Mattr Corp.

Good day and thank you for standing by. Welcome to MATTERS first quarter 2024 results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Megan McEachern, Vice President, External Communications and ESG. Please go ahead.

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 Matter's statement on forward-looking information is included in section 4.0 of the first quarter 2024 earnings press release in the MD&A that's available on CDAR Plus and on the company's website at matter.com. For those joining via webcast, you may follow the visual presentation that accompanies this call. I'll now turn it over to Matter's president and CEO, Mike Reeves.

Good morning, and thank you for attending our first quarter conference call. Today, Megan and I are joined by our Senior Vice President of Finance and CFO, Tom Holloway. During the first quarter of 2024, MATA's consolidated results included $224 million of revenue, $30 million of adjusted EBITDA, and adjusted earnings per share of 16 cents, with our teams around the globe working efficiently to navigate normal seasonal slowness while preparing for an expected rise in second and third quarter activities. Customer buying patterns were largely aligned with expectations across all business lines, and new order capture rates during the quarter continue to support our belief that financial performance will elevate in Q2 and again in Q3, with full-year revenue and underlying profitability exceeding the levels delivered in 2023. Our Manufacturing Modernization, Expansion, and Optimization, or MEO program, has made considerable progress since year end, with all four of our new North American production facilities remaining on budget and on schedule to commence production between mid 2024 and early 2025. These investments are expected to enhance production capacity, efficiency, and proximity to key markets, provide added footprint optimization flexibility, and lower risk by strategically establishing U.S. domestic manufacturing capabilities while providing increased production redundancy. They are expected to accelerate mid- and long-term revenue growth, elevate margin profiles, and deliver attractive overall returns. The hard work of recent years to strengthen our balance sheet and our cash generation profile positions us to continue pursuing a flexible but disciplined capital allocation strategy. In addition to completing our 2024 organic growth investment initiatives, we remain alert to strategically aligned accretive acquisition opportunities which have the potential to further accelerate our growth trajectory. Finally, we continue to believe the intrinsic value of our business represents an excellent investment opportunity and consequently anticipate renewing our normal course issuer bid late in Q2 when regulatory rules permit. Looking at each of our segments, in Q1, composite technologies delivered modestly higher sequential revenue as growth in North American and international flex pipe sales were partially offset by seasonal declines in North American Xerxes fuel and water product sales. Within the flex pipe business, continued share gain in the U.S. and Canadian onshore markets, primarily driven by large diameter product adoption, drove first quarter North American revenue to grow sequentially by nearly 10%, significantly outpacing total North American onshore rig count, which rose approximately 2% in the same period. In addition, international flex bite revenue during the first quarter alone was greater than 50% of full year 2023 international sales, rising significantly versus the prior quarter as the company began to deliver against the orders secured and announced last December. As previously discussed, freight costs associated with the movement of larger diameter products from our Calgary production site into U.S. and international markets are substantial and weighed on margins during the quarter. This is one of several drivers for the ongoing investment to establish a second manufacturing facility in Texas, which remains on schedule to commence production around mid-year. and is expected to yield measurable freight cost reductions as its output volumes rise during the second half of 2024. Within the Xerxes business, we observed a more typical and pronounced degree of seasonal slowness during Q1, after several years where post-COVID supply chain challenges had extended lead times, driven changes in customer buying patterns, and reduced the observed impact of this seasonal cycle. As expected, customers across much of North America limited receipt of Xerxes fuel and water products as they faced ground and weather conditions unfavorable to construction and installation activity. The timing of specific projects and customer orders meant the mix of tanks invoiced during Q1 was more heavily weighted than normal towards smaller and less complex units, which unfavorably impacted margins. We do not believe this is a longer-term trend, and current order backlog supports our expectation that a more normal mix of tank sales will likely prevail for the remaining quarters of 2024. As previously communicated, the Xerxes business slowed production in the fourth quarter of 2023 and the first quarter of 2024 to carefully manage finished tank inventory levels. I can confirm that the anticipated ramp back up in production entering Q2 has occurred, but our first quarter results were impacted by lower absorption of fixed plant costs as a result of the actions taken. In combination and as expected, these factors led to Xerxes revenue moving sequentially lower with accompanying margin compression. Looking forward, the composite segment is expected to deliver substantially stronger sequential results in Q2 and also in Q3. as Xerxes production and shipments of liquid fuel and water products elevate in response to expected seasonal demand expansion, with virtually all customers continuing to indicate that they have in hand the permits necessary to support their 2024 site construction plans. As already noted, we also expect a return to more normal tank size and complexity distribution in the second quarter and beyond. In addition, domestic sales of FlexPipe are anticipated to rise further in the second quarter, driven by the timing of specific U.S. projects and continued new customer onboarding, while international deliveries remain strong. A number of incremental FlexPipe international orders originally anticipated to be delivered during Q2 now seem more likely to occur in Q3. Consequently, instead of a revenue peak in Q2, we believe FlexPipe will deliver similar results in the next two quarters, both healthily above Q1. The one-time costs associated with commissioning new sites under the segment's MEO program will be elevated during the second quarter, before lowering to a nominal level in the second half of the year. In combination, these factors lead us to expect segment adjusted EBITDA to rise significantly in the second quarter before moving further upwards in the third quarter. The last 12 months have been challenging for the Xerxes business, as our convenience store customers navigated permit issuance delays, which impacted the quantity of new store construction projects throughout much of 2023. As previously noted, while the underlying inefficiencies within the permitting process persist, Customer adaptation of application quantities and timelines means we now expect and are so far seeing a return to more normal patterns of convenience store construction activity in 2024. Several of our customers have publicly