Earnings Call: Q2 2021

Aug 11, 2021

Earnings release

Ladies and gentlemen, thank you for standing by and welcome to Shawcor Q2 twenty twenty one Results Webcast. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during this session, you will need to press then 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press 5 then 0. I would now like to hand the conference over to your speaker for today, Megan McKickran. You may begin. Good morning. Before we begin this morning's conference call, I would like to take a moment to remind all listeners that today's conference 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 Shawcor's statement on forward looking information is included in Section four point zero of the second quarter twenty twenty one earnings press release that is available on SEDAR and on the company's website at Shawcor.com. I'll now turn it over to Shawcor's President and CEO, Mike Reeves. Good morning, and thank you for joining us on this morning's conference call. This morning, Megan and I are joined by our CFO, Gaston Tano. On June, Steve Orr stepped down as CEO of Shorecorp, and on behalf of everyone who had the pleasure of working with him, I wish Steve the very best as he enjoyed some well earned time with his family. Steve's contributions to the culture, vision, and performance of this organization have been enormous, and I'm honored to follow him in this role. In addition, I want to thank the employees of Shorecorp for their continued commitment to keeping each other healthy and safe despite the ongoing challenges posed by the pandemic and a number of significant weather events this year. Most recently, Shorecore's team in Rhinebach, Germany was directly impacted by significant flooding. While all Shorecore employees in the local area have been accounted for and are safe, many of these team members have suffered personal property loss and will receive our fullest support as they and their families recover. Fortunately, our Rhinebeck production site saw limited damage and only brief business interruption. Yesterday, we released our results for Q2 twenty twenty one, during which the company generated adjusted EBITDA of $35,200,000 on revenue of $3.00 $6,000,000 with cash flow from operations of $24,700,000 Revenue increased compared to Q1 twenty twenty one, driven primarily by the expected seasonal increase in shipment of composite underground storage tanks and rising demand for flexible composite pipe, with SureCore's Composite Systems segment delivering its highest quarterly revenue since Q4 twenty nineteen. In addition, continued strong sales of heat shrink tubing and premium wire and cable products coupled with pricing escalation tied to elevated copper input costs enabled Shawcor's Automotive and Industrial segment to achieve another record revenue quarter materially exceeding pre pandemic levels. Our Pipeline and Pipe Services segment saw a flat quarter over quarter revenue, but delivered increased margins driven by favorable project mix and continued focus on cost management and efficient project execution. The company's 90% sequential step up in adjusted EBITDA on 10% sequential revenue growth is a reflection of the meaningful operating leverage inherent in SureCore's increasingly efficient cost structure and physical footprint, a result of the restructuring activities completed to date. At quarter end, the company's backlog stood at four eighty nine million dollars reducing less than originally expected versus the prior quarter as the impact of limited new project awards in our Pipeline and Pipe Services segment was largely offset by slightly lower than expected pipe coating backlog consumption, strong underground storage tank bookings and continued order capture in other parts of the business. Restructuring activities intended to further lower the company's fixed cost base continued with Shorecore deciding to permanently close its Adria, Italy pipe coating facility and completing the sale of one of our two pipe coating facilities in Argentina. While a substantial majority of planned footprint optimization activity has now been completed, we will continue to assess further opportunities to lower our cost basis while retaining the right capabilities in strategic locations to meet future market needs. At quarter end, the company's global salaried workforce stood 27% below March 2020 levels and Q2 SG and A expense was slightly below our continued guidance of $55,000,000 per quarter for the current year due to the COVID-nineteen wage subsidy received in the quarter. Thoughtful timing of investment decisions limited Q2 CapEx spend to $5,000,000 and our full year CapEx spend guidance is modestly lowered to 40,000,000 to $45,000,000 Looking at Q3, despite industry wide raw material supply chain tightness and other ongoing pandemic impacts, we anticipate continued strength in demand for composite systems and automotive and industrial products and consistent execution of scheduled pipe coating projects. This organization remains intensely focused on those variables we can control, protecting the health and safety of our employees, delivering the products and services needed by our customers, generating cash and strengthening the balance sheet and capturing our share of increased customer spend. SureCore's high quality product and service portfolio, including robust non oil and gas components coupled with early and late cycle oil and gas exposure positions the company very favorably to create and secure profitable growth opportunities as spending continues to recover in the energy, transportation and infrastructure markets. I will provide more detailed comments later in this morning's call after Gaston Tano, ShoreCore's CFO has discussed the numbers. Thanks, Mike. As Mike mentioned earlier, operational results in the current quarter reflected strong performance across all business