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.

Thanks, Mike. The first quarter's consolidated revenue from continuing operations was $224.5 million, 6% lower than the $238.7 million in the first quarter of 2023. The decrease of $14.2 million from the first quarter of 2023 is reflective of a decrease of $13.3 million in the composite technology segment and a decrease of $3.9 million in connection technologies, partially offset by an increase of $2.9 million in the operating entities being reported under financial, corporate, and others. Adjusted EBITDA from continuing operations was $30.1 million, a 25.7% decrease from the prior year first quarter. This decrease of $10.4 million is primarily attributed to lower revenue and product mix, along with higher selling general and administrative costs of $2.7 million related to our MEO growth activities during the quarter. While these MEO costs are slightly below our expected spend rate, The lower spin represents cash preserved during the first quarter, which will be spent in the second quarter of 2024. All MEO projects remain on time and on budget. During the first quarter, the company also recognized a $3.2 million restructuring charge, primarily for severance costs related to its decision to close the Xerxes manufacturing facility in Anaheim, California. Share-based incentive compensation during the quarter resulted in an expense of $7.6 million compared to a nominal recovery of $40,000 during the previous quarter, reflecting the relative share price movements during those periods. Turning to segment results, the composite technology segment revenue was $119.3 million, a 10% decrease compared to the first quarter of 2023, and adjusted EBITDA was $15 million. a 43.9% decrease from the prior year first quarter. This revenue decrease was primarily attributable to lower production and shipment of Xerxes FRP tanks in response to pronounced seasonal market activity reductions as customers faced unfavorable ground conditions for fuel station construction. This was partially offset by increased international flex pipe sales. The adjusted EBITDA reduction was due to a combination of the drop in revenue coupled with a 4.7 percentage point decrease in gross margin. The decrease in gross margin is attributed to an unfavorable mix of product sales within the quarter and lower utilization rates at the tank manufacturing facilities, which impacted overhead absorption rates. As Mike previously noted, early second quarter demand for tanks has risen as expected. And production activity across the Xerxes network has been elevated in response. Finally, MEO costs of $2.3 million related to the two new facilities in the segment were recorded during the first quarter of 2024. Connection technology segment revenue was $90.8 million, which was 4.2% lower than the first quarter of 2023. And adjusted EBITDA was $17.6 million, which was $0.7 million lower than the prior year first quarter. The decrease in the segment revenue was a result of lower wire and cable product shipments to Canadian industrial market distributors and the non-repetition of a substantial aerospace order, which contributed to the prior year period. This was partially offset by a stronger demand in the automotive and infrastructure markets. Additionally, selling general and administrative costs attributable to MEO costs related to the two new facilities in this segment were $0.4 million during the first quarter of 2024. As discussed during our March earnings call, during the fourth quarter of 2023, the company completed the sale of the majority of its pipe coating business, or PPG, to Tenaris and received total gross proceeds of $241.2 million, which included the agreed-upon purchase price and an initial working capital estimate. The final net cash proceeds received by the company in satisfaction of the contractual purchase price for the sale of the PPG business remain subject to completion of a customary final true-up of the estimated working capital calculation as provided in the definitive purchase and sale agreement for the transaction. The company now expects its net cash outflow to settle the working capital adjustment to be approximately $37.4 million, and therefore, in the first quarter of 2024, the company recorded an incremental $5.4 million loss from the sale of PPG and discontinued operations. The company expects the parties to finalize the net working capital adjustment by the third quarter of 2024. Turning to cash flow, cash provided by operating activities in the first quarter was $10.5 million compared to cash used by operating activities from continuing operations of $6.6 million in the prior year first quarter. This result reflects a lower level of working capital investment in the first quarter of 2024, which is partially offset by lower net income from continuing operations. Cash used in investing activities in the first quarter was $28.5 million, reflecting a total of $30.4 million of capital spending on property, plant and equipment, primarily MEO projects, offset by $2.1 million in net proceeds from the disposal of property, plant and equipment. During the first quarter, cash used in financing activities was $2.6 million, primarily comprised of lease payments. Net cash used in the first quarter of 2024 was $18.1 million. As of March 31st, 2024, we had a cash balance of $316 million, debt of $145 million, and $26.7 million of standard letters of credit. As of the end of the quarter, the company's net debt to adjusted EBITDA ratio was negative 0.23 times. significantly below our ceiling of 2.0 times. Subsequent to the end of the first quarter, the company refinanced its senior notes with an extended seven-year term at a significantly lower interest rate of 7.25% versus the old notes at 9%. Additionally, we extended our credit facilities to April 2028 with additional flexibility included in the covenant. With the strategic review process now significantly complete and debt instruments extended and refinanced, the company is in a strong liquidity position. We continue to expect sufficient cash flow generation and continued access to our credit facilities subject to covenant limitations to fund our operations, working capital requirements, and capital programs, including MEO costs related to the new facilities, inorganic investments, and shareholder return initiatives in the form of a normal course issuer bid. Capital expenditures in the quarter were $24.8 million, including outstanding payments to suppliers, of which $23.1 million were related to growth expenditures for continuing operations. These were mostly related to MEO projects, which are intended to increase production capacity and efficiency within both segments. We continue to expect capital spending for 2024 to be in the range of $90 to $100 million. MEO projects for composite technologies are expected to begin producing around mid-year, with connection technologies projects expected to begin production late in the year. All projects remain on time and on budget. I'll now turn it back to Mike for some final comments. Thank you, Tom.

