Mattr Corp.

a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 11 again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Megan McCacklin, VP of 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 second quarter 2024 earnings press release in the MD&A that is 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 second quarter conference call. Today, Megan and I are joined by our Senior Vice President of Finance and CFO, Tom Holloway. During the second quarter of 2024, Matter's consolidated results included $254 million of revenue, $43 million of adjusted EBITDA, and adjusted earnings per share of 31 cents, with our teams around the globe working efficiently to drive strong sequential growth despite a number of market and geopolitical challenges. Customer buying patterns in the quarter were largely aligned with expectations across all business lines. Order visibility for the rest of this year and into next is improving in multiple business lines, and the company is beginning to see an increase in quoting activity within several market sectors that are traditionally sensitive to interest rates. We continue to believe that our investments in technology, operational efficiency, and enhanced production capabilities will support our ambition to double revenue by 2030 while driving EBITDA margins above 20%. Our manufacturing modernization expansion and optimization or M E O program has made considerable progress in the first half of 2024 with both of our new composite technologies production sites now largely completed and commencing operations early in July. While both of our new connection technology sites remain on budget and on schedule to commence initial production around year end. As they come online, These investments are expected to gradually enhance production capacity, efficiency, and proximity to key markets, provide added 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 enables our commitment to a flexible but disciplined capital allocation strategy. In addition to completing our 2024 organic growth investment initiatives, we remain active in our development of 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 renewed our normal course issuer bid late in Q2. Looking at each of our segments, in the second quarter, composite technologies delivered significantly higher sequential revenue and adjusted EBITDA as a strong North American seasonal upswing in our Xerxes business compounded a new quarterly revenue record in our FlexPipe business. Excluding the impact of MEO costs, the segment's underlying profitability approached the recent historical highs of mid-2023. Within FlexPipe, quarterly international activity was robust, although modestly lower than the prior quarter, as expected. Year-to-date international revenue represents the strongest six-month performance period in the company's recent history and nearly equaled our full year 2023 results. We remain committed to strategic actions intended to continue driving annual growth of international revenue in the coming years. While we currently believe full-year 2024 international flex pipe sales will represent a significant increase over 2023, the project-driven nature of most international revenue means sequencing remains subject to change, driven by operational and procurement priorities within our customer base. Recently, we were advised by a customer that they have elected to defer a substantial project and related contract award that was previously expected to occur during the second half of 2024. While we remain confident in our opportunity to compete for this award in the future, this timing adjustment lowers our Q3 international revenue and related margin contribution expectations. Domestically, Continued share gain by FlexPipe within its US and Canadian onshore markets, including further large diameter product adoption, drove second quarter North American revenue to grow sequentially by over 20%, outperforming the average North American drilling rig count, which fell nearly 14% in the same period. FlexPipe Q2 North American revenue was also modestly higher than the prior year's quarter, despite a year-over-year decline of more than 16% in average North American drilling rig count and over 18% in average U.S. drilling rig count. We currently anticipate a continued lowering of North American drilling rig count during the second half of 2024, with U.S. completion activity moving down following its typical seasonal high point in Q2. Our ability to materially outperform key market activity indicators throughout the first half of 2024 gives us confidence the substantial investments made in technology, training, and domestic operational infrastructure over the past several years have positioned us well for the future. Among our operational infrastructure investments is a new flex pipe production facility located in Rockwall, Texas. This significant project is part of the company's MEO strategy And I'm very pleased to confirm that it commenced commercial operations in early July safely, on time, and on budget. This site has been designed specifically to be highly efficient in the production of larger diameter products. And its initial equipment installation, which consumes about 50% of the rock wall manufacturing floor space, more than doubles the company's total prior output capabilities in these sizes. The site is strategically located and, when compared to our existing Calgary facility, is expected to enable significantly lower cost shipments of large diameter products to customers in the southern US oil fields and in future years to the port of Houston for export orders. Production activity within the site is expected to increase progressively throughout the coming 12 months and based on our current outlook, including continued domestic and international adoption of our larger diameter product offering, We expect the site to be operating at reasonable levels of efficiency as we approach the middle of 2025. We retain the option to add further production equipment into the facility in future years, as market demand requires, and note that this includes future optionality for the output of even larger flex pipe sizes. Turning to the Xerxes business, Q2 is traditionally a period where North American weather and ground conditions are conducive. to underground tank installation activity, and we saw a robust sequential rise in tank shipments and production during the quarter. Xerxes revenue was very similar to the prior year period, while expanding nearly 50% versus the prior quarter. Our retail fuel customer base demonstrated an ability to more effectively navigate underlying permitting challenges, requesting shipment of over 35% more tanks to their sites in Q2, when compared to the same period of 2023. Shipments during the quarter also exceeded the same period of 2022 by over 5%, supporting our belief that absent permit-induced fluctuations, the industry remains in a secular growth cycle. We currently expect fuel tank shipments to remain robust for the majority of the rest of the year before normal seasonal slowing late in Q4. It's important to note that while Xerxes tank shipment quantity in a particular period is a helpful indicator of current customer demand, it does not necessarily correlate perfectly to revenue generation because some tanks may be built, shipped, and recognized as revenue during that period, while others may have been built and recognized as revenue in prior periods and then stored as customer-owned inventory until a project is ready to receive them. The elevated tank shipment activity completed during Q2 has