Good morning. Before we begin this morning's conference call, I would like to take a moment to remind all listeners that today's call includes forward-looking statements that involve estimates, judgments, risks, and uncertainties that may cause actual results to differ materially from those projected. The complete text of Mattr's statement on forward-looking information is included in Section 4.0 of the third quarter 2023 earnings press release in the MD&A that is available on SEDAR+ and on the company's website at mattr.com. For those joining via webcast, you may follow the visual presentation that accompanies this call. I'll now turn it over to Mattr's President and CEO, Mike Reeves.
Good morning, and thank you for attending our third quarter conference call. Today, Meghan and I are joined by our Senior Vice President of Finance and CFO, Tom Holloway. The third quarter of 2023 saw Mattr move closer to concluding our strategic review process with the announcement that most of our pipe coating business will be acquired by Tenaris. This is the last significant step in our transformation into an infrastructure products provider, delivering high-value, differentiated solutions used in harsh environments by our customers around the world as they expand and renew critical infrastructure. Turning to operational performance, the company delivered robust total operating results in Q3, continued to commit capital to high return potential organic growth opportunities, and accelerated its share repurchase activity.
Total consolidated adjusted EBITDA was $ 128 million during the quarter, with adjusted EBITDA margins of 25%, a substantial increase from the prior year and the prior quarter. Our continuing operations, which exclude the business components now held for sale to Tenaris and reported as discontinued operations, delivered adjusted EBITDA of $ 41 million in the third quarter, a significant accomplishment in the context of an unfavorable shift in several market conditions. I'll speak more about these conditions later, but note that we believe them to be transient in nature and likely to dissipate over the first half of 2024. Despite these conditions, continuing operations adjusted EBITDA margins exceeded 18% in the quarter, a testament to the organization's ongoing commitments to tight cost control and efficiency improvement.
The hard work of recent years to substantially strengthen our balance sheet and our cash generation profile positions us to pursue a disciplined, high return potential capital allocation strategy, balancing share buybacks with investment in high margin growth opportunities to generate elevated returns. Consistent with our previously shared full-year capital guidance range, during Q3, the company continued its substantial growth investments into its composite and connection technology segments. These investments into four new operating sites will enhance production capacity, efficiency, and proximity to key markets, provide footprint optimization flexibility, and lower risk by providing increased production redundancy. They are expected to accelerate mid and long-term revenue growth, elevate margin profiles, and deliver attractive overall returns. We continue to believe the intrinsic value of our business represents an excellent investment opportunity, and consequently, the company increased its stock repurchase activity under its normal course issuer bid during the third quarter.
In addition to organic growth opportunities, we remain alert to strategically aligned, attractively valued acquisition opportunities and believe the current interest rate environment creates an opportunity for Mattr to utilize its balance sheet strength in a slightly less competitive M&A landscape. Subsequent to the third quarter, we completed the sale of our Casale, Italy, facility for gross proceeds of $ 6 million. We also continue to evaluate opportunities to divest a small Western Canadian real estate portfolio, a process we believe could deliver gross proceeds of approximately $ 10 million over the coming quarters. Looking at each of our segments, during Q3, Composite Technologies delivered revenue growth of 5% when adjusting for the $ 13.6 million delivered in the comparative period by OAM, which was divested in the fourth quarter of 2022.
The segment also expanded Adjusted EBITDA margins by 100 basis points compared to the same period last year. Sequentially, segment revenue moved down from the second quarter of 2023 by approximately 7%, as sales of the company's spoolable composite Flexpipe products moved lower in the face of roughly 10% quarterly declines in North American onshore drilling and completion activity, and a slight step down in international shipments. In parallel, the company's Xerxes fuel and water management business was impacted by project delays as our customers continue to face extended state and local permit issuance timelines. It's important to look a little deeper into these market dynamics. We have confidence both are relatively short-lived, and neither changes our favorable mid and long-term outlook for the composite technology segment.
In the North American onshore oil field market, we have seen customers trim activity levels throughout the third quarter to remain within full-year capital spending budgets. Prior to Q3, these activity reductions had largely not affected our core business in the Permian Basin, but the basin saw approximately 12% fewer rigs operating at the end of the quarter than at the start, an impact that lowered overall demand for our Flexpipe products, despite another record sales quarter for our newly released six inch product. We anticipate North American onshore oilfield activity levels will be 5%-10% lower on average in Q4 when compared to Q3.... as normal year-end slowing overlays an activity baseline that we believe has stabilized.