With the transformation of our portfolio completed, MATA is now focused on a narrow range of high-growth, critical infrastructure-oriented businesses. We have built a strong cash balance and are approaching the completion of several high-value organic growth investments, positioning the company to take full advantage of our unique technology portfolio and strong long-term customer demand to deliver elevated returns over the years that come. 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 MATA'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. Our focus remains on technology development, efficient delivery of quality products, careful cost management, and completion of our North American MEO programs. with three of our four new production sites expected to be substantially complete by year eight. We continue to evaluate tuck-in and more substantial accretive strategically aligned acquisitions and are fully committed to continuing the return of capital to shareholders. We remain vigilant towards the potential impacts of geopolitical events, supply chain risks, inflationary impacts, and interest rate movements and continue to take steps designed to minimize our risks related to rising international trade friction. The company views any potential future action by central banks to lower interest rates as favorable, likely to drive an increase in broad industrial and infrastructure demand for the company's products, particularly from smaller customers and distributors. Typical improvements in weather and ground conditions across much of North America during Q2. are expected to drive a substantial increase in operational activity within our composite technology segment, while the most likely timing of some international flex pipe order deliveries have adjusted from Q2 to Q3. Consequently, we now anticipate the segment will see sequential growth in Q2 and again in Q3. Second quarter MEO project costs are expected to move up from the prior quarter as site commissioning activity accelerates. And we currently believe Q2 adjusted EBITDA excluding the impact of MEO expenses will be similar to the same period of 2023. We remain confident that MATA's full year 2024 revenue and underlying profitability will rise by high single digit percentages when compared to 2023. I'll now turn the call over to the operator and open it up for any questions you may have for myself, Tom, or Megan.

As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of David Ocampo with Cormark Securities.

Thanks. Good morning, everyone. Good morning. It's nice to see market share gains continue for your large diameter pipe product. I'm just curious, how are you guys competing with your main competitor? Are you guys doing it mainly on price or is quality a factor there? And then maybe probably most importantly, has your entry into the market put downward pressure on pricing where the margin profile that you may have conceived 12 months ago is entirely different or more or less the same?

So we're certainly very pleased with the pace at which we're being able to capture customers and demonstrate our value in the larger diameter product offering. Certainly, whether it's sequential or year over year, when we assess our North American revenue results versus North American rig count, we've exceeded the market in both measurements. So we're happy with that. I would say that the last variable that comes into our commercial activity on any front is pricing. We believe that our products, including the larger diameter FlexPipe product, have certain technical and operational benefits, whether it's speed of installation or performance under certain conditions. And that's really at the core of how we address opportunities in the marketplace. I would say that based on our view of the market, we do not believe that there has been any meaningful shift in the pricing structure for larger diameter products.

Mike, maybe you can comment on your development phase of the 7- and 8-inch products in terms of timelines on when that potentially could get launched.

Yes, I think I mentioned during the last quarter that as we look at those two products, first, we do believe that there is a substantial market. for products larger than six inch and are fully committed to achieving the technical development and then the commercial introduction of those products. I think late in 2025 is the beginning of the window where we may start to be able to offer a product to the marketplace. But in terms of having a full year of activity, it's more likely 2026 that you should start to see that.

