Shawcor Ltd. reported its operational and financial results for the three and nine months ended September 30, 2022. This press release should be read in conjunction with the Company’s Management Discussion and Analysis of Financial Condition and Results of Operation (the “MD&A”) and condensed interim consolidated financial statements for the three and nine months ended September 30, 2022, which are available on the Company’s website and at www.sedar.com.
Highlights from the third quarter of 2022 include:
• On a consolidated basis, revenue was $335 million, income from operations was $23 million and Adjusted EBITDA1 was $40 million, which includes expenses of over $9 million of share-based incentive compensation costs partially offset by approximately $7 million of foreign currency gains;
• Generated approximately $70 million of cash from operating activities during the quarter, compared to $17 million in the third quarter of 2021;
• Shawcor’s businesses serving infrastructure & industrial end markets represented 47% of total revenue during the third quarter of 2022, compared to 44% in the third quarter of 2021;
• Composite Systems segment revenue increased by 43%, to $148 million compared to $103 million in the prior year’s quarter;
• Automotive and Industrial segment revenue increased by 14% to $81 million compared to $71 million in the prior year’s quarter;
• Pipeline and Pipe Services segment revenue decreased by 9% to $107 million compared to $118 million in the prior year’s quarter;
• Order backlog for execution in the next 12 months rose by 30% to $1,010 million as at September 30, 2022, compared to $779 million as at June 30, 2022. This increase reflects several offshore pipe coating contracts which were secured or moved into the coming 12-month window during the quarter, including the Southeast Gateway Pipeline (“SGP”) project in Mexico, the Darwin Pipeline Duplication project in Australia and the Yellowtail project in Guyana;
• Announced the commencement of a strategic review process for the entirety of the Pipeline and Pipe Services segment and the Oilfield Asset Management (“OAM”) operating unit, and the intent to rename the Company from Shawcor to Mattr during the first half of 2023, subject to necessary regulatory and shareholder approvals;
• Received gross proceeds of $6 million for the sale of Lake Superior Consulting, previously part of the Pipeline and Pipe Services segment. The sale excluded $1.9 million of trade and other receivables that the Company expects to collect in fourth quarter of 2022;
• Repaid $50 million on the Credit Facility (as defined herein). As at September 30, 2022, the Company had total net debt of $163 million and a Net debt-to-EBITDA1 ratio (using a trailing twelve-month Adjusted EBITDA1) of approximately 1.46 times. Subsequent to the quarter, the Company made an additional repayment of $15.0 million on the Credit Facility;
• Initiated a Normal Course Issuer Bid (“NCIB”), under which the Company repurchased 246,100 of its common shares for an aggregate repurchase price of $2 million. Subsequent to the quarter, these common shares were cancelled;
“Shawcor’s transformation is well under way, and the Company remains committed to becoming a more profitable, less volatile business focused on the development and delivery of differentiated, high value, materials-based solutions in support of industrial and critical infrastructure end markets.” said Mike Reeves, President & CEO of Shawcor.
“During the third quarter, strong execution resulted in robust sequential and year-over-year growth in revenue, gross profit, operating cash flow and backlog. Shawcor also completed several important steps in our portfolio optimization strategy. With net debt ratios now below targeted levels, a shareholder returns program initiated through our recently launched NCIB, and the capacity available to pursue high return, organic and inorganic growth opportunities, we believe Shawcor is very well positioned to accelerate value creation for all stakeholders over the coming years.”
“While economic and geopolitical risks remain, Shawcor’s business portfolio has limited direct exposure to consumer discretionary spend and our primary markets continue to present favourable mid- and long-term growth opportunities. With offshore pipe coating activity rising quickly, the Company’s Adjusted EBITDA1 in the final quarter of 2022 is expected to be the highest of the year, and we anticipate delivering very robust Adjusted EBITDA1 growth in 2023 from the core businesses, including a strong contribution from the Pipeline and Pipe Services Segment with a significant second-half contribution from the SGP project.”