However, with commodity prices expected to remain in an attractive window for the foreseeable future, we anticipate the onset of a new annual capital budgeting cycle at the beginning of 2024. Will then cause gradually increasing activity as we move through the first two quarters of next year. In our Xerxes business, our predominantly North American customer base started to observe a slowdown in the pace of new convenience store construction permits during the second quarter. The underlying drivers for this pattern include understaffed permitting offices in many local jurisdictions and generally lower processing efficiency, as many issuing agencies attempt to navigate post-pandemic remote working approaches and arrangements.
Having reached the conclusion that extended permitting timelines represent a new norm, our customers have indicated that they have substantially modified their permit submission approach, significantly increasing the volume of permits they seek and submitting applications further in advance of anticipated construction commencement than they would historically. We believe that these changes will ensure that the flow of permit approvals will begin to move closer to prior expectations during the first half of 2024. Customer demand for Xerxes fuel tanks and water management products to support permitted new sites remains elevated. However, a slowed pace of construction during Q2 has led to a build in customer-owned tank inventory, which we believe will take approximately two quarters to return to typical levels.
Consequently, we anticipate the normal seasonal slowing of Xerxes business during Q4 and Q1, driven by ground conditions, is likely to be more pronounced than in recent years, with lower production activity and modest costs related to new production facilities dragging on margins during this period, before recovering in the second quarter of next year. In the face of this anticipated brief market slowing, the Composite Technologies team continues to embrace tight cost controls and to pursue further optimization of their operating activities. This focus on operational efficiency continues to also drive further reductions in total emissions. The Composite Technologies Production Center in Calgary is in the process of completing the installation of a solar panel array and an LED lighting retrofit, which are both expected to be completed during the first quarter of 2024. This investment will be almost entirely funded by government and landlord incentives.
When completed, this is anticipated to lower the site's annual energy expenses by hundreds of thousands of dollars and significantly reduce the scope to greenhouse gas emissions. Our favorable long-term outlook for the market served by Composite Technologies underpins our ongoing investments to increase capacity, improve efficiency, and enhance proximity to key customers, including our commitment to establish two new production sites in the U.S., one for Flexpipe and one for Xerxes tanks, which were announced earlier this year and are on track for first production during the second half of 2024. With a healthy long-term demand outlook across the Flexpipe and Xerxes portfolio, we believe our composite technology segment is well positioned to recommence its prior growth profile once we move past these near-term market challenges.
During Q3, the Connection Technologies segment reported very similar revenue and Adjusted EBITDA to the same quarter of 2022, while moving down sequentially, reflecting delivery completion during Q2 of a large, high-margin aerospace order that supplemented the first half of 2023. While North American industrial and infrastructure demand for the company's harsh environment, wire, cable, and heat shrink products remains intact, segment performance during Q3 was achieved despite continuing economic weakness in Europe, modest impacts from North American auto sector strikes, and a significant pullback in ordering by Canadian wire and cable distributors, who have worked aggressively to lower inventory levels in the face of higher interest rates.
This distributor behavior has created an opportunity for the segment to lever lower lead times and capture incremental share in North American utility markets, particularly in the U.S., a trend that we believe can be sustained and capitalized on moving forward. We believe the inventory destocking by wire and cable distributors that would typically occur at year-end and normally causes Q4 to be the lowest activity quarter of the year for Connection Technologies, has largely already been completed. Consequently, the company expects Connection Technologies revenue in the fourth quarter to be similar to Q3, with Adjusted EBITDA modestly lower, as revenue mix is slightly less favorable and the business continues to incur costs related to its ongoing North American production facility relocation and expansion.
Overall, we maintain a favorable view of the long-term market trends which impact the Shawflex and DSG-Canusa businesses, and we will continue to invest growth capital to enhance our product offering, improve our manufacturing capacity, elevate our production efficiency, and lower lead times, including the ongoing commitments to bifurcate, expand, and modernize our North American production footprint, which is on schedule to be fully completed during the first half of 2025. Combined, our continuing operations total backlog was $393 million at the end of Q3, down approximately $40 million from the prior quarter, as revenue generation in each business modestly exceeded new order capture, in part reflecting the previously discussed market dynamics....
Lastly, our discontinued operations saw revenues rise by 186% compared to the third quarter of 2022, delivering an Adjusted EBITDA margin of over 30% compared to a loss in the prior year quarter. Sequentially, revenue and Adjusted EBITDA from the former Pipeline and Pipe Services segment moved substantially upwards as a result of very robust coating activity in all operating regions, particularly related to the SGP and Scarborough projects in Mexico and Indonesia, respectively. Assuming the sale to Tenaris does not close prior to year-end, we currently anticipate Q4 revenue and Adjusted EBITDA from discontinued operations will be modestly above Q3 levels. This outlook is driven by the timing of specific pipe coating projects and particularly impacted by coating activity and related revenue recognition on the SGP project, which will reach peak levels during the fourth quarter.