And then, you know, a ton of cash on the balance sheet. And you guys touched a little bit on the U.S. expansion of your wire and cable business. And it's actually featured quite prominently in your deck. So if we fast forward to year end, do you expect an acquisition to be completed? And then if so, can you talk to us about how much capital can be deployed there? Are you guys thinking a large, you know, chunky size deal as your initial entry into the U.S.? Or are you guys thinking, you know, smaller tuck-ins?

Maybe I'll address some of that and then pass it to Tom to talk about some numbers. Obviously, M&A is a part of running a business where you don't have total control of the process. Obviously, there has to be a willing seller to match with a willing buyer. I would describe us as a willing but disciplined buyer. very, very focused on finding the right fit to add to the existing wiring cable business. I would be hope I would say I would hope very much that we have secured a meaningful acquisition by the end of this year. There are a number of potentially interesting opportunities in the market or were likely to be in the market between now and year end. So I think there is the potential. but you can never be certain. What I'll tell you is that there is no lack of effort going into finding and securing the right opportunity there. And when it comes to scale, as we've said, we look across the spectrum, but obviously it tends to be a similar amount of effort going into an M&A transaction regardless of how big it might be. So we're certainly very open to something of scale to give us a more meaningful presence, particularly in the U.S. Talk a little bit about capital.

Yeah. You know, as Mike said, we're active in this area and our pipeline is quite full. So we're working aggressively to make something happen. Despite the fact that we don't have control of the timelines, I would say to you that the sizes of deals, you know, range probably from 50 to a couple hundred million dollars and maybe even north of that, depending on which one we refer to. So it's a pretty wide range of what we could get done here. We're very aware of the fact, as Mike said, that deals of small size take a significant amount of effort, as do large deals. So in an effort to get the right deal, we'll continue to be disciplined, but we would like to do something of scale if there's something out there. So that's how I would think about it.

And then, Tom, just in terms of your return threshold, I think you guys are looking at a 20% after-tax IRR. Does that number change for the gain scale in the U.S., where you might be willing to take a little bit less than 20% to get that across the table?

I would say we still believe 20% is out there, but... anything above our weighted average cost per capital, you know, kind of mid-teens is probably acceptable in an M&A scenario. But the really important thing here is that we test both the upside and the downside. And so as we look at these things, we make sure that we're stress testing any sort of acquisition we do in that return threshold. And then I'll just remind everyone that last quarter we talked about the fact that we do test everything against an SIV as well. So we would want to make sure that the deployment of capital would be more efficient than doing some sort of large return of capital to shareholders, which we believe to be the case, but we'll continue to be disciplined around that.

Okay, that's perfect. Thanks so much, everyone. I'll pass the line over.

Our next question comes from the line of Ian Gillies with Stiefel.

Good morning, everyone. Good morning. Good morning. Would you be willing to confirm whether the shipments that were intended to be delivered on the FlexPlave side in the second quarter are en route now to their international destinations?

So maybe I'll speak more broadly and attempt to answer your question, Ian. So we made one announcement that covered multiple substantial awards of international flex pipe orders that we press released in December last year. I can confirm that the products associated with those orders have either been delivered or are in the process or being delivered. So some of those components are on the water or still working their way through factories. There are additional opportunities or orders that were not press released, that on a singular level are smaller in scale, but in combination are meaningful. And that collection includes orders that are in the process of production, are either on the water, have maybe reached the end destination port, or are orders that we fully expect to receive and to work through the manufacturing process between now and the end of Q3. So it's a bit of a mix. But there's a good chunk of what we expect to recognize in Q2 and expect to recognize in Q3 that is already fully committed.

No, that's very helpful. Maybe switching gears, I mean, you've highlighted the data center opportunity and appreciating the fact that it's early days. Are you able to articulate at all how you go about winning business in that market or how you vote? about getting MSAs, et cetera, just because it will be a newer vertical?