segments, driven by higher pipe coating margins, improved demand for composite pipe and continued solid demand in the company's non oil and gas businesses. Consolidated revenue in the second quarter was $3.00 6,000,000 fifteen % higher than the second quarter of twenty twenty. This reflects increases in the Composite Systems and Automotive and Industrial segments, partially offset by a decline in the Pipeline and Pipe Services segment compared to the second quarter of twenty twenty. The Composite Systems segment revenues increased by 44%, primarily due to higher demand for composite pipe products, driven by improved drilling and completion activity in North America, along with continued higher demand for retail fuel and water and wastewater tanks. The Automotive and Industrial segment revenues increased by 54% as demand for the company's automotive products continued to outpace automotive production recovery as a result of increased vehicle electrification and inventory build. The company also benefited from infrastructure spending on communication, transportation and nuclear refurbishment projects. While the Pipeline and Pipe Services segment revenues decreased by $14,000,000 reflecting the absence of $22,000,000 of revenue related to the products business sold in December 2020 and lower revenues in North America and Asia Pacific, primarily due to the closure of several pipe coating facilities. This is partially offset by an increase of higher large project pipe coating activity in Latin America and EMAR regions. Consolidated results for the second quarter were impacted by nonrecurring items outside of the company's normal course of business. The current quarter includes $5,200,000 of net restructuring costs as a result of ongoing cost saving initiatives completed in the quarter, which include the decision to close our pipe coating facility in Adria, Italy the sale of one of our facilities in Argentina and a loss of $1,700,000 related to Argentina hyperinflationary accounting. The prior year second quarter was negatively impacted by $17,100,000 of restructuring costs and a loss of $400,000 for Argentina hyperinflationary accounting. Adjusted EBITDA for the current quarter was $35,200,000 significantly higher than the $4,300,000 reported in the second quarter of twenty twenty. The increase is primarily due to improved profitability in our pipeline and pipe service segment, reflecting higher margin from large project pipe coating activity and the reduced operating cost base from the completed cost control initiatives and facility closures to date. Additionally, the increase from the prior year's quarter reflects strong performance in the company's composite pipe and non oil and gas businesses. SG and A expenses decreased by $2,900,000 compared to the second quarter of twenty twenty, reflecting the absence of $4,000,000 of expenses related to the products business and the positive impact from the cost saving initiatives completed to date, partially offset by a reduction of $6,700,000 in benefits received from COVID-nineteen related government wage subsidies. Adjusted EBITDA margin for the second quarter was 12% compared to 2% for the prior year second quarter due to the reasons mentioned earlier. The Pipeline and Pipe Services segment margin increased to 9% from negative 2% in the prior year, reflecting the lower operating cost base. The Composite Systems segment delivered a 16% margin compared to 12% in the second quarter of twenty twenty, and the Automotive and Industrial segment margin increased to 16% compared to 12% a year ago. Turning to cash flow in the quarter. Cash flow provided by operating activities for the second quarter was $24,700,000 slightly below the $26,600,000 in the second quarter of twenty twenty. This variance is primarily driven by a net change in noncash working capital and foreign exchange, offset by lower net losses and noncash items. The change in noncash working capital in the quarter was a cash inflow of $3,200,000 which includes $3,100,000 decrease in restructuring liabilities. Excluding restructuring liabilities, the current quarter reflects higher accounts payable related to timing of purchase and payments and lower inventories in automotive and industrial and composite tank businesses. This was almost entirely offset by higher accounts receivable from increased revenue in all businesses. Cash used in investment activities in the second quarter was $200,000 primarily due to $5,000,000 of purchases of property plant equipment, offset by $5,100,000 in proceeds from the sale of property, plant and equipment. The prior year quarter had $1,500,000 used in investing activities, reflecting $3,700,000 of purchases in property, plant and equipment, partially offset by $1,600,000 in proceeds from the sale of property plan equipment. During the second quarter, cash used in financing activities was $79,900,000 primarily reflecting the $75,000,000 repayment of debt outstanding and $4,800,000 payment of our quarterly lease obligations. This compares to $5,700,000 used in the second quarter of twenty twenty that included the repayment of lease liabilities of $5,100,000 Net cash used in the second quarter of twenty twenty one was $54,300,000 compared to cash provided of $17,400,000 in the second quarter of twenty twenty. With respect to cash and debt, the company has cash balance of 140,000,000 debt of $359,000,000 and $45,800,000 of standardized credit as at 06/30/2021. The company's liquidity position has benefited from significant initiatives completed in 2020 and its continued focus on reducing its operating cost base. With this confidence, the company repaid $75,000,000 against the outstanding debt under its credit facility in late April, which will result in reduced financing costs for the remainder of the year. Based on the actions completed and its outlook, the company expects to generate