Ladies and gentlemen, thank you for standing by, and welcome to the Shawcor Third Quarter 2020 Results Webcast Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Paul Pierroz, Senior Vice President for Corporate and Investor Relations. Please go ahead, sir.
Thanks, Josh, and good morning. Before we begin this morning's conference call, I'd 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 Five of the third quarter 2020 earnings release that is available on SEDAR and on the company's website at shawcor.com. I'll now turn it over to Shawcor's CEO, Steve Orr.
Thank you, Paul, and good morning, and thank you for joining us on this morning's conference call. Yesterday, we released our Q3 2020 results. As expected, the pressures associated with the dual impact of COVID-19 global pandemic and the reduced capital spending of E&P operators continued from Q2 and made Q3 another operationally challenging quarter. Focusing on what we can control, ensuring that we put our full attention and energy into a very narrow set of priorities, we are gaining traction, and it is resulting in the improving position of the company to manage through this period of unprecedented uncertainty.
As we have communicated in past quarters, the priorities for the company are just three: number 1, protecting the health of our employees; number 2, delivering the products and services needed by our customers; and number 3, strengthening the balance sheet through cost reductions and conserving cash. Before I go any further, I'd like to acknowledge the support and dedication of the employees of this company. The current environment in which we all find ourselves is truly foreign and very dynamic. I am continually impressed and appreciative of how well the employees of Shawcor are able to adapt and execute in such times.
I wish for all of them and their families to stay healthy. Ensuring the health of our employees is requiring constant resourcing and vigilance. I believe we've done very well, and although we have had several positive cases within our work sites, we've been able to limit propagation and support the impacted individuals. Operationally, the management of COVID-19 has resulted in changes in where our employees work, the physical separation of our employees, and in some cases, temporary production line shutdowns.
As we ramp up activity in the fourth quarter, the management of COVID-19 will continue to be very important, and we must take very seriously if we're going to be successful. Now, turning to Q3 2020. Adjusted EBITDA was CAD 17.8 million, compared to CAD 4.3 million in the second quarter of 2020. Revenue for the quarter was CAD 268 million, flat from the previous quarter. Overall, quarter's results had the benefit from the Canadian wage subsidy program. Operationally, the results were primarily due to the positive impact of continued strong demand for composite tanks for the retail fuel market, wire and cable products for the industrial applications, and engineering integrity services in the midstream energy space.
There was also demand recovery in the quarter for heat shrink products for automotive applications. Apart from composite pipe, the company's products and services related to North American drilling and completions saw little or no improvement from the low point of Q2. Although pipe coating activity related to projects was set up for improvement in Q3, a combination of pipe delivery delays, startup inefficiencies, and supply chain disruptions due to Hurricane Laura pushed the forecasted improvement performance out of the quarter. Some additional color on the quarter.
The Payara project moved from pending FID to firm order, with coating production to start in Q4. We also continued to reduce cost structure of the company during the quarter, including the initiation of closing one of two of our pipe coating facilities that are located in Southeast Asia, and further reduction in the company's salary headcount, bringing the total reduction year to date to now over 19%. Looking into Q4, we are expecting a much stronger performance. The stronger performance will come primarily from increased pipe coating activity from projects that are under order, continued strengthened demand for composite tanks, and the continued recovery of automotive-linked business.
Furthering improvement will be the positive impact of cost measures we have taken. However, we do not anticipate any improvement in Q4 demand for our products and services that are tied to North American drilling and completions market. The combination of improved activity and cost measures is expected to result in adjusted EBITDA, net of government assistance, in the $25 million to $30 million dollar range for Q4. Our direction to give specific Q4 guidance reflects the need to address the market's current perception of the company's performance and financial position at this time.
Although it's still difficult to forecast, we expect the improved performance we have visibility on for Q4 will continue into 2021. In 2021, we expect that our book and turn business will see gradual improvement in demand, that work we have secured will remain firm and will be executed, and that we'll see a real tangible benefit from the cost we've already taken out or in the process of taking out. Although the quarter-on-quarter performance will vary due to pipe coating project execution timing and yearly seasonal elements, overall, 2021 outlook, due to the factors I've just mentioned, is much better than we expect to deliver in 2020. Beyond this period, I would again highlight, it's difficult to forecast.
However, we do expect that our diversified portfolio, which has both early and late cycle oil and gas exposure and a growing non-oil and gas component, has positioned the company to weather the storm and emerge a stronger, more profitable, more profitable organization when spending recovers in energy, transportation, and infrastructure markets. I'll provide more detailed comments in a moment. I will now turn it over to Gaston Tano, Shawcor's CFO, to discuss the numbers.
Thanks, Steve. As Steve mentioned earlier, operational results in the current quarter continue to be negatively impacted by the COVID-19 pandemic and the volatility of the oil and gas markets. Consolidated revenue in the third quarter was CAD 268 million, 32% lower than the third quarter of 2019. The pipe and pipe service segment revenues decreased by 36% compared to the prior year quarter, primarily due to decreased activity levels resulting from the ongoing COVID-19 pandemic, the lower demand for pipe coating and girth weld inspection services as a direct result of the significant capital spending cuts by North American E&P operators, and continued delays in land transmission line projects.