Selected Financial Highlights
1.0 THIRD QUARTER HIGHLIGHTS
The Company delivered Income from Operations of $22.9 million and Adjusted EBITDA1 of $40.0 million in the third quarter of 2022, an improvement of $20.4 million and $8.2 million respectively, compared to the third quarter of 2021, primarily attributed to a healthy demand for products in the Automotive & Industrial and Composite Systems segments. During the quarter, the Company saw particular strength in both the composite underground storage tank and composite pipe businesses. The Company’s sales into infrastructure & industrial end markets accounted for over 47% of total revenue during the third quarter of 2022, compared to roughly 44% in the third quarter of 2021.
Since March of 2020, the Company has undertaken the controlled shutdown or sale of several girth weld inspection branches and 9 fixed pipe coating facilities to reduce its operating cost base and has continued to focus on cost optimization. In the third quarter of 2022, the Company recorded restructuring costs and other of $2.1 million, largely attributed to the Company’s completed exit from its Global Poly leased facility in Edmonton, Canada.
In the third quarter of 2022, the Company continued to execute on its strategy to optimize its portfolio. During the quarter, the Company sold its Lake Superior Consulting business for proceeds of $5.9 million and recorded a loss on sale of $5.9 million. The Company also announced its intent to evaluate strategic alternatives for the businesses in its Pipeline and Pipe Services segment and its OAM operating unit, reported within the Composite Systems segment. Subsequent to the quarter, the Company entered into definitive agreements to sell its fixed pipe coating facility in Argentina, a standalone operation which services the onshore Argentinian marketplace, and its OAM operating unit. As at September 30, 2022, the OAM operating unit and the fixed pipe coating facility in Argentina were classified as assets held for sale in the Company’s condensed interim consolidated financial statements for the three and nine months ended September 30, 2022.
In the third quarter of 2022, the Company’s share price increased by $2.83, or 50%, from $5.71 as at June 30, 2022 to $8.54 as at September 30, 2022. While the Company continues to perform actions to improve shareholder value, this significant increase in share price has impacted selling, general and administrative expenses through increased share-based incentive compensation accruals. The Company recorded $9.5 million and $14.9 million in share-based incentive compensation costs during the third quarter of 2022 and year to date respectively.
As at September 30, 2022, the Company had cash and cash equivalents totaling $124.2 million, an increase from $115.8 million as at June 30, 2022 (December 31, 2021 – $124.4 million). During the third quarter, the Company generated cash flow from operations of $69.6 million, reflecting a reduction in working capital investments, excluding the impact of restructuring liabilities of $34.4 million, and received $5.9 million of proceeds from the sale of the LSC business. The current quarter cash balance also reflects $21.9 million in capital expenditures which largely relate to facility mobilization and the re-establishment of a high-capacity concrete coating facility in Altamira, Mexico, in support of the SGP project and the repayment of $50.0 million against the outstanding debt under the Company’s syndicated credit facility (the “Credit Facility”). Since the beginning of 2021, the Company has repaid $218.5 million against the outstanding debt under the Credit Facility. The Company will continue to focus on maximizing the conversion of operating income into cash to continue to manage its long-term debt, explore organic and inorganic growth opportunities, and maximize returns to shareholders.
Selected Segment Financial Highlights
Revenue in the third quarter of 2022 for Composite Systems increased by $44.5 million, or 43%, compared to the third quarter of 2021, with an operating income of $21.7 million. The Company continued to see strong order activity for composite pipe products as completion activity levels in North America, particularly with larger operators, maintained its gradual rise. The business also benefitted from market share gains in the US, partially due to the commercialization of its larger diameter pipe products. In addition, the Company completed the delivery of a substantial composite pipe order to an international customer during the quarter. The segment also delivered more tanks for liquid fuel applications and for water management systems, which experienced another record quarter. The rise in revenue also reflects a roll out of price increases to help offset the inflationary increases in raw material and labour costs across the segment. Adjusted EBITDA1 in the third quarter of 2022 was $31.0 million, a 99% increase compared to $15.6 million in the third quarter of 2021.