allowed the company to lower its customer-owned tank inventory to a level within our normal historical range, measurably below the same period of last year. The Energy Information Administration report for May 2024 gasoline consumption showed the strongest monthly demand since August of 2019 as the total number of miles driven by liquid-fueled vehicles on U.S. roads continues to rise. With robust balance sheets, healthy fuel and convenience store margins, and rising demand for their products, we continue to observe a strong appetite from larger fuel retailers to expand their geographic presence via both organic and inorganic means. Early indications suggest the construction of new-to-industry fuel stations in 2025 will increase by around 10% year-over-year, with the quantity complexity and average size of tanks at each site likely to continue slowly rising. MATA remains committed to deploying capital within the Xerxes business to ensure we can efficiently meet this rising demand. Included within these investments is our newly established Xerxes tank production facility in Blythewood, South Carolina, which commenced output early in July as expected. This site is the largest in our network the first to incorporate semi-automated production technology, and the only location specifically designed to optimize the construction of larger, more complex tank designs. Production activity within the site is expected to increase progressively throughout the next 12 months, and based on our current outlook, we expect the site to be operating at reasonable levels of efficiency as we approach the middle of next year. Positioning these critical capabilities in South Carolina will, over time enable even greater efficiency in our transportation of tanks to the high demand eastern seaboard and southeastern U.S. markets, where we continue to see substantial customer investment to expand retail fuel networks. By the end of this year, we expect the site to be populated with approximately two-thirds of its ultimate total production equipment capacity, including incremental 12-foot tank production capabilities which are expected to support the continued growth in sales of very large fuel and water storage tanks into the rapidly accelerating data center market, which we discussed last quarter. Based on customer indications, we believe robust market demand for fuel and water tanks in 2025 will be sufficient to consume the incremental production generated from this site. Turning to connection technologies, As expected, the segment reported Q2 adjusted EBITDA of just over $17 million, similar to the first quarter, on modestly lower sequential revenue. Excluding the impact of MEO costs, segment adjusted EBITDA margin in Q2 would have exceeded 20%. When compared to the same period of 2023, the segment delivered similar revenue and modestly lower adjusted EBITDA. These financial performance similarities do not fairly reflect the challenges faced and overcome by the Connection Technologies team in the last 12 months. During the second quarter of 2023, the segment benefited from a substantial high margin delivery to an aerospace customer for a project which has not repeated in 2024. In addition, Q2 2023 was the last full quarter in which Canadian distributor stock product demand and average margins remained elevated, before moving materially downwards in mid-2023 as higher interest rates lowered demand and distributors actively reduced inventories. Q2 of 2024 also saw the segment carry just over half a million dollars of MEO expense, where none was present in the prior year period. In combination, these three factors created substantial revenue and margin dollar voids for the segment to fill. This comparable period deficit was substantially filled by continued capture of new projects within infrastructure and non-stock utility markets in Canada, the U.S., and our EMEA region, with a strong growing funnel of projects for potential future award established. The successful capture of market share in utility, nuclear, and non-stock industrial markets is a crucial component of the segment's longer-term growth and profit expansion strategy, and a key driver behind our substantial ongoing investment to modernize, expand, and bifurcate the segment's North American production footprint. Progress on both of the segment's new production sites remains on time and on budget, with first production from our new DSG Canoosa heat shrink factory in Fairfield, Ohio, expected before year-end, and first production from our new SureFlex wire and cable factory in Vaughan, Ontario, likely to occur around year-end. Looking forward, while Canadian wire and cable distributor customers continue to tightly manage inventories and limit purchases of stock products during the second quarter, As the Bank of Canada has taken recent steps to lower interest rates, we have observed a material increase in quoting activity across the industrial sector, and currently anticipate deliveries of stock products to Canadian distributors will rise in the second half of this year, albeit at initially modest margins. Our view of specific project timing suggests the third quarter of 2024 will see a less favorable mix of revenue sources for the segment, with relatively lower sales into nuclear, communication and utility sectors, and relatively higher sales of stock industrial products into Canadian distributors. While quoting activity for non-stock industrial projects, including several larger opportunities, has also risen recently, these tend to have a longer award cycle than stock orders, and we currently do not expect to see elevated quoting convert into elevated revenue this year. Our outlook for the automotive sector currently presumes some third quarter moderation of total auto production by our customers in the European and Chinese markets, and a continued slowing in the growth of US battery electric vehicle sales. The diverse and differentiated DSG Canusa portfolio is not dependent on any specific drive type to underpin demand, and we continue to observe gradually increasing consumption of our product per vehicle as electronic content within cars and light trucks steadily rises. Overall, we maintain a favorable view of the long-term electrification, communication, and transportation trends which impact this segment. We have established a strong and growing foundation in the North American infrastructure markets, and we believe interest rate reductions by the Bank of Canada and signaling by the Federal Reserve that similar steps may be on the near-term horizon within the U.S. have the potential to drive measurably higher demand for the company's products across the industrial marketplace. Consequently, we 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, Brazilian pipe coating operations which is reported as part of our financial corporate and other section in our financial statements continued to execute safely and efficiently during the quarter delivering revenue and adjusted EBITDA similar to the prior year period and modestly below Q1 the business is fully booked in the mid 2025 and based on the sequencing of project activity is currently expected to deliver revenue and adjusted EBITDA in Q3 that moves higher sequentially, returning to or slightly above its Q1 level of performance. We remain confident that this business will yield increased full year 2024 financial performance when compared to 2023, and the company continues to seek the best long-term owner for this part of our organization. Tom will now walk through the company's second quarter financial highlights.