The current quarter was also negatively impacted by lower production levels in our Channelview facility related to supply chain issues caused by Hurricane Laura. The composite system segment revenues decreased by 35% compared to the third quarter of 2019, primarily due to the continued lower demand for our composite pipe products as a result of the decline in North America drilling and completion activity across the segment's customer base, as operators aggressively reduced their capital spending. While revenues in our composite tank business remained strong due to continued demand in the retail fuel and water and wastewater markets.
In automotive and industrial segment, revenues were lower by 8%, primarily due to lower demand for our automotive heat shrink products, resulting from the impact of production shutdowns and government lockdown restrictions from COVID-19 at the majority of automotive OEM assembly plants in North America and EMAR regions earlier in the year, which have yet to return to full capacity as of the end of the third quarter. Consolidated results for the third quarter were negatively impacted by non-recurring items outside of the company's normal course of business.
The current quarter includes CAD 12 million of restructuring costs and CAD 4 million impairment charge as a result of the ongoing savings initiatives completed in the quarter, including the recently announced closure of a pipe coating facility in Asia Pacific. The current quarter reflects a gain of CAD 1 million for land in Western Canada and a gain of CAD 8 million from investment from associates, while the prior third quarter benefited from a gain of CAD 5 million on the sale of land in Western Canada, offset by ZCL acquisition cost of CAD 4 million and a loss of CAD 2 million for Argentina hyperinflationary accounting.
Adjusted EBITDA for the quarter was CAD 17.8 million, significantly lower than the CAD 42.4 million reported in the third quarter of 2019. This decrease is primarily due to lower revenues in all three segments, the impact of lower production activities due to the COVID-19 pandemic, partially offset by lower SG&A. The decrease of CAD 22 million in SG&A is primarily due to the completed restructuring and cost control initiatives that result in decreases of CAD 12 million in compensation costs and CAD 4 million in travel and entertainment expenses.
The current quarter also benefited from the receipt of COVID-related government subsidies of CAD 17 million, of which CAD 9.5 million was recorded in cost of goods sold and CAD 7.5 million in SG&A expenses. Adjusted EBITDA margin in the third quarter was 7%, compared to 11% for the prior year third quarter, due to the reasons mentioned earlier. The pipe and pipe services segment margins decreased to a -9%, compared to 3% in the prior year. The composite systems segment experienced an increase of 26% in the current quarter, compared to 21% in the third quarter of 2019, and the automotive industrial segment also increased to 19%, compared to 18% a year ago.
The company delivered positive cash flow in the quarter. Cash flow provided from operating activities in the third quarter was CAD 7 million, a slight decrease compared to the CAD 8 million provided in the third quarter of 2019. This decrease in cash flow is primarily driven by a loss in the current quarter, lower non-cash items, and partially offset by a positive change in non-cash working capital. The change in non-cash working capital in the quarter was a cash inflow of CAD 9 million, which includes CAD 5 million dollar increase in restructuring liabilities, compared to a cash outflow of CAD 19 million in the same period of 2019.
Cash flow working capital primarily is driven by higher accounts payable, lower contract assets, and lower inventories, offset by higher accounts receivable and prepaid expenses. Cash provided by investment activities in the third quarter was CAD 3 million, reflecting CAD 6 million in proceeds on sale of property, plant, and equipment, and offset by CAD 3 million of purchase of property and plant equipment. This increased from the CAD 2 million used in investing activities at the prior year quarter, which reflected CAD 10 million in purchase of property, plant, and equipment, offset by CAD 7 million in proceeds from disposal of property, plant, and equipment.
During the third quarter, cash used in finance activities was CAD 7 million, reflecting the payment of required lease obligations and a slight decrease in long-term debt. This compares to CAD 45 million used in the second quarter of 2019, which reflected the repayment of debt of CAD 29 million, the payment of dividends of CAD 10 million, and the repayment of lease liabilities of CAD 5.5 million. Net cash flow for the third quarter in 2019 was positive CAD 3 million, compared to an outflow of CAD 40 million in the third quarter of 2019. With respect to cash and debt, the company has a cash balance of CAD 107 million, debt of CAD 435 million, and CAD 47 million of standard letters of credit as of September 30, 2020.
In addition to the successful completion of the debt amendment at the beginning of this quarter, the company's liquidity position has benefited from the significant progress made to date on our targeted CAD 60 million sustainable annual SG&A savings and CAD 40 million in incremental cash generation. During the quarter, the company completed further actions to reduce its salary workforce, bringing the total reduction to over 19%, announced the closure of one of its pipe coating facilities in Asia Pacific, and reduced capital budgets further to the CAD 30 million-CAD 35 million range for the full year of 2020.
