Mattr Corp.

Good day and thank you for standing by. Welcome to the MATTER Third Quarter 2024 Results Webcast Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1 on your telephone. You will then hear an automated message if I think 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'd like to hand the conference over to your first speaker today, Megan McCaffrey, 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 Third 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 third quarter conference call. Today, Megan and I are joined by our Senior Vice President of Finance and CFO, Tom Holloway. The third quarter saw matter continue to progress favorably against its key strategic objectives while navigating mixed market conditions. 2024 is a year of operational transformation, and we remain on track to enter 2025 with that transformation substantially complete. During the quarter, MATA delivered consolidated results, including Brazil, which is now reported through discontinued operations, of $250 million in revenue, $37 million in adjusted EBITDA, and adjusted earnings per share of 23 cents. In parallel, we completed the establishment of and initial production within two new manufacturing sites in our composite technology segment, significantly upgraded an additional legacy composite technologies production site, remained on schedule to complete both new manufacturing sites within our connection technology segment, announced the pending sale of our last remaining pipe coating business, and, subsequent to the quarter, announced the planned acquisition of AmerCable in a transaction expected to be immediately and materially accretive. while positioning our connection technology segment for even more robust mid- and long-term growth across the North American highly engineered wire and cable market. During the third quarter, North American critical infrastructure demand remained broadly elevated and industrial demand moved upwards, with MATA's 2025 outlook for these two sectors continuing to strengthen. As expected, continued weakness was observed in the North American onshore oilfield market, Eurozone industrial sector, and increasingly the global automotive market. The company generally expects weakness in these sectors to linger into and potentially throughout 2025. While we are confident in our ability to continue capturing market share across our product lines regardless of underlying customer activity, we are acting quickly to lower costs tied to these specific end markets by approximately $20 million annually. 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% and, once closed, that our acquisition of AmarCable will serve to accelerate our progress towards these goals. I encourage any investor seeking to better understand the AmeriCable business and how we believe it will favorably impact matter to review the November 8th transcript of our conference call on this topic. Finally, we continue to believe the intrinsic value of our business represents an excellent investment opportunity. And consequently, we remained active under our normal course, issue a bid throughout Q3 and expect to remain so moving forward. Looking at each of our segments, In the third quarter, composite technologies saw sequential revenue move down, as expected. This decline was driven by flex pipe, which was impacted by U.S. onshore oil field completion activity moving seasonally lower, and by reduced sequential international revenue, which is tied to the specific timing of orders and deliveries. This was partially offset by Xerxes, where fuel tank demand remained strong, and our water products business set a new quarterly revenue record. FlexPipe's continued share gains within its U.S. and Canadian onshore markets, including further large-diameter product adoption, drove revenue in the third quarter associated with ultimate customers and end users in North America to move modestly higher year over year, outperforming the average North American drilling rig count, which fell approximately 6% in the same period, and North American well completions, which fell nearly 11%. We currently anticipate a continued lowering of US drilling rig count and well completion activity during the fourth quarter of 2024, as several customers are expected to face budget exhaustion before year end. While predicting go forward commodity prices is particularly challenging in a volatile geopolitical environment, We currently expect U.S. customer activity in early 2025 to move modestly above Q4 levels as new annual capital budgets come into effect. Overall, we currently estimate North American onshore drilling rig and well completion activity levels in 2025 will, on average, be approximately 10% lower than the full year average of 2024. Our demonstrated ability to outperform key market activity indicators gives us confidence that the substantial investments made in FlexPipe technology, training, and domestic operational infrastructure over the past several years have positioned the business well for the future, despite near-term industry headwinds. Within the Xerxes business, Q3 revenue was modestly higher sequentially and virtually unchanged year over year. despite September impacts to customer fuel and water project activities following hurricane damage in the southeastern U.S. Sales of water management products reached a new quarterly high during Q3, as customer adoption of matters water storage and treatment solutions continues to rise, and demand remains strong for very large-diameter water storage and backup fuel tanks in the U.S. data center market. Fuel tank shipments were strong during the quarter, although customer mix was slightly less favorable sequentially and year-over-year, as activity skewed to our largest customers who generally attract our highest discounts, resulting in year-over-year revenue and margin compression. This mix is likely to remain similar over the next two quarters before moving to a more typical and favorable ratio entering the Q2 2025 construction season. Our retail fuel customer base continues to demonstrate an ability to navigate underlying permitting challenges and continues to signal their desire to further elevate fuel station construction activity levels in 2025 and beyond. Of note, both 7-Eleven and Murphy have offered bullish public updates in recent weeks, supporting our belief that the industry remains in a secular growth cycle. We expect fuel tank shipments and related revenue to follow a normal weather and ground condition driven seasonal cycle, slowing in mid Q4 and remaining subdued until late Q1 before stepping up as ground conditions improve. Q3 saw the commencement of production at the new FlexPipe large diameter product manufacturing site in Rockwall, Texas, and the new Xerxes large tank manufacturing site in Blythewood, South Carolina. Each of these locations will gradually elevate output over their first four quarters of operation and are expected to reach efficient levels of utilization around mid-year 2025. During this ramp-up period, we anticipate both sites will have a temporary unfavorable impact on the segment's margin profile, with this impact lessening each quarter. The segment will strategically balance flex pipe production between its legacy Calgary and newly established Rockwall sites in this period of uncertain demand, and ensure the related cost bases in both sites are appropriately managed. In Q3, the segment also experienced margin impacts associated with lower efficiency at a legacy Xerxes tank production site, while undergoing a meaningful equipment upgrade, which is scheduled to be completed during Q4. The segment incurred modest severance expenses during the third quarter as it adjusted its fixed cost base to reflect near-term market conditions and is expected to incur greater severance expense during the fourth quarter as it completes these actions. With production network upgrades and fixed cost reduction actions expected to be completed by year end, a strong 2025 outlook for Xerxes fuel and water product demand and a demonstrated ability to consistently capture market share in the FlexPipe business, we expect composite technologies to regain revenue and margin momentum as we move beyond the seasonally slow fourth and first quarter period. Turning to connection technologies, the segment set a new Q3 revenue record, delivering modestly higher sequential revenue and nearly 10% higher year-over-year revenue. Sequential improvement was primarily driven by rising demand from the North American industrial sector and market share gains with industrial and automotive customers, partially offset by slowing total automotive unit production and, as expected, lower shipments into infrastructure applications based on project timing. During Q3, the segment's SureFlex highly engineered wire and cable business experienced an anticipated rise in demand for stock industrial products, primarily from its Canadian distributor customers who are gradually rebuilding inventory levels as interest rates move lower and industrial activity trends higher. As expected, sales of these stock products came at below average margins, which caused overall margins within the business to move sequentially lower. Since mid-year, the business has also observed a gradually rising volume of quoting and ordering for non-stock, higher-margin industrial products tied to specific projects and is beginning to rebuild the backlog of such orders, although related deliveries are unlikely to commence before the first quarter of 2025. The segment's DSG Canoosa premium heat shrink tubing business delivered year-over-year revenue growth in Q3 as it secured new customers and captured incremental market share in the North American industrial and both North American and European automotive markets. These gains were partially offset by a modest slowing of total vehicle production activity late in Q3 as several customers took corrective action in the face of profitability challenges, particularly related to electric vehicles. We currently anticipate this trend will linger into at least the first half of 2025, and consequently the segment is taking action to adjust its cost base to align with these expectations. Looking forward, the company would expect revenue in the connection technology segment to follow typical seasonal patterns, modestly slowing during the fourth quarter before rebounding in the first quarter of 2025. The building momentum in North American industrial activity, compounding already robust demand from infrastructure projects, leads the company to have a favorable view of its opportunities within these sectors in 2025. This favorable view of industrial and infrastructure markets is enhanced by the pending acquisition of AmeriCable and the cross-selling potential we believe will exist following an initial onboarding period. Again, I encourage any investor seeking to better understand the AmeriCable business and how we believe it will favorably impact matter to review the November 8th transcript of our conference call on this topic. 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 segments' 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 ShoreFlex wiring cable factory in Bourne, Ontario, likely to occur around year-end. Lastly, our Brazilian pipe coating operations, which, following our announcement of its pending sale to Valeric, is now reported as discontinued operations, continued to execute safely and efficiently during the quarter, delivering sequentially higher revenue and adjusted EBITDA. The business is fully booked into mid-2025 and, based on the sequencing of project activity, is currently expected to deliver revenue and adjusted EBITDA in Q4 that is similar to its level of performance in the first quarter of this year. We remain confident this business will yield full year 2024 financial performance, which is higher than 2023. Tom will now walk through the company's third quarter financial highlights.