sufficient cash flows and have continued access to its credit facilities to fund its operations, working capital requirements and capital program. I'll now turn it back to Mike for some additional commentary on the company's performance and outlook. Thank you, Gaston. Before talking in more detail about each of our business segments, it is important to note that tightness across much of Shawcor's raw material supply base continues to pose a challenge. Whether our products incorporate specific polymers, resins, metals or glass fiber, we continue to observe supply limitations, extended lead times and sometimes volatile costs, both for the materials themselves and related shipping activities. Driven by supply demand imbalance and based on the expected timing of producers bringing incremental capacity online, it is reasonable to expect these challenges will continue throughout the remainder of 2021 before abating during the first half of twenty twenty two. Across the company, we have and will continue to work respectfully with our customers to ensure incremental input costs are fairly reflected in our selling prices. While some limited impact to productivity will continue to be felt in parts of the organization, built on many years of close cooperation with suppliers, a strategic diversity of sources and the ability to lever our balance sheet for risk lowering forward material purchases, we remain confident that ShoreCore is well positioned to navigate these continuing global supply challenges. Turning to segment business activity, Our Composite Systems segment is primarily influenced by two market forces. The first is demand for premium UL listed underground storage tanks within the North American retail fuel and water markets. The second is demand for reliable, spoolable composite pipe to connect newly completed oil and gas wells into existing processing and storage infrastructure. Second quarter Composite Systems segment revenue rose by $25,600,000 or 36% when compared to the first quarter of twenty twenty one. Q2 shipments of ShoreCore's market leading underground fuel storage tanks were substantially higher than Q1 as typical seasonably favorable ground conditions drove robust fuel station construction and refurbishment activity. In addition, through strategic partnerships, Q2 saw Shorecore secure several commercial orders for our expanded HydroChain stormwater product lines. The HydroChain system involves the application of premium composite infiltration chambers to clean and recirculate water runoff from roadways, parking lots, and roofs back into aquifers for society's reuse. An added benefit is that our chambers are constructed from soy resin, which is more environmentally friendly than alternatives. The HydroChain stormwater system helps communities manage water from climate events to ensure it is infiltrated back into the natural environment, free of contamination from man made surfaces. This is an area of growing awareness and will continue to increase as a source of demand for our products. Demand for both fuel and water related underground tanks is expected to remain robust throughout Q3 and into Q4 before experiencing a normal seasonal softening towards year end and into Q1 as ground conditions become less favorable for installation activity. North American demand for composite pipe rose in Q2 versus the prior quarter with revenue growth outpacing slowly advancing well construction activity levels in The U. S. And Canada. This outperformance was driven primarily by increases in drilling and completion activity by several of ShoreCore's larger customers. Provided oil and gas commodity prices remain relatively stable at or near current levels, it is realistic to anticipate near term North American demand for these products will continue at levels similar to Q2, with further upside potential in 2022 as our customers establish updated capital spending programs and SureCore brings to market its six inch flex pipe product. Outside North America, we are observing increased quote activity for composite pipe products driven by an improving customer capital spending outlook. While several contract award decisions are currently expected to occur later in 2021, it is likely 2022 before meaningful incremental revenue generation tied to these awards is delivered. Pipe shipments associated with the substantial Middle East order noted in our Q1 earnings release commenced during Q2 and will continue for the coming twenty four months. In summary, we anticipate continued demand across the Composite Systems segment during Q3 and into early Q4 before shipments of composite tanks follow a traditional seasonal slowdown. During the second quarter, Shorecore's Automotive and Industrial segment revenue rose $3,000,000 or 4.6 percent compared to the first quarter reaching a new record high. The growth of this business continues to be driven by increasing demand for heat shrink products within automotive applications and consumption of engineered wire and cable products by electrical utilities and communications providers, dynamics we anticipate continuing into 2022 and beyond. While the automotive marketplace remains challenged by a well publicized shortage of microchips, at this time, we do not anticipate any material microchip driven disruption in demand for our products. As previously noted, Shawcor's automotive and industrial business includes a substantial production site in Rhinebach, Germany. This site and the employees working there were directly impacted by recent flooding. However, our well established emergency response and recovery procedures have ensured our employees are safe and related business interruption has been minimal. Within the SureFlex wire and cable business, our largest single expense is copper, a commodity which has experienced sharp price rises in recent quarters. Our teams have rapidly adapted