The Automotive and Industrial segment continued its strong performance, delivering new record segment revenue of $81.1 million, which represents an increase of 14% compared to the third quarter of 2021, with an operating income of $13.7 million. This record segment revenue is primarily due to strong project-based activity in industrial markets, particularly for its wire and cable products, and a roll out of price increases to offset the inflationary increases in raw material and labour costs. The segment delivered a strong quarterly Adjusted EBITDA1 of $14.8 million, an 18% increase over the prior year quarter, largely stemming from higher demand in industrial markets and bolstered by a more profitable product mix.
The Pipeline and Pipe Services segment generated revenue of $106.8 million, a decrease of $10.9 million, or 9%, from $117.8 million in the third quarter of 2021, with an operating loss of $9.6 million. This revenue decline was due to lower large pipe coating project activity in Europe, Middle East and Africa (“EMEA”)2, as well as lower North American revenue due to the absence of $17.7 million of revenue attributable to the Shawcor Inspection Services business that was sold in December 2021 and the Lake Superior Consulting business that was sold in August 2022. Partially offsetting these declines, the segment saw increased revenue in Latin America and Asia Pacific as large project work commenced. Adjusted EBITDA1 in the third quarter of 2022 was negative $1.7 million, a decrease in comparison to the positive $6.8 million reported in the third quarter of 2021 primarily due to lower revenue, a less profitable project mix and increased share-based incentive compensation accruals. Despite the year-over-year decrease in revenue and Adjusted EBITDA1, the Company’s cost reduction and site optimization initiatives have substantially lowered fixed expenses for the segment which, in turn, partially offset the lower activity levels in the quarter.
The twelve-month order backlog of $1,010 million as at September 30, 2022, represents a 30% increase over the $779 million order backlog as at June 30, 2022. While strong order intake continues to be prevalent across the Composite Systems and Automotive and Industrial segments, the primary driver for this growth was the successful award of the SGP project, reinforced by other pipe coating projects that have been secured or moved into the coming 12-month window during the quarter. The backlog includes firm customer contracts which will be executed over the next twelve months.
Outstanding firm bids were nearly $960 million as of September 30, 2022, a decrease compared to approximately $1.5 billion from the previous quarter, largely attributed to the SGP project moving from bid into backlog during the quarter. Conditional awards, pending final investment decision, were at $11 million, down from the $61 million recorded in the prior quarter. Budgetary estimates were nearly $1.3 billion at the end of the third quarter of 2022, an increase from the budgetary value of $1.2 billion from the previous quarter as customers continued to develop scopes for new projects. Outstanding firm bids and budgetary estimates are measures used primarily for the Pipeline and Pipe Services segment, and as such the vast majority of the numbers reported relate to this segment.
2.0 OUTLOOK
The Company expects to continue its strong performance in the fourth quarter of 2022. While the Company does not forecast the impacts of foreign exchange and share price movements (the latter which impacts share-based incentive compensation costs), it is expecting Adjusted EBITDA1 in the final quarter of 2022 to be the highest of the year with offshore pipe coating activity rising quickly. In management’s view, the underlying business trends for all of Shawcor’s primary businesses remain favourable as its infrastructure and industrial focused portfolio continues to experience consistent demand growth, while the Company’s oil and gas focused offerings remain well-positioned as commodity prices and energy availability challenges drive a multiyear upcycle in both onshore and offshore activity. Looking forward to the remainder of 2022, raw material and labour costs continue to rise and, as a result, the Company will continue to monitor its pricing and, if needed, roll out price increases to help offset these increased costs. Supply chain volatility is expected to continue, including availability of gas supply to suppliers and customers of Shawcor’s Automotive & Industrial plant in Germany, which may present challenges through the balance of 2022 and into 2023. The Company has materially rationalized its footprint, including the divestiture of non-core businesses, and will continue to focus on optimizing and maintaining efficient operations with the technical expertise and geographic footprint that provide the best opportunity for the Company to secure work and drive profitability, particularly as pipe coating project activity continues to ramp in the fourth quarter of 2022.
