff exposure, enhancing supply chain control, and lowering business risk.
Speaker #3: The transaction involved minimal integration or onboarding activity, and is expected to deliver an after-tax internal rate of return significantly above the company's 20% target.
Speaker #3: We anticipate segment revenue and adjusted EBITDA will move sequentially lower in the fourth quarter, as unfavorable oil prices prevail, and normal holiday season slowing
Speaker #1: Conditions will lower the number of Xerxes tank shipments approaching year end . Looking beyond quarter , we believe the composite the fourth technology segment is positioned to outperform its markets in the coming years as efficiency and increasing output from its newly established and upgraded Xerxes , combined with facilities the introduction of new flex pipe technology , are expected to create significant growth opportunities for the segment in the mid and long term .
Speaker #1: will now Tom walk us through some additional financial details . Thanks , Mike .
Speaker #2: Third quarter from continuing revenue operations was $314.9 million , 39% higher than the third quarter of 2024 . While adjusted from EBITDA continuing operations was $34 million , a 16% increase from the comparative period in the prior , primarily attributed to the inclusion of Amr cable .
Speaker #2: Results . In 2025 . The connection Technology segment delivered a new third quarter revenue record of $184.2 million , which was 105% higher than the third quarter of 2024 , with segment adjusted EBITDA being $7.5 million higher than the year prior .
Speaker #2: Both outcomes are primarily driven by Amr cable's results being included within the reported numbers segments . Despite the higher segment revenue , sales mix in Amr cable was less sequentially and elevated freight and tariff related costs in the DSG canusa business impacted profitability .
Speaker #2: Composite technology segment revenue was $130.7 million , a 4% decrease third compared to the quarter of 2024 . While adjusted EBITDA only decreased by 2% over the same time period .
Speaker #2: This decrease in revenue was primarily attributable year over to year declines in North American oil field . Well completions , which were partially offset by flex pipe , larger diameter sales technology gains , segment adjusted EBITDA in 2024 Q3 included $1.5 million of Meoh related costs that were not present in the current year .
Speaker #2: Turning to cash flow . Cash provided by operating activities from continuing operations in the third quarter was $6 million . This heavily was impacted by an increased investment in working capital due to a significant shift in copper supply chain within our wire and cable businesses to mitigate tariff impacts , which resulted in shorter supplier payment terms .
Speaker #2: This unfavorable change in working cycle was more than capital offset by the tariff savings achieved used in . Cash investing activities in the third quarter was $33.1 million , which included capital spending on property , equipment plant and of $14.6 million and the $22.5 million business acquisition discussed previously .
Speaker #2: Partially offset by a receipt of a modest working capital related to settlement the Amr cable acquisition . During the quarter , cash provided from financing activities was $13.2 million , primarily driven by $21.7 million of net borrowings on the credit company's facility , largely related to funding the acquisition .
Speaker #2: Cash outflows included the repurchase of 445,000 shares under the company's normal course issuer bid and lease liability payments at quarter end. The company's net debt to adjusted EBITDA ratio was 3.9 times, or 2.8 times when its lease liabilities are excluded.
Speaker #2: reflects the This impact of higher working capital tied to tariff mitigation , modest borrowings to fund the small Q3 acquisition and a sequentially lower trailing 12 month adjusted EBITDA .
Speaker #2: We remain committed to returning to a normal course ratio of two times or below and will be prioritizing debt reduction in the near term to ensure maximum future balance sheet flexibility.
Speaker #2: While we anticipate pausing activity under our share repurchase program in the short term , this does not represent a change in long term strategy .
Speaker #2: Capital expenditures recognized in the quarter were $14.3 million , with $14.6 million of cash deployed , including $7.8 million of cash outflow tied to capital expenditures .
Speaker #2: Previously accrued . Q3 expenditures capital included $10.8 million related to growth projects , primarily with new associated product readiness and production equipment , intended to increase manufacturing capability and efficiency within both segments .
Speaker #2: Full year 2025 capital spending expectations have been revised down to 50 to $60 million from our previously communicated range of 60 to $70 million .
Speaker #2: This is driven by spending reductions and efficiencies , and does not represent costs that will move into 2026 . We anticipate 2026 capital spending will be within the company's previously communicated normal run rate range of 40 to $50 million .
Speaker #2: I will now turn it back over to Mike .