Thanks, Mike. As Mike just mentioned, during the third quarter, a definitive agreement was entered into to sell the company's subsidiary ThermoType, its final remaining type coding business, to Valoreq. The transaction under which Valoreq will acquire 100% of the shares of the ThermoType legal entity is subject to customary closing conditions and Brazilian antitrust review and approval. The company will retain all earnings from the business until the transaction closes, and upon closing, expects to receive the gross proceeds of approximately $24 million, or U.S. $17.5 million, at October 31, 2024 exchange rates, on a cash-free, debt-free basis, subject to normal working capital adjustments. The regulatory approval for this transaction and subsequent closing is expected to conclude by mid-2025. Thermotype, which was previously accounted for under the financial and corporate section when it was referred to as financial, corporate, and other, is now accounted for as held for sale, and its financial reporting is reflected as discontinued operations. Accordingly, prior period information has been retrospectively revised to reflect this and continuing operations now excludes the results of the Brazil business. The third quarter's revenue from continuing operations was $226.2 million, 2% higher than the $221.9 million in the third quarter of 2023, The increase of $4.3 million from the third quarter of 2023 is reflective of an increase of $8.1 million in the connection technology segment, partially offset by a decrease of $3.8 million in the composite technology segment. Total consolidated adjusted EBITDA from operations, which includes discontinued operations was $36.7 million. However, adjusted EBITDA from continuing operations was $29.3 million, a 26.9% decrease from the comparative period in the prior year. This decrease of $10.8 million is primarily attributed to a decline of $11.5 million in gross profit related to changes in product and customer mix, higher legacy warranty costs, and lower utilization in the composite technology segment manufacturing facilities and the related impact on overhead absorption rates. We also reported $3.1 million related to our MEO growth activities during the quarter with $2.7 million included in selling general and administrative costs and $0.4 million in gross margin. While these MEO costs are slightly below our expected spend rate, the lower expense represents deferred spending during the third quarter which will be spent in the fourth quarter of 2024 and the first half of 2025. All MEO projects remain on time and on budget with initial production occurring on the timelines noted by Mike earlier. During the quarter, the company reported $2.8 million lower short-term incentive accruals and $1.4 million lower legal and professional costs when compared to the comparative period of the prior year. These movements were partially offset by $1.8 million in severance costs associated with organizational changes and right-sizing the company's workforce. Turning to segment results, the composite technology segment revenue was $136.4 million, a 2.7% decrease compared to the third quarter of 2023, and adjusted EBITDA was $20.3 million, a 37.5% decrease from the prior year third quarter. This revenue decrease was primarily attributable to decreased international flex pipe sales in the third quarter of 2024 compared to the same period in 2023. The adjusted EBITDA reduction was due primarily to a decrease in gross profit of $10.6 million. This was driven by a reduction in revenue and a 6.9 percentage point decrease in gross margin compared to the third quarter of 2023, attributed to a less favorable mix of product sales and lower overhead absorption within the segment's manufacturing network. Third quarter 2024 adjusted EBITDA also includes $1.5 million in non-capitalizable MEO costs within the segment's reported selling, general, and administrative expenses. Connection Technology segment revenue was $89.9 million, which was 9.9% higher than the third quarter of 2023, and adjusted EBITDA was $12 million, which was $2.6 million lower than the prior year third quarter. The increase in segment revenue was a result of higher demand for stock industrial products from Canadian distributors and increased sales in automotive markets in North America and EMEA reflecting market share gains. This was partially offset by lower sales in US and Canadian infrastructure markets due to specific project timing. The lower adjusted EBITDA was driven by a reduction of 3.9 percentage points in gross margin, primarily due to a less favorable product mix within the Shaw Flex business, together with $1.6 million of MEO costs related to the two new facilities in this segment. Discontinued Operations, which currently consists primarily of the pipe coating operations in Brazil, reported revenue of $23.6 million a decrease of 91.9% compared to the third quarter of 2023, primarily resulting from the absence of revenue from the operations sold to Tenaris in the fourth quarter of 2023, but are included in the results of the comparative period. Adjusted EBITDA was $7.5 million, which compared to the $88.3 million recorded in the prior year third quarter, reflecting the aforementioned lower revenue and the impact of the operations previously sold. As discussed during our August earnings call, the final true-up of the working capital calculation related to the sale to Tenaris was reached during the third quarter of 2024. The final agreed upon cash outflow to settle the working capital adjustment of $10.8 million was dispersed in the third quarter of 2024. Turning to cash flow, Cash provided by operating activities in the third quarter was $4.6 million compared to cash provided by operating activities from continuing operations of $24.3 million in the prior year's third quarter. This result reflects the decline in operational results and a slightly higher investment in working capital during the quarter. Cash used in investing activities in the third quarter was $45.9 million reflecting the aforementioned settlement of working capital related to the PPG sale and a total of $35.3 million of capital spending on property, plant, and equipment, primarily MEO projects. During the third quarter, cash used by financing activities was $24.7 million, primarily driven by $21.9 million in share repurchases under the company's normal course issuer bid and $2.9 million in lease liability payments, excluding the imputed interest on leases. Net cash used in the third quarter of 2024 was $67.6 million. As of September 30th, 2024, we had a cash balance of $186 million, debt of $166.2 million, and $34.8 million of standard letters of credit. As of the end of the quarter, the company's net debt to adjusted EBITDA ratio was 0.59 times. Lease liabilities remained relatively flat during the third quarter at $165.8 million. As a reminder, we will be funding the MR Cable transaction through a mix of balance sheet cash and our existing credit facility, which is expected to temporarily increase our leverage above our normal course target of two times. Pro forma for this transaction and based on the results from this quarter, our trailing 12 month net debt to adjusted EBITDA ratio at September 30th, 2024 would have been approximately 2.9 times or two times if lease liabilities were excluded. As previously discussed, we remain committed to returning to a normal course ratio of two times or below. As noted in the conference call regarding Ammer Cable, we remind investors that since the beginning of 2021 to the middle of 2024, and including the expected capital outflow to acquire Ammer Cable, Matter is deploying nearly $1 billion of capital under our all-of-the-above strategy. while maintaining strict balance sheet discipline. In that period, we have paid down over $260 million on our credit facility, deployed over $200 million into high-return organic growth initiatives, and repurchased over $100 million, or nearly 10% of our shares. Post-transaction, Matter will retain financial flexibility and expect to adjust capital allocation priorities to emphasize debt repayment complete existing growth investments, and continue share repurchases under our NCIP. Capital expenditures in the quarter were $26 million, including outstanding payments to suppliers, which was all 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 and early 2025. All projects remain on time and on budget. I'll now turn it back to Mike for some final comments.