At the end of the third quarter, the company had recognized approximately 40% of total expected SGP project revenue, and given operational efficiencies observed to date, the company still expects project coating and revenue recognition will largely be completed during Q1 of 2024. Tom will now walk through the company's third quarter financial highlights.
Thanks, Mike. During the third quarter, the company entered into a definitive agreement, subject to regulatory approval and other customary conditions, to sell a substantial part of its Pipeline Performance Group, or PPG, business, which was previously reported under the Pipeline and Pipe Services, or PPS, segment to Tenaris for $166 million, or approximately $ 230 million at October 31st, 2023 exchange rates. This transaction is subject to normal working capital adjustments, is currently expected to close by the middle of the first quarter of 2024, and largely completes the company's portfolio transformation and strategic review process. Consequently, the company is now reporting those elements of the PPG business covered by this agreement as held for sale and the results as discontinued operations, while the remaining active businesses are reported as continuing operations.
Accordingly, prior period information has been retrospectively revised to reflect continuing operations and discontinued operations. The third quarter's consolidated revenue from continuing operations was $ 225.4 million, 3.8% lower than the $ 234.2 million in the third quarter of 2022. Excluding the impact of the Oilfield Asset Management business, which was sold in the fourth quarter of 2022, consolidated revenue from continuing operations increased by $ 4.8 million, or 2.2% from the third quarter of 2022. Adjusted EBITDA from continuing operations was $ 41.1 million, a 5.3% decrease from the prior year third quarter.
Adjusting for the Oilfield Asset Management sale, this decrease is $ 0.5 million, or a 1% decrease from the prior year third quarter, primarily attributed to modest selling, general, and administration costs related to our divestment, rebrand, and growth activities during the quarter. During the quarter, the company recorded an impairment charge of $ 8.7 million related to certain Western Canadian real estate assets. As marketing of the assets began, it became apparent that carrying values were above what could be recovered in a sale process due to a variety of market-driven variables. Additionally, a gain of $ 1.9 million was recorded during the quarter related to the wind down of our Canadian defined benefit plans.
Share-based incentive compensation during the quarter resulted in a gain of $2.9 million, reflecting the downward movement in the share price since the prior quarter. Turning to segment results, the Composite Technologies segment revenue was $140.1 million, a 5.3% decrease compared to the third quarter of 2022, and Adjusted EBITDA was $32.4 million, a 0.6% increase from the prior year third quarter. This revenue decrease was largely attributable to the absence of the Oilfield Asset Management business, which was sold during the fourth quarter of 2022. Demand for composite pipe products slowed slightly as North American onshore rig counts declined by over 10% during the quarter. The Composite Technologies segment also observed a modest decline in underground fuel tank shipments, driven primarily by permitting delays for customer installations.
Connection Technologies segment revenue was $ 81.8 million, which was relatively consistent compared to the third quarter of 2022, and Adjusted EBITDA was $ 15.2 million, a $ 0.6 million or 3.8% decrease from the prior year third quarter. The decrease was driven primarily by increased selling, general, and administrative costs due to higher compensation and modest relocation expenses to support the growth initiatives in the business. In the wire and cable business, the segment was impacted by earlier destocking activity from its Canadian distributors during the third quarter. This decrease was offset by leveraging shorter lead times to capture increased sales into Canadian and U.S. utility markets.
Deliveries into the segment's automotive markets were also impacted slightly by the United Auto Workers strike in North America. Discontinued operations, which consists primarily of the businesses formerly reported under the Pipeline and Pipe Services segment, reported revenue of $288.6 million, an increase of 186.3% compared to the third quarter of 2022, primarily resulting from the continued successful execution of pipe coating activity, including the SGP project in the Altamira, Mexico facility. Adjusted EBITDA was $87.4 million, which compared to negative adjusted EBITDA of $0.5 million recorded in the prior year third quarter, reflecting the aforementioned higher revenue, a more profitable pipe coating project mix, and the impact of higher activity on manufacturing absorption.
Turning to cash flow in the quarter, cash provided by operating activities in the third quarter was $ 24.3 million, reflecting strong operational performance. This cash generation included an investment in working capital related primarily to prepayments on capital expansion projects. Cash used in investing activities in the third quarter was $ 26.7 million, reflecting $ 29.2 million of capital spending on property, plant, and equipment, slightly offset by proceeds from the disposal of property, plant, and equipment, and other of $ 2.5 million. During the third quarter, cash used in financing activities was $ 26.1 million, including $ 9 million in debt repayments, $ 7.2 million in lease payments, and $ 9.9 million in share repurchases under the company's normal course issuer bid.