Thanks, Mike. The second quarter's consolidated revenue from continuing operations was $253.9 million, 1.4% higher than the $250.4 million in the second quarter of 2023. The increase of $3.5 million from the second quarter of 2023 is reflective of an increase of $2.1 million in the composite technology segment, and an increase of $2.2 million in the operating entities being reported under financial, corporate, and others, partially offset by a decrease of $0.8 million in the connection technology segment. Adjusted EBITDA from continuing operations was $42.8 million, a 15.6% decrease from the prior year's second quarter. This decrease of $7.9 million is primarily attributed to higher selling, general, and administrative costs of $7.9 million related to our MEO growth activities during the quarter, together with a change in product mix. While these MEO costs are slightly below our expected spend rate, the lower spend represents deferred spending during the second quarter, which will be spent in the third quarter of 2024. All MEO projects remain on time and on budget, with initial production occurring on the timelines noted by Mike earlier. During the second quarter, the company also recognized a $0.3 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 $1.6 million compared to an expense of $18.7 million during the previous year's quarter, reflecting the relative share price movements during those periods. Turning to segment results, the composite technology segment revenue was $152.5 million, a 1.4% increase compared to the second quarter of 2023 and adjusted EBITDA was $27.5 million, a 20.9% decrease from the prior year's second quarter. This revenue increase was primarily attributable to increased international flex pipe sales in the second quarter of 2024 compared to the same period in 2023. The adjusted EBITDA reduction was due primarily to an increase in selling general and administrative costs, mostly related to MEO growth activities with MEO costs of $7.3 million related to the two new facilities in the segment recorded during the second quarter of 2024. The segment also experienced a 0.4 percentage point decrease in gross margin compared to the second quarter of 2023, attributed to a slightly less favorable mix of product sales and lower overhead absorption within our Xerxes tank manufacturing network. Connection Technology segment revenue was $88.8 million, which was 0.9% lower than the second quarter of 2023, and adjusted EBITDA was $17.2 million, which was $2.7 million lower than the prior year second quarter. The decrease in segment revenue was a result of lower stock 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, MEO costs of $0.6 million related to the two new facilities in this segment were recognized under selling general and administrative expense during the second quarter of 2024. As discussed during our March earnings call, during the fourth quarter of 2023, the company completed the sale of a substantial majority of the assets of its pipeline performance group, PPG, pipe coating business to Tenaris SA. The company received gross proceeds of $241.2 million, which included the agreed-upon purchase price of $225.4 million and an initial working capital estimate. The final net cash proceeds, which were contingent upon a customary final true-up of the working capital calculation as outlined in the definitive purchase and sale agreement, were ultimately determined after an agreement between Matter and Tenaris was reached subsequent to the second quarter of 2024. The agreed upon total net cash outflow to settle the working capital adjustment was $47.5 million. of which $36.6 million was dispersed in June 2024, with the balance to be dispersed in the third quarter of 2024. The second quarter of 2024 reflects an additional $9.3 million loss from the sale of the PPG business in discontinued operations, predominantly driven by the working capital item noted here. Turning to cash flow, Cash used in operating activities in the second quarter was $9 million compared to cash provided by operating activities from continuing operations of $67.3 million in the prior year's second quarter. This result reflects prepayments received from contracts awarded in Brazil in the second quarter of 2023 and movements in working capital in the second quarter of 2024. Cash used in investing activities in the second quarter was $65 million, reflecting the aforementioned settlement of working capital related to the PPG sale and a total of $28.6 million of capital spending on property, plant, and equipment, primarily MEO projects, offset by $0.8 million in net proceeds from the disposal of property, plant, and equipment. During the second quarter, cash provided by financing activities was $10.6 million, primarily driven by the refinancing of the long-term debt of the company, which generated a net cash inflow of $12.7 million. Net cash used in the second quarter of 2024 was $62.4 million. As of June 30, 2024, we had a cash balance of $253.6 million, debt of $165.8 million, and $28.7 million of standard letters of credit. As of the end of the quarter, the company's net debt to adjusted EBITDA ratio was 0.23 times, remaining significantly below our ceiling of two times. Lease liabilities increased during the second quarter to $166.6 million to record the additional facilities leased under the MEO projects, including extension options. As discussed in the first quarter earnings release, the company refinanced its senior notes during the second quarter 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 facility to April 2028 with additional flexibility included in the covenant. With the strategic review process now substantially complete and debt instruments extended and refinanced, the company remains in a strong liquidity position. We continue to expect sufficient cash flow generation and continued access to our credit facilities, subject to covenant limitation, 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, which we renewed just prior to quarter end. Capital expenditures in the quarter were $29.4 million, including outstanding payments to suppliers, of which $27.5 million was related to growth expenditures. These were primarily 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 now online and beginning production, while connection technologies projects are 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 substantially completed, Matter is focused on a narrow range of high-growth, critical infrastructure-oriented businesses. We maintain a strong cash balance and are completing 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. The employees of MATA have continued to demonstrate extraordinary dedication and commitment, outperforming several key market indicators in the second quarter, while also safely executing multiple MEO projects, including commencing initial production at two new composite technology sites on time and on budget. 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 end. We continue to evaluate accretive, strategically aligned acquisitions and are fully committed to continuing our 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 risk related to rising international trade friction. The company views any 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. We currently believe Q3 revenue will rise modestly from Q2, driven primarily by increasing Canadian industrial activity within our connection technology segment, before moving lower in Q4 as normal year-end seasonal slowing effects are seen in several business lines. Q3 adjusted EBITDA likely moves lower than Q2, driven by project timing impacts, including those related to international flex pipe activity, lower expected North American onshore completion activity, and a less favorable mix of revenue sources in both segments. before moving modestly further down in Q4 as revenue slows. Despite significant year-over-year declines in North American drilling rig count, continued impacts from elevated interest rates, and the typical uncertainties that accompany a U.S. presidential election, we remain confident that MATA's full year 2024 revenue will rise when compared to 2023. We continue to observe broadly favorable indicators of demand for 2025 and beyond, and firmly believe that the company is well-positioned to deliver on its longer-term growth, profitability, and cash flow objectives. I will now turn the call over to the operator and open it up for any questions you may have for myself, Tom, or Megan.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment for our first question. And our first question is going to come from the line of David Ocampo with Cormark. Your line is open. Please go ahead.