Thank you, Tom. MATA remains focused on a narrow range of high growth critical infrastructure oriented product lines. We continue to balance near-term business performance with execution of value enhancing strategic actions and are confident that the operational transformation commenced in late 2023 will be substantially completed by year end. Over the course of Q3, We completed the establishment of and initial production within two new manufacturing sites in our composite technology segment, significantly upgraded an additional legacy composite technologies production site, remained on schedule to complete both new manufacturing sites within our connection technology segment, announced the pending sale of our last remaining pipe coating business, and subsequent to the quarter, announced the planned acquisition of AmeriCable, and a transaction expected to be immediately and materially accretive all while returning capital to shareholders under our NCID. Normal seasonal and market cycles will continue to drive some variation in near-term activity levels. However, we believe the underlying long-term trends for each of MATA's primary businesses are favorable and expect them 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, along with timely closing of the AmeriCable transaction. We are committed to lowering our post-acquisition net debt and 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 continue lowering interest rates as favorable, likely to further accelerate an increase in broad industrial and infrastructure demand for the company's products, particularly from smaller customers and distributors. We also generally believe the recently confirmed outcome of the U.S. election cycle is likely to have favorable consequences to the majority of our U.S.-focused business activity. We currently anticipate typical seasonal activity slowing across all markets, and near-term unfavorable macro drivers within the North American onshore oil field and global automotive markets are likely to cause Q4 revenue to be the lowest of yielding full-year 2024 revenue which is similar to or modestly below the prior year. Fourth quarter adjusted EBITDA is expected to reflect this lower revenue level and will also be impacted by severance expenses and the ongoing recognition of NEO costs. We continue to observe broadly favorable indicators of demand across the North American industrial and critical infrastructure sectors for 2025 and beyond, and believe we can continue to capture market share across our portfolio, including in those businesses faced by temporary slowing of market activity. While the early portion of 2025 will see massive building from the lower activity base established in Q4, while carrying gradually reducing under absorption tied to our new facilities. we firmly believe the company remains well-positioned to deliver on its longer-term growth, profitability, and cash flow objectives. We expect to update commentary on 2025 when we release full-year results, at which time we would anticipate the AmarCable transaction will have closed, our North American oilfield customers will have confirmed their 2025 capital budgets, and initial policy positions from the incoming U.S. administration will be clearer. 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. At this time, we'll conduct a question and answer session. As a reminder to ask a question, you'll need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.