Yeah, so it's a market where there's a variety of data points out there, but to the best of our visibility, there's an order of magnitude 5,000 data centers in the U.S. as we sit here today. And we've seen a number of data points that tell us that that number is likely to grow at something approaching between five and 10% CAGR. There's a big difference between those two numbers, but there's a wide range. What we've generally seen is that data centers, particularly larger data centers that are built closer to urban areas where land is more expensive and more restricted in its availability, are starting to skew to underground storage of liquids. So not every data center will store liquids underground. If they have the space, they can use above ground tanks and that's usually a cheaper option. So our products don't apply to every data center, but a big enough portion that it's an interesting end market. There's not that many ultimate owners of data centers. It's a relatively consolidated market. And as a consequence, there's a relatively consolidated number of general contractors that actually build data centers, and most of them also build other types of construction projects, and we already have relationships with them. So our pathway into this market has largely been through existing relationships with those general contractors. I think the history of performance and quality of our products speak for themselves and we're a trusted provider in that space. So as we see more and more data centers be constructed and more and more of them need underground fuel and other liquid storage, we're seeing the demand for our products rise. And as I mentioned in the prepared remarks, generally the demand is for the very largest of our tank sizes, which obviously the South Carolina facility will help improve our production efficiency and scale in that size range. And something that we believe will over time become a more material piece of the revenue for the Xerxes business.

Perfect. That's very helpful. I'll turn the call back over. Thank you for the details. Thanks.

Our next question comes from the line of Tim Monticello with ATV Capital Markets.

Hey, good morning. Morning. I just wanted to kind of get a view on Q2 guidance. Are you expecting Q2 to be lower than what you were expecting before? It sounds like you've got a little bit more traction perhaps in the North American piece of the FlexPipe business, but also you mentioned some order shifting into Q3.

Yes, so I'm happy to respond to that. To be clear, our view of Q2 performance at the last quarterly earnings call was a little higher than our view of Q2 performance as we sit here today, driven by two factors. One, we are likely to see a substantially higher MEO spend during Q2. which is purely a question of timing. There's no change to the full year MEO spend expectations and no delays or changes to the project timings. But Q2 will have, I think, the heaviest MEO cost recognition of the year, now that we see how the sequencing is lining up, which obviously impacts reported adjusted EBITDA. And then second component is what I've spoken about, the slight movement in timing of certain larger flex pipe international deliveries and therefore revenue recognition that will cause adjusted, reported adjusted EBITDA in Q2 to move down from where we had originally expected. But that is just a movement from Q2 to Q3. And I'd reinforce absolutely no change to our full year expectations of both revenue and adjusted EBITDA as we've previously communicated.

Okay, got it. And then just following up on Ian's question there, and you mentioned some additional, I guess, touch points for data centers within the connection technologies business. Can you talk a little bit more about what you think a potential revenue penetration might be for the entire company for a data center if you were able to get connection technologies

orders and and opposite technologies orders yeah I can give you a range obviously there's a fairly broad spectrum of scale when you talk about data centers I think on the low end it may be a couple of hundred thousand square feet of coverage and at the high end it's a million square feet and they require very different degrees of product today on the connection technology side we sell and a range of wire and cable solutions that are incorporated into the construction of data centers. And then as a byproduct of the addition of data centers, we're seeing incremental demand for utility network expansion, and obviously we sell into the utility expansion marketplace as well. I'd say when we look at a single data center of average size, if we were to secure Everything we can possibly secure from a wiring cable and connection protection side, as well as the underground tanks, certainly the per site revenue stream could be well north of $2 million, considerably higher than that with a larger data center. And then the related revenue that comes from supporting the expansion of utility networks is a bit harder to measure on a per data center scale. scale, but it's definitely there.

Do you have any data center orders in your backlog today?

Yes, we have a substantial backlog for the production equipment that supports the very largest of the tank sizes, which is what data centers tend to consume. We have a very robust backlog.

And then wondering if you can just provide an update on how the stormwater management business is going.

Yes, it is, as with most things that get buried, a bit of a seasonal business. So Q1, as it usually is, was a fairly slow quarter. But we continue to see market penetration, see our products get qualified for use in new geographies and new customers. And we've been investing in that business in terms of adding to the commercial structure, the leadership structure, fully expect that it will continue its recent trend of delivering substantial year-over-year growth.

Okay, we'll turn it back.

Thanks, guys.

Thank you.

Our next question comes from the line of Zachary Evershed with National Bank Financial.