Net cash used in the third quarter of 2023 was $ 26.6 million. Based on the actions completed and planned, its diversified business, current order backlog, and confidence in the outlook, the company expects to generate sufficient cash flows and have continued access to its credit facilities, subject to covenant limitations, to fund its operations, working capital requirements, and capital programs, including share buybacks. As of September 30, 2023, we had a cash balance of $ 98 million, debt of $ 174 million, and $ 64.9 million of standard letters of credit.
Our liquidity position has benefited from the initiatives undertaken since 2020, with continued focus on reducing our operating cost base, as well as repayment of $ 259.8 million of outstanding net long-term debt since the start of 2021, including $ 9 million paid in the third quarter. As of the end of the quarter, the company's net debt to Adjusted EBITDA ratio was 0.5 x, significantly below our ceiling of 1.5 x. Subsequent to the close of the third quarter, the company repaid an additional $ 30 million on the credit facility, bringing that balance to zero. We also continue to purchase shares under our Normal Course Issuer Bid and repurchased 535,000 common shares during the quarter, a significantly higher number of shares than in the prior quarter.
Total capital expenditures for the entire company in the quarter were $39.6 million, including outstanding payments to suppliers, of which $23.8 million were related to growth expenditures for continuing operations. These were mostly related to infrastructure improvements to increase production capacity and efficiency in the Composite Technologies and connection technology segments. The capital expenditures for discontinued operations were $12.4 million and were largely spent to support the SGP projects. Looking ahead, the company expects full year 2023 CapEx spend to be on the lower end of the $160 million-$180 million range previously communicated.
During the previous quarter, the company announced further details on this expected capital spend, including two new Composite Technologies production facilities in the U.S., as well as a new facility in the Greater Toronto Area and one in the U.S. for the Connection Technologies segment, which will expand and replace the current North American footprint. The investments in these lower risk, high return potential opportunities are expected to create further annual revenue-generating capacity of approximately $150 million, and further expand Adjusted EBITDA margins once these facilities are brought online and approach efficient utilization levels. We will continue to prioritize organic capital spend to drive growth in our most differentiated, high-value, materials-based solutions in support of industrial and critical infrastructure end markets, while ensuring that sufficient capacity is available to execute on our pipe coating projects in our backlog.
The company continues to execute on the strategic actions that are intended to enhance, over time, its margin and operating cash flow profile, lower overall volatility, manage risk, and deliver greater full cycle value to all stakeholders as our market-leading technologies enable responsible, sustainable renewal and enhancement of critical infrastructure. Since early 2020, the company has successfully divested multiple non-core, lower-margin businesses and other assets. These efforts have generated over $207 million of cash proceeds, with the disposed businesses generating an average trailing 12-month Adjusted EBITDA margin of 6%, significantly strengthening our balance sheet and margin profile, while lowering organizational complexity and risk. The announcement of the sale of the majority of the PPG business brings the strategic review process near to completion.
Once that sale is completed, we will have generated approximately $442 million from the strategic review exercise, enabling significant debt reduction, investments in the organic growth of the remaining business, and modest acquisitions, while also beginning to return capital to shareholders through our NCIB. We look forward to focusing on the remaining core businesses, getting the capital program completed, and organic growth investment capacity expansions running efficiently, and continuing to evaluate potential strategic acquisitions and investments to grow the business. I'll now turn it back to Mike for some final comments.
Thank you, Tom. Over the last three years, we have taken significant steps to simplify our organization, increase average margins, lower operational and financial volatility, elevate cash flow, and concentrate on a narrow range of high-growth, critical infrastructure-oriented businesses. We remain committed to tightly controlling fixed costs, completing the pipe coating business sale, and optimally deploying capital to drive high return growth. We have substantially reduced outstanding debt by returning capital to shareholders and leaning into high-value, organic and inorganic growth opportunities, taking advantage of our unique technology portfolio and strong long-term customer demand to deploy significant growth capital and deliver elevated returns. I would like to specifically thank the thousands of Mattr employees globally who have worked so hard to achieve these outcomes. Normal seasonal cycles and transient market movements will continue to drive some variation quarter to quarter.