Thanks. Good morning, everyone. Good morning. Good morning. I just wanted to touch just on your guidance first. I think you guys are alluding to Q3 being less than Q2 on an EBITDA basis. But if I take a look at your commentary for the full year, you guys are expecting underlying profitability to be similar to last year. So that does imply quite a bit of growth in Q4 to hit those levels. So just curious what's giving you the confidence to reach that target? Or am I looking at the numbers incorrectly there?

So perhaps I'll start and then I'll pass to Tom. So to make sure that we have clarity around the term underlying profitability that was referenced in the press releases, When we look at our full year 2023 adjusted EBITDA and exclude the fairly modest MEO expenses we incurred in the second half of 23 from that number, you are looking at an underlying EBITDA number of around $168 million. So when we talk about year over year underlying profitability being similar, we are attempting to refer to that comparison. Obviously this year we have far more substantial MEO expenses that are working their way through the income statement and as Tom has indicated before we continue to believe those numbers are are in the $20 to $25 million range for the full year, but they are not evenly distributed quarter to quarter. So as we look forward, we expect Q3 MEO expenses to be lower than they were in Q2, and Q4 MEO expenses likely to be similar to Q2. So there is some movement in the MEO side of things that perhaps causes a little confusion as you look at quarter to quarter performance. But what I would say to you is that we are continuing to see underlying demand for our products remain strong. We see it in our outlook for revenue this year being above last year, and we see it across all of our business lines. We've seen FlexPipe continue to perform at extremely high levels despite a very substantial drop in their underlying North American market activity levels. We have seen stronger than expected rebound in customer demand for fuel tanks this year, which we expect will continue until the very late Q4 typical seasonal slowdown period. And we continue to see the connection technology segment have very robust demand for their products, although the mix of where that demand is coming from is moving around just modestly. And consequently, we see slightly lower margins in that segment in the second half of the year than we did in the first half of the year. But I would tell you, I think that is a temporary effect. And the first half of next year is far more likely to have a margin profile similar to the first half of this year than the second half of this year. Hopefully that provides some clarity, David. Tom, anything you'd add there?

Yeah, I mean, I think Mike's commentary around MEO costs is really what's causing a bit of a skewing in Q3 and Q4. So just to be clear, I think the profile of Q1 and Q2 look similar to Q3 and Q4. So Q1, similar to Q3, Q4, similar to Q2. So in terms of MEO costs, and then, as you said, adding those back to get to underlying profitability is what we were referring to.

Okay, that's helpful. I appreciate the color there. Just the next question is just on the deferred large international flex pipe order. And I think it was supposed to be delivered sometime in Q3 or Q4. It does sound like you have to re-bid on that contract now if it does come back to market. But just curious if you have any work in progress that was related to that previous business one. No.

So we certainly have not incurred any direct expense associated with that order that we would have to recognize. I think this is a great moment just to comment. The FlexPipe international business is really no different than most international oil field service and oil field product businesses. We tend to be serving projects. At this point, we've expanded our international FlexPipe business to the point where we have, I would say, a fairly healthy underlying foundation of projects that are... smaller and therefore as those projects move around they tend to cause relatively little consequence to quarter to quarter performance but every now and again there are really substantial opportunities these these are occasional and i wouldn't guide you to expect that these things will be a frequent occurrence and but in this particular case a very large order in the middle east that originally we thought was going to contribute to revenue in the second quarter of this year. It moved to the third quarter and has now moved out of the year, but it's driven entirely by our customers' reassessment of their levels of current inventory. And the timing of when they will come back to market with that particular order is not perfectly clear, but it's probably in 2025. But until they confirm to us, we obviously can't confirm to you.

Okay, that's helpful color there. Then just if I could sneak one last one in maybe for Tom. We did see a big uptick in lease liabilities on the balance sheet, but the payment stayed relatively flat. So curious how we should think about payments as it relates to lease obligations for Q3, Q4, and if there's another uptick again in 2025.

Yeah, I think what you should expect, I think I think we should see lease payments being around $20 million a year. That stays relatively consistent to what we've talked about before. So no change to that. What caused the increase in the lease liabilities was effectively two things. One, taking possession of the final two pieces of our relocation of the Toronto footprint. So the Ohio facility and the Vaughan facility. And additionally, factoring in the lease extension options on those, which because we're building manufacturing facilities, it's highly unlikely that we don't extend those facilities. And so that drove the liabilities up a little more than we had originally anticipated. So those are the two factors that caused the lease liability to move. But the payments have not changed since our original discussion. So we should be in good shape there.

Okay. That's helpful. I'll hand the line over. Thanks. Thank you.

Thank you, and one moment for our next question. And our next question is going to come from the line of Arthur Nagarney with RBC. Your line is open. Please go ahead.