Backlog is expected to continue to grow over the next several quarters as customers seek to secure orders for the Company’s infrastructure and industrial offerings, several pipe coating projects reach final investment decision and contract awards move into the 12-month period. Execution on work secured in the Company’s backlog is expected to rise in the fourth quarter as coating activities for newly sanctioned pipeline projects commence.
Composite Systems Segment
The Company is expecting robust demand for underground FRP tanks to continue through the remainder of 2022 and into 2023 as liquid fuel service station networks expand, upgrade and replace existing aging tanks. In addition, growth in demand for water and storm-water storage and treatment systems is expected to continue, supported by increasing societal demands to conserve and manage water resources, and projected higher infrastructure spending on commercial and municipal water projects. Specific supply chain constraints which have tempered FRP tank production output during 2022 have been addressed and at this time are not expected to be a constraint for the foreseeable future. In addition to qualifying alternative raw material sources, the business continues to manage production schedules and lead times to minimize impacts on the business. Price increases have been implemented to manage raw material cost escalations. Additionally, labour shortages and capacity constraints are being managed to ensure adequate personnel and facilities are available to meet the robust demand in the market. Growth in demand for the segment’s core composite pipe products in North America are expected to continue as activity levels in Western Canada and in the Permian Basin continue to rise. Further opportunities for the Company’s composite pipe products are expected as the commercial adoption of larger diameter products continues.
Automotive and Industrial Segment
The Automotive & Industrial segment is expected to see normal seasonal slowdowns in the fourth quarter of the year as customers draw down inventories and activity levels ease throughout the holiday period. While the Company expects that industrial markets will dominate demand for the segment’s products, demand for the Company’s heat shrink tubing products within the automotive sector is expected to continue to outpace overall automotive production as a result of electronic content growth in premium, hybrid and full electric vehicle markets, particularly in the Asia Pacific and EMEA regions. Broad supply chain impacts, including the global semiconductor shortage, and energy supply shortages related to the Russia-Ukraine conflict and European gas supply continue to create challenges for automotive manufacturers and consequently the Company’s full year outlook does not incorporate any expectation of meaningful growth in total global vehicle output. The Company’s diversified geographies and end markets are expected to provide insulation from the near-term impacts of these automotive industry challenges. On the industrial side of the business, which represented approximately 73% of the segment’s revenue in the third quarter of 2022, the Company is expecting to benefit from continued infrastructure spending in 2023 and beyond as new and upgraded communication networks are constructed, nuclear refurbishments continue in Canada, and federal stimulus packages are rolled out. Additionally, the Company will continue to manage the volatility of copper raw material costs.
Pipeline and Pipe Services Segment
The Company continues to expect growth in its Pipeline and Pipe Services segment in the fourth quarter of 2022 as it executes on the increasing volume of work that has been secured in its backlog. The Company continues to monitor international developments including sustained exploration success and additional project phases in Guyana and Brazil, and Middle Eastern offshore projects designed to meet domestic energy needs and global LNG demand. Increases in inbound subsea orders have been observed across the Company’s customer base, particularly in Brazil and Norway where the Company is well-positioned to secure and execute work. Activity levels in Western Canada are expected to remain strong, yielding steady demand for small diameter coating solutions. New offshore pipeline installations that range from small and mid-size to large in scope, are expected to arise during the remainder of 2022 and into subsequent years, project sanctioning activity, bid, budgetary, and general interest from customers to install more pipelines, all of which are expected to drive elevated demand for the Company’s market leading pipe coating technologies. Despite successfully executing substantial cost reduction activities within the PPS segment in the last two years, the Company has maintained the resources needed to execute on projects currently in backlog and those projects for which the Company is currently bidding.