Our first question comes from the line of David Ocampo.

Of course, Mark, your line is now open.

Thanks. Good morning, everyone. Morning. Good morning. Just on the restructuring that you guys are doing, do you guys expect all the costs to be wrapped up by Q4 and then that $20 million in cost savings to show up in 2025? Is that the right way to think about it? Yes. That's the right way to think about it. Okay. And then just More specific to that, I mean, you guys opened up the new FlexPipe facility, but you're restructuring the onshore market. So is it fair to assume that the staffing reductions that you guys are doing is more on your legacy smaller pipe products?

Yeah, obviously the details are not something I want to get into too much here, but I would say our focus has been largely on ensuring that our fixed cost base is appropriate and that tends to be not the shop floor employees. Although we obviously have had to be thoughtful about how we balance current and go forward production activity between the Calgary site and the new site in Texas. So our addition of incremental staff in Texas on the shop floor will be a little slower than we would have originally imagined. And there will be a little less production coming out of Calgary than we would have originally imagined. So it's more of a balancing act between those two sites. But the majority of our cost reduction here is really about the fixed cost base of the organization.

Okay, that's helpful. Then maybe a last one for me before turning the call over. Maybe Tom can answer it. We've seen a pretty sizable working capital build this year. I'm just curious if that's all related to the four facilities that you're opening or have opened. And do we expect the working capital to continue to be a drain into Q4 and into 2025 as those connections facilities start to ramp up?