Hey, good morning. I just wanted to touch on the 2024 outlook as well. You mentioned sales mix as kind of having a negative impact. Can you touch on sort of the moving pieces there between the two segments?

Yes. So obviously, when we think about composites, as we've discussed before, the average margin contribution tends to be a little higher from the FlexPipe business than from the Xerxes business. So when we see a relative movement of revenue contributions that has FlexPipe moving slightly down and Xerxes moving up, obviously the combined impact there is to slightly lower the blended margin of the segment. And then on the connection side, there is a fairly wide range of margins that come from the different products that we offer. At the very upper end of that range would be aerospace and nuclear applications. And at the lower end of that range would be stock industrial products. And by stock, what I mean is products that are typically held in inventory by our distribution partners. So they buy to their stock. What we've seen in connection technologies as we've worked our way through this year, in the first half of the year, relatively high levels of nuclear project activity, relatively high levels and rising levels of infrastructure sales, so we're talking about utility, communications, mass transit, and relatively low levels of industrial, particularly stock industrial revenue. As we roll into the second half of the year, just the timing of some of the projects that we're involved with and the order patterns of our customers has meant that we'll see a little bit less revenue coming from nuclear, a little bit less coming from utility, and a little more coming from industrial, particularly stock industrial. So those are the things that move and cause H2 margin profile to be below H1. What I'd say is that the slight lowering of revenue contribution from the higher margin components of our portfolio is a transitory item. This is project-oriented work, lots of different projects, but it just happens that in Q3 and Q4, we currently believe that the combination of those projects will lead that portion of our portfolio to be a slightly smaller percentage of revenue and have full expectations that we'll see those revenue contributions move back to something closer to Q1 of this year as we roll into the first part of 2025. Thank you.

That's helpful. And can you give maybe some perspective on distributor inventory levels for Xerxes and when you might expect production to more closely follow shipments going forward?

Yes, Xerxes has been a bit of a roller coaster the last 12 months, as you recall. Mid-year last year, it became clear that our customers were really wrestling with some extending timelines on securing permits for their fuel construction projects. And we saw shipments start to fall materially below normal yearly trends and we saw inventory start to rise. That rising inventory pattern continued for most of last year. We curtailed production in the fourth quarter of last year and we maintained production at relatively low levels in the first quarter of this year in order to manage that inventory level. But what we've observed is our fuel customers, while they still face the same significant timelines to secure permits, acted very quickly in the middle of last year to begin procuring greater volumes of real estate to file for permits earlier than they normally would and in greater volume than they normally would. And what we've seen as we've moved into the construction season this year is that they clearly have found ways to work around the permitting issue. The underlying issue hasn't gone away, but their behavior has adapted and it has driven a much more substantial rise from Q1 to Q2 than we would normally have expected to see. It has caused us to ship substantially more tanks in the second quarter than we built. which is why the rise in shipments is a little bigger than the rise in revenue. Some of those tanks were built and recognized as revenue last year. I think we see our inventory balance today sitting within a normal range, but I think our inventory balance will continue to move down for the rest of this year. Our distributors, who tend to serve smaller fuel station construction customers, have themselves relatively low levels of inventory, So I think we are now into an environment where demand is rising, inventories are shrinking. And if I look forward, I think even with the addition of our South Carolina production facility, which is just starting to produce products, I do not envision a scenario where we are lacking for demand across the entire Xerxes production network as we roll through the rest of this year and into next. So I'm very pleased with the decision we made to build that South Carolina facility. I think it's coming on time at exactly the right moment, and we're very well positioned to take advantage of what I think will be a robust step up from 24 to 25 in customer demand.

All right, that's helpful. And then just one last one for me. You had an active start to the NCIB. Can you just share how you're thinking about the cadence of buybacks over the coming quarters?

Yeah, absolutely. I think that's in line with what we had kind of signaled is that we are still very much in favor of the NCIB program and will continue to be active there. You've seen July as we've moved and reported that was quite a robust activity level. I would say we've kind of signaled something around 10 million a quarter right now where things are trending that's likely to be a little bit north of that and we're comfortable in that range just given The opportunity that we see in the long-term outlook that we hold for the company and also just the multiple that we still continue to trade out so we still see it as an opportunity will be Relatively I would say systematic but also opportunistic with the program Thank you Thank you in one moment as we move on to our next question.

I And our next question is going to come from the line of Zachary Evershed with National Bank Financial. Your line is open. Please go ahead.

Good morning. Thanks for taking my questions. Morning. So when you say you're outperforming rig counts, that implies you're taking share. Could you give us an update on the competitive dynamics of spoolable pipe right now? Yes.

So to quickly answer the question, yes, I believe we are taking share. And I believe that while we are taking share across the product portfolio, I think the majority of the share gain that we have been able to secure over the course of the last 12 months has been due to the addition of larger diameter products to our portfolio and our ability to finally address customer needs in that very large addressable market. When we look at what does this performance really look like, year over year, North American revenue for FlexPipe is almost identical, Q2 of last year to Q2 of this year, during a period where the rig count in the U.S., which is our biggest single market, fell by 18.5%. So certainly kudos to our sales teams. They've done a wonderful job of introducing these new products, and I think operationally we've performed very, very well. We do not see changes in behavior from our competitors in this space at this time of any substance. I think it's a market where it's still a relatively small number of suppliers of high quality product who believe in the quality of their products and believe that they should be priced fairly. But outside of that, I think we indicated in the prepared remarks, we believe that we'll continue to see U.S. active rig count trickled downwards over the second half of the year. I've heard others who have indicated they think it may be flat for the rest of the year. We continue to see that the consolidation from customers, particularly large customers, and the general uncertainty that tends to surround a U.S. presidential election cycle are probably going to drive rig count a little lower over Q2, sorry, over Q3 and Q4. And we know that in the U.S., There tends to be an annual peak in completion activity in the second quarter, which we saw, and we'll start to see completion activity move down a little bit in the second half of the year. But I continue to have very high confidence in our ability to outperform whatever the rig count does and certainly believe that we're very well positioned if we start to see a rig count growth as we roll into 2025. to substantially elevate the performance of the FlexPipe business, both on the revenue level and on the margin level as the new Texas facility comes online and substantially lowers our cost of production and cost of shipment of these larger diameter products.