Good morning. Thanks for taking my questions. Good morning. So just a quick one on the working capital trope accounting. Do you see any risk to incremental outflows versus the $37.4 million?

Yeah, so I think this is a case of in the end of the year, we had just gotten the results or the response from our counterparty. recorded our best estimate. Now we've had time to work through it. We think that this is the most reasonable estimate we have today. I would say, and I think we said in the documents, that there's potential movements up or down. But we don't think it's material at this point. We think we've reached a point where we're pretty close, as with all negotiations, you know, that's subject to change. But as we've said today, that's our best estimate, and we would hope to settle at that range.

Good color. Thanks. And then for DSG Canusa being mentioned, demand in Europe, can you share some details about how you're currently penetrating that market and faring within that competitive landscape?

Yes. So we haven't talked that much about DSG Canusa over the last several quarters, which is unfair to that business and the people within it because they're performing at a very, very good level. And as I mentioned on the call, the margin profile for that business continues to move rapidly. Upwards as we develop and introduce new and better products to serve higher and higher temperature applications amongst other things and while total automotive production activity Hasn't been rising at a substantial pace I'd say that our ability to continue to win new vehicle platforms from our customers based on the quality consistency and customer service that we offer is being shown every day and So the growth that we're seeing in Europe is a mix of automotive and industrial. We are less fully penetrated in the European industrial markets than we are in the North American industrial markets. So we have a blueprint to follow from our North American success and the European team are executing very, very well as they implement that blueprint. And as we've seen, there's been a modest slowdown in electric vehicle demand and consequently production. But it's largely been offset by an increase in hybrid vehicle demand and production, which is an even more interesting opportunity for us, given the complexity of a hybrid vehicle and the sheer quantity of product from our business that is required to serve that vehicle type. So it's a mix of vehicle type change, capture of share in both automotive and industrial markets. And I would tell you that we believe we are a very long way from having a fully mature market share on the European industrial side.

Great, Collier. Thank you. Zachary, could you restate your question? Of course.

What is the biggest challenge you're seeing to selling the Brazilian operations?

So I would say, really, that there's no challenge. It's a process that we didn't really commence until the early part of this year. It's proceeding as I would have expected. There are multiple parties that have expressed an interest. Certainly our intention is to move as rapidly through this exercise as we can. So if things continue on their current pace, I would hope that certainly by the early part of Q3, we've got something to communicate. And then it will be a question of working through regulatory approval in Brazil, which is a little harder timeline to predict. But if things go reasonably well, we ought to be able to transact by the end of the year. Gotcha. Thanks.

Last one from me before I turn it over. Are you seeing any impact from the high interest rate environment pressuring customers on the economic decision of steel storage tanks versus FRP?

We have not seen that particular variable come into play. What I'd say is that we've seen relative stability in interest rates now for multiple quarters. I think the The pain that some of our customers and particularly smaller customers felt as those interest rates rose is now baked into the baseline of our business. And we've not seen any further variation. What we've generally seen is that they are choosing to defer investment in new fuel station construction or upgrades of existing fuel stations where they possibly can. while their cost of capital is at an elevated level. So we haven't seen a skewing of market share. We've just seen a slowing of overall activity from the smaller independent fuel station operators and fully expect that there will be pent up demand from that population that will start to have an impact on our business when and hopefully soon interest rates start to move in a more favorable direction.

Very helpful. Thanks. I'll turn it over.

Our next question comes from the line of Michael Tupholm with TD Securities.

Thank you. Just with respect to the MEO expenses, it sounds like you think the full year impact is unchanged, but maybe not as heavy in Q1 as you were expecting. So can you help us understand how we should think about MEO expenses in Q2?

Yeah, so I think the full year is still what we had said, 20 to 25. First quarter came in a little lighter. I'll remind you that the first half is skewed towards composites. And in the second quarter, we would expect effectively what wasn't spent in the first quarter to be spent in the second quarter. So you think of that number in the $8 to $9 million range. And then for the back half of the year, we expect it to be skewed towards the connection technologies business. Again, no change at this point to our expectation there. So that's $5 to $6 million a quarter is what we've talked about. I would point you to those numbers remaining intact.

OK. I appreciate the fact that first half is heavier toward composite and back half toward connection, but for connection in Q2, is that likely to be similar to what we saw in Q1, or does it step up at all?

