Shawcor Ltd.

Hello, and thank you for standing by, and welcome to the ShotCore Q4 2021 results conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Megan McCaffrey. Director of External Communications at ESG. Please go ahead.

Good morning. Before we begin this morning's conference call, I'd 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 Shakur's statement on forward-looking information is included in Section 4.0 of the fourth quarter 2021 earnings press release and in the MD&A that is available on CDAR and on the company's website at shockor.com. I'll now turn it over to Shockor's President and CEO, Mike Reeves.

Good morning, and thank you for joining Shockor's fourth quarter conference call. Today, Megan and I are joined by our CFO, Gaston Tano, and our Chief Accounting Officer, Tom Holloway. Before commenting on business performance, I want to recognize the employees of Surecore for their continued dedication to each other and our customers in the face of ongoing pandemic-related restrictions, risks, and impacts. Unfortunately, in recent days, these existing challenges have been compounded by the terrible events in Ukraine, where many of our colleagues have friends and family members enduring horrific circumstances. Our thoughts are with the people of Ukraine as we hope for a rapid end to this conflict. Turning to business, In addition to delivering higher than previously guided adjusted EBITDA, further lowering our cost base, generating substantial operating cash flow, and expanding our backlog, the fourth quarter of 2021 saw Surecore complete several important steps in support of our strategic focus on the provision of differentiated materials-based technologies into industrial and other critical infrastructure end markets. Through the announced exit from several smaller non-core business lines, the pending sale and leaseback of our current Toronto footprint, issuance of our first public notes, and renewal of our revolving credit facility, the company sharpened its operational focus, lowered net debt leverage, and created financial flexibility. These important strategic actions and others that will evolve over the coming 12 to 18 months are intended to enhance over time the company's margin and operating cash flow profile, lower overall volatility, and deliver greater full cycle value to all stakeholders as our market leading technologies enable responsible, sustainable renewal and enhancement of critical infrastructure. Key macro drivers for each of our businesses continue to move favorably. Gradual expansion of global investment in communications, transportation, low emissions energy, and water management infrastructure coupled with further strengthening of commodity price fundamentals, underpin our confidence that a multi-year upcycle in Surecore's primary markets is developing. While the employees of Surecore work hard every day to deliver on our commitments to customers and to execute critical near and longer-term business activities, the challenges of lingering pandemic impacts and the recent geopolitical tensions in Eastern Europe, particularly in the form of supply chain tightness, continue to pose the most meaningful constraint, both for Surecore and our customers. As expected, Q-force or resin availability limit our fuel and water tank manufacturing output, while our automotive customers were forced to idle vehicle production in several locations due to a shortage of microchips. Additionally, as we've entered Q1, some offshore pipeline customers have advised of delays in the arrival of premium steel tubulars, which will further lower Surecore's pipeline coating activity in the first half of this year. When combined with previously communicated project timing and normal seasonal cycles, this ongoing supply chain friction will result in our 2022 business profile being substantially more second-half weighted than originally anticipated. The company's Q1 adjusted EBITDA will be the lowest of the year, approximately half of the level delivered in Q4 2021, with sequential quarterly growth throughout the rest of 2022 as our supply chain strategies take further effect, onshore oilfield activity rises, and incremental offshore pipe coating projects commence. Full year adjusted EBITDA is now anticipated to be similar to 2021. Across the company, we continue to work respectfully with our customers to ensure incremental input costs are fairly reflected in our selling prices. Built on many years of close cooperation with suppliers, the strategic diversity of sources, and the ability to lever our balance sheet for risk lowering forward material purchases, We remain confident that Surecore is well positioned to navigate these continuing global supply challenges, but near-term volatility remains a risk, particularly in light of the recent tragic events in Eastern Europe. Surecore's direct exposure to customers within Ukraine and Russia is limited, with less than $5 million of annual revenue derived from both markets combined. While too early to assess indirect impacts from the conflict, Potential consequences include a further slowing of Eurozone automotive production and elevated global energy input costs. In contrast, elevated oil and gas commodity prices have the potential to spur accelerated North American oilfield activity, which would likely drive incremental demand within Surecore's flex pipe, Western Canadian pipe coating, and oilfield asset management businesses. Turning to segment-specific business activities, Our composite systems segment is primarily influenced by two market forces. The first is demand for premium underground storage tanks within the North American retail fuel and water markets. And the second is demand for reliable, spoolable composite pipe to connect newly completed oil and gas wells into existing processing and storage infrastructure. Fourth quarter composite systems segment revenue was virtually unchanged when compared to the third quarter of 2021, with adjusted EBITDA margins falling slightly, as lower revenue and manufacturing efficiency within our underground fuel storage tank business was almost entirely offset by increasing sales of water management products and spoolable composite pipe. Despite sustained retail fuel station construction and refurbishment activity, Q4 shipments of Surecore's market-leading underground fuel storage tanks were lower than Q3 due to resin supply constraints. Tank-related backlog reached a new record during the quarter, and while resin availability is expected to remain challenged for much of the first half of 2022, strategic actions to secure increased supply commitments from current vendors and to qualify alternative resins from new vendors are anticipated to ease limitations as we enter the second half of 2022. Demand for the company's hydrochain stormwater management systems also remains high, and revenue rose versus the prior quarter as hydro chain's unique value proposition drove incremental market share gains. Demand for composite pipe rose in Q4 versus the prior quarter as commercial acceptance of the company's five-inch flex pipe product grew and improved oil and gas commodity prices drove increased new well construction activity in the U.S. and Canada. While most onshore oil and gas operators remained thoughtful in their capital spending plans, The expectation of elevated commodity prices in the current year and likely beyond is expected to drive further growth in demand for these products as we move through 2022, notwithstanding the usual seasonal impact of Canadian breakup. Surecore supports its composite pipe business from a single production site in Alberta and benefits from improved manufacturing efficiencies and enhanced margins as revenue increases in this business. At this time, our composite pipe business is not significantly impacted by raw material availability issues, although price escalation has continued, which the company has generally been able to pass through to customers with a modest time lag. Looking forward, in addition to demand growth driven by rising North American onshore drilling activity, the company anticipates the introduction of its six-inch spoolable product during 2022. further enhancing our portfolio and positioning Surecore to better serve our customers in the year to come. This six-inch spoolable product effectively replaces a previous generation of non-spoolable product marketed under the FlexFlow brand. Consequently, our Q4 results reflect appropriate impairment charges tied to the permanent retirement of the FlexFlow product line, among other things. In summary, while some near-term raw material availability impacts will be observed in the underground fuel tank business, We anticipate robust demand across the composite system segment throughout 2022 and likely beyond, and are well positioned to capture incremental margins as revenue rises. Moving to Surecore's automotive and industrial segment, during the fourth quarter, this segment saw revenue decline by $9.7 million, or 14% compared to the third quarter, with an associated reduction in adjusted EBITDA, as continued strength in demand for heat shrink tubing and premium wiring cable products from industrial end markets was insufficient to offset temporary reductions in automotive market demand. These fourth quarter reductions are typical as our customers lower year-end inventories. However, acute shortages in microchip supply caused several customers, particularly in the European region, to idle factories and further exacerbate the normal quarterly impact. While still constrained, entering 2022, microchip availability has begun to improve, which, when combined with normal seasonal restocking of inventory, is expected to drive a rebound in automotive-related revenue in Q1. Automotive supply chain impacts beyond Q1 remain difficult to predict. While the worst of recent microchip shortages are likely behind the industry, several European auto manufacturers have component supply chains that extend into Ukraine and the current conflict could result in temporary shortages as geographic rebalancing of supply takes place. Our SureFlex wire and cable business benefited from continued deliveries of premium products into 5G communication build-out and nuclear refurbishment projects during Q4, although previously communicated project timing caused these deliveries to be lower than the prior quarter. It should be noted that 5G communications build-out activities are project-based, having variability quarter-to-quarter, and early 2022 deliveries into these applications are likely to be similar to those seen in Q4. During Q4, our automotive and industrial business reached a new record backlog, driven by a broad array of critical infrastructure renewal and expansion projects. We have a constructive view of the mid- and long-term market trends which impact this business and continue to invest growth capital to expand and enhance our manufacturing capabilities, including the recently announced intent to relocate our Toronto production site into a larger, modern, more efficient facility, enabling profitable growth for the next decade. We expect the sale leaseback of our current site to close during the second quarter of 2022. Lastly, our pipeline and pipe services segment revenue during Q4 fell by $15.1 million, or 13%, compared to the third quarter. with adjusted EBITDA falling modestly below neutral on lower pipe coating and pipeline inspection project activity. As we discussed during our Q3 earnings call, the COVID and commodity price-driven lack of new offshore pipeline project sanctioning during 2020 and 2021 caused our pipeline and pipe services segment to face a low level of activity in Q4, with those levels falling further still in the first half of 2022. The anticipation of this multi-quarter lull has been the primary driver for very substantial cost and fixed footprint optimization over the last two years, which, when combined with highly efficient execution of remaining work, has enabled the segment to deliver positive adjusted EBITDA contribution in 2021. I noted earlier that compounding the pipe coating project schedule, several customers have recently communicated delivery delays for premium steel tubulars. This will cause a number of projects originally scheduled for startup during the first half of 2022 to be delayed into the second half of the year, driving a substantially higher second half loading of pipeline and pipe services segment business than originally anticipated. Despite continued cost control, this is expected to cause the segment to return negative adjusted EBITDA during Q1. While challenged in the near term, backlog for the pipeline and pipe services segment rose again in Q4, As several new projects were awarded, then Surecore's contract to execute coating of the Scarborough gas pipeline in Australia was activated following final investment decision approval. Partly driven by this project, we anticipate this segment's 12-month backlog will rise more substantially over the first half of 2022. As discussed on numerous occasions, Surecore's pipe coating business is tied primarily to the timing of offshore pipeline project sanctioning, which inherently leads to volatility from quarter to quarter. However, continued favorability in oil and gas commodity prices, coupled with elevating global demand for natural gas, has driven an increase in pipeline investment planning and sanctioning activity, which is expected to continue throughout 2022 and forms the basis for what the company expects to be a multi-year offshore pipeline capital spend cycle. From a low point in Q1, pipeline coating activity is expected to rise each quarter of 2022. During Q4, the company announced the divestiture of its Surecore inspection services business, which had historically formed part of the pipeline and pipe services segment, and in 2021 had contributed $37.5 million of revenue with negative adjusted EBITDA of $2.5 million. This transaction for a sale price of $11.2 million enables greater focus on Surecore's remaining business lines while improving overall margins and lowering organizational complexities. Turning to backlog, at the end of Q4, the company's committed backlog of work to be completed within the next 12 months stood at $589 million, an increase of $82 million when compared to the prior quarter. This improvement was the result of new order capture exceeding backlog burn in all three reporting segments, with backlogs in our composite systems and automotive and industrial segments reaching new record levels. Backlog beyond 12 months also rose in Q4, reaching $155 million versus the prior quarter level of $27 million, primarily driven by the recent Scarborough Award. SureCause bid number reflects the value of work where the company has issued a firm price with proposed contract terms against an explicit scope of work with a defined timeline for execution. At the end of Q4, the bid balance was $843 million, a decline of $68 million when compared to the prior quarter, reflecting the transition of several bids into backlog. Included in the bid number are now $57 million of conditional awards pending the client's final investment decision, down from $237 million in the prior quarter as multiple coating projects crossed the FID milestone. Surecore's budgetary number, reflecting the value of indicative pricing submitted to allow customers to build a project budget ahead of formal procurement activities, remains unchanged versus the prior quarter, at $1.5 billion. This supports our expectations that pipe coating activity will rebound during the latter part of 2022 and into 2023. In parallel with Surecore's focus on business execution, we continue to also evaluate our social and governance performance and seek opportunities to lower our environmental impact, both through the products and services that we provide our customers and our own environmental footprint. During Q4, we released our annual ESG report, which included ambitions to reduce our scope one and two greenhouse gas or GHG emissions by 50% and elevate diversity within our senior leadership team by 20% versus our 2019 baseline by the end of the decade. We have a carefully identified action plan to drive achievement of these specific ambitions and will continue to demonstrate broad ESG progression for the benefit of all stakeholders in the years to come. We also continue to innovate solutions that allow for improved health and wellbeing within our workforce. As an example, we recently redesigned our offshore automated ultrasonic testing system to reduce the weight from 75 pounds to 46 pounds. For a technician on a typical offshore shift, this reduces the total amount lifted by about 7,000 pounds, reducing back and repetitive motion injuries. Finally, Late last year, we announced Gaston's decision to step down from the company at the end of May 2022 after transitioning his CFO responsibilities to Tom. This extended, thoughtful executive succession plan is progressing as expected and is consistent with Surecore's long-held practices, ensuring minimal disruption to the organization's tactical and strategic initiatives. Gaston and Tom will now walk through Surecore's fourth quarter and full year 2021 financial numbers.