Yeah, that's a great question. So I would say the working capital issues in Q3, if we call them issues, were primarily related to one business, our FlexPi business, and they were related to some international receivables, which half of the issue has been resolved. The other half is committed by the customer in terms of AR, so we feel pretty confident that resolves itself. The other piece of the issue is an inventory build that we've seen, which we are working on that to get that inventory down. Your direct question about Q4, I've said it before and I stand by it. Our Q4 tends to be our best working capital quarter of the year, and we are committed to making that happen this year as well. So I would not expect Q4 to continue to see working capital build. I would actually expect it to start to release some working capital and that to be our best working capital quarter of the year. So that's how we're thinking about it.

Okay, that's helpful. I'll hop back in the queue.

Thanks, David.

thank you one moment for our next question our next question comes from line of arthur nagorny of rbc the line is now open hey good morning good morning uh so it sounds like your commentary is indicating that uh you know it's possible that the composite technologies facility ramp ups i guess to run rate revenue could take longer than previously expected i guess just given the operating backdrop.

Is there anything that we should consider here, anything that you would call out?

You may have cut off right at the tail end there, but I think I understood the question, yes. So obviously when the market activity levels surrounding a business change, and they certainly have changed for the onshore North American oilfield market, which impacts our flex pipe business, then you have to be thoughtful about how much production you want to push through a site, whether it's new or old. So we've certainly taken, I think, an appropriate position on the pace of ramping of production in the new FlexPipe facility in Texas. We are ramping production there. It's not quite as fast as we would have expected. But that is a conscious decision just based on the number of active rigs and our outlook for the near-term performance of customers. But we are seeing the benefits of fundamentally more efficient manufacturing on a per-meter basis in that site. We are seeing the benefits of fundamentally less expensive transportation to our West Texas operations from that site. So our general view of the economics of that site has not changed. But I do think we will see less product come out of it in its first 12 months of activity than we would have thought standing here 12 months ago, just purely because of activity levels in the market. In terms of the new site for Xerxes in South Carolina, the market has absolutely not wavered in demand for large diameter fuel and water tanks. So I don't believe that that ramp up will be

any different than we would have been originally anticipated we've always said it would ramp over its first four quarters of activity and that's still our expectations okay um and uh you called out the uh two hurricanes making landfall late in the quarter um how material of an impact is that expected to be uh in q4 and do you expect any of that to spill over into 2025

I think the areas that were most heavily impacted by those weather events are likely to be dealing with those consequences for several quarters. Fortunately, they were not massively dispersed geographically, so I think the impact in Q4 is likely to be nominal, but there's a small impact there. some of the projects that our customers were planning to execute late in q3 that were impacted by this and in certain parts of that environment once you get into q4 it's difficult to execute and they tend to get pushed into the next construction season which means they go out into the second quarter of next year but i wouldn't call it a material impact okay and then uh on xerxes um

One of your major fuel tank customers recently indicated that they might be looking to close quite a number of stores across North America. Do you expect this to have any impact on your business? Or how are you thinking about that so far?

No. So, yeah, I agree with you. I think many of our larger customers in the fuel business are private, so they don't speak openly. But I think you would find that those who have been in the business for an extended period of time are constantly reviewing and closing some sites and then constructing and opening new sites. You should expect, I would expect that that particular customer will continue to follow the pattern that they've described here recently. For us, it's the new construction of sites that really drives our business. When an existing site is shut down for any reason, The tanks that were buried when it was originally constructed tend to get excavated and then disposed off. They don't get reused anywhere. So really the metric that matters for us is the quantity of new stores that are planned to be built and opened, the scale of those stores, and therefore the quantity and size of tanks that they will consume. And I would tell you that almost without exception, our customer base in the fuel business in the US is very strongly signaling their desire to build more stores in 25 than they've built in 24. And the relative ratio of large stores or truck stops continues to move up. So I think that bodes well for demand in the Xerxes fuel business broadly. And really, the defining factor on what 25 looks like for Xerxes in the fuel domain will be our ability to ramp production across our network to meet that customer's needs.

Okay, and then last one for me here. It's just given the outcome of the U.S. election, what kind of an impact would you expect kind of a broad import tax to have on your business? I think you called out in your prepared remarks that you expect a net positive impact overall on the US election outcome. So just wondering if you can walk us through the puts and takes there.

Yes, it has been our opinion that almost regardless of the specific individual in the White House that the US has for several years been leaning consistently more against trade with China. So we have for multiple years had a decoupling exercise in place where internally supplied products from our Chinese footprint into other parts of our heat shrink tubing business have effectively dropped to zero, and we've found ways to make those products within the boundaries of North America. And externally sourced Chinese-made products have been reduced, and we have found North American alternative sources or non-Chinese alternative sources with which we can replace when and if necessary. So I think we are positioned well to navigate whatever may occur in terms of tariffs, particularly on Chinese-made products. Broadly speaking, I don't think anything happens quickly in politics, but we would expect the inbound administration to seek to find ways to to make the permitting process, which impacts everything from oil and gas to new transmission and distribution lines for electrical utilities to power generation sites to LNG export footprints, simpler. It will take some time, but I think if they can be successful with those policies, then we will find higher average levels of infrastructure construction activity, which bodes well for our businesses. I would say while we've heard the mantra drill, baby, drill out of several mouths in the political world, The reality is that oil and gas companies in North America are not government controlled. They will make good, prudent economic decisions. And until they see macro trends that lead them to believe that oil prices and natural gas prices are likely to rise and remain at higher levels, I think you should expect that their activity levels will continue to be muted. That's certainly our own expectation.

Thank you. One moment for our next question. Our next question comes from the line of Tim Monticello of ATB Capital Markets. Your line is now open.

Hey, good morning, everyone.

Good morning.

Mike, I think you provided some of the details in your prepared commentary, but just trying to, I guess, get a little bit better clarity on the Q4 guidance across the The business line. So I'm wondering if you can just talk about your expectations on a business line basis or a segment basis, excluding MEO and severance costs and perhaps a year over year sequential basis.

I'll do my best and then I will pass the microphone to Tom for the hard part. So I think from a revenue perspective, as we said in the prepared remarks, we would expect both segments to move lower, Q3 to Q4, which is a fairly typical pattern. The seasonal effects that are either greater or smaller depending on which business, but generally are there across all businesses. We expect that the seasonal slowing in composites will be more pronounced than normal because we do think that we're likely to see a slowing of North American onshore oil field activity, particularly in the U.S. As we get into the very late stages of November and into the month of December, several of our customers have indicated they're likely to reach the conclusion of their budgeted spend before year end. On the connection technology side, again, seasonal slowing, more pronounced. I think that that degree of incremental change is going to be smaller in that segment than it is in composites, but it's going to be there because we are definitely seeing indications from automotive customers, particularly in Europe, to a lesser degree, but still there in North America. that they may consider longer than normal Christmas shutdowns at their facilities as they try to better balance their costs and their inventories. So we think we'll see the impact of those that slowing effect in the fourth quarter. So as I said, I think revenue will be the lowest of the four quarters of 2024 as a consequence of those behaviors. And excluding the impacts that you listed, we would expect EBITDA to move generally in line with that revenue. But those items are there, so I'll pass to Tom to talk about them.

yeah so just just to round round that out i know you said excluding certain things i'm going to include them for a minute just so that there's clarity for you know how you should expect things to look so the other piece of what mike was referring to is and he talked about it a little bit before is the ramp curve on some of our composite facilities is has been a little less linear than we would have liked it to be if we still expect production to come you know up to speed in in the second half of next year as expected but We do anticipate some incremental underabsorption costs in the fourth quarter, probably on the order of mid-single-digit millions, $3 million to $4 million or so. And then, of course, I would be remiss not to just remind you, NEO costs of $4 million to $5 million in the quarter, primarily sitting in the connection technology segment, and severance costs of $6 million to $8 million in the fourth quarter, evenly split across the two segments. So those are kind of the big moving pieces to get us to a number. And then the last thing I'll just, we haven't talked about it. We said it in the prepared remarks, but reminder that Brazil is now part of discontinued operations. So going forward, you'll see that removed from the continuing operations number. So a lot of moving pieces. I know there's a lot of noise this quarter, but wanted to try to provide that clarity.

Okay, that's helpful. Those under-absorption costs that you're expecting to be elevated in Q4, can you provide, I guess, some visibility on what that would have looked like in Q3 and when you think that those will sort of normalize?

Yeah, so I'd say in Q3, as I said, they were not linear, so they were slightly more than the 3 to 4, but not material. You know, we were kind of $4 to $5 million of underabsorption in those facilities in the third quarter. And I think you can expect that to continue to come down pretty quickly as we get into next year. So first and second quarter, putting aside the revenue comment, because of course we have revenue coming down in some of those periods, but the underabsorption itself will start to correct it as we get into next year. So hopefully I answered your question.

That's great. And apologies if I missed it, but how should we be thinking about CapEx for the full year in 24?

Yeah, so we're still holding to our $90 to $100 million CapEx guidance range. I think we're likely to be probably toward the top end of that this year in terms of spend. There will be some – there's always some timing as you get close to the end of the year. Some might slide into next year. And so we'll see where we end up, but I think we're going to be very close to that range and no reason to change it at this point.

And then on the international flex pipe side, how are you expecting that in 2025? I'm just trying to, I guess, you know, bridge the gap between lower or sort of right-sizing flex pipe business likely kind of muted, but probably largely flat activity in North America in 25 versus 24. And you know, what your expectation is for international on a year-over-year basis.