Very modest step up. I'd say it's still a small number in the grand scheme of things. The bulk of that $8 million to $9 million sits in the second quarter. Okay, perfect.

And then you were just asked about the Brazilian pipe coating operations, and it sounds like we could see something in terms of an announcement at some point over the next quarter or so, quarter two. But it does sound like those operations are likely with you probably through the balance of the year. So when we look at the corporate and other segments, what's the best way to think about the costs that you're likely to see moving forward on a quarterly basis, they were a little lower than I expected in Q1.

Yeah, so I think Q1, our Brazil business, performed slightly better than we had expected it to, just timing of pipe coding, which I would say means Q2 is probably slightly lower than we had expected it to be. So it's a bit of a shift. If you assume normal corporate expenses and what we've guided to before, which is $6 to $7 million a quarter, And then I think last quarter we talked about Brazil being roughly 3 million a quarter from an EBITDA perspective. There is a bit of variability in that number as pipeline, type coding businesses have. So I think Q2 is slightly below that, Q3 is above that, and then Q4 is roughly in line with that 3-ish million number. So hopefully that gives you a little bit more color.

That is helpful. Thank you. And then just lastly on the data centers, just so I'm clear, I mean, it sounds like you see opportunities really across the business. You're already serving that market through both segments, but you simply see an opportunity for a step up in activity as the market grows or you think you can further penetrate. I'm just kind of trying to understand the growth opportunity and where it's coming from. If it's simply that market is growing or you think there's actually an opportunity for you to accelerate the your penetration, and I guess the question maybe to follow on from all that would be when you likely see that step up in revenues.

Yeah, so I think there's three variables here that are in play. The first is the pace of data center construction, which I'm not sure we necessarily see that accelerating, but we certainly see it persisting and being fairly meaningful. The second is the type, size, and location of data center construction. If you can build a data center in the middle of a very large field and you have no restriction on the land, then your cheapest way to build it is with above ground tanks, which we don't make or sell. But if you need to be closer to a source of electrical power and you're starting to move into spaces where you are restricted or the cost of land is just outrageous, Then you start to plan your data center with underground storage of liquids because it allows you to do everything on a smaller footprint. And we are starting to see a trend in that direction, which clearly grows the addressable market for an organization like ours on the tank side. And then the third variable, of course, is our ability to deliver very large composite tanks because data center construction timelines tend to be very rigid. and they are not willing to delay that construction activity waiting for a tank. And if I can't get them a large tank array in time, then they will use steel. We have a limited production capability in the very largest tank size today, but obviously as the South Carolina site comes online, it will bring with it incremental production capacity, which we believe will allow us to take a growing share of that growing market. In terms of seeing the impact in the business, I think you will start to see the impact as you start to see the impact of the South Carolina facility coming online, which will be a ramp up over the course of the first half of this year, sorry, the second half of this year and into the first half of next. Perfect.

That's very helpful. Thank you.

As a reminder, that is star 1-1 to ask a question. Our next question comes from a line of Arthur Nagourney with RBC.

Hey, good morning. Morning. Just wanted to touch on the international flex pipe side of the business. So I think you mentioned in your prepared remarks that international revenue growth was above 50% in Q1. Can you just talk about the runway here and maybe how you're competing in international markets kind of going forward?

Yes. So to be clear, what I said was that our Q1 international revenues for FlexPipe were greater than 50% of all of the revenue we recognized for international FlexPipe in 2023. So really, you know, indicating that we have a run rate growth there that is roughly 50% year over year International is a market where most commercial engagements go through a fairly protracted quoting process, and then customers will issue orders against a one or a two or three year commitment, and they tend to be lumpy. So there is some variability quarter to quarter, as we're seeing here, which will persist. So we should all have realistic expectations that there's unlikely to be a perfectly flat and upward line on international flex pipe revenue. But the fact that we are now able to offer 5-inch and 6-inch products, which have particular application in the international market, has opened doors that were not open to us before. We have a presence, we have relationships, but we didn't always have the right product. And I'd say still today, we don't have all of the right products. Larger sizes are required to meet the full array of international opportunities, as are, in some cases, higher temperature capability. And we're obviously we've been talking about and are working on delivering those additions to the portfolio over the course of the coming years. But we've a big enough window now that it can start to become a more meaningful piece of our business. And I think you should continue to expect to see year over year growth, perhaps not 50 percent year over year, every year. But the opportunities are meaningful and we're investing in the organization to ensure we can pursue those at an aggressive pace.

That's helpful. And then on the Shaw Flex side, we've seen quite a run up in copper prices here to start the year. Can you maybe just give us some perspective on what you're seeing from a cost perspective and maybe how you might be passing that on to your end customer?

Yes, so certainly we have seen commodity price move up on the copper side. I'd say we perceive that to be more a reflection of some supply side issues rather than a true demand issue at this point, although I don't see any clear evidence that it's likely to move back down again in the second half of the year. Our approach on the wire and cable business follows one of two pathways. For larger, particularly longer lead orders, we tend to Negotiate a fixed selling price with the customer and then make a pre-purchase of the required copper to lock in our supply cost and ensure we do not have exposure to moving commodity price. The alternative is that we have a floating selling price with customers that is ultimately fixed on the date of delivery based on the cost of copper on that day. So in both cases, we tend to see very limited exposure to variations in commodity price that might impact our margin dollar generation.

Got it. And then on the Xerxes side, you talked about above ground tanks just briefly there. I think historically Xerxes had some exposure to above ground tanks, but maybe it sounds like you guys aren't in it today. So just wondering if we can get your updated thoughts on, you know, this side of the business and whether there's any potential to maybe expand into above ground tanks kind of going forward in the future.

Yeah, you certainly never say never. I think if there's a good business opportunity that plays to your strengths from manufacturing and a commercial organization, it's always worth looking. But I would say over the course of the last couple of decades, we've become very focused on underground storage tanks. We believe that's where we can bring the most value to our customers. It's where we've generally specialized on manufacturing processes and our technology development efforts. So I would say you're unlikely to see us enter the above-ground marketplace for tanks in the near term, but we're always open to new and interesting business opportunities, so we'd never rule it out. All for me. Thank you. Thanks.

Our next question comes from the line of Tim Monticello with ATB Capital Markets.

I just wanted to follow up on the plans to fill the funding facilities and when you might hit that $150 million incremental revenue. It says here in the MD&A a three to five year period, but that's a little bit detached, I would say, from the view of doubling revenue organically through 2030. So I'm just curious, is that just conservative guidance, the three to five years, and maybe you can provide some more tangible commentary on your expectations for filling that revenue capacity?

Yeah, so I'll certainly do my best, Tim. Obviously, we try to be realistic with everything that we provide to the market. Remember that the capital that we are deploying now and will complete the deployment of over what's left of this year and the very early part of next is to establish the initial production capability in those four facilities. And that initial production capacity tied to the initial footprint of machinery in those sites is capable of delivering 150 million or more of incremental annual revenue. Getting that initial production equipment up to full utilization Certainly, three years is not an unrealistic expectation. It could happen sooner than that. That depends entirely on our ability to execute well. And I'd give us a good chance, but I wouldn't want to make a commitment there. Every one of these sites has extra floor space, which will allow us to put incremental capital to work that's nowhere near on the scale of what we've deployed in 23 and 24. And we'll have anywhere from $2.5 to $4 of annual revenue per dollar of incremental CapEx tied to those additional equipment investments over the course of the years that come. I think that we could reach a point where these physical facilities are fully equipped and manufacturing at their maximum possible output in five-ish years. But I'd say it might take a little longer than that. Let's see how the markets evolve and our execution goes. But there's a couple of factors there. So we're most focused right now on getting the equipment in, get the production ramped, and get that initial array of equipment to the point where it's delivering on that 150 million of incremental revenue and you know three to five years is a reasonable envelope clearly internally we're targeting three or better okay so if you hit the high end of that sort of five-year range do you think like is there enough growth outside of those facilities that you can still hit your doubling target As we sit here today, I have absolutely no remorse in putting the doubling of revenue by 2030 number on the table. We're very comfortable with our ability to get there.

Okay, got it. Thanks very much.

Thanks. That concludes today's question and answer session. I'd like to turn the call back to Mike Reeves for closing remarks.

Thank you so much for taking the time to join us here this morning. We'll look forward to hosting another call in August. I wish everybody a wonderful day. Thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.