That's great, Collier. Thanks. So then would it be fair to say that the softening market conditions don't have any impact on your innovation plans for new diameters or temperature ratings? That is true.

The R&D investments that we're making in that business and have made for multiple years are in the big scheme of things, not material percentages of revenue. And we are very committed. to continuing the development of those larger sizes and expanding our temperature ranges we're seeing good early success in in that technical development cycle and i'd say that the guidance i provided previously that 2026 is probably the first full year in which we have the next step up in size range available for sale it is still true thank you for that

Given the strength you're seeing in Xerxes, the Anaheim closure seems a little counterintuitive. Can you run us through that decision and what's left to do there? Certainly. I'll take the second part first.

There's very little left to do there. You saw a very small amount of Expense that we recognized in the second quarter associated with that restructuring activity and at this point I believe that's the last that you will see in terms of restructuring costs tied to Anaheim or any other project in 2024 The lease at that facility comes to a conclusion at the end of this year So we'll carry some some cash lease expense for the rest of the year But at the end of the year that will come to an end as I said at the time that we made the decision and announced that decision Really not a vote against the need for tank production capability, but the Anaheim facility was one of the oldest in our networks. It was physically really not well laid out for the construction of the types of tanks that our customers are buying today. That facility was built when customers generally were ordering six and eight foot diameter tanks Our customers now typically order 10 and even 12 foot tanks. That facility was absolutely not optimal to allow us to produce those sizes of tanks. And unfortunately, the regulatory environment in California meant that it was a very, very challenging place to operate, a very expensive place to insure both the property and our operations. and quite frankly, increasingly further and further away from the primary points of demand from our customers, which tend to be through the Midwest, the Southeast, and the Eastern seaboard. So I'm very comfortable with the decision we made to shut Anaheim, and I'm also very pleased with the progress we've made in South Carolina. So I feel that South Carolina will bring to us not just far greater production capacity than Anaheim ever had, but certainly much greater efficiency in that production as they get more and more comfortable.

That's clear. Thanks. And just one last one for me. Could you give us some more details surrounding production increase in hydro chain? Kind of how much, why now is this to fill existing customer demand?

Yes. So Hydrochain and specifically the Stormwater Chambers product line that we acquired from Triton about a year ago. When we made that acquisition, Triton itself held intellectual property and commercial relationships, but did not have any of its own manufacturing capabilities, relied entirely on third parties. And to date, that's what we have continued to do. While we certainly value those relationships and will continue to have them in place, we I think when you surpass a certain level of sales activity on a consistent basis, it's prudent to bring your manufacturing in-house. And given that we believe manufacturing is a core competency, that was a logical step for us. So within the overall MEO project sphere, we are now approaching the completion of a production site that is co-located with the FlexPipe production site in Rockwall, Texas. That will start to produce chambers as we roll towards year end or very early next year. And I would tell you that the amount of chamber production that we need to put through that facility for it to be fully absorbed is less than our current run rate sales activity levels. So I feel very good about the investment itself. It will allow us to control our own destiny to a greater degree. It will lower our total cost for the product line. And the facility will have capability of producing several multiples of our current annual sales rate. So we'll be very well positioned for the future.

Thank you very much. I'll turn it over.

Thank you. And one moment for our next question. And our next question is going to come from the line of Michael Tupom with TD Cowan. Your line is open. Please go ahead.

Thank you. Good morning.

Good morning. Morning.

I have a follow-up question on the discussion around flex pipe in North America. So as you mentioned, you've seen share gains that have allowed you to overcome drilling activity headwinds. If I'm reading the press release correctly, it seems like maybe there's been a little bit of a change just in terms of how you're viewing the ability to overcome possible additional pressure in the market. So can you maybe just speak about what is changing there on that dynamic?

Yes, happy to comment. So I think active rig count, while it is the most readily accessible public metric that ties to North American activity, is an imperfect metric. The reality is that our product is consumed when our customers complete their wells, not when they drill them. And what we tend to see is that there is also a seasonal cycle of completion activity. In the U.S. in particular, Q2 tends to be a point in the year where many customers, particularly in West Texas, have concentrated completion campaigns. So we have this underlying generally downward trend this year in active drilling rig count. And then layered on top of that, you have what exactly is going on in the completion environment, which was a little more favorable than the rig count would suggest in Q2. And we'll drop off its seasonal high point as we move into the second half of the year, which means, I think, that our revenue trend in the second half of the year is more likely to closely approach the rig count movements than it did in Q2. I still believe we will take share. I still believe we will outperform the market. But just based on our current outlook for rig count movement and completion activity, I would set the expectation that I think North American flex pipe revenue in Q3 is likely to be a little below where it was in Q2. Obviously, if the rig count surprises us, manages to hold steady, then there is some upside potential there. That's helpful.