quoted prices to incorporate these raw material cost changes and Q2 saw modest incremental revenue tied to copper cost pass through. This incremental revenue delivers little to no incremental gross margin and therefore modestly lowers profit margins in the segment. During Q2, the ShoreFlex business continued to deliver on those five gs communications related contracts discussed in our prior call. It should be noted that five gs communication build out activities are project based and therefore will have some variability quarter to quarter. We anticipate Q3 will see an increase in five gs related shipments before returning to more modest levels in Q4 and early twenty twenty two. Our Pipeline and Pipe Services segment revenue during Q2 fell by $2,000,000 or 1.4% compared to the first quarter, as increases in Western Hemisphere pipe coating project execution offset decreases in Eastern Hemisphere. A favorable mix of coating technology, pipe size and end use environment coupled with ongoing footprint and cost optimization within the segment drove higher profit margins when compared to Q1. As we have discussed many times, ShoreCore's pipe coating business is tied primarily to the timing of offshore pipeline projects being sanctioned, which inherently leads to volatility from quarter to quarter. Looking forward, we anticipate modestly lower levels of pipe coating activity during Q3. A project scheduling lull then drives lower revenue in Q4 and early twenty twenty two, although already completed fixed cost optimization and ongoing efficiency initiatives are expected to yield continued positive financial contribution by the segment. As previously noted, we continue to assess optimization opportunities within the segment infrastructure while remaining focused on providing world class service and value to our customers from a highly cost efficient strategically located footprint. Additionally, we continue to see key customers demonstrate a need for even higher coating technology performance and are confident our investments made in recent years to develop market leading solutions, including Lotus Flow and Ultra have positioned ShoreCore to be the partner of choice for customers operating in challenging offshore environments. In summary, following improved financial performance in Q2, we remain confident ShoreCore will deliver higher adjusted EBITDA in 2021 than in 2020 despite continued quarterly variations and the ongoing challenges of supply chain stress and lingering impacts from COVID. Our full year outlook remains subject to modest upward revision in the event North American onshore oil and gas activity experiences a more substantial acceleration than currently anticipated during the second half of the year, which would drive incremental demand for ShoreCore's composite pipe and girth weld inspection services. Turning to backlog. At the end of Q2, the company's committed backlog of work to be completed within the next twelve months stood at $489,000,000 a decrease when compared to the prior quarter. This decline was anticipated and driven by completion of work in backlog within our pipeline and pipe services segment, partially offset by continued growth in our underground storage tank backlog, which reached a new record during the quarter and an increase in orders within other parts of the organization. The company anticipates some modest delays in final investment decisions and contract award decisions tied to several larger pipe coating projects, pushing associated backlog build into early twenty twenty two rather than late twenty twenty one as originally expected. However, in most cases, the execution schedules for these projects are not expected to be materially delayed. Shawcor's bid number reflects the value of work where the company has issued a firm price with proposed contract terms against an explicit scope of work with a defined timeline for execution. At the end of Q2, the bid balance was $972,000,000 an increase of $160,000,000 when compared to the prior quarter, reflecting continued robust project planning activity by our customers and the associated migration of projects from budgetary into bid status, which indicates the strength of potential future work beyond the coming twelve months. Included in bid are over $151,000,000 of conditional awards pending the client's final investment decision, up from $110,000,000 in the prior quarter. Short course budgetary number, reflecting the value of indicative pricing submitted to allow customers to build a project budget ahead of commencing formal procurement activities remain relatively unchanged at approximately $1,000,000,000 at quarter end despite the movement of several projects from budgetary into bid status during Q2. This supports our outlook for a rebound in pipe coating activity during the latter part of 2022 and into 2023, which when combined with a constructive outlook for composite and automotive and industrial product demand provides confidence that Shawcor will deliver earnings growth in the coming years. Finally, we continue to evaluate our ESG performance and look for opportunities to lower our environmental impact both through the products and services that we provide and via managing our footprint. During the quarter, our pipeline performance group was awarded a small pipe coating contract by Subsea seven for the Northern Lights project, a 100 kilometer pipeline that will transport liquefied CO2 to an offshore subsea location in the North Sea for permanent storage. Northern Lights is part of a full scale carbon capture and storage project in Norway known as Longship. This pipeline will be the first of its kind in the Norwegian continental shelf. With this contract and our historical experience coating CO2 pipelines, we are well positioned to continue to support decarbonization efforts through carbon capture, usage and storage. With respect