Speaker #1: Thank you . Tom . Over the last three and a half years , we have fundamentally enhanced our ability to efficiently develop and deliver highly differentiated , critical infrastructure products from an optimized footprint across the matter organization .
Speaker #1: We are tightly focused on accelerating workforce proficiency and operational efficiency to enable margin and cash flow enhancement . In parallel , we continue to exercise tight spending control , adjusting our cost base as needed to appropriately reflect activity levels .
Speaker #1: As previously noted , given our current view of likely market conditions and customer demand , we expect our reported business performance in the fourth quarter will be below the third quarter of 2025 .
Speaker #1: Our outlook for 2026 remains cautious given the impact of ongoing macroeconomic and geopolitical uncertainties experienced during the second half of 2025 and the potential impacts .
Speaker #1: future Such factors may have on certain markets . The company serves . The company remains optimistic regarding the benefits of recent investments to develop new technology , enhance manufacturing capability , improve operating efficiency and acquire Amr cable .
Speaker #1: We also remain optimistic that robust near-term demand for the company's products in US infrastructure applications , including fueling network renewal , water management , data center construction , utility expansion and mining will persist for an extended period of .
Speaker #1: In parallel , the company is experiencing significant declines in demand for wire and cable in the Canadian industrial and mining sectors , expects depressed commodity prices to weigh on oilfield sector activity for the foreseeable future , and cannot yet determine the potential for direct tariffs on Canadian made wire and cable products sold into the US utility market .
Speaker #1: Consequently , the company will not be providing an outlook for full year 2026 at this time , but anticipates providing such an outlook when it reports Q4 2025 results .
Speaker #1: Despite the near-term turbulence associated with macroeconomic and geopolitical uncertainty , we retain high conviction that our differentiated technologies , which support increased generation , movement and use of electrical power , and the ongoing transition to composite fuel and water materials in management applications , provide matter with substantial long term growth and profit expansion opportunities .
Speaker #1: 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 , certainly .
Speaker #3: And our first question comes from line of the Tim Monticello from a Capital Markets . Your question , please .
Speaker #4: Hey , thanks . Good morning .
Speaker #1: Good
Speaker #1: morning .
Speaker #5: Good morning .
Speaker #4: I just want to try to calibrate the level of change in the outlook across business lines . It sounds like you're taking a more conservative stance around capital allocation and the outlook is probably become a weakened relative to where you thought it was in .
Speaker #4: The last reporting cycle . So maybe can you talk a little bit about , you know , under absorption trends across the four facilities when you expect to hit normalized capacity in each one and then I guess the range of of growth trajectories that you think you might achieve in each business line in 2026 .
Speaker #1: Yeah , I'll certainly address some of that . Obviously , we've been clear that we'll speak more about 26 when we report Q4 results .
Speaker #1: I think we need a little more time to see how certain things will unfold. But I'll speak some more about what those items are.
Speaker #1: More specifically in the new facilities . Very happy with the progress of the flex pipe facility in the Dallas area . The Xerxes facility in South Carolina is continuing to ramp up , and the flex facility that relocated within Toronto allowed that business to deliver a new record revenue quarter in Q3 .
Speaker #1: So those three sites either are already at or will absolutely be at a normalized level of production . As we roll into the first half of 2026 , where we've had more challenge here recently has been the DSG facility in Ohio , which is relocation of production activity from Canada into the US .
Speaker #1: We faced a number of challenges there , which I spoke about on the last earnings call , and those challenges persisted in the first part of Q3 , which led to that facility falling below our expected production output levels and required us to import product made in our German and Chinese facilities to meet North American demand at levels that were above our expectations for the quarter .
Speaker #1: So we did incur some incremental freight logistics and tariff expenses associated with plugging that gap . The the production in that facility has ramped substantially as we've the rolled through tail end of Q3 and into early Q4 .
Speaker #1: It has already surpassed the productive output of Canadian the facility that it replaced . So we are well on the way to being back on track with that facility .
Speaker #1: And I would expect that we will be at a normalized level of production there in the first half of 26 , as originally anticipated .
Speaker #1: So some short term pain , but not something that I expect will linger for an extended period of time . I think when we talk about our outlook , really the the one thing that has meaningfully changed from our last earnings call to today is the effect of Canadian economic slowing on industrial demand for wire and cable in Canada .
Speaker #1: We have seen that demand level drop quite substantially from the middle of Q3 to today . And I think it's likely to stay at a relatively low level throughout Q4 and probably well 2026 .
Speaker #1: into Underlying industrial demand has absolutely lowered , and our distribution partners are , as you would expect , working hard to reduce their inventories , which further compounds the challenge .
Speaker #1: So what you'll see from us in the wire and cable space is cost reduction actions that have effectively already been taken . And an aggressive reallocation of resources to drive incremental growth of sales of wire and cable products into US utility data center and other applications .
Speaker #1: As we attempt to overcome the shortfall in Canadian industrial demand . So I know that doesn't give you everything you've asked for , but hopefully it gives you enough .
Speaker #4: Yeah , helpful . understanding that it's probably difficult from your perspective to have a view on 26 , but Q1 is not too far away .
Speaker #4: There's some seasonal factors that are impacting Q4 on a sequential basis , and probably , you know , overshadowing some of the absorption improvement that you might in Q4 .
Speaker #4: So about when you think margins in Q1 and seasonal trends and filling up those facilities , is it a reasonable expectation to think that margins should improve sequentially in Q1 and Q4 ?
Speaker #1: I think I think there is a wild there that you the card in answer to right now , and that is the potential levying of tariffs on shore flex .
Speaker #1: made Canadian wire and cable shipped into the US . As you may recall , there was an expectation that the US government would make further announcements on their copper related tariffs on the 28th of October .
Speaker #1: That date has come and gone . There have been no announcements , although that could well be due to the government shutdown . So we are waiting to see if something announced there's there and if that's something .
Speaker #1: Impacts us . So with that there's we one caveat , see similar normally degrees of seasonal impact in Q4 and Q1 . The businesses that are seasonally affected largely are in the composites business , where ground conditions tend to be a factor in both quarters .
Speaker #1: So I would say I don't see macro conditions or seasonality being materially different Q4 to Q1 . There are some upside opportunities . There is this tariff thing that we're waiting to see how that settles .
Speaker #1: And at this point , I think that's about all I can tell you .
Speaker #4: guess the one segment where I you might see some upside for seasonality would be flex pipe , just given the exhaustion in Q4 .
Speaker #5: There's certainly .
Speaker #1: Certainly the potential , I think we think I also need to see where oil prices move to . They sit in the high 50s today with some potential that they could move lower .
Speaker #1: So that obviously is an effect that we need to be thoughtful around right I now . would expect activity levels would follow a normal seasonal track , which means we're slower as we go into the holiday season , and then we start to see activity move up as we roll into , let's say , the second half of January .
Speaker #1: So we'll have to we'll have to see how the customers respond to oil prices . I doubt there'll be a material movement provided oil price stays where it is now .
Speaker #4: Okay . And just on Canadian industrial demand for wire and cable , is that isolated to like a lower margin products or stock are you seeing that across some of the higher margin product lines as well .
Speaker #1: Yeah, we've seen it across the industrial sector. So, projects and stock products have been impacted very similarly. Obviously, we don't have perfect insight into other suppliers in that space, but we can tell by quoted lead times that I think everybody working in that space is seeing exactly the same effects.
Speaker #4: All right . Thanks for the commentary . I'll turn it back .
Speaker #5: Thanks .
Speaker #3: Thank you . And our next question comes from the line of Ian Gillies from Stifel . Your question please .
Speaker #6: Good morning everyone .
Speaker #5: Good morning. Good morning.
Speaker #6: Can little you talk a bit about the margin dynamics connection technologies and composite technologies sequentially ? Just revenues reasonably flat . Margins are down .
Speaker #6: Is it solely due to product mix, or is there product price inflation? I'm just trying to reconcile that.
Speaker #5: Yeah . So I mean I think I'll take the first stab at that . Are you asking Q2 to Q3 Ian or are you asking Q3 ?
Speaker #6: Yeah, yeah, yeah. Specifically Q2 to Q3.
Speaker #5: mean , I Yeah . I think if we if we look at connection technologies , I mean , we had we had left the market know that we thought cable's margins would be down quarter over quarter given the mix .
Speaker #5: And that played out about how we expected .
Speaker #2: We saw some good data center orders , which are great . They fill the they fill the pipeline and it's good business , but it's slightly lower margin than some of the oil field or mining activity that we see in that business from time to time .
Speaker #2: So, that played out about how we expected. I think the big wild card here, and the big impact, was the DSG business.
Speaker #2: The Ohio facility . And in my prepared comments and mine , we talked about the fact that because of production struggles in that facility , we had to augment it with German and China production from our other facilities .
Speaker #2: Get that across to North America to meet customer demand , which is great . But the cost of doing that is we had expedited , expedited freight costs and tariffs on those products to get them over here at a much level than we higher anticipated , that we do not anticipate persisting , which is why you will likely see DSG margins move up in Q4 .
Speaker #2: But that's the biggest dynamic that was playing out in that particular connection . Technology space .
Speaker #6: Okay . And then stepping back , looking at the balance sheet , do you feel the need to pursue asset sales or any other sort of discrete financing to plug the balance sheet , do you think you or can work your way this through
Speaker #2: feel
Speaker #2: feel mean , we very ? No . I confident with our ability to plug our way through this . I mean , our secured net debt covenant ratios are , well within range .
Speaker #2: You know, obviously, you see the interest coverage ratio getting a little tighter as you get EBITDA shrinking a little. But we feel very confident in our ability to manage through this.
Speaker #2: The capital allocation pause on NCIB is really more of a lets get let's really focus on that ratio and get it down so that we can be more aggressive in the future with with allocating capital in other areas .
Speaker #2: As I make my remarks, I want to note that this is not a long-term change. This is something we're just doing in the short term to ensure that this market dynamic, which is causing the macros and therefore our results to be impacted, doesn't create further issues.
Speaker #2: So just trying to get in front of that , but we don't any , any see significant issues or concerns . No asset sales would be required .
Speaker #2: There .
Speaker #6: Understood . Thanks very much .
Speaker #2: Thanks , Ian .
Speaker #3: Thank you . And our next question comes to the line of Arthur Nadjari from RBC . Your question please .
Speaker #4: Hey , good morning .
Speaker #1: Good morning .
Speaker #7: I just wanted to touch on the large diameter pipes when within the flex pipe . I guess that's now at 50% in North America .
Speaker #7: As you mentioned, I know you've previously outlined that as being the target, but now that we're here, is there any indication that you can get that number?
Speaker #7: Maybe above 50% ?
Speaker #1: Yes , absolutely . I think the market continues to evolve . Customers generally are migrating to larger and larger products . And I think what started out three years ago as a that business representing about half of our revenue as a potential , is now , I think , considerably greater than that .
Speaker #1: So as we roll forward , I think we would expect that we can continue to grow , share with the current large diameter products .
Speaker #1: And they will likely move to north of 50% of our revenue generation in North America . And then , of course , we will be supplementing that with additional large diameter variants that we introduce early in the new year , which will open up a substantial new market opportunity that we would expect to grow into over a period of years .
Speaker #1: So underlying while the market for flex pipe in North America is obviously been challenging conditions 16% year over year decline in well completion activity , the business has performed extremely , extremely well .
Speaker #1: Our revenue is just barely down year over year , and entirely due to the success of the sales team capturing incremental share , deploying new technology which will be enhanced as we roll into 2026 .
Speaker #1: So I think in almost any market environment, flex pipe is going to be an outperforming business as we roll forward if we can see some.
Speaker #1: And stabilization of underlying activity levels , then obviously the business can start to deliver some meaningful growth .
Speaker #7: Okay . That's helpful on Xerxes , I guess last quarter you disclosed that you had kind of , I guess , a backlog going into mid 2026 .
Speaker #7: Just curious where that stands now. And separately, could you maybe touch on how demand is trending with data center customers specifically?
Speaker #1: Yes . So over the last 12 months , Xerxes has added approximately $100 million to its backlog . The backlog at the end of Q3 stood at an all time record , and represented somewhere north of six months , somewhere little south of nine months of forward revenue .
Speaker #1: So the business is facing a sustained and growing demand , which we believe will persist for many years to come . Hence , our very strong focus on productive enhancing output .
Speaker #1: As I mentioned in the prepared remarks , productive output rose by more than 10% from Q2 Q3 to . Obviously , Q4 will be a little slower because of the ground conditions .
Speaker #1: It limits some of the shipments that we'll see , but the business will exit this year with a productive capacity that is materially above the level entered that it this year , which sets us up for that business to have some strength in 2026 and beyond .
Speaker #1: Data center demand continues to be very robust . able to take We're incrementally more orders as our very large molding for the tanks that data centers require continues to and that's expand , mostly in the Blythewood facility in South Carolina .
Speaker #1: So I think Xerxes all in all , is positioned to have good performance as we roll forward . We're still working on operational efficiency while we've got site and one fully one new refurbished site , we still have four sites that have existed for , you know , nearly 40 years with limited investment until recent years .
Speaker #1: So the opportunities to extract incremental efficiency and production output from those sites is still there . And the teams will be incrementally that as we extracting roll through the next several quarters .
Speaker #7: All right . And then on Amr cable , I know you share a little bit of color there . It sounds like things are progressing more or less as expected .
Speaker #7: Would you say that the acquisition is still kind of on track? With the guidance that you've previously laid out, I guess specifically on the adjusted EBITDA front?
Speaker #2: Yeah , great question . I would say , Arthur , that that Amr cable has performed extremely well . Despite the market challenges in some of the end markets .
Speaker #2: They replaced those orders with other orders . As we talked about the data center piece . And for the full year , we expect them to perform at or above their initial expectations that we had communicated to the market .
Speaker #2: So very , very pleased with the execution and the integration process . And onboarding process , which is effectively complete at point this .
Speaker #7: And then last one for me , is there any way that you can help us with the direct tariff impact , kind of what that looked like across the business this quarter and maybe what the outlook for that is going forward , given some of the mitigating actions that you've undertaken .
Speaker #2: Yeah , we I think last quarter we had signaled that it's rough . We expect it to be roughly 1 to $2 million per quarter per segment .
Speaker #2: That's generally in line with our expectation going forward . As I talked about the DSG dynamic going on , there's there were a little more tariffs in the third quarter than we anticipate .
Speaker #2: And so there might be a little a little uptick in that . So if you were to say 1 to 2 in the connect sorry , in the composites business per quarter , I think that's in the right range .
Speaker #2: If you were to say kind of maybe on the upper end , closer to that two number for the for the fourth quarter in the segment , and then getting back to normalized , probably 1 to 2 going forward after that .
Speaker #2: how we see But that's it . And obviously we're trying to bring that down as can . much as we But that's effectively what that's we expect .
Speaker #1: Yeah , the element that's the other worth here noting is with announcement the tariffs on of certain copper that products were issued in August early , had we not rewired our supply following that chain announcement , I think we would have been facing an annualized tariff cost on our copper supply chain that could easily have been 50 million a year .
Speaker #1: Very, so very proud of the teams at Keflex and within Amr that worked within weeks to rewire that supply chain.
Speaker #1: Obviously , we carrying a little extra networking capital as a consequence of some less favorable payment terms . But that's a price to pay to , you know , up avoid to 50 million of annual tariff costs .
Speaker #1: So I'd say , broadly speaking , we're doing a very good job of mitigating the direct effects of tariff announcements on the company where we are struggling is customer affects from tariffs and the on knock economic impacts , particularly in that Canadian industrial market right now .
Speaker #7: That's all for me . Thank you .
Speaker #3: you . And our next question comes Thank from the line of from Tappan Michael TD Cowan . Your question , please .
Speaker #8: Thank you . Good morning .
Speaker #1: Good morning . Good morning .
Speaker #8: Tom , can you talk about how thinking about changes in non-cash working capital in we should be the fourth quarter , as well as any initial thoughts around 2026 , full year for for that ?
Speaker #2: So Yeah . as Mike was just to the referring copper supply chain piece , we did see the third quarter move negatively , almost entirely because of that .
Speaker #2: That negative working that capital piece was really just that . So our previously discussed trajectory for should be Q4 intact . Where Q4 is an quarter unwind , we should see working capital move favorably .
Speaker #2: Our DSOs are in a good place. We're working to get inventories down, and our DPOs are in a pretty good place.
Speaker #2: So I would expect the fourth quarter to to be a release of working , as we had signaled before , capital as we go into next year , our general trend over the course of the quarters is that the first quarter is our worst working capital quarter as we , you know , invest , working we capital future quarters for orders .
Speaker #2: The second quarter kind of trends a little bit better than that . And then the third and fourth quarter generally are more of an unwind quarters this year being the exception .
Speaker #2: Because of that copper supply chain . And just to say it , that that supply chain has now been adjusted . So we don't anticipate significant moves unfavorably because of that .
Speaker #2: we're What hopeful not committing yet , but what we're to do hopeful to to do is actually improve be able those payment terms and make over that a little better time .
Speaker #8: Okay . That's helpful . Thank you . And then some of the commentary around around the and leverage and pausing buybacks , focusing on debt repayment .
Speaker #8: we be thinking evolution How should about the leverage ratio here . And when you would expect to be getting back within your target range .
Speaker #8: And then sort of freeing up , you know , capital to other alternative to be uses deployed to , .
Speaker #2: Yeah , I think if you if you look at what's happened in 25 when we've had a couple of down quarters as you , as you're noting here , that's really what's impacted our ratios .
Speaker #2: So the business is still generating good , working capital in healthy flows . Otherwise , other than that we go into 26 again as , as Mike touched on in his commentary and we see we see the impacts of 25 moving into 26 .
Speaker #2: And so we're there for being cautious with the way we're managing the balance sheet. I would tell you that the seasonality in the first quarter will mean the first quarter is a lower quarter over the course of 2026, which is normal.
Speaker #2: That's what happens in our business every year . So as you look at our working capital , use of our use of cash during that period , we want to put as much as possible into reducing that debt .
Speaker #2: That's the reason for that change, I think. From a trajectory depending on where the fourth and the first quarters end, you could see that ratio tick up just slightly because of the EBITDA numbers.
Speaker #2: And then decline as we start to move through the course of 2026 . I given given what we know from the macros now , you know , it's take us most , if not all of 26 to get back to a two times ratio .
Speaker #2: And it could it could take us slightly longer depending how tariffs impact our customer behaviors . And those sorts of things . these But as I said previously , we don't see any need to do anything drastic here .
Speaker #2: We're just taking precautionary measures to make sure we're being proactive , getting that interest down , getting that debt down to ratios that we're with comfortable .
Speaker #8: Perfect . And then just the last one , I don't know if I missed this earlier , but the small acquisition you did , which was sounds like it was really to help on the tariff side of things .
Speaker #8: supply And perspective . But can you maybe quickly speak about that if , already covered that and I unless you've back and review but but that , secondly , like there is mention about the of possibility sort future of acquisitions and being opportunistic .
Speaker #8: And , you know , think about that ? And how do we when you would have appetite and be potentially looking at further something on the M&A side ?
Speaker #1: Yeah , maybe I'll address the acquisition and I'll pass the time to talk about the future . We have historically purchased metallic components to support the composites business .
Speaker #1: We don't we don't use a huge volume of them in the big scheme things , but of important they are an component of the supply chain for both flex pipe and Xerxes .
Speaker #1: We made a number changes in our of supply chain over the course of the last 18 months to lower our reliance on Chinese origin products and migrate that to reliance other , tariff , lower cost environments lower .
Speaker #1: In that process , we were working with an intermediary which was helpful , very but now , start as we see particularly flex pipe , larger diameter products come to and the market expected consumption of these metallic components rise , we felt it was a good moment to take advantage of an opportunity to acquire the intermediary , simplify the supply chain , enhance our own margins , lower the tariff costs that we will have to pay going forward , and take some risk out of that .
Speaker #1: that's the So decision you made mid-year . Relatively modest acquisition , but one that was strategically important for the composite And will pay segment .
Speaker #1: back very healthily over the course of the next two , three , four years . So feeling good about that decision . to speak Tom , do you want about .
Speaker #2: Yeah . On the M&A front , you know , obviously with pausing the buybacks and putting money into debt , you shouldn't expect us to be active in the M&A other space than filling our pipeline , which we will continue to do , because obviously it takes years to do that sometimes and get good , good deals on the table .
Speaker #2: But I would not expect to see anything in 26 . Again , we're always opportunistic and looking for things , but from a balance perspective , we sheet really want to get that ratio down and get back into a comfortable level before we are really active again .
Speaker #2: So likely a pause in 26 again filling the pipeline , but not not doing a deal and closing anything unless something changes materially in the market .
Speaker #2: I do think you should expect us to , you know , try to be active again as we get into 27 . Again , things have to go right .
Speaker #2: But our ratio should be getting into a range at that point where we'd be comfortable looking at something and, again, expanding this business.