Thank you very much. The adjustments you called out in terms of timing of certain projects, I guess a key element there is the specific international flex pipe order that you mentioned was deferred. But it sounded like there was also some other changes to project timing. Perhaps I'm getting a little bit too focused on that. But just curious, is there sort of a common denominator here or the timing issues on some of these projects are all project specific and unique?

They're certainly project specific and unique, specifically around FlexPipe. I think I mentioned there were one or two smaller projects that normally I wouldn't call out at all, but we had one or two smaller projects that we'd expected we would deliver in Q3 and were able to get customers to confirm willingness to receive those products in late Q2. So we actually saw a little bit of benefit in Q2 from some project movement to the left, obviously more than offset by this much larger projects that moved to the right. Broadly speaking, we do not see a common theme in projects. We're not seeing projects across the board or across multiple product lines move to the right. We see a blend. The challenge, of course, is when you have one particularly large project in that blend and it moves, it can skew the appearance of performance. And that's really what's happened here with FlexPipe.

It's helpful. It makes sense. And then just maybe lastly, there are multiple references to geopolitical uncertainties in the press release this quarter. It wasn't really the case last quarter. Is that a specific comment around potential changes in demand around the U.S. election? Is that what you're specifically calling attention to, or are there other factors there that would fall into that bucket?

Yeah, we try to highlight that geopolitical risk exists on almost a perennial basis, but you're right. I think the way we view the world right now is that it feels like the risk profile for a variety of reasons is trending in an upward direction and when i say risk i mean risk of geopolitical events that are not good for anybody not specifically not good for us so we see the tensions in the middle east continuing to escalate and were they to boil over clearly there would be some impact on shipping routes through that part of the world and Whether or not we would see a direct impact to our business is not clear. I think we hold sufficient inventory to manage through that. The US presidential election obviously is on the near-term horizon and we'll know the result before we issue our next earnings release. I personally don't think we're going to see a dramatic swing in our business as a consequence of the outcome of the election. I think the one area where there's very clear differences in perspective from the two candidates is around traditional oil and gas. But at the same time, I think common sense will prevail. And I do not expect to see an immediate act that would have a negative impact on North American oil and gas drilling and completion activity. But you can always have surprises in these things. So that's probably the one area where we are most focused on the outcome of the election and understanding what it may mean. At the moment, I don't think it will mean very much. But I do think there are a number of people, including some of our customers, who are just being thoughtful. with the initiation of new projects when we are this close to an election and they're uncertain of the outcome i would say though none of that risk commentary changes anything about our view of our business of the strength of the demand for our products i see the need for infrastructure expansion and renewal whether it's electrification communication transportation is clearly a long cycle favorable tailwind for this business and one that we believe will drive us to deliver on our longer term commitments. Thank you.

That's very helpful. I will turn it over.

Thank you. One moment for our next question. And our next question is going to come from the line of Tim Monicello with ATB Capital Markets. Your line is open. Please go ahead.

Hey, good morning everyone. First one on the demand for Zerk season and the comment just around, you know, you thinking that you could be at your capacity for Zerk season at Blithewood in 2025. Is that the initial capacity at 50% or do you think that you're going to have to move to further capitalize that facility in 2025 to add additional

manufacturing lines yeah what I would say Tim is that our mid case outlook for production from our Xerxes network I think as it rises with with South Carolina becoming more and more proficient is likely to to see no shortage of demand I do not think we will have excess capacity that is sitting idle but our mid case view does not presume that we add incremental lines of over and above the initial installation at South Carolina. And clearly, if we see demand that trends above our mid-case view, we have the ability to move quickly and add additional lines in South Carolina at very modest capital expense. And obviously, we always have the flex associated with adding incremental shifts or utilizing overtime, not just in South Carolina, but across the network. So it's too early to suggest that the demand would be above our mid-case view, but I'd say our mid-case view represents a approximately 10% rise versus 2024, which I think is a substantial driver of growth for that business. And as we get more proficient in South Carolina, and quite frankly, get more proficient across our entire network, because we do have quite a lot of relatively new employees in the organization, I think you'll see efficiency and margins move upwards in that sector.

How quickly can you ramp that facility up? You've got to hire people and get people trained up and get them working. So when you think in this scenario, like you're outlining, that there is sufficient demand probably today to have a substantial fill of that facility and hit normalized efficiency levels,

Yeah, so we've set expectations that we get into something approaching a normalized efficiency level around the middle of next year. I think that is still a realistic expectation. Buying and installing equipment is one thing, and we're very good at that. Hiring and training people is something we've also proven very good at. But it really doesn't matter how much training you provide individuals. They need repetitions in the job to become fully proficient. And that really is the aspect of any facility that I think is likely to be the longest hole in the tent. We've got a wonderful group of employees in South Carolina, as we do across our network, but they are all relatively new to their roles. So we're being realistic with our expectations. We are continuing to find ways to support them. And it's, I think, important to point out that South Carolina is the first automated processes that will accelerate the pathway to proficiency within that workforce and once we have demonstrated to ourselves that those semi automation elements are as reliable as we believe they will be then you should expect to see us proliferate those across the network at relatively minor expense so that we can drive that accelerated proficiency throughout the Xerxes network okay that's helpful

I want to talk a little bit about pricing dynamics. It sounds like obviously you've seen a downtrend in flex pipe demand in North America for the last few quarters. Are you seeing any pricing weakness or competitive pricing dynamics in that business? And then same question for industrial stock products and the connection side.