Yeah, maybe I can just talk more broadly about FlexFight and try to make sure that you have everything you need. Obviously, we will cross from 24 into early 25 operating at a considerably lower level than we were crossing from 23 into 24. North American activity levels, particularly in the U.S., will be considerably lower than they were 12 months ago. As we said on the call, I think average to average that the activity drivers that are really applicable to our business in North America are going to be about 10% lower on average in 25 than they have been in 24. We are still gaining market share, particularly in our larger diameter products in North America. And I think there is a reasonable chance that that market share gain can offset that decline year over year in activity. But obviously, hard to predict with perfection, but in and around a similar number in North America seems reasonable to believe. And I think internationally, we benefited from a particularly large order internationally in the first half of 24. We press released it in December of 23. I don't have in hand right now a PO for something that is a material project internationally. So hence, you haven't seen any additional follow-up press releases. But we have a constant and gradually rising undercurrent of small to mid-sized projects internationally. So, at this point, I think it would be prudent to consider that the revenue in the FlexFight business, all in all, is likely to be very similar in 2025 to 2024. Maybe a little lower, maybe a little higher if we can capture some larger international projects, but I don't have anything in my pocket just yet.

Okay, that's really helpful. I'll turn it back. I appreciate the details.

Thanks, Tim.

Thank you. We'll move on to our next question. Our next question comes from the line of Zachary Evershed of National Bank Financial. The line is now open.

Good morning, everyone. Morning. Morning. So you mentioned the cost savings were more targeted at the fixed cost base. Could you go back into that and give us maybe just a bit more color around that rationalization the split between factory workers versus salespeople? And more specifically, what kind of flexibility or capabilities do you think are being sacrificed to reduce that cost? And can you scale back up quickly if macro improves?

Those are all great questions. I'll be able to answer some of them. Clearly, when you lower production activity, there is an impact on the factory floor. So there's unquestionably a portion of this cost savings that comes at the factory floor. But the majority, and in fairness, when you think about the relative cost of employees in different roles, employees who are not on the factory floor tend to cost more than those who are. We have made some moves to rationalize leadership positions and we have made similar rooms to rationalize kind of middle management positions there have been some certain roles that we've chosen to eliminate in this process but broadly speaking I'd say we have worked very hard to execute our cost savings program here in a manner that preserves our ability to deliver on market share gain and to deliver high quality on time products safely in both of our production sites to ensure that the momentum we have on the development of new technology, particularly the next size ranges up seven inch and eight inch is not impaired at all. So I feel very confident that if we were wrong and the market springs back more aggressively at some point in 2025 than we are currently predicting, we will be in a position to take full advantage of that. And while you can never snap your fingers and replace really talented people, I do think that we will have the ability to recruit individuals into key roles if we need to refill them at some point in 2025.

That's helpful, thanks. And then if we're looking at the renewed demand for stock products, how long do you think that takes to start driving strengthening prices? Or is it just a complete mismatch still between supply and demand?

I think, as I think I said on the last conference call, I don't think we're going to see a substantial movement in pricing for stock products this year, only because there's still... A few more participants in that market than there used to be. There are some organizations who I think would consider their core business to be construction-related, housing wire, things of that nature, who can make some of these stock products. And when the housing market slowed a little, they found their way into this sector. And hopefully soon the housing and other construction activities start to rise. I'm sure we'll see them move back into their core markets, which would bode well. But I think the more important thing about margin profile generally for SureFlex is getting back into a more normal rhythm of infrastructure project execution. As I said on the last earnings call, just the way that the calendar has fallen. The second half of this year, we've had fairly modest nuclear activity, fairly modest communication network activity. And we've had some, just the timing of deliveries into specific utility customers have been a little lower in the second half than in the first half. So I think getting back into a more normal ratio of those infrastructure products to rising industrial stock product demand will help move margins in the right direction in SureFlex as we move into 2025. Thank you very much.

And just one last one. If we don't see CapEx spillover from 2024 into 2025, do you think you're still on track for a $30-ish to $50-ish million spend next year?

Yeah, I'd say we're probably on the upper end of that next year. $50-ish, maybe a little more, because I do anticipate probably a little spillover, but... Short answer is yes. We're probably on the upper end of it and, you know, towards the tail end of our significant organic investments.

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

Thank you. One moment for our next question.

Our next question comes from the line of your link of Kenna Corden. Your line is now open.

Hey, good morning, everyone. Good morning. What, just as we think about 2025, what MEO expenses should we expect next year?

Yeah, I think with Q3 being a little below some of that shifting into Q4, so $4 to $5 million in Q4, we anticipate $8 to $9 next year now. So it kind of shifts a little bit. probably pretty evenly spread across the first two quarters. I'd say that the total total spend, if you add up this year and next year, is still in line with what we had anticipated, but a little bit higher next year, because they'll be a little bit lower this year.