As a result, the company remains on track to meet its goal of quarterly normalized sustainable SG&A run rate of CAD 70 million, which includes a targeted incentive compensation cost. The company has also delivered positive cash flow in the first nine months of the year, reflecting CAD 47 million from reduced working capital, excluding the impact of restructuring liabilities, and CAD 17 million from proceeds of asset sales. Based on these actions completed and planned, its diversified business and current backlog, the company expects to generate sufficient cash flows to fund its operations, working capital requirements, and capital program. I'll now turn it back to Steve for some additional commentary on the company's performance and outlook.
Thank you, Gaston. I'll first start with providing details on Q3 by segment. The pipeline and pipe services segment revenue is closely tied to the capital spending of exploration production operators in the upstream, and that of transmission line companies in the midstream of the energy sector. As a result of uncertainty in forward-looking economics, our customers are under pressure and have reacted by severely cutting capital budgets and delaying decisions on large capital expenditures. Additionally, driven to reduce costs and gain scale, strategic alternatives, such as mergers and acquisitions, are moving forward, and this is resulting in the consolidation of the end customer base that Shawcor serves in the PPS segment.
As a result of these factors, the third quarter continued to be very challenging for the segment. Depressed demand for small-diameter pipe coating and girth weld inspection, which are tied to North American drilling completion activity, continued at Q2 levels as a result of the reduced spending in this market. Girth weld inspection of larger diameter pipe was up from the low level of Q2 as projects started to be mobilized, as COVID-19 measures were implemented and regulatory-induced delays experienced some advancements. Pipe coating in the quarter was not as expected, even though we had firm production schedules.
This was due to lower-than-expected run rates in our Leith operations due to customer pipe quality issues, and our Channelview facility halts production as a key raw material was not available from our supplier. The root cause of the supply chain disruption was Hurricane Laura's damage to electrical grid servicing the supplier's facility. Of note, alternative sourcing solutions were available, but were rejected by both Shawcor and our customer due to the perceived higher risk to the insulation coating performance. The supply chain issue has now been addressed.
The Channelview facility is now back to production, and we estimate that the impact of the incident will be approximately CAD 6 million in EBITDA from a combination of work being moved out into later quarters and additional holding costs within the quarter. Engineering consulting services demand, as in the first half of the year, continued to be resilient as North American transmission companies look for expertise to move forward with integrity programs on existing assets. We continued to make progress in the quarter on reducing the cost structure of this segment, including the initiation of shutting down one of our two pipe coating facilities in Southeast Asia.
The facility shutdown is well underway and will be concluded in early 2021, after the completion of work that the facility has under order. With this facility closure, we have reduced our pipe coating facility footprint by five fixed plants year to date. We will continue our efforts to reduce our pipe coating footprint in the upcoming quarters, with a specific focus on one servicing international markets. One additional point pertaining to the pipeline and pipe services segment for the quarter that is important to note, is the preparation that has occurred to de-risk the step-up in activity that will start in the fourth quarter from work that is in our backlog.
Furthermore, work under order for both pipe coating and large-diameter girth weld inspection had positive developments in the quarter. Pipe coating with the finalization of the Payara project contract and girth weld inspection with an award of approximately $20 million related to construction of a major US land transmission line. The Q3 results for the composite systems segment in the third quarter had two main components. The first was continued very strong demand for composite tanks from the retail fuel market and increasing demand for our tanks in water and wastewater applications.
The second was the improved demand for composite pipe in both North America and international markets from the very low level of Q2. As a result of increased composite pipe volumes in the quarter, this business was able to be a positive contributor to the overall results. High demand for tanks is expected to be resilient as convenience store margins remain high. There remains an inventory of aged tanks that need replacing, which now includes older generation single-walled composite tanks, and from the traction we are gaining in our strategy for water and wastewater.
Let me go into a little more detail on our strategy for water and wastewater. One of the markets we are targeting in the water sector is stormwater. Studies have shown that 30% of the pollution in North American waterways comes from untreated stormwater runoff. Our strategic approach in stormwater is to connect our tank products with 3rd party components and build integrated systems that treat and clean storm runoff water before it returns to the waterways. One of our systems is capable of processing 2.5 million gallons of stormwater per year, or the equivalent to four Olympic swimming pools.
By cleaning stormwater runoff, our integrated systems can protect our community's potable water sources, control stormwater flow, and reduce flooding risk, and thus creating a core future demand element for our composite segment. Composite pipe demand has improved from Q2 low point, as completion activity in North America has improved, and our customers hold low inventory levels, and from project orders in international markets. Continued recovery in the quarters ahead will be tied very tightly to the increasing well completion activity in North America and our presence with select operators that will be active.
This business benefits from a very low support cost base that results in material torque and profitability as volumes increase. The most recent outlook has indicated the most active operators will be those that have adopted composite pipe over steel pipe. Currently, it does appear that Q2 will be the low point for our composite pipe business. The automotive and industrial segment results in the quarter benefited from, one, the return of demand for heat shrink products for automotive applications as vehicle assembly plants in North America and Europe resume production.