to our own footprint, the company is currently completing a comprehensive review of Scope one and two carbon emissions and will establish a firm fact based carbon reduction commitment by the end of this year. In closing, ShoreCore's performance in Q2 provides a demonstration of the earnings leverage, which has been created by thoughtful but rapid cost rationalization over the last eighteen months. We are proud of our differentiated product and service portfolio, our commitment to technology development and every one of the employees who make SureCall the partner of choice for so many of our customers around the world. I'll now turn the call over to the operator and open it up for questions you may have for myself, Gaston, or Megan. Thank you. Ladies and gentlemen, as a reminder to ask a question, you will need to press star then 1 on your telephone. To withdraw your question press the pound key. Again, let's star one to ask a question. Please stand by while we compile the Q and A roster. Our first question comes from the line of with TD Securities. Your line is open. Hey, morning all and thanks for taking my questions. Mike, I've got a couple follow-up, questions for you on your cost inflation commentary. Most of them relate to steel because that's a bit in the news, but I wanted to look at it from a customer behavior perspective. So, specifically, what I'm wondering, you know, and using steel as an example, you know, is that delaying FIDs for new pipeline projects, or, you know, is it changing the competitiveness of offshore pipelines versus FPSO? I'm also wondering, you know, on the on the flip side, if it's positively impacting market share for composite pipes versus steel, but, you know, perhaps you could also fill in the blanks of for other, you know, dynamics that I may not be thinking about. Absolutely. Good morning. I think if we look at steel particularly and related to our our pipeline, business, we are not seeing obvious evidence that our customers are making FID decisions or changing the timing of FID decisions based on the cost of steel. What we're generally seeing is that those customers are very focused on prioritizing their investment on pipelines that have the highest need. And in some cases, we see customers revisiting their engineering process to determine if there's any opportunity to consume less material in the construction of their intended pipeline. So we talked a little bit about some modest delays in FID decisions. And in some cases those are related to revisiting the engineering of the project to see if there's an opportunity to simply use less material. But we've certainly not seen any evidence that there are FID decisions being either delayed or rejected because of the cost of the raw material. Moving to flexible spoolable pipe, certainly as steel increases in cost, you would expect that the customer thought process on the selection of the material they use would continue to swing more favorably towards composite materials. I would tell you that we haven't yet seen that particular issue drive a substantial proportion of the customer base to change their buying behavior. But we certainly keep a close eye on it and it is an important part of our conversations with customers to highlight the opportunity that they may have in front of them to convert to composite pipe. So in summary, I think we would expect generally in our composite pipe business, that we would be favorably impacted by continued elevated costs for steel. But I don't see clear evidence that it is yet showing up in the buying behavior of our customers. Hopefully, that helps. Got it. That's helpful. You mentioned in your prepared remarks, carbon capture is a potential growth opportunity. Can you walk us through the types of coatings that a CCUS pipeline might require if it's different than normal pipelines and if you have any sort of proprietary intellectual property in that area that might help you win a disproportionate amount of that that work. So first, I'd say that the the volume of CCUS offshore CCUS pipelines is not yet a material number. We highlighted the project award that we are very proud to be a part of, in the Norwegian continental shelf. That's the first of its kind in that geography. So we're in the early stages I think of CCUS related pipelines in the offshore environment, but certainly would expect that it will expand over time. It depends very much on the environment as to the requirements from a coating perspective. But generally they are very similar to the types of technologies used in pipelines or in pipeline coating for oil and gas transportation. So not a materially different set of technologies required. What I'd say is that the same capabilities that differentiate Shawcor in the traditional oil and gas pipeline coating space differentiate us in the CCUS coating space. So proximity, experience, ability to execute on time, on budget with extremely high quality. And I think it's those capabilities that are likely to, ensure that we take more than our fair share of the CCUS pipeline coating space as time evolves. Understood. And then maybe one question for Gaston. I guess just, you know, how much of the quarter over quarter change in pipe coating margins was a function of product mix versus the cost rationalization measures that you implemented? And I can appreciate that you probably don't have an exact number handy, but, you know, just trying to get more of a sense of what was the most meaningful quarter. Yes. So I think it's difficult to look at it on a year on year basis. We need to point out that Quarter over quarter, I think there is some additional cost impact in the current in Q2 versus Q1. But a majority of that cost was already built out since we completed the majority of our restructuring efforts in 2020. We have completed some other ones, but they have yet to impact the quarter. So a bigger