However, the underlying long-term trends for each of Mattr's primary businesses are favorable and expected to remain so for several years. Long-duration North American critical infrastructure activity remains robust, and demand for our core products is expected to persist. We remain vigilant towards the potential impacts of geopolitical events, supply chain risks, inflationary impacts, and higher interest rates. We continue to take steps designed to minimize our exposure to rising international trade friction and our portfolio of high-value, differentiated products that have limited exposure to consumer discretionary spending, which we believe provides resilience in the face of recessionary forces. We expect consolidated Adjusted EBITDA in Q4 2023 to move modestly higher than Q3, driven by continued significant pipe coating activity, while continuing operations Adjusted EBITDA will move down as short-lived market conditions in our composite technology segment overlay normal seasonal cycles.
I will now turn the call over to the operator and open it up for any questions you may have for myself, Tom, or Meghan.
Thank you. As a reminder, if you have a question at this time, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile our Q&A roster. Our first question is going to come from the line of David Ocampo with Cormark Securities. Your line is open. Please go ahead.
Thanks. Good morning, everyone.
Good morning.
Morning.
My first one's for Tom, just on your cash flow heading into Q4 and into Q1. I think you previously called for net debt to decline by year-end, and that's even before the proceeds from PPG. But we did see an uptick in net debt this quarter. If I look on your balance sheet, there's still a pretty sizable contract liability that's sitting on the PPG side of the balance sheet. But this should be, you know, I think, somewhat offset by some contract assets and tax credits and inventory that you have on hand.
So obviously, there's a lot of moving parts there, but I was hoping you could walk us through your cash flow expectations for the discontinued operations for Q4 and Q1, and just the overall impact that it should have on the net debt profile.
Yeah. Thanks, David. So, I'll start with, I think our net debt actually kind of stayed flat compared to EBITDA. Now, that's including the entire business, so including continued and discontinued, it's a 0.5 ratio for the quarter. Specifically, moving to the question around Q4 impact of discontinued operations. In Q3 was the last big quarter of investment for the discontinued operations portion of the business. We see Q4 as being a very large cash positive from the discontinued operations portion of the business and a good result from the continuing operations, I should add, and still hold that our net debt number should come down by the end of the year.
If you were to exclude leases, which did move up from Q2 to Q3 due to the signing of some of our new facility leases, I think we'll still be approaching a zero by the end of the year, which is what we've guided to before. Going into Q1, I mean, it's going to depend on the timing of close of that business. So, you know, I think that the SGP project will continue to generate significant cash flow into Q1, but just depends on the timing of when that sale closed as to whether that will be ours or the acquirers. So hopefully, I answered most of your questions, David.
Yeah, that was helpful. And maybe just on the net working capital true up, just given your expectation that this business will now close in the middle of Q1, do you expect that to be a negative or positive headwind for the company?
... Yes, I think the way we've typically talked about this, the last quarter was, we think the cash generated between signing and closing, offset by the working capital, will be modestly favorable, I think are the terms we typically have used. So think of that in terms of $10-ish million. We still hold that view. So if we close at the end of Q4, we still anticipate that to be the result. Now, the timing will be, we'll get cash in Q4 and potentially Q1, and then we'll pay out a working capital true up in, you know, 90 days post-close. So I think we still hold that. If the close extends a little bit, there'll be some additional cash coming in. The working capital should move favorably in that period, and, you know, those numbers might move a little bit.
But generally, we still hold the same view that we indicated last quarter.
Okay, that's perfect. And then my last one is just for Mike. I think you've talked about the go-forward assets as assets that should grow at a pretty favorable rate for the next few years. But when I take a look at your investments and your expectation that it should add up around $150 million of revenue over three to five years, I'd say margins north of 20%. You kind of put that all together and you're talking about EBITDA of around $30 million added over three to five years. That's a low single digit to mid-single digit growth rate on a CAGR basis. Are we missing anything there that would allow your business to grow by more than that $30 million?
Yeah. So certainly, that is not the extent of our growth expectations. Obviously, the large capital project commitments that we've communicated publicly make up just a part of what we're doing to drive growth in these businesses. And I guess we've spoken about before, most, not all, but most of our existing businesses are getting a little close to their max production capacity. It varies month to month, quarter to quarter, but that's generally a true statement. So it's vital that we get these new facilities up and running on the schedule that we've communicated, and as noted earlier, that is absolutely the case as we sit here today.
So we would start to see the benefit of those facilities in the composite segment during the second half of next year, and in the connections technology segment in the first half of 2025. But around those bigger investments, there are a lot of smaller investments. Some are R&D, some are sales, some are facility optimization, upgrade of equipment, introduction of automation or semi-automation, a variety that we haven't publicly communicated because they really, you know, don't rise to a threshold that would be worthy of that. Our expectation that once we get these facilities completed, that this business can, on an average basis, deliver 10% growth or more each year, is absolutely still the case.