And two, continued demand for wire and cable products from electrical utilities and communication providers. Although we do expect some impact from the usual seasonal slowdown in the fourth quarter, the fundamentals of the segment are turning supportive for a faster recovery than we had first anticipated. Low interest rates, the increasing importance of personal transportation in response to the pandemic, and electrical and hybrid purchasing incentives are all positive factors for this segment. We are cautiously optimistic that returning to our pre-COVID-19 level for this segment could now occur in late 2021.
I'll now turn to Q4 and into 2021. Q4 is set to be a much better quarter for the company, and as I stated earlier, we expect that we will deliver Adjusted EBITDA net of government COVID-19 assistance in the CAD 25 million-CAD 30 million range. We anticipate the improved performance will be sustained into 2021, although this step-up in performance should be expected to have quarter-on-quarter volatility due to project execution timing. The improvement is based on the expectation that the start of recovery that we are now seeing will continue, and there will be a return to a minimum level of spending from our customers.
This will positively impact our book and term businesses, but it will also result in revenue generation from the execution of work that is captured in our CAD 542 million 12-month backlog and growing secured work outside of 12 months. Additionally, the actions we have taken to date and will take, such as reducing the salary headcount by over 19%, closing facilities, and aggressively reducing the variable costs to match a much lower forecast, will assist in improving the bottom line. In terms of project activity, our backlog is holding, and no book project has been canceled, and we are seeing projects that were pending award in March of this year starting to be revisited with associated pipe delivery schedules, albeit 12 to 18 months delayed from what was originally being considered.
Our bid and budgetary numbers, an indication of future opportunities, have remained high at $2.5 billion. Bid is just over $870 million. Resilience in bid is related to submissions associated with natural gas in the Middle East and Asia regions and the offshore markets of the Gulf of Mexico, Brazil, and Norway. I would note, our bid at the end of Q3 does contain over $120 million that we have been awarded, but is conditional on FID. Before we open up for questions, I'd like to make the following points. Shawcor's diversified portfolio of late and early cycle oil and gas and non-oil and gas businesses provides a hedge that would be a benefit in these uncertain times.
Shawcor has a substantial book of work for execution over the upcoming 12 months, and the work is holding firm. Additionally, we are starting to see the start of recovery in many of our book and term businesses. Shawcor has taken and is taking the necessary and difficult actions to reduce costs and preserve cash, which is needed in these very uncertain times. These actions include the analysis and consideration of exiting markets and divesting full businesses. Shawcor's future success continues to be underpinned by supportive long-term fundamentals that will drive investments in energy, transportation, and infrastructure. With that, I'll now turn the call over to Josh, the operator, and we can open up for questions that you may have for Gaston and I.
Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Aaron MacNeil with TD Securities. You may proceed with your question.
Hey, good morning, all. Thanks for taking my questions. Composite Systems seemed to have a very good quarter in Q3 from a sequential revenue perspective. Can you give us a sense of how much of the sequential increase was the ZCL business versus the composite pipe business? And maybe what the approximate revenue split for those two sub-segments were in Q3?
So, Aaron, as we've discussed before, we don't split the revenue in the composite business by tank, pipe, or lined tubing, so we don't split it. In my prepared remarks, I did comment that we had a better quarter for pipe in the quarter, so you can assume that therefore, the revenue is higher because it is now profitable where it wasn't in Q2. And tank, we had, as usual, historically, tanks are better in Q3 than Q2, and should be good in Q4 as well. So I think the incremental improvement was equal around tanks and pipe, and little to nothing from the oilfield asset management or the lined tubing business.
Understood, and that's helpful. I wasn't trying to get into specifics. I was just trying to get a sense of the quarter-over-quarter change. I'm also hoping to get a bit more details on the guidance of CAD 25 million-CAD 30 million, excluding subsidies. Obviously, if I take your Q3 excluding subsidies and basically at a break-even on an EBITDA basis. So I'm wondering if you could perhaps bridge the gap from quarter to quarter, or in other words, can you walk us through how you get from Q3 EBITDA to Q4 EBITDA? What are all the main moving parts in each segment? I know you mentioned the CAD 6 million in non-recurring items in the pipe coating segment. But just trying to get a sense of bridging the gap quarter-to-quarter.
Yeah. I think it's fair to say, if you look at the Q3 numbers and you do it by segment, the biggest improvement certainly that we've messaged is in the PPS segment. And the major uplift will be pipe coating, but also in the IM business and Girth Weld Inspection because of the work that I stated that we had won. So it's primarily in the PPS segment. That being said, we expect that the composite segment will have a strong quarter. Pipe is off the bottom of Q2. And we, of course, have a view because October is close to being finalized.
So pipe will be strong, and tanks in the fourth quarter, usually in December, there's a little bit of a pullback, but it'll be strong, so I don't think there's much movement there. Automotive and industrial in the CAD 25 million-CAD 30 million, it is probably the largest variable, I would say, because as you're probably seeing in other sectors in automotive, there is a spike in activity in the fourth quarter that nobody anticipated, and we expect that we will participate in it. So if you kind of back through what I just said, so the major difference will be in the PPS segment, and the variable in the range is probably in the automotive and industrial segment.
Okay. Does the PPS segment need to have positive EBITDA for you guys to hit that CAD 25 to 30 million, excluding subsidies?
Substantially positive EBITDA.
Got it. And then I know your guidance-
Maybe I'll give some additional color, right? So guidance is something we don't usually do, so we did it this time in particular because we had signaled the second half of the year was going to be stronger, and projects do move. And so with the EBITDA that we put on the table in Q3, we wanted to make sure the market understood that our view in the second half remains exactly the same, but it means a stronger Q4. In order for us to give guidance, you have to imagine the confidence that we have to have in the number, and if it's a project-based work, it cannot be one facility.
So projects are now being executed in Asia, Norway, Scotland, Channelview, and we're starting the Guyana project in Veracruz. And so we're finally getting back to the point where the utilization, and I would say better margin projects are gonna start running through our pipe coating facilities in Q4, and our hedge is that we have more than one facility running.
Understood. Last question for me. I know your guidance excludes wage subsidies, but can you give us a sense of what Q4 wage subsidy proceeds might be, as well as what restructuring costs would be, if any? And can we expect any other major facility closures in the coming quarters?
Yeah. So I think, looking in the short term on the wage subsidy side, Aaron, it's gonna be significantly less. You know, if you, periods 3 to 7 represented that the amount of the CAD 17 million will be booked this quarter, we basically, at this point in time, only have two more to book. The Canadian government has extended the wage subsidy. We're still reviewing what that impact is for us. But we're not expecting the number to be greater than CAD 2 million-CAD 3 million in the fourth quarter at this point.
Understood.
On the restructuring, there is some further restructuring, but it will not be to the extent that we've had in the last two quarters. So right now, it is going to be in the range about, I would recommend about CAD 3 million-CAD 5 million, and that's probably, probably on the low-- on the, probably more appropriate, the low range of, the low, at the bottom of that range, from that perspective. And yes, we will continue to look at facilities for closure. May not be in the fourth quarter, but in probably more into early 2021.
Okay. Thanks for the color. Appreciate it. Turn it over.
Thank you. Our next question comes from Michael Robertson with National Bank Financial. You may proceed with your question.
Hey, good morning, team. Thanks for taking my questions. I thought it was an interesting jump quarter-over-quarter in the value of the budgetary estimates to CAD 2.5 billion. From a high level, what's the sort of composition of that CAD 2.5 billion in terms of oil, gas, and non-oil and gas? And has that composition shifted significantly relative to the second quarter?
Yeah, let me kind of break it apart a little bit so that we're very clear. So the budgetary is, and as you're aware, but I'll clarify for everybody in the call, budgetary is when we give a number to a customer on a given scope of work so that he can make an estimate. In that number, I think it's somewhat inflated because there is a project in East Africa that's now in the budgetary number that we put in there after removing it from a previous period of time, that's several hundred million dollars. So I would... It's there, it's a project that we're actively discussing, but I really don't anticipate the likelihood of it going ahead or Shawcor getting an attractive return on participation in the near term.
So you need to back that out of the number. Then the number that I'm quite, you know, comfortable that is staying strength is the bid number that I mentioned. And in that, which is numbers that we actually have put in proposals through tender process or direct, and we have a line of sight of pipe direct. It is primarily gas in the Middle East and gas in the Middle East for domestic consumption, but also export of LNG. Asia, for export of LNG, so it's heavily gas related. But the offshore markets of Brazil, the Gulf of Mexico and Norway are oil. So if I actually look and break down the CAD 800 million that's in there, it is, you know, it's probably 60/30 towards the gas. So 60% gas, 30% oil.
That's good color. And has that sort of changed significantly over the recent quarters, or is it sort of holding steady at that ratio?
I think it's oil's come back a little bit in it, but the bigger projects continue to be gas related.
Got it.
So the biggest way to move that number is gas.
Got it. You noted expected improvements in financial performance heading into 2021. Would it be fair to assume that you are expecting quarterly EBITDA performance that is sort of in the ballpark with what you guided to in Q4 as we enter the new year?
I think on average for next year, I think that's a safe assumption, so on average. But the portfolio of the company, so for example, ZCL seasonally has a slowdown in Q1. It's a fact, right? So we ship less tanks in Q1. Also, it's really difficult in the pipe coating business, and it was demonstrated in Q3. We have production schedules in Q2 for Q3 of this year, and we were pretty confident it was going to go. It's really not unusual for pipe to show up with scale that takes a second cleanup trip through the facility that will push revenue out. So I think it's a very safe assumption that we will average the Q4 number into across 2021, but there's gonna be volatility per quarter.
So, you know, the guidance that we've given for Q4 is something nobody should expect us doing again, right?
Got it. Got it. Yeah, I understand the difficulty in this environment. That's great color. I'll, I'll turn it back. Thanks a lot for taking my questions.
Thank you. Our next question comes from Matthew Weekes with Industrial Alliance Securities. You may proceed with your question.