Yeah, so obviously I'd be a little bit careful how much detail we dive into when we talk about pricing. But what I would tell you is that in the composite side of the business, we have not seen material movements in pricing dynamics. But I would say that as we... approach the beginning of 2025, I think our pricing leverage, particularly in the Xerxes side of the business, is likely to be higher than it was entering 2024. That's just what demand does. And then we flip over to the connection side of the business. I'd say largely demand has outstripped supply across almost all subsectors that we serve in that business. So pricing has remained, I think, where it should be. The one exception has been the industrial stock side. And as I said earlier, what we're really referring to here is probably the least differentiated of the product range that we make, which perhaps leads to the obvious question, why do you make it? Because the industrial end market is split between stock and non-stock. Stock being products that our distributors hold on their own shelves and inventory, non-stock being project specific, more technically differentiated, sometimes customer-specific products that our distributors tend not to hold in their inventory. And at the end of the day, when a distributor earns a project, they need to be able to provide a mix of those two products. So if we want to be able to win the non-stock work, which comes at substantially higher margins, we need to at least participate in the stock side, although we don't need to prioritize it, and we certainly do not. Stock industrial demand dramatically lowered over the course of last summer. Interest rates were high, industrial activity was lowered generally, and our distributors worked incredibly hard to lower their inventories of stock product as fast as they possibly could. Those distributors have historically low levels of stock product. and we're starting to see them return to the market and to repurchase, rebuild those inventories as interest rates are lower. But as with anything, when demand starts to turn up, there is a period where the lower margins that prevailed in the lower demand environment are there for a little while. What I tell you is as we see demand returning, clearly we would expect market dynamics to do what they normally do and allow us to charge a fair price for all of our products. So I do not believe that the initial impact of rising stock revenue growth will prevail for an extended period of time. I think we'll start to see those margins move back into more historically normal ranges and the impact on the blended average margin of the connection technology segment become far less visible.

Okay, that's helpful. And then last one here. Can you provide an update on, I guess, your search for a US entity to acquire for the US Shoplex expansion and provide some ranges of the size of that acquisition that you're looking at?

Yeah. So what I'd say is that we spent the last three years building a very robust funnel of targets, primarily in the wiring cable domain. And we've been, I think, quite transparent that we would choose to find an opportunity that establishes a US production footprint. The range in that funnel is everything from tuck-in to substantially more meaningful, and we do see several potentially transactable opportunities on the more meaningful end of the scale that have the potential to evolve in the coming quarters. So I'd say the deal environment is relatively unchanged from where it was 90 days ago. we're seeing buyers and sellers finding ways to bridge valuation gaps. And I would still say that on a personal level, I would be disappointed if we don't have something to communicate to you before the end of the year.

Okay. Does the increase in lease liabilities on the balance sheet change your level of comfort around the size of acquisition? Is that like a consideration when you're thinking about your leverage targets going forward, or are you thinking about leverage in an M&A context excluding leases?

Yeah, we typically think of leverage excluding leases, although we include it obviously for reporting purposes. So, I would say broadly it does not change our view. We still have the same parameters that we had before. That's a balance sheet item that'll sit there and it'll work its way down as the liability comes down, but it doesn't change our view at all. Okay.

I appreciate all the color. Thanks, Tim.

Thank you. And again, if you would like to ask a question at this time, please press star 1-1 on your telephone. And our next question is going to come from the line of Ian Gillius with Stiefel. Your line is open. Please go ahead.

Morning, everyone. Morning. This has been addressed a few times. I'm just going to be blunt about it. But as we enter 2025 and we think about connection technologies, there's obviously a number of moving parts through the back half of the year. But as we enter that year, would you anticipate that EBITDA margins for that segment return to what I would call a more normalized historical range of call it 18 to 20%?

The short answer is yes. The slightly longer answer is remember that the connection technology segment will still be recognizing some MEO costs in the first half of next year as they complete the move of the wire and cable facility in Ontario. So we would need to allow for that MEO expense. But if that were not in place, the answer would be a straight yes.

Okay. Understood. The other question, there's been a lot of focus on 2.524 through this call, but are any of these issues or have any of these issues materially changed your view as it pertains to 2025 revenue and EBITDA generation? Or do you expect this, what I'll call an air pocket, to largely be done by the end of the year?

There's nothing here that has materially changed our outlook for 2025. I think the one market movement that is real, and we can't ignore it, is the continued downward trend of North American onshore drilling activity. We certainly expect to enter 2025 with a lower active drilling rig count than we entered 2024. So as that has migrated, we need to be a bit thoughtful about what its impact is on the flex pipe business. But we continue to demonstrate our ability to outperform that metric, and I'd say from Big picture perspective, our outlook for 2025 really has not materially changed.

Okay. And last one for me, it doesn't sound like it, but has the size of deal you're willing to contemplate gotten smaller over the last 90 days, given some of the changes in the near-term outlook and consequent changes to the balance sheet?

Yeah, I would say the short answer is no. We still feel comfortable with the leverage We still have lots of cash on our balance sheet, which we're looking to deploy, as Mike talked about. We're very comfortable proceeding on plan, as we have been, and would love to have something to announce to you before the end of the year, as Mike just said.

So no change at all. Okay. Thanks very much. I'll turn it back over. Thanks for taking my question as late in the call. Thanks, Ian. Thank you.

Thank you. And I would now like to hand the conference back over to Mike Reeves for any further closing remarks.

Thank you for joining us this morning and for your interest in MATA. Obviously look forward to talking with everybody again next quarter and the operator will now close the call. Thank you.

This concludes today's conference call. Thank you for participating and you may now disconnect. Everyone have a great day.