Okay. And what's a good guess for the impact of the inefficient absorption of overhead on the Connection Technologies facilities? that'll be ramping up next year.

I think we're going to be, the impact will be materially less than we are seeing in composites because as a reminder, These are not net new facilities in connections. These are relocations. So instead of ramping under new demand from zero, we will have pre-existing demand that we will transition from the current site to the new site. So I think they'll be modest, but not nowhere close to what we see with composites.

Okay, that's helpful. What does corporate EBITDA look like going forward? Is this quarter a good run rate?

I think this quarter benefited from a couple things we called out in our NDNA. So there were a couple one times. I still believe that the $6 to $7 million a quarter is the right run rate, and that's what you'll likely see going into next year. Okay.

Okay. And then last one, just, you know, the MD&A states, you know, demand across most of your businesses, you expect to outperform the kind of the headwinds on onshore oil field and global automotive headwinds. Can I take that to assume, you know, both segments are kind of flattish in 2025? Or how should I think about that statement?

I think in those specific businesses, so FlexPipe and then the automotive-oriented piece of the DSG business, flat year-over-year I think is about the right way to think about it. Underlying market activity lowering, market share gaining, yielding roughly flat year-over-year in those two pieces.

And the other two have more growth?

Yes, and we'll talk some more about what we think that scale of growth can be, but I think the underlying drivers for the Xerxes business, for the ShoreFlex business, and for the industrial and infrastructure-oriented piece of the DSG business are generally very favorable.

Okay. Okay, that's helpful. All right, I'll turn it over there. Thanks.

Thanks. Thank you. We'll move on to our next question. Our next question comes from the line of Michael Tupone of TD Column. Your line is now open.

Thank you. Good morning.

Morning.

When thinking about the $20 million of annualized cost savings, I'm not sure if you've provided this or not already, but how do we think about that being allocated or spread across the business in terms of composite connection and corporates?

So I would think about it as being order of magnitude, three quarters composite, one quarter connections, relatively small amount in corporate. Perfect. Thank you.

Question regarding the water business. I don't think we've talked about it much on this call, but it does look like it had a strong quarter. It was an area of strength. And I'm wondering if you can comment a little bit further on the performance of that business in the quarter and Maybe talk about some of the drivers. I think you called out strong data center demand. Is that the primary driver to the growth you saw or was that just a contributor and you still saw growth in your more conventional applications?

Yes, so growth across the board in the water business, but certainly the tank piece. So we sell a variety of products in that water business, one of which is the underground storage tanks for various types of water. We have seen particularly strong demand for underground water storage tanks over the course of the 2024 construction season. So that tends to be Q2, Q3 into the early part of Q4. It's a business, obviously it has a seasonal cycle to it, but this quarter, as I said, Q3, was the best quarter we've ever had in that business, and I think it bodes very well for next year. The demand is there. The addition of demand for very large underground water storage tanks in support of data centers is something that really wasn't a huge part of our view of things. This time last year has become a much bigger part this year. And as I've mentioned on previous calls, one of our challenges in servicing that particular subsector is our ability to produce very, very large tanks. We don't have as much capacity in that particular subsector as we would like to have, but as we roll from the end of this year into the first part of next year, we will substantially increase that capacity. So I'm hopeful that as we move through the 2025 construction season for water, that we'll continue to see some new records set.

That's helpful. Thank you. One housekeeping question. In the release, you highlighted just under a million dollars of non-ordinary warranty costs in the composite technology segment. I wonder if you can clarify what that relates to, and is there any risk of ongoing costs of this nature in future quarters?

I'm happy to cover that. There have been at times some issues related to tanks that were built, sold and installed before we owned the Xerxes business. And it happened that in this quarter we addressed some of those lingering items with customers and therefore called it out. I think you can never say never, but I would hope that there is no more need to call that out in future quarters.

Perfect. I'll leave it there. Thank you.

Thank you. We'll move on to our next question. Our next question comes from the line of Ian Gillies of CFO. Your line is now open.

Morning, everyone.

Morning.

As it pertains to FlexPipe, has the range of outcomes for potential margins to come from that business shifted lower just given the change in outlook and given utilization may not be where you would have thought it to be at some point? And I don't necessarily mean in the near term, but like over the medium term, has that shifted lower?

So, no. In the medium to long term, it absolutely has not shifted lower. If anything, we still have the expectation that in an environment where demand is supportive of growth, that we would see margins continue to improve. Large diameter products, particularly those made in our Texas site now, yield substantially higher margins than the equivalent products made in Calgary.

Understood. I'm acknowledging we're getting a bit long here, so I'll turn the call back over. Thank you, sir. Thanks.

Thank you. I'm showing no further questions at this time. I'll now turn back to Mike Reeve for closing remarks.

So we appreciate everybody's interest in the company this quarter. Thank you for the questions. I look forward to speaking again when we report full year results at the middle of March next year. Thank you very much.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.