Okay, that's perfect. I'll hop back in queue.
Thanks.
Thank you. One moment as we move on to our next question. Our next question is gonna come from the line of Yuri Lynk with Canaccord Genuity. Your line is open. Please go ahead.
Good morning, and thanks for taking my question.
Good morning. Morning.
Yeah, Mike, just wanna follow up on the last line of questioning. I understand that the long-term growth profile is very attractive, but when we think about 2024, I mean, there seem to be a couple of headwinds developing. I mean, you mentioned the capacity issues until these new facilities get online, some softness in the composite segment heading into the year. And then I don't know what the margin impact of those two composite facilities coming online in the back half, but is it reasonable to expect, you know, 2024 is more of a, I don't know, call it a transition year, before we kinda hit that growth profile you spoke about?
I think you've described it very well. Yes, that's absolutely how we think of 2024. Obviously, we don't typically provide guidance beyond the coming quarter, but what I would share is that, first, we think that the pattern of the last several years for our continuing operations, where the middle two quarters are the strongest two quarters of the year, is likely to be repeated in 2024. More broadly, we still believe the underlying business performance in 2024 is gonna be up year-over-year, probably kind of mid- to high-single-digit percentages. But as you pointed out, we will have the effect of some one-time costs that are associated with our North American facility activities, probably likely to be several million dollars in each quarter of 2024.
So when you add all those things together, I think, you know, 2024 is likely to look at a bottom line, quite a lot like 2023. But it positions us for the slightly longer term, and the ability to really accelerate the growth of this organization. So I think a transformation or a transition year is the right way to think about it.
I'll just add, as Mike said, you know, these one-time costs we'll have, we will call them out, so you can explicitly see what they are each quarter, because I do think the underlying business will grow, you know, as Mike pointed out, both top line and bottom line, if you were to exclude these one-time.
But these costs, several million dollars, these will be expensed and included in your Adjusted EBITDA. Is that right?
That is correct, because they're of a nature that we aren't allowed to add them back.
... the things like relocations, startup costs, getting people hired while we're transitioning plants, you know, one to another, startup of the plant itself. So there's a variety of things embedded in there, that we're just not allowed to explicitly call out and add back to Adjusted EBITDA, but we will give the market and all of our analysts that information so you can do with it, as you will, and you can see what the underlying business is actually doing without those costs.
Okay. And last one for me. On the permitting delays, I mean, it strikes me as a bit of a unique situation where you're seeing permitting delays across numerous states, municipalities. Is it localized in one region that you're particularly active in? Or just how do we think about that? Because it strikes me as a bit peculiar, and I'm not picking that up in any other end markets that I'm looking at.
Yeah, it's an interesting dynamic. So we started to see, let's say, lower than prior year shipments to our customers' work sites, as we worked our way through the second quarter of this year, and obviously engaged with our customers, both, you know, at executive level and at the lower levels to make sure we understood their drivers.
It's not a perfectly consistent pattern of behavior, but I would say in many jurisdictions, and particularly the kind of the Eastern Seaboard, which is the largest single consumption point for fuel tanks, and convenience store growth, we are seeing a very consistent pattern, where in the face of modified working patterns after COVID, in the face of, you know, budget challenges, many municipalities, many towns and cities have had to pull back in their permitting staff, whether they're office-based or field-based inspectors. And it has had a fairly substantial effect on the pace at which permits are getting issued. So we're seeing it in water projects, we're seeing it in fuel projects.
What I would say, as I think I said in the prepared remarks, our customers' lifeblood is the ability to put new convenience store footprints on the ground, and they are 100% committed to continuing to do so. We have seen them change their behavior. They did so in the second quarter, and we're continuing to see it go forward. They've acquired increasing parcels of land so that they can apply for more permits than they would historically have applied for, and they are applying for them earlier in the construction cycle than they would ordinarily have done.
So we actually saw shipments of tanks in the third quarter pick up considerably and move much closer to a normal level, which I think is evidence that, you know, the permits that should have been issued and allowed construction in Q2 actually got issued, and allowed construction in Q3. So, at this point, I think the pattern of permit issuance is no longer a substantial issue. It has been addressed by our customers' behavior, and we've got through that brief period when permits just weren't being issued. The challenge we have to navigate here is that during that period where permits weren't being issued and we weren't shipping tanks, we built an inventory of customer-owned tanks. As a reminder, in almost every case, we invoice our customers for our tanks at the point that we complete the production.