Thank you. Good morning, and thanks for taking my questions here. I was just gonna ask specifically about the North American pipeline pipe services. It looks like on a sequential basis in terms of revenues, we saw about a $15 million decline there. I was wondering if it'd be possible to break out kind of how much of that can be attributed to closures of facilities in the second quarter versus how much is attributable to the one-time impact resulting from Hurricane Laura?
But your question is quarter-on-quarter, correct?
Yes, that's correct.
Okay. So, as we mentioned, not much from North America completions, because Q2 was a low point, and we saw no improvement in Q3. So if you look at the PPS, so whether it be in our small diameter girth weld inspection or our small diameter pipe coating, and of course, we've removed a lot of capacity out of the market, there's not much. So what you're really seeing in the delta, and we expected it to actually be an increase, is the three things that I commented about. So, first of all, the Channelview. As we said, the overall impact, and I didn't give a revenue number, I gave an estimated EBITDA, but you can figure it out.
Quite a bit of revenue in Channelview was pushed out, and that's included in North America. The second comment I would make on the revenue drop is there was a delay in pipe arrival that also affected the Channelview facility. And we had a slow or delayed start in our IM business. So it's kind of those three things that pushed it out, but not, you know, the Q2, Q3, if I look at the North America drilling and completions, with the exception of composite pipe, it's still at the Q2 level, so there's not much.
Okay. So really, the quarter-on-quarter decline was mostly due to these kind of delays rather than any kind of worsening of activity?
I think the majority of the drop that you see in the PPS segment were things that we didn't anticipate before.
Okay, thanks. Thank you. That's helpful. I'll turn the call back.
Thank you. Our next question comes from Miguel Ladeira with Cormark. You may proceed with your question.
Hey, good morning. So you flagged potential plant closures, but also stated that you would not rule out existing product lines. Could you provide some color as to what specific product lines you view as non-core?
It's a very, very good question. I think what I wanna make clear when we're in the prepared remarks is that we are working through the complete portfolio of the company, and we're not ruling out divestitures of businesses, whether it be one product line. So, we recently have divested of a product line within the automotive industrial business that will be visible in the fourth quarter, which is CAD 2 million of sale of a trademark and a product line that is better fit with somebody else. That's an example. But we are looking at full businesses, and it's difficult for me to identify them on the call. Some of them are in process, and some are just in consideration.
Perfect, that's very helpful. Last one for me. With the rebound expected in Q4, how should we think about CapEx? And if there is an uptick in CapEx, where do you think this will be directed?
Yeah. So as we communicated in our documents and the prepared remarks, we've reduced our overall range for planning capital expenditures to CAD 30 million-CAD 35 million. So probably, again, conservatively more at the bottom of that range, for the things. And really, what that continues to reflect is, you know, a maintenance CapEx that we have, and a bit of growth CapEx for key growth segments like the composite tank business, and a little bit of, you know, CapEx required for increased activity in the pipe coating side, in the plants that we expect to continue to have revenue generation, going forward. So, that's really where we're at right now.
Perfect. That's very helpful. Thanks for taking the questions.
Thank you. Our next question comes from Tim Monachello with ATB Capital Markets. You may proceed with your question.
Hey, good morning, everyone.
Good morning.
First question, just a clarification on the Q4 guidance. That excludes the 1 time cost from Hurricane Laura, correct?
In Q4, the CAD 25 million to CAD 30 million is the operating EBITDA. So there is no 1 time in the number. So it, it-
Oh, okay. I must have been confused. You mentioned $6 million of impacts from a hurricane.
That was-
Which quarter was that in?
Q3. That's the quarter we just-
Oh, okay. Sorry about that. Busy night last night. Okay. I was encouraged to see that the budgetary and bid and backlog were, you know, up in the quarter. Trying to square that up with the commentary around sort of increased, I guess, timing around project awards of 12 to 18 months. So I'm wondering if you could just talk a little bit about what the average contract award timing might be within the bid right now?
So maybe it's a difficult one, right? So maybe I'll go back because I think it's a good question to give a point of reference of where we are. So historically, when I say historically, pre-2016, it was usually by the time we first saw a project, it went through budgetary bid and award, it was around 18 months. Then in 2016, of course, everything canceled, and I would actually use the term infinity, because the projects actually were removed from bidding budgetary. So you know, we started having visibility on them, they would move to bid, and then when 2016 hit, they actually disappeared.
In March of this year, we had several projects that had worked through the 2016 outlook, put back in the numbers, reworked, and they were pending FID. And that was, you know, if you think about, they were moved in 2016, came back, so probably a 24 to 36 month cycle to get us to the point where they were prepared to be awarded. They now, in my prepared remarks, I said 12 to 18 months delay. So the projects that were pending award in March of 2020, they're now starting to be discussed again, but the pipe schedules and the pipe coating revenue recognition is 12 to 18 months pushed out from what we thought was going to happen in March of 2020.
If I now look at the current bid number that's out there, we've moved, we've moved 9 months down the road from March, so I, I would say we're now, you know, 12 months, a large volume of the bid and budgetary will be decided in the next 6 to 12 months.
Okay, great. So, I guess, just to make sure I understand that, in 2021, you expect that you could be awarded, you know, a decently large percentage of that bid, depending on, you know, success rates.
Yeah.
You don't expect that there'd be a ton of revenue recognition from that bid?
It depends, right? So I think some of the work that we have in under contract, pending FID, will be decided, right? So there's $120 million there that's included in our bid number. That's pending a decision on the FID. So that's-
Mm-hmm
... that's a quick one to go, and that's a 2021. We have other projects that are, and in particular, Middle East gas, that will be decided in the next 2 to 3, the next 3 to 6 months. And it will possibly have revenue in 2020 to backfill in our backlog in 2021, in the later quarters. So we still have projects in the bid book that should they go ahead in our expected timing, it will start to fill back in the backlog, which means there's revenue in 2021. But we have a very strong outlook for 2021 because, you know, we have a strong backlog for the next 12 months.
Our backlog, which would not include the fourth quarter of 2021, we have work that we secured in, in Guyana, as an example, that has work for the fourth quarter that's not in the backlog. So our actual backlog is higher than the number that we communicated for 2021, because the fourth quarter's not in it.
Okay. Understood. And then I was just curious around the North American composite pipe business. As you've come out of the second quarter lows, and things started to recover, do you think that that business has outperformed the broader market recovery?
I think give us a quarter. I think the challenge that we have, and because we actually own the reels in which the customers have pipe on it, we have a very good handle on the inventory of the customers. So I think, you know, what I'd ask is, give us a little bit of time, give us the fourth quarter, because in the fourth quarter, we'll understand what is the impact of the inventory that's sitting on that the customers have. It's substantially depleted, and there's a lag between this little bit of strengthening completions that we're seeing right now and when they start going to reload their inventory and buy from us.
The second comment I would ask, why we need a little bit more time, is 'cause the consolidation that you're seeing in US land is providing some havoc in who is the person that's doing the purchasing, as you can understand. But I will make an overall comment, is that US land will continue to reward those companies that bring advancements in technology, that bring efficiency, or lower cost solutions to the market. And so composite pipe, and in my prepared remark, I said, is the gathering line of choice for the majority of the large customers now. And so really, it's the market share over steel that's important to us, with the customers that are actually active.
So give us one quarter, and, and I think I'll give some commentary next quarter on how pipe is doing versus the general market. But I think we have this kind of buffer of inventory that we need to figure out and see.
Okay. I guess maybe I'll provide a little context for, for the question. From what you've said in the call, my understanding is that Q3 was, you know, a more profitable and above break-even quarter for the composite pipe segment, whereas Q2 was not. Is that correct?
Yes, that's correct.
Okay. And then with the backdrop of sort of average rig counts across the US being down quarter-over-quarter into Q3 from Q2, and obviously, you know, completions activity has probably outperformed drilling activity over that period. I'm just curious how that profitability has transformed. Is that a function of higher top-line revenue, or more a function of just costs being taken out of the business, or a combination of the two?
It's really the tipping point. You know, it's really a one-facility business, so there's an absorption rate that once you get over, the business turns profitable. So it's a marginal improvement in revenue that pushed the business over the absorption rate.
Okay, got it. Thanks a lot for-
I did clarify in the call that it's not just U S land. We booked a nice order in the international market.
Okay. Is that something that, you know, will continue to be processed through the next couple of quarters as US land rebounds?
So the international order is a nice hedge into the fourth quarter.
Okay, great. Appreciate it.
Thank you. As a reminder, to ask a question, you'll need to press star one on your telephone. Our next question comes from Keith Mackey with RBC. You may proceed with your question.
Hi, good morning. Thanks for taking my question. Just wanted to start out on the water strategy. In Q3, I think there was about, you know, 35% of your revenue that was non-oil and gas. Obviously, water would, would be in there. Could you just maybe give us a sense of where the water business is in that mix now, where you think it could potentially get to, given your strategy? And is the strategy incremental to the channel synergies you would have identified in the ZCL acquisition, or is the, or, or was that sort of included in there?
So, I can give some numbers reference to the performance of the water business for tanks, because ZCL, prior to the acquisition, disclosed some numbers. So a very good year for them was, and they had challenges to break through the CAD 23 million to CAD 24 million range. And so that was. And they always had water as a identified market on how to go. Our strategy, as I mentioned, is we're. And it's a challenge, as you can imagine, because the capacity in our current facilities to serve the fuel market, because fuel market is quite strong. You know, we need to effectively manage the capacity to ensure that our strategy in water gets traction, and we're using, in some cases, 3rd party manufacturing to get it done.
The current revenue projection for the end of the year, we will surpass ZCL. So we'll surpass this kind of line that they were challenged to get past. So you can assume that it will be beyond the CAD 23 million to CAD 24 million that we said. When we actually break down the water business and our offering, I think we could get this to CAD 100 million, but we need to find the manufacturing capacity to do it, which would involve utilizing toll manufacturing. But what's really important for us is that we fully realize that the fuel business has an annuity of replacing steel tanks and older composite tanks that is not forever.
And so as we start to develop our water and wastewater business, it is what we're trying to ensure will provide a stable, long-term demand for the tank business. And it was always part of the discussion and rationale why we did the ZCL acquisition, because we identified the risk of an endpoint for the refurbishment of fuel tanks.
Got it. Okay. Thanks, thanks for that color. My last question is just in, in pipe services, had negative EBITDA in Q3. You said you expect it to be positive in Q4. I'm just wondering if, if revenue were to be at Q3 levels, and we incorporate the changes you've made in that, in that business, with the five plant shutdowns, et cetera, would we expect that business to be EBITDA positive go forward, if, if revenue were at Q3 levels, or, or is there still more, more room to run there?
No. At the Q3 levels, with the current cost structure, No, it would not. So we would, you know, and our focus is to take more and more cost out of the segment, but the Q3 level revenue was very low.
Is the biggest lever there, I'm guessing it is on additional plant closures that would get that number to be there, to be-
No.
to be positive at two, three levels, or are you not even considering sort of planning at those levels just because it was, you know, kind of a one-time low, and you expect the run rate market to be better?
No, there was a substantial drag in Q2 and Q3 from our field services business tied to drilling completions, so this is the girth weld business. And also large diameter girth weld inspection is not contributing. So, it's really field services and under absorption of plants, so it's two elements. So, we, you know, in the PPS segment, we often talk about pipe coating, but there is a substantial drag that we're seeing in our field services, IM-orientated business, with the exception of our engineering consulting services, which is profitable.
Got it. Okay. Okay, that's it for me. Thanks very much.
Thank you. Our next question comes from John Gibson with BMO Capital Markets. You may proceed with your question.
Thanks. Good morning, guys.
Good morning.
Just given your prior views around facility closures, do you feel that you're still well-positioned relative to your peers to win some of these awards in your bid log? Or I guess what I'm trying to ask is, now that you've—you have fewer pipe coating facilities in play, what has changed with regard to your outlook for winning new, new work?
So, we've been very strategic on the plant closures that we're doing, both domestically, where the model of high volume, low margins without the high volume doesn't work. So that's a strategic direction to reduce our exposure to that business, so I'll put those to one side. The most recent shutdown that we did is an international offshore-oriented facility. And by doing it, we're taking capacity out of the market, but certainly, as I said, it's one of two facilities in Southeast Asia, so we are very much still in the running for work that's there.
The additional facility closures that we are targeted to do, all are the ones that we're taking the capacity out of the market, but without question, we have access to the market through another facility. So in some cases, what we're actually doing is reducing the options for the customer. I think if everyone is following the pipe coating business, capacity is coming out of the market quickly. Our competitors are also shutting facilities. And there was a recent announcement in the Gulf of Mexico on a competitor that we have there. So the competitive landscape is quickly, quickly changing, and I think customers, as we communicated the shutdown of our Southeast Asia facility, are understanding that they're just not going to have the choice anymore. So we will give an execution strategy of one facility, not multiple facilities, going forward.
Okay, great. Thanks for that. Last one for me, a bit more of a high-level one. But when you look at your EBITDA covenants, you know, they, they kick back into effect in Q4, where EBITDA gets annualized. I guess, in a worst case scenario, where could you, where does your sort of current work sit relative to, sort of a, a minimum EBITDA threshold, to stay within covenants here in Q4? And then, do you think in sort of a worst case scenario where maybe another, you know, one-time event hits, that there's potential to breach?
Yeah, no, I think we based on the range that we provided, we have sufficient room for the covenants, the amended covenant that we have for Q4 on an annualized basis. So, there's no concern there. It's also important to note that, you know, the covenant is based on an adjusted EBITDA basis. So, so that is really the focus that we have, and that's how, why we have disclosed unadjusted EBITDA. So at this point in time, I don't believe we have any concerns about meeting our covenants in the fourth quarter.
Okay, actually, one quick one for me as well. Just, you've talked about larger diameter composite demand being strong from international areas. I think you touched on it a little bit in the call, but can you talk about how this market's trended?
So just a correction. So large diameter in the pipe world is usually 20-inch and above. We don't supply 20-inch composite pipes. So I mentioned that there was strong demand in the quarter with an order in international markets. So we have spent tremendous time in getting our products certified internationally. And a lot of the delays have come because of COVID-19, getting access to the customers and making decisions. So we usually have orders in the international market throughout the year, and it's more project related. In the third quarter, we started to see closures of these orders, so POs being issued, and we expect it will continue into Q4.
So it was usually not material overall, with the exception of some large orders that we did in Australia and Saudi historically. So these are $3 to $4 million-sized orders that go through. And I expect they'll be sporadic as we go forward, but they are now moving forward. And as I said, it is something that brings some confidence to us in Q4 because we have a PO for pipe.
Okay, great. Appreciate the color. I'll stand by.
Thank you. I'm not showing any further questions at this time. I'd now like to turn the call over to Steve Orr for any further remarks.
Well, I really do appreciate the interest in the company and everyone taking the time to join us for this morning's call, and I look forward to speaking to you again next quarter. And everybody on the call, please stay healthy. Thank you.
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.