highlighted the increases in their projected construction activity this year, and in some cases for the next several years, which further cements our confidence that Xerxes will deliver year-over-year growth in 2024 and beyond. While taking action to mitigate the temporary slowing of tank demand, we have also used this last year to invest in our business, enhancing production equipment in several existing sites, exiting our aging Anaheim location, and nearing the completion of our first new production facility in more than three decades. Our Blythewood, South Carolina site is expected to commence production around mid-year and is a state-of-the-art composite tank manufacturing facility. incorporating automation and a layout optimized for large complex tanks to enable significant production efficiency gains, which are expected to enhance overall business margins over time. I spoke last quarter about the unique and favorable tank demand profile tied to interstate travel center or truck stop site construction, which is rising at an accelerating pace. In addition, The added capacity for complex larger tanks that our South Carolina location will provide is particularly relevant to the emerging and growing demand tied to data center construction. As noted in several prominent publications recently, the volume of new data center construction in North America is substantial and rising, driven primarily by accelerating demand for artificial intelligence capabilities and cloud storage solutions. While typically served by grid electrical power, virtually every data center also incorporates liquid fuel generator backup power solutions and substantial underground or surface fuel tank batteries to ensure uninterrupted operation even in the face of extended grid disruption. A single data center utilizing underground storage will require between eight and 15 very large composite fuel tanks. In addition, many data centers will require an incremental five to ten large tanks to store water and other fire protection system fluids. In combination, this drives the total potential Xerxes tank demand from a single data center construction project to be two to five times the demand from a single new fuel station site. While not yet a material component of Xerxes revenue, we believe the growing data center construction market will provide an added source of revenue and margin expansion for our tank business in the years to come. Turning to connection technologies, as expected, the segment reported higher sequential revenue and adjusted EBITDA during Q1. Despite the non-recurrence of a large aerospace order, which contributed materially to the first quarter of 2023, This year's first quarter results were only slightly below the prior year period, with strong cost control across the segment, continued North American utility demand in the ShoreFlex business, and improving margins in the DSG Canusa business, yielding segment adjusted EBITDA margins above 19%. Within the quarter, we observed continued strong demand across the segment's portfolio in the North American infrastructure and industrial markets, and for DSG Canoosa's heat shrink and cold applied products in the automotive sector across all regions. While U.S. battery electric vehicle sales have recently showed signs of slowing, we currently believe the diverse and differentiated DSG Canoosa portfolio, which serves all engine types, is likely to continue experiencing healthy demand from automotive customers and consequently MATA currently does not anticipate a measurable near-term impact from lower US EV adoption rates. Canadian wire and cable distributor customers continue to tightly manage inventories and limit purchases of stock products, a pattern we expect to prevail until the Bank of Canada is able to provide greater certainty regarding interest rate reductions. This is likely to eventually present an incremental driver of growth for the segment, But in the near term, we have redirected resources to address U.S. utility end markets and continue to drive expansion within this strategically important sector. I'll speak more about this in a moment. The segment continues to execute the relocation, expansion, and modernization of its North American production activities into two new sites, with its Vaughan, Ontario, and Fairfield, Ohio facilities progressing on time and on budget. First production from both sites is expected during the second half of 2024, with final site completion occurring in the first half of 2025, enabling Connection Technologies to maintain and accelerate its North American growth trajectory. The company currently expects Connection Technologies revenue in the second quarter to move modestly upwards sequentially, primarily resulting from continued demand growth in infrastructure and automotive markets. while strategic investments in research and development combined with slowly rising MEO expenses are likely to yield second-quarter adjusted EBITDA similar to the first quarter. As we evaluate the mid- and long-term growth opportunities for connection technologies, we're particularly excited by the significant long-cycle investment required to renew and expand North American electrical power and utility grids. According to an October 2023 International Energy Agency report, annual investment in electric grids will need to double by 2030 for countries to achieve stated carbon emission and energy security priorities. While addressing decarbonization goals, utilities are also focusing on reliability, efficiency, and resilience to meet changing consumer demands. Today, our connection technology segment participates in the North American transmission and distribution market by the sale of low and medium voltage cables, accessories, and connection protection products into electrical substation applications. In Canada, we are proud to already be a significant provider in this space. While in the US, we are currently a relatively small but growing participant with a meaningful portion of our ongoing R&D investment intended to enable accelerated growth within an addressable U.S. market that's approximately nine times larger than in Canada. We believe the U.S. marketplace to be a potentially compelling growth opportunity, not only due to its current scale, but by the aging nature of its electrical grid assets and the rapidly growing demand for electrical power from a wide variety of sources, including the data centers I spoke of earlier. Overall, we maintain a favorable view of the long-term electrification, communication, and transportation trends which impact this segment and will continue to invest in the development of new technologies and to improve our manufacturing capacity, elevate our production efficiency, and lower lead times. We also continue to evaluate accretive acquisition opportunities to further expand our product offering and geographic presence. Lastly, Our Brazilian pipe coating operations, which are reported as part of our financial, corporate, and other segment in our financial statements, continue to execute safely and efficiently during the quarter, delivering revenue and adjusted EBITDA modestly above the prior year period. The company continues to explore options to divest this business, and while we do not anticipate Brazilian financial results to be material to the organization, The business is fully booked into mid 2025 and expected to deliver increased full year 2024 financial performance when compared to 2023. Tom will now walk through the company's first quarter financial highlights.