They will then hold them at our sites, and we will charge them a holding fee for that. But we have seen a fairly significant increase in customer-owned inventory that built over the course of Q2, and we need to let it come down a little bit, which is why you have, you know, seen us or heard us talk about lowering fuel tank production activity as we roll here into the fourth quarter. That will mean we'll produce fewer tanks. Since we invoice on production, we will see lower revenue and lower EBITDA from that part of our business, and we will lower the customer-owned inventory in that process. I think that exercise continues into the first quarter, and then we resume normal activity levels as we roll into the second quarter. That is our current expectation.
In total, our customer demand for fuel tanks to be shipped to new sites in 2024 is clearly well above what it has been in 2023. I have no concerns about the underlying demand for the product or the behavior pattern of our customers. I think they've navigated an interesting set of situations quite well, but we now need to make sure we get inventory into the right level.
Very helpful. Thanks.
You're welcome.
Thank you, and one moment as we move on to our next question. Our next question is gonna come from the line of Aaron MacNeil with TD Cowen. Your line is open. Please go ahead.
Hey, morning. Thanks for taking my questions.
Morning.
I can appreciate you're not gonna wanna get into specific details here, but I'm just hoping to better understand some of the puts and takes in the composite segment. You know, obviously, the revenues are down year over year. You mentioned the OAM sale in the prepared remarks, but can you give us a sense of, like, how much this legacy, smaller diameter Flexpipe was down? How much of that was sort of backfilled by the larger diameter stuff? And, you know, what was the order of magnitude in terms of permitting delays on the FRP tank business?
Yeah, maybe I can give some big picture, and then I'll see if Tom wants to add some more detail here. When you remove the effect of the OAM business, which was with us for all of Q3 last year, but was sold in Q4, the revenue and the EBITDA for the composite segment was actually up year-over-year. It was down very modestly quarter-over-quarter. And I'd say that the you know, the downward movement quarter-over-quarter was roughly evenly split between the Flexpipe business and the Xerxes business. So not a material dollar value of movement, Q2 to Q3. Within Flexpipe , as I mentioned, another record quarter for our six-inch product.
The larger diameter products make up now something slightly north of 20% of the revenue of that segment, and a year ago, that would have been single digits. So that gives you a feel for how things are shifting a little bit within that portfolio. And as I mentioned in my answer just a moment ago to Yuri's question, the effect on the Xerxes fuel business during Q3 of this permitting issue was relatively limited. Towards the tail end of Q3, we started to lower production activity, which is why you saw a little bit of a movement down quarter-over-quarter.
We'll see more of a pronounced effect here in Q4 now that we've got production levels down to what we think is the appropriate level to allow customer inventory to unwind this quarter and next. Tom, anything you'd add?
No, I think you covered it well. I mean, I think the, it's really, really the OAM businesses where you kinda get clouded up here. If you exclude that, there was growth and slight growth, but there was some growth in the composites technology segment.
That makes perfect sense. Thanks. I'm sort of skipping ahead to the next thing here, but you've got the Investor Day coming up. I guess I'm wondering, you know, what do you think could be better understood by analysts and investors? What types of new disclosures can we expect, and what sort of takeaways do you hope that the investment community will ultimately come away with?
Yeah, I'll ask Meghan to comment there.
Hey, Aaron. For Investor Day, we're really focused on giving a little bit more visibility into our longer-term view for the organization, what we expect for this business to look like in the next three, five, 10 years. So I think that'll be something new for investors to wrap their arms around. In addition to that, just a little bit more color on the water opportunity and the growth opportunities within both the Composite Technologies and the Connection Technologies segments.
Cool. Great. I'll turn it back. Thanks.
Thanks.
Thanks.
Thank you. And one moment as we move on to our next question. And our next question is gonna come from the line of Zachary Evershed with National Bank Financial. Your line is open. Please go ahead.
Thank you. Good morning, everyone.
Morning, Zachary.
Morning.
So building on the commentary in your prepared remarks and the answers to Yuri and Aaron's questions, just hopping on the Composite Technologies bandwagon. If you look at both Flexpipe and tank sales, what's been the pace of sales thus far in Q4, versus the year ago period and versus Q3 this year? And is that comparing well to your expectations for the quarter as a whole?
So maybe I can offer some perspective on Q4 broadly. As we sit here, I think, as I mentioned in the prepared remarks, if we include the pipe coating business, which is clearly discontinued ops, we're still thinking that Q4 has higher Adjusted EBITDA than Q3. But if we move discontinued ops off the table, I think continuing ops Adjusted EBITDA is probably down somewhere in the order of 20%-30% sequentially, so Q4 versus Q3 of this year. Some of that, the minority of that, is the effect on our Flexpipe business of an average rig count in North America land during Q4 that we believe will be somewhere between 5% and 10% lower than Q3.