Speaker #8: Thank you for the time . Thank you .
Speaker #3: Thank you. Our next question comes from the line of Zachary Evershed from National Bank Capital Markets. Your question, please.
Speaker #9: Good morning everyone .
Speaker #1: Good morning .
Speaker #2: Morning .
Speaker #9: So just continuing on the question about the small acquisition there, internalizing a supplier obviously comes with a little bit of margin accretion.
Speaker #9: Do you think that'll be noticeable on the PNL .
Speaker #1: I do , but I think it will take until we are working our way start to see the through benefits of that . full Obviously , there's there's certain inventory already in our system that predates the acquisition , but as we draw down that and start to see full advantage of the should see acquisition , we in it both Xerxes and Flex light margins .
Speaker #1: And obviously , pipe as flex becomes a increasingly bigger consumer of these metallic components with larger and larger products diameter , and as that revenue stream starts to ramp up , we will see incremental benefit from the acquisition .
Speaker #1: So maybe , maybe low single digit millions of EBITDA , incremental margin in 2026 , little better than that , but perhaps a probably in that range .
Speaker #1: And I think we can get into double digits as we roll into 2027.
Speaker #9: That's helpful . Thanks . And then since we're talking about the diameter flex pipe larger products , can you speak to your most recent expectations for the sequencing of sales for the addition of those additional large diameter products and the higher temperature flex byproducts ?
Speaker #1: Yeah . So I think the likely growth path for the the new products that we will introduce right around the end of the year is probably going to follow a similar curve to that that we experienced with the five engine , six inch products , which were released somewhere in that 2122 timeframe .
Speaker #1: So I think we would expect that revenue is , let's say , 10 million or perhaps a little less in 2026 . But ramping quite aggressively from there .
Speaker #1: As we roll forward , obviously there's there's substantial demand in the market . We believe that we are well positioned to take that .
Speaker #1: you have to Obviously , ramp up production in many cases , customers will want to try it and once evaluate performance before they try it for a second time .
Speaker #1: So there'll be a a gradual roll into the revenue contribution from this one . But nonetheless , it's the products I think are going to prove themselves to be very robust .
Speaker #1: customer The pool will be significant . And , you know , in a 12 months or 18 months from now , we will find that these new make up material a products percentage of the revenue of the business .
Speaker #9: Thank you for that . Color . And then on Xerxes , with a 2 to 3 quarter backlog , why do ground conditions for insulation limit your output ?
Speaker #9: Couldn't you be working with customers on terms around taking ownership so you can just be cranking out tanks during the off-season as well?
Speaker #1: We do so, the physical installation of tanks obviously is impacted by the conditions on the ground. We produce at full capacity all year long because we, quite frankly, are still not in a position to meet 100% of our customers' demand.
Speaker #1: So there is no incentive to back away from production at any point in the year . Tanks that we produce during periods where customers can't physically install them will , in most cases , get invoiced upon completion , and then will be stored on our own land until the customers can take them .
Speaker #1: There's a number of accessories that are built to customers when tanks are shipped to their final installation location , we don't get to charge for those items until we physically ship them .
Speaker #1: If you go back and look historically at the revenue of Xerxes and how it was really very seasonal, it is far less seasonal today because we've managed to migrate most of our customers to our bill upon completion agreement.
Speaker #1: But this stunts seasonality because not every customer has agreed to allow billing upon completion. And if we don't ship a tank, we don't get to bill for the accessories.
Speaker #1: So that's why you see some some modest but still noticeable seasonality in that business .
Speaker #9: Understood . Thank you . And then I guess if we set the potential for tariffs aside , do you think being you're overly negative in your outlook here ?
Speaker #1: Try be overly not to negative . I think we are we are trying to be realistic given what we have seen unfold over the last two quarters .
Speaker #1: It takes time for tariffs to work their way through supply chains and all the way to customers, and ultimately have an effect on customer behavior.
Speaker #1: are seeing And we now the effect of tariffs that were implemented in the first half of the year on the Canadian industrial market .
Speaker #1: We've seen Canadian economic activity slow , turn negative in Q2 , and we are seeing the effects on the industrial infrastructure in Canada .
Speaker #1: So that is the biggest area where I am . Cautious looking into 2025 . There's some element of the slowing in industrial demand in Q4 that is related to distributors lowering their inventories , how long it will take them to get to a point where their inventories are in balance is not yet clear , and whether we will see any positive impact from the recently announced Canadian federal budget and the investments into capital projects is also not yet clear .
Speaker #1: If we federal see dollars start to stimulate industrial activity at some point in 2026 , then obviously that would pose an upside opportunity .
Speaker #1: If we see something approaching a return to balance in the oil field markets and we see oil field pricing move up , that would present an upside opportunity .
Speaker #1: I'd say while there are these these macro elements that obviously we are keeping a close eye on and are not necessarily favorable for the business .
Speaker #1: There are also bright spots we've about spoken regarding Xerxes and the overwhelming demand that business has. I think we will enter 2026 with lots of opportunities.
Speaker #1: We've talked about flex pipe , large diameter . We've talked about the success that Amber cable is having penetrating the . US data center market .
Speaker #1: We continue to see strong demand from U.S. utilities. We continue to see strong demand for mining outside of Canada. Nuclear water.
Speaker #1: There's a lot of areas where we see strong demand and think that that will prevail throughout 2026. The areas where we are facing some challenges are substantial enough that they're worthy of conversation.
Speaker #1: So I am trying not to be overly negative or overly positive . Hopefully we're presenting a balanced view .
Speaker #9: Thank you very much. I'll turn it over.
Speaker #3: Thank you . And our next question is a follow up from the line of Tim Monticello from ATB Capital Markets .
Speaker #4: thanks Hey , . Quick follow ups on the freight costs from Europe on DSG . How much did that contribute to the margin weakness in Q3 for connections ?
Speaker #2: mean , I Yeah , I would say it was order of magnitude . A couple million dollars , right . So you can probably do the math on that .
Speaker #2: that's the But order of magnitude . And as I said , I don't we don't anticipate that continuing at that level going forward .
Speaker #2: But yeah , that's the impact for the quarter okay .
Speaker #4: That's helpful. And then on the intermediary position, I'm just curious, strategically, what prevented you from just going straight to the supplier?
Speaker #1: So obviously you have to , I think be mindful of what experience and skill sets you have in an organization and what you don't have in this particular case , we were not perfectly positioned to organically execute the establishment of a production footprint , and the output of these products in , in this case , Vietnam .
Speaker #1: So we chose to work through a party that had that experience . And I'm very pleased that we did the pace at which we were able to set up that footprint .
Speaker #1: Have access to those products and at those costs and those quality levels has been very beneficial over the course of the last 12 to 18 months .
Speaker #1: So we we chose a pathway that we yield the highest thought would value for the business . And at this point , I think that's going to prove to be the case .
Speaker #4: And is that intermediary have any other customers or were you their sole customer ? Just curious if there's any other revenue that comes out of this acquisition ?
Speaker #1: We did not acquire anything that involved us supplying to a third party. So this is entirely supply into our own business.
Speaker #4: And do you get exclusivity with .
Speaker #1: Do ? Yes . So we have a multi-decade exclusivity arrangement , which obviously we believe will have value . .
Speaker #4: Is that one of the strategic rationales? Are you sort of cornering the market on this component from Vietnam? I guess.
Speaker #1: So I would describe these components as being proprietary components to us . But in way the we've deal , we can ensure that our competitors don't get similar products from the same source .
Speaker #1: So I think we have protected ourselves in terms of both intellectual property having pricing advantage and of course , now gaining some tariff advantage as well .
Speaker #4: Got it. And in the event that these tariffs go away, does the accretion of this deal also go away? Does it make sense if there are no tariffs?
Speaker #1: The accretion does not go away . Obviously , if there are no tariffs anywhere in the world , then the calculation would change a little bit .
Speaker #1: But the value associated with securing this incremental margin by removing the intermediary and having direct access to the end producer , is something that would have made sense regardless of tariff environment .
Speaker #4: Okay. Thanks. I appreciate it.
Speaker #1: Of course .
Speaker #3: Thank you . This does conclude the question and answer session of today's program . I'd like to hand the program back to Mike Reeves for any further remarks .
Speaker #1: We appreciate everybody's time and attention here this morning . We'll look forward to speaking to everybody when we release our Q4 earnings next results year .
Speaker #1: Have a great rest of the day.
Speaker #3: Thank you , ladies and gentlemen , for your participation in today's conference . This does conclude the program . You may now disconnect .