chunk of that is higher margin business, but also the higher revenue, Aaron, as you can understand, that drives higher utilization and additional absorption of costs. So I think this quarter is a good highlight of the margins that are capable in that business if we have this level of revenue that we have this thing that we have in this quarter. I think the majority of it is really being based on, the higher margin business that we have and just higher overall revenue and absorption. Understood. Okay. That's all for me. I'll turn it over. Thank you. Our next question comes from the line of Michael Robertson with National Bank Financial. Your line is open. Hey, good morning all. Congrats on a solid quarter, and thanks for taking my questions. You noted in the release that production levels for the tank business were impacted by raw material shortages in the quarter. I was wondering if you could ballpark how much of a limiting factor that was in Q2, either as like a rough percentage of sales or units that could have been sold without those limitations? Yes. Michael. I think maybe to talk more generally about supply chain, and then I'll zero in on your question. I think you've listened to earnings releases of many, many manufacturers across quite frankly all industries not just energy related. Supply chain tightness for input materials and related transportation costs and availability is a meaningful challenge. As we look internally, while those challenges are certainly present across all of our businesses, they have had the most material impact in our composites business. And it's purely a question of exactly which, variants of certain polymers we consume in that business and their availability. So generally when we think about the tanks business, the impact from the supply chain challenges is more one of availability than it is of cost. We have the ability to pass through costs to our customers in a relatively rapid fashion. That availability, was certainly felt during Q2, and I think we should expect to continue to feel it in Q3 and into Q4. But we do have a number of our key vendors that have committed to us that they will bring incremental production online later this year, in most cases towards the very end of the year. And that's what gives me the challenges will abate as we move into the first half of twenty twenty two. I'd rather not give an explicit either percentage or dollar impact, that we've experienced. There's probably some competitive value to that being in the public domain. But what I would say is that I think our team have done an extraordinary job of navigating this challenge. They have been limited by the number of tanks they can produce but have still done a very good job of meeting customer expectations in terms of deliveries. And as you saw by the numbers, meeting or beating our expectations of their performance during the quarter, and I'm confident they'll continue to do that. Got it. Appreciate you wanted to keep some of that close to the vest, and that's helpful color nonetheless. I guess staying in that same vein, has raw material shortages also impacted your production for composite pipe? Or have you been able to fulfill a lot of that recovering demand from, maybe from existing inventory levels? I would say outside of the composite tanks business, we have been able to navigate the material shortage challenges without any impact to our production schedules. So whether it's composite pipe, the various products that we offer through our automotive and industrial business and also everything that we do in our Pipeline and Pipe Services business. We have not seen a delay in production schedules from raw material shortages. Those issues have been concentrated to this point entirely in the tax business. Got it. Got it. Thank you. That's helpful. Maybe one last one for Gaston. Good to see some strong cash flow from operations in the quarter. With activity levels recovering and liquidity concerns easing, I was wondering if you could give us an update on how you're thinking about capital allocation priorities in this environment and moving forward? Yes, sure, Mike. So I think for us, as you know, we do have an improved outlook on liquidity. Our continued focus is funding our working capital and CapEx needs. But our positive cash flow outlook that we have will have excess cash that we hope to deploy to further debt repayments, in the back half of this year. Of course, it will be dependent on continued recovery and requirements that we need on working capital, but we're still very confident that we'll be able to, fund additional debt repayments the year. But from the capital allocation, I think that is our key VA priority at this point in time. That's helpful, Gaston. And maybe just as a follow-up, Look looking longer term, do you sort of have a target range or comfort zone for, you know, either a carrying balance on the facility or or just a, you know, a a net debt to EBITDA sort of metric leverage level that you're looking for? Well, it it really depends on the overall EBITDA level, but I think, you know, and requirements that we need. But I think, you know, somewhere in the range of, you know, a debt level a net debt level of under 2x is something that I think we've said in the past is where we feel comfortable, maybe even slightly lower than that at 1.5x. But it's still it really needs to talk about the mix and the stability of our EBITDA and where so that is where what businesses are providing that EBITDA for us and ensuring that we can stay within our debt covenants along with having, flexibility and liquidity for internal funding, for working capital and working capital needs and whatever else we need. Got it. Okay. Well, that's very helpful color, team. Appreciate you taking my questions. And I'll turn it back. Thank you. Our next question comes from the line of Tim Monachello with ATB Capital Markets. Your line is open. Hey. Thanks for taking my questions. And so some of the previous questions answered some of them, the list is shorter than it used to be. Know, cognizant of the sensitivity around the impacts in the quarter, I'm just I'm curious to understand how much, maybe on an aggregate basis for the entire business, pass through costs impacted the margin in Q2, like surcharges. Yeah. Good morning, Tim. This is one where perhaps I'll offer some thoughts, and then, Gaston may have some additional ones. Again, we're a little hesitant to get into too much detail there because I think we believe that our supply chain, our relationships with our vendors and our ability to secure, materials from those vendors is a competitive advantage. I mean, there's no doubt that we are impacted and have been and will continue to be impacted. But I think we have a competitive advantage in how we manage that, versus some of those that we compete with in the marketplace. So that's really the reason we want to be a little cautious here about how much we share. Gaston, I don't know if there's anything you would add there. No, think that's a fair comment, Mike. I think for us, Tim, we've been able to pass on, a majority of the costs that we've been experiencing. And the bigger impact, I think, for us is, its impact on our ability for absorption, to produce products and its negative impact on absorption. So, but I mean, so it's not something we want to share, but I think we're doing a very good job about offsetting those things with the relationships that Mike's mentioned with our vendors and then and then our, you know, our strong competitive advantage in the market and our ability to, put in price increases or surcharges as required. Okay. Got it. You know, I thought the margin is relatively strong even with surcharges. So just kinda curious where it would have been without it, but understand the sensitivity. And just speaking about the cadence of earnings for an EBITDA, I guess, cash flow for the second half of the year, a few moving parts there. And you gave some good color around where you expect sort of pipeline revenues to come in. We also have maybe a marginally improving trend line in the composite business in q three. Obviously, seasonality in q four. And the automotive and industrial segment seems to be going well. So do you expect Q3 EBITDA to be higher than Q2? So, Tim, I'd say that, I think Q3 is unlikely to be higher than Q2, in part just because of the timing of certain pipe coating projects, which as you know are fairly large in their impact to the overall business. But I agree with your thought there that the automotive industrial business is certainly continuing to see robust demand. I think across the composites business, the demand is likely to remain, fairly robust. But one thing I'd say is that particularly in North America, but actually globally, our flex pipe customers tend to buy from us and place the pipe in their own inventory and then consume from their own inventory. So we end up in circumstance where there's a little bit of lumpiness in the order timing for pipe. In very robust marketplace, that tends to even itself out. Obviously, the market is nowhere near as robust as it was pre COVID. So we're still seeing some lumpiness in the exact timing of orders for the FlexPipe product. So I just caution you not to expect a perfectly flat up into the right curve on that product line. Generally, I'd say, I think Q3 will be a good quarter. I don't know that it will reach Q2 levels. And as you pointed out, Q4 will see the normal seasonal impacts that affect both our fuel tank business, and to some degree, the automotive industrial business. So we should all have realistic expectations for Q4. Gaston, would you add anything? No, Mike. I think you did a good job there. Okay. Yeah. That's helpful. Can you speak a little bit about what the CapEx items that you're looking to, I guess, invest in in the back half of the year are? Gaston, do you want to cover this one? Yes. Sure. So as we mentioned is we do expect to be still a modest decrease in our CapEx range of 40,000,000 to $45,000,000 for the remainder of the year. We've spent about $10,000,000 so far. So it is back half loaded. The key thing is that we continue to be optimistic of the products we'll be able to complete in the back half, with a key focus on continued capacity expansion in the automotive and industrial, to meet the growing demand there. We also expect to, invest in CapEx related to the commercialization of our larger diameter flexible pipe. And then the other thing that we have in the back half is we have to start spending for the consolidation of our Western Canada pipe coating footprint. As you recall, a couple of years back, we sold, one of our facilities. That lease is coming up, so we need to start preparing for the move of that business, and the the pipe that we have in the current facility to consolidate another facility. So you will see some spending regard in that regard also. Okay. That's helpful. And then last one for me. Nice to see the the bid increase, you know, fairly substantially quarter over quarter and the conditional award book increase as well. Can you speak to what you're seeing on the ground in terms of new project opportunities? Yeah. So agreed. We were certainly pleased to see the bid number continue to move up. And that conditional award number came up largely on the back of a single award in Norway. But what we're seeing is certainly an elevated level of requests for quote and really meaningful engagement from our customer base around the world. It gives me continued confidence that the, outlook for pipe coating activity as we move into the latter part of 'twenty two, into 'twenty three, possibly beyond, will be substantially more robust than we've experienced here in the last several years. I think despite the fact that there is intense pressure from an ESG perspective and, of course, an intense pressure on on investor returns, a lot of our customers have underinvested in their pipeline infrastructure for a number of years, and there are certain projects that just need to get constructed. So while we've seen a modest delay in a couple of FID processes here, I do not currently see any substantial lowering of interest or lowering of expectations for, activity levels in the next couple of years. So I would say generally very favorable. Of course, there is uncertainty on exactly when FID decisions get made, But we we've lived in that world for a long time, and I'm sure as a long time analyst for this business, you're you're used to it as well. Okay. No. That's, very helpful. I appreciate it. I'll turn it back. Thank you. Our next question comes from the line of Keith Mackey with RBC. Your line is open. Hi, good morning, everyone. Thanks for taking my question here. I just wanted to ask about where you think your composites market share sits, maybe separating the pipes and the tanks. Where does that sit today? And how has it changed as you have introduced new products in the composite pipe space? Recently introduced the five inches pipe, now you're talking about a six inches pipe. Have you seen the increase in, I guess, revenue and share that you would have thought? And then more broadly to that, how much more runway do you think there is for composites in general to take share from steel over time? And has it been a harder sell, than you might have thought earlier on in the business? Keith, happy to address that. So I'll start with tanks. I think while we don't have perfect visibility because, information isn't published, across the industry, we we certainly believe we are substantially the largest supplier of underground fuel tanks to the North American market. When we think about our market share there, I believe that our continued investment in manufacturing technology to ensure that first time quality, continues to rise and our capability to incorporate certain unique features into our tanks that our customers find valuable, should ensure that at the very least we're able to defend that market share position. And obviously we push hard to grow it. I would note that while we continue to be very encouraged by the progress we're making on water and wastewater related tanks and related technology, that is certainly a space where we are a small market share player today and an opportunity for growth over time that we're excited about. On the pipe side, the introduction of our five inches product certainly has brought with it an opportunity to participate in a number of customer, projects that otherwise we would not have had the opportunity to participate. So we have seen early adoption of that product. The revenue coming from it is not yet a material percentage of our flex pipe revenue, but certainly growing. And I think initial feedback from customers as they use the product has been very encouraging. And we would expect exactly the same when we introduce the six inches product. That five- and six inches addition to the portfolio gives us access to the higher flow, subsectors that historically we've addressed with multiple lines of smaller diameter. And in some cases, don't find that an acceptable solution. So I think very encouraging for our sales force to now have a broader portfolio to offer our customers. Market share in North America, again, difficult to pin down, but we certainly would put ourselves in the top one or two. I think we have opportunities to grow from here, both in terms of market share, but I certainly think there is a substantial percentage of onshore North American operators who still have not completely, adopted composite pipe technology. Many of them use composite pipe occasionally, and some of them still are 100% committed to steel pipe. And, certainly not naive enough to believe we can convert 100% of that population to composite pipe, but I'm confident we can convert more of them over time. So I think the runway is still substantial on that product line. Got it. Thanks for that. And just to follow-up then. In the water wastewater business, you mentioned that small but growing, and you you did discuss some new product applications that you're seeing. Just curious how the margins in that segment might compare to some of the other tank applications, if they're different or similar at all? They are generally a little higher than fuel tank applications. And what I'd say is that, you know, my mention of the hydrochange solution in the scripted comments earlier, really it's an important step for us. We've been a provider of some of the components in a water or wastewater treatment solution. And as we have advanced in that space over the last year or so, we're now in a position where we can offer, the HydroChain solution, which is, really a holistic solution that involves capture, conveyance, storage and treatment of rainwater runoff. So that opens up a much broader sector for us, and I'm very excited by the mid and long term opportunities for growth. I would say I still don't think that that will be a material percentage of company revenue or earnings for at least another two years, but we are aggressively pursuing. And, the long term opportunities there are very, very substantial. I see. Thanks very much. I appreciate the color. That's it for me. Thanks. Thank you. Ladies and gentlemen, that concludes our Q and A session. I would now like turn the call back over to Michael for closing remarks. Thank you so much operator. I would just like to thank everybody for their participation and continued interest in Shorecorp. We'll look forward to talking with you again next quarter. Ladies and gentlemen, this concludes the conference call. Thank you for your participation. You may now disconnect.