The bigger effect is the topic that we've discussed a couple of times here already, the fact that we, we need to get customer-owned inventory down to a manageable level in the Xerxes fuel business. We can control when and how we do that, and we're doing it by lowering production activity in our, in our sites here in Q4. So that's gonna be by far the most substantial driver of movement, Q3 to Q4, in the business. I'd say as we sit here today, the business activity across all segments, all businesses, is very much largely in line with what I've just shared with you.
Yeah, and, Zach, the only thing I would add is just a reminder, and we did say it in the remarks and in the MD&A, is that connection systems will also be down, Connection Technologies will also be down in Q4 from a profitability perspective, just on mix, primarily.
That's very helpful. Thanks. And then if we look at capital allocation opportunities, your stock has pulled back from the recent highs. Or how are you evaluating share repurchases, especially with the revolver now fully paid off? Any plans to move up the repayment of the high-yield notes?
Yeah, so I'll touch those one at a time. So in CIB, I think if you look at our CDR filings for October, you will note we did accelerate our, our spend in that area because we do see this as a good opportunity.
... If prices stay in this range, you'll see us continue that activity. I think you can use Q3 as a general proxy for what we plan to do going forward. It will ebb and flow, of course, it won't be exactly that number, some up, some down, depending on share price movement, but we will, we will remain active there. On the high yield, I would say our, our, story hasn't really changed. We, we still think that having a level of debt that is long-term in nature around one turn of EBITDA, at least at the current business's run rate, is, is not a bad thing. So likely, you will see us look to refinance that when the time is right, and the time will be driven by, you know, market conditions, interest rates, and a variety of things.
We'll take a look at that as we get into the new year. I don't think you should expect us to, you know, see December as our first call period and immediately act. We will be opportunistic and take action when the market conditions are appropriate.
Great, Keller. Thanks. I'll turn it over.
Thanks, Zach.
Thank you. And again, if you would like to ask a question at this time, please press star one one on your touchtone telephone. One moment for our next question. And our next question is gonna come from the line of Ian Gillies with Stifel. Your line is open. Please go ahead.
Good morning, everyone.
Good morning.
Tanks have been topical today. I'm gonna... My question has somewhat been answered, but I wanna frame it in a bit of a different way. As you look at the tanks business today and demand, like, is there any evidence that you see in the business that there was a meaningful pull forward of demand during COVID and the period shortly thereafter COVID from population migration, or is that a fear that you don't think most need to worry about?
I personally don't think anybody needs to worry about that. No. I think had we not had this unfortunate and, you know, very brief interruption from this permit delay issue, you would have seen very healthy year-over-year growth, and I am very confident you will see very healthy year-over-year growth as we roll forward. The appetite of our customer base, particularly the larger, in many cases, private convenience store operators who use their own balance sheet to drive their investments, they are agnostic to interest rates. Their level of aggression to grow out large footprint convenience stores, particularly on interstate highways across the country, particularly Eastern Seaboard, is unabated. We are very confident in that business.
That, that's helpful. And then the other part, I suppose, that hasn't been touched on much in this call, and I get only so much can be said, is around M&A. As you look through your pipeline of opportunities, are you seeing seller expectations reset in such a way, given the current interest rate environment, that you're feeling better about the opportunities you have in front of you at more reasonable prices, or are you still in a wait-and-see mode as you move into 2024?
I, I definitely think that the elevated interest rates plays favorably into the, the hands of an organization like ours that, that has cash and, and can move forward with M&A without needing to put debt in place to do so. So I, I do think that the level of buyer interest has moved down a little, particularly for those that would, would lever acquisitions heavily. I think seller expectations take a little while to adjust to, to, to markets that move, so I'm not yet at a place where I would tell you that seller expectations have changed, but I do think they will. And we have a fairly robust funnel.
We're obviously engaged in a variety of areas where we think there's real strategic value to be secured, and I certainly believe that we'll be in a position to communicate things over the coming quarters where we have secured, you know, attractive valuations and can bring real value to the organization.
Okay. Thank you very much. I appreciate the detail.
Absolutely.
Thank you.
Thank you, and I would now like to hand the conference back over to Mike Reeves for any closing remarks.
Thank you very much for joining us this morning and for your continued interest in Mattr. We'll look forward to speaking with everybody again next quarter, but until then, wish everybody a safe and successful week. Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect.