Mattr Corp. (MATR) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Shawcor First Quarter 2020 Results Webcast and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to Paul Pierroz, Senior Vice President for Corporate Investor Relations. Thank you. Please go ahead, sir.

Thank you, and good morning. Before we begin this morning's conference call, I'd like to take a moment to remind all listeners that today's conference 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 Shawcor's statement on forward-looking information is included in Section 5 of the first quarter 2020 earnings press release that is available on SEDAR and on the company's website at shawcor.com. I'll now turn the call to Shawcor's CEO, Steve Orr.

Well, thank you, Paul. Good morning, and thank you for joining us on this morning's conference call. Yesterday, we discussed and released our Q1 2020 results. Like many companies in our industry, the first quarter was challenging for Shawcor as the dynamics that drove activity changed quickly to the negative as the dual impact of the COVID-19 pandemic and the oversupply of oil and gas was felt. These unparalleled events have translated into a very difficult environment in a period where our social and economic outlook is extremely uncertain as we adapt and work through the new and complex challenges in front of us. I'm very proud of the commitment of our teams across Shawcor and their ability to quickly adjust to this new environment. I wish for all of them and their families to stay healthy. As the quarter progressed, it was clear that we were heading into a storm, and it was imperative that we narrow our focus and take clear priorities. They are: number one, protecting the health of our employees; number two, safely delivering products and services needed by our customers; and number three, taking the actions to strengthen the balance sheet. Driven to limit propagation and insurer containment if one of our sites was exposed to the virus, we have had great success in keeping our employees safe and healthy. This is due, in a large part, to the actions our teams took to move early and develop, communicate and implement new health monitoring and operational protocols. Our approach is centrally managed and locally implemented. Coupled with our strong safety culture and execution ability, aided greatly in mitigating the risk, supporting our employees and servicing our customers. With much lower immediate market demand for the company's products and services and a wide band of uncertainty for the near-term outlook, we moved to address the balance sheet concern. And our March 16 and later in our April 21 press release, we highlighted actions we have taken and will take to remove cost and conserve cash. Now turning to Q1 2020. Adjusted EBITDA was $6 million versus $30 million in the fourth quarter of 2019. Revenue for the quarter was $319 million, a 5% decrease over the previous quarter. These quarterly results were not as expected. The impact of exploration and production operators reducing capital budgets in North America was seen in composite pipe, small diameter pipe coating and girth weld inspection. Further negativing the impact of the quarter was the disruption that COVID-19 had on our operations, supply chain and customer demand levels across energy, transportation and infrastructure markets. Despite these challenges, our teams were successful in winning new business, and order intake continued an upward trend, which resulted in the backlog exceeding $575 million at the end of the quarter. Looking into Q2, we fully expect that the negative headwind will intensify, and it will be not until Q3 that we expect we'll see any real stabilization. Although the future is extremely difficult to forecast, we do expect that work in our backlog will be executed. That there will be a gradual return for demand in our book and term businesses. And when combined with actions we are taking to reduce costs, strengthening will be visible in the second half of the year. Beyond 2020, the outlook becomes more unclear and difficult to estimate. However, we do expect that our diversified portfolio, which has both early and late-cycle oil and gas exposure and a growing non-oil and gas component, has positioned the company to weather the storm and emerge a stronger, more profitable organization when spending recovers in energy, transportation and infrastructure market. I'll provide more detailed comments in a moment, but I'm going to turn the call now over to Gaston Tano, the Shawcor CFO, to discuss the numbers.

Thanks, Steve. As Steve mentioned earlier, the first quarter results were challenging due to the negative impact caused by the COVID-19 pandemic and the rapid decline in oil prices, resulting in lower demand for our products and services. Consolidated revenue in the first quarter was $319 million, 9% lower than the first quarter of 2019. The Pipeline and Pipe Services segment revenues decreased by 17% compared to the prior year, primarily due to lower demand for pipe coating and girth weld inspection services as a direct result of the significant capital spending cuts by North American E&P operators and delays in land commission projects. As expected, the current quarter's revenues were also negatively impacted by the execution of work to resolve the fourth quarter 2019 service quality event in our Channelview, Texas facility. The Composite Systems segment revenues increased by 16% compared to the first quarter of 2019, reflecting the benefit from ZCL acquisition, which was completed in April 2019. This was partially offset by lower demand for composite pipe products due to the rapid decline in North American drilling and completion activity across the segment's customer base as operators reduce their capital spend. In automotive and industrial segment, revenues were lower by 9% primarily due to lower demand for our automotive heat shrink products, resulting from the impact of production shutdowns and government lockdown restrictions from the COVID-19 on the majority of automotive OEM assembly plants in North America and EMAR regions. Consolidated results for the first quarter were negatively impacted by nonrecurring items outside of the company's normal course of business. The current quarter includes $203 million of impairment charges, reflecting a $144 million and $46 million on goodwill and intangible assets for Pipeline Performance Group and Shawcor Inspection Services, respectively; and $13 million on assets at 2 U.S. land pipe coating facilities and certain assets related to large diameter products in the Composite Systems business. The current quarter also included a loss of $500,000 related to hyperinflation accounting for Argentina and $200,000 of restructuring charges. Adjusted EBITDA for the quarter was $6 million, significantly lower than the $28 million reported in the first quarter of 2019. This decrease is primarily due to the revenue declines in all 3 segments, if you exclude the positive impact from the acquisition of ZCL in April 2019 and higher SG&A expenses, reflecting the addition of ZCL business and higher costs in insurance, professional fees and other equipment costs, partially offset by lower incentive compensation expense. Adjusted EBITDA margin for the first quarter was 2% compared to 8% for the prior year first quarter due to the reasons mentioned earlier. The Pipeline and Pipe Services segment margins decreased to negative 4% compared to a positive 1% in the prior year. The comps and systems segment also experienced a decline to 12% margin in the current quarter compared to 28% in the first quarter 2019. The Automotive and Industrial segment margin declined slightly to 18% compared to 19% a year ago. Now let's discuss cash flows for the quarter. Cash flow provided from operating activities for the first quarter of 2020 was $100,000, lower compared to the $18 million in the first quarter of 2019. This decrease reflects lower net income and higher changes in noncash items in the current quarter. The change in noncash working capital in the first quarter was a net cash inflow of $9 million compared with an outflow of $700,000 in the prior year period. The cash inflow from working capital in the current quarter is primarily due to higher accounts payable and lower taxes receivable and foreign exchange gains, partially offset by higher accounts receivable and inventories. Cash used in investment activities in the first quarter was $300,000, reflecting $10 million of purchases of property plant equipment, almost entirely offset by $9 million of additional proceeds received during the quarter from the redemption of a minority investment. During the first quarter, cash used in financing activities was $17 million, reflecting the payment of our quarterly dividend and lease obligations. This is significantly lower than the $118 million of cash used in financial activities in the prior year quarter, which reflected a net impact of the repayment of the senior notes, long-term debt and the payment of lease obligations and quarterly dividend. Net cash flow for the first quarter in 2020 was negative $12 million compared to negative $119 million in the first quarter of 2019. With respect to cash and debt, the company has cash and short-term investments of $86 million, long-term debt of $435 million and $37 million of standard letters of credit at March 31, 2020. In addition, the company has full compliance with its debt covenants as of March 31, 2020. However, due to the current adverse conditions caused by the global COVID-19 pandemic and the volatility in the oil and gas industry, there is uncertainty that our financial results -- there's uncertainty in our financial results and our ability to remain in compliance with certain covenants for the remainder of 2020. In response to this uncertainty, as mentioned earlier, the company has completed several restructuring initiatives, including the suspension of its dividend to deliver significant cost savings and cash conservation. The company also is currently in discussions with its lenders to seek revenue relief from certain of its covenants and expects that these discussions will be successful and that suitable terms for the relief will be obtained. Based on our actions completed and planned, our diversified business and our current backlog, the company expects to generate sufficient cash flows to fund its operations, working capital requirements and capital investments. I'll now turn it back to Steve for some additional commentary on the company's performance and outlook.

Thank you, Gaston. I'll first start with providing some additional color on Q1 by segment. The Pipeline and Pipe Services segment experienced a significant step down in demand for the company's product and services that are related to North American upstream, particularly in small diameter pipe coating and girth weld inspection that are important to our book and term volumes. With activity in Canada already being very depressed, the step down was a direct result of reduced capital programs of exploration and development operators in the U.S. shale plate, now trending at a greater than 40% reduction year-on-year. The expected execution of pipe-coating projects, both North America land transmission lines and offshore and international projects was also negatively impacted by project delays and supply chain disruptions from COVID-19. A positive spot was a seasonally high demand for engineering and integrity services from Lake Superior Consulting, as our customers contracted our technical resources to address increasing workloads and virus-related restrictions. Pipe coating for offshore projects, as expected, did see increased activity, as we move to execute work in our backlog in Norway, Indonesia, UAE and Scotland. Additionally, backlog increased to $575 million from projects that have been sanctioning and have approval and are continuing with momentum. These projects include Sangomar and Baltic pipe. During the quarter, our teams worked closely with operators and EPCs to ensure project continuity and to support them as they review projects and capital programs, taking into consideration recent reductions in forecasted commodity prices that most likely will result in project delays. In the Composite Systems segment, our pipe business was also impacted by the reduced capital expenditures in U.S. land shales as operators completed fewer wells, and therefore, required less gathering line meterage or could manage with existing inventory. Although we had orders for newly introduced large-diameter composite pipe and in international markets, it only partially made up for the reduction experienced in North America. Our composite tank business continues to perform nicely, and incoming orders remain above the levels realized over 1 year ago and has resulted in strong backlog bookings. We continue to see strength in the retail fuel, water and wastewater markets and continue to deliver tanks for oil and gas midstream applications. Although Q1 tank volume output and customer tank installs were negatively impacted by COVID-19 as we implemented new protocols, which resulted in factory for inefficiencies and our customers experienced on-site construction delays. In the automotive industrial segment, the impact of COVID-19 expanded in the quarter from a primary China operational and demand issues, one that was a material headwind across the whole segment. Operating at reduced capacity due to production shutdowns and shelter in place orders, demand declines and inefficiencies were seen throughout the heat shrink business, especially late in the quarter when the OEM assembly lines were completely halted. Our specialty wire and cable business saw stable demand and did experience higher-than-usual incoming orders from electrical utilities and communication applications late in the quarter. But it, too, experienced supply-chain challenges related to COVID-19. As I turn to Q2 and the balance of 2020, I believe everyone joining us today on the call would acknowledge, we are without question in a period of extreme uncertainty. Forecasting how the upcoming quarters will evolve is very challenging and difficult task. However, based on what we know today, we expect the second quarter is likely to be the most disruptive quarter the company has ever experienced as the full impact of COVID-19 and the capital-spending cuts in oil and gas are felt. With limited opportunity to quickly offset the impact, we now expect the financial results for the quarter to be lower than what we just delivered this quarter. As we move to the second half of the year, we are very cautious but are expecting a gradual return of demand and lifting of restrictions that will see improved performance in our book and turn businesses across the company from the Q2 low point. Should this be the case and the work we have booked and captured in our backlog, specifically offshore pipe coating continues to remain firm, the second half of the year will be a significant improvement over what we delivered this quarter. It should be noted that we are not counting on a swift return of the activity and are planning for an extended downturn by putting our energy into what we can control. Simply stated, we are focused on executing work under order, reducing costs and preserving cash. In terms of project activity, the company has been successful in securing work related to multiple offshore projects, and this is captured in our backlog of $575 million at the end of the quarter. Based on discussions with our customers and the reality that many projects are in advanced stages, with substantial investments already made, including pipe being ordered, we continue to expect that we will execute work secured. However, we do not hold the same confidence for projects that we are still pursuing, and we do expect that operators will pause to recalibrate their capital programs and that some projects will be delayed or even halted. An example of this is Woodside's recent decision to suspend Browse, a major offshore Australia LNG project, a very large opportunity for Shawcor that last quarter was captured in our budgetary number. However, projects that are tied to sourcing gas, such as those in the Middle East and Asia are maintaining access, such as those in Latin America will likely move forward. Captured in our bid and budgetary numbers is over $2 billion in potential pipe-coating opportunities that will gain support as commodity prices return and the economics improve. I should add, at the end of Q1, the company continued to have a $190 million of work secured conditionally, pending FID, which is not in our backlog and should be considered at lower risk. On the cost side, we are moving ahead aggressively to cut and generate additional cash with a goal of a minimum of $60 million of cost out and $40 million of cash generated, the tax include a reduction of our fixed pipe-coating fitment with 4 plants targeted for closure this year and the exiting of lower-margin markets where the outlook does not justify remaining. Before we open up to questions, I'd like to make the following points. Shawcor's diversified portfolio of late and early cycle oil and gas and non-oil and gas businesses provides a hedge that will be a benefit in these very uncertain times. Shawcor has a sustainable book of work, and it is substantial for execution over the upcoming 12 months, and the work is holding firm. Shawcor is taking the necessary and difficult actions to reduce costs and preserve cash, which is needed in these very uncertain times. And finally, Shawcor's future success continues to be underpinned by support of long-term fundamentals that will drive investments in energy, transportation and infrastructure. I'll now turn the call over to the operator, Bridget, to open it up for questions that you may have for Gaston and I.

[Operator Instructions] Our first question comes from the line of Greg Colman with National Bank Financial.

I wanted to -- I'm sorry, I'm having some phone problems. I just want to confirm. Can you hear me?

Yes, we can hear you fine, yes.

Wonderful. I wanted to start by talking about the backlog, the $575 million. Can you talk to us a little bit about the expected margin profile of the order backlog? I know that in the past it's very greatly and can kind of bounce all over the place. In more recent commentary, in a general term, you've talked about how the style of project awarding has changed and how you're involved in earlier stage with your customers. So I was wondering if you could talk to me a little bit about the expected margin profile of that backlog and how it would compare to, I mean, say, the trailing 12 months of margin performance?

Yes. So Greg, I guess, the color on the margins. So as expected, the work that we're going to execute, and the first work that we'll execute in the second half of the year is representative of orders that we booked as the cycle turned, and so we were filling capacity. So I would look at the margins in the mid-30s to high-30s in what we're going to do in the near 6 months. There is work that is in there as we get closer to the end, has higher margins, but of course, it's a mix because some of the work that we wanted at the very beginning was just to fill capacity. And it will progressively get better. But I think mid-30s, high-30s is a good number to take.

Got it. And just for clarity, Steve, we are talking about operating margins there, obviously.

Gross margin.

Gross margin.

Gross margins, correct. Great. Got it. On the Pipe and Pipe Services segment, if we just focus on that for Q1, you generated negative $8 million-ish in EBITDA. Can you give us a little bit of color on the regional profitability? Were all the regions you operated in on about the same at that negative 4% or were some materially lower, some materially higher, in fact, contributing positive? Just looking to get a little bit of granularity there.

Yes, you go ahead.

So Greg, I think it's important that there is a mix. I think there was better profitability in EMAR and Asia Pacific as we executed some work there. And there was a bigger decline, specifically in North America as it relates to both demand for small diameters being in our U.S. land business and in Western Canada. And then of course, the more importantly is as we execute the work in our Channelview facility, there wasn't revenue being generated there. So there was a lot of lack of profitability in that facility because absorption of overheads wasn't with -- we didn't have revenue to absorb their overheads.

Maybe, Greg, if you allow me, an extension to your question, and I think it's an important point to make is the pipe-coating business can kind of be divided into 2 distinct buckets. One bucket is, call it, anticorrosion or a lower barrier to entry service. We do deliver anticorrosion related to the second bucket, which is primarily offshore concrete or inflated coating. When primarily in the U.S. land or Canadian market, where it is primarily anticorrosion, the margins are attractive if you have a high-volume going to the plant. So -- and it's not the absolute margins, but you can get volume uplift when you use up the capacity or the absorption rate in the facility. When the demand for -- or the capital spend in North America fell, in the first quarter, very quickly, the volumes drop and the margins that you make because they're not attractive per meter that you apply in the pipe drops. So certainly, there is a difference between margins made in an offshore project that is underway in Asia versus a facility in North America that no longer can pay for the absorption rate. That's very visible in Q1.

Okay. Got it. I think I got enough color on that one to be dangerous. I appreciate the added clarity. Just 2 more quick ones from me. First of all, on the bid book. The firm bids fell by over $200 million, so just under $800 million as projects were pushed out. Can you help us understand the risk associated with the remaining bid book? Is it one where based on your discussions with these counterparties, we could expect that just under $800 million to continue to wane, I mean, it's rapidly evolving environment, but just wondering how your confidence is on that $800 million?

Okay. So first, let's take everything in context: the backlog, the bid and the budgetary. So in the prepared remarks, we were very clear that a very substantial project has been removed from the budgetary. And so the budgetary was influenced by the removal of this large project because now it's out of what we refer to as a planned period. We don't have any visibility on a schedule. So we pulled it out altogether, and we don't refer to any more as an indicative offer, similar to what we did with a project called [ ECAP ], if you recall. So the influence on the budgetary was we have in discussions with customers, relooked at the timing and the proposal. So any projects that kind of have a gray area on execution, we've now pushed into budgetary. And that's why you see some sustainability in the budgetary numbers because as we pull those out, we saw projects move from bid to budgetary. And these are the uncertainty component. Then the other thing, of course, is within the bid, if you look at it, it was over a $1 billion in Q4. And of that, $240 million was this section that we call pending FID. So -- and you can assume that Sangamoro was in that. So the impact on the bid number was we saw movement into the backlog, but we also saw a movement into the budgetary that went the other way. So as it sits right now, the, say, $800 million that are in the bid at the end of the quarter, we still had a view of production schedules that would happen. So I do expect that you are going to see of that $800 million with the exception of a few projects that we have confidence that will go, that you'll see a stalling of decisions of about -- and we use this number historically that it was about 18 months by the time we saw a project, and it moved into revenue generation. I think you're going to have to add 12 months at a minimum to what we thought at the beginning of March versus what we see now on the project execution. So in reality, what we thought was going to be a very, very strong 2021, and we were quite excited about it at the beginning of the March on the back of a buildup on 2020, we're going to see a buildup in 2020. It's going to extend, we expect, as we burn through the backlog into 2021. But there may be right now unless several key projects that we're seeing that our material move ahead, you may see a stalling, and it won't be until the second half of 2021, that $800 million starts to populate the backlog again. But to answer your question, the $800 million that we have in our bid, are projects we have pricing, terms and conditions and a schedule, if not, we've moved them to budgetary.

Got it. I appreciate that. And then just lastly for me. On your commentary regarding -- you talked about Q2 weakening from Q1 and then a strengthening in the second half from the first half, so sort of a trough in Q2 and some sort of letter-shaped recovery, whether it's a U, a V or a Nike swoosh? I'm curious, is your confidence in that strengthening second half driven more so by your micro knowledge, meaning your confidence in the work in the backlog being executed coming through your facilities, driving up utilization and flowing through the income statement? Or is it driven more by your opinions on a changing macro environment, meaning a restart in end-use markets like automotive and the book insured activity in the land-based market? And where my question is predicated on is, if we see a changing macro, is that very, very likely to materially change your view, if that's where the majority of your confidence is? Or is it the micro that drives it and it's an execution of the backlog that drives it mainly?

All right. Good. So we -- and again, I think there's all kinds of uncertainty right now is, we're very comfortable with the backlog project by project. And the backlog execution and I like your term, micro, gives us confidence that the second half of the year will be a significant improvement from what we just did this quarter. So a significant -- so a material impact improvement. And then if I go kind of the next step is, depending on the recovery mode, things like automotive, how does that influence the magnitude of recovery off of Q2? Because we are expecting to see the full impact of 0 demand in automotive from the OEM shutdown. So that's why we keep saying that Q2 could be the very difficult quarter for the company because there is businesses that have had 0 activity, and we're in that workflow. So it's going to get us. So it is the backlog that's secured in pipe-coating, and we need to make sure everybody understands that today, the backlog also captures backlog from our tank business, which is trending and just look at the historical numbers, is trending better than it has been historically. So we have confidence in pipe-coating and we have confidence in the ZCL profile will happen like it does every year, where the second half is substantially better than the first half. There is an element of certainty in the cost that we're seeing over the company. So by the time we get to Q3, Q4, we're going to get the benefits of what we are doing in Q2. And then the macro that you mentioned is just -- what is the magnitude and the profile of the -- okay, what is the letter and the alphabet to use your term that it looks like on the other side, in a lot of the businesses that are related to automotive, to infrastructure. We have exposure, for example, in global poly and -- that if infrastructure in municipalities turns back very quickly in the second half, the magnitude of it changes substantially, but we do have confidence in the backlog, both through pipe-coating and ZCL, and we do have confidence in the cost that we're going to take out.

Our next question comes from the line of Aaron MacNeil with TD Securities.

Can you hear me all right? Perfect. On the Composite Systems segment EBITDA margins. Aside from the seasonal slow period for ZCL, was there anything onetime in the quarter? And if so, what would be normalized EBITDA margins have been for that segment?

Aaron, the margins for the Composite business are impacted by the seasonality of the ZCL business. A little lower seasonality impact in comparison to what you see in the back half and in Q2. But I think the other part of it is the factor of a lower demand for a higher-margin composite pipe business. So if you look at it from a perspective of margins perspective -- look at it compared to a year ago, the lower demand for our composite pipe did have a negative impact in overall because of how high the margins are on our composite pipe. So there is seasonality with ZCL, and then there's also an impact just because of higher demand. And there are no onetime items in the thing right now. It's all just business related.

Okay, perfect. And you mentioned in the prepared remarks or in the press release that you'll adjust the cost structure quarterly. And understanding that there's a bit of uncertainty even in the current quarter, how should we think about margins going forward, either next quarter or beyond that? Whenever you can get those cost structure changes pushed through -- can you get back to maybe those historical margin levels, lower activity outlook in the back half of the year?

Yes. So I think -- listen, I think what's going to -- in the back half of the year, we will get back to close to the margin levels on the composite side of the business by the end of the half based on all the cost structures that we have. And then, of course, the growth that we continue to see in the composite tank business. But a big part of it, I think, is all related to the amount of cost that we're going to take out of the business. As we talked about here, our targeted is to take out $60 million of SG&A cost across the group and come to a run rate by the end of the year, annualized at $70 million. So it is a function of -- really in respect to the cost that we have and some level of phase business for composite tanks and some growth on the -- sorry, some base business on the composite pipe and then some strengthening in composite tanks.

Got it. And you guys touched on it a bit, as part of Greg's question, but can you maybe give us a sense of the impact on the Automotive and Industrial segment outlook for Q2 based on the headwinds you kind of discussed qualitatively?

I can give you a range.

Yes, sure.

It could be 0. It is very, very difficult to say right now. If I was to estimate, based just on what happened to China, and -- because China, if you recall, COVID-19 impacted China, and they've shut down all the production in China for automotive. And we went through 0 revenue in China very quickly. And it took us the better part of 2.5 months and we're now at kind of 70% of what we were pre-COVID-19. So I think it is very reasonable to expect that we could have a month where the revenue could be very, very low. And I'm saying that because if OEMs do not start-up, then there's no demand. They preloaded demand as normal at the end of Q4. And then you estimate that, okay, they had a higher inventory at the end of Q4 as they normally do and then they burn through that in Q1, they shut down in Q1. So it could be substantial.

Understood. And then final question from me, just on the potential impact of severances in the quarter. Do you have any kind of ranges that you'd be willing to provide us? Or is that something that's still ongoing?

Well, I think, if you look at our press release that we had in April 21, we did give an estimate in there. And I'm just -- with an estimated severance cost of $6 million. And so the other on top of that, of other things that we do, on especially closure of facility, that will be making a greater number, but it's probably another $4 million to $5 million maybe, but it's still [ great ].

And our next question comes from the line of Keith MacKey with RBC.

Hope everybody is doing well. Steve, you just sort of touched on one of my questions in the automotive section. I was actually wondering in the composite segment, whether you're seeing or have seen any preloading of inventory from customers heading into the downturn in the composite side, particularly in the North American upstream? Just trying to gauge, should we expect that segment of the business to be down commensurate with the rig count or potentially more, given if customers have preloaded any inventory they needed or expected to need?

So we actually have a very good visibility. So we -- the realty in which our pipe is stored on that the customers hold are our realty. And so we track how many kilometers are sold, how many in the kilometers the customer sits on and what is their completion. One of the issues that we had in 2019 is the high-volume of inventory on the customers. And as things got a little bit questionable in the fourth quarter and the budgets were used up, they started burning inventory. So today, it's almost real time. There is no inventory buffer with our large customers. Orders are now on a weekly basis. We don't get much visibility on what they want for the year, which is expected right now in uncertain times. And so I expect should activity come back and the kind of -- the expectation the activity will start first with those wells that are shut in, the services that are required to turn them back on again. Then the normal process is, they'll do the drill but not complete it, and then we'll start to see an uptick. And then, of course, the rigs will come back kind of as the process. I think if everybody looks at the shale place today, there's no question that unlike any other downturn that I've experienced that the cut in the OFS sector has been extreme. So I think it's -- there's been a substantial capacity outtake that has happened. And so you have to think that on top of underinvestment overall in the energy sector and now a cut in oilfield services sector that is substantial, when things turn, services companies are not going to go back to work unless they have confidence or higher margins. And I think that's the case for the composite pipe as well. When things turn, we're not going to get much noticed. And it will be pretty much immediate, and they don't have any buffer of inventory.

Got it. Next question is just on working capital. Do you still expect to see a release in the second quarter? And if so, can you maybe just give us a little bit more on what magnitude you might expect?

Well, it's difficult for us to really determine what the actual amount is. There will be some in the second quarter, but it's going to be a little more in the back half. That is part of the $40 million target that we have on cash conservation if you think beyond the $9 million that we've received in our minority investment. But right now, Keith, it's difficult to estimate, but we do expect to release as we expect our book and term business like composite pipe to be impacted, there will be a release of working capital.

Got it. And finally, just on the bank line and the covenant relief, I appreciate things are still ongoing. Maybe if you could just talk a little bit more about some of the inputs into that decision? Is it more just a matter of waiting to see how things look to know how much relief you should be asking for? Or just -- is there something else that you're working through as part of the process?

No. I think it's important to know that, as I mentioned in my comments, that we are seeking relief on covenants. We currently believe that the company will generate sufficient cash flows to support the working capital, the capital spend and fund our obligations. It is really just relief in our covenant. It is really directly related to our outlook. But this is a long-term view that we're trying to get here in respect to the uncertainty that we have in our results. And we are fortunate that we have a very cooperative syndicated banks that we're working with. And we're working through how long relief we require and sufficient room for us to stay on site, take care of some of the uncertainty that exist in our outlook.

Our next question comes from Tim Monachello with AltaCorp Capital.

Most of my questions here have been asked. But I suppose I'd like to understand a little bit better. If you had any price discovery on the book and term businesses through this downturn? And what you expect to see on the pricing level, if you see a rebound in demand for those product lines?

No change in pricing. It doesn't make -- it doesn't matter. If you reduce pricing the demand for the products in Q1, and I expect in Q2, it doesn't matter. It's -- we're not -- of course, like everybody in the industry, we're being asked by customers on price decreasing and payment terms delays, and we're doing the same to our suppliers. But there's no concessions on pricing because there's no commitment on work volumes right now. So I don't see any deterioration in pricing, but I also don't see until the demand increases that there's an opportunity to move pricing either. I didn't make a comment on pricing on work that we have secured, and it's a variable. I think the pricing on work that we have secured is the poorest, the earliest that we secure to work and it gets better as we get to the end of it. So that's how we got the average of that, mid-30 on gross margin.

Okay. Got you. And then a question on the impairment. I was a little bit surprised to see you mention that the large diameter composite pipe of the Alberta facility. I was wondering if you could sort of put that in context of some of the other commentary around your view that you expect increasing demand and increased products cues in that large-diameter segment?

All right. So I think we need to separate the large diameter into 2 different platforms. So we have a large diameter that we introduced into the market, that's a spoolable product late last year. So -- and I mentioned that yesterday on the AGMS, a 5-inch and above, and I mentioned on this call, that is gaining success. And then we have a large diameter product that is a stick product, and it today has a commercialized 6 inch. And we're preparing to formally push into the market 8 inch and larger diameters. In light of the demand and the way it works, as you have indications of impairment and uncertainly, that's what we have today with the decrease in the commodity prices, our decision to retract resources that are put into the 8 inch and focus them on the larger diameter spoolable results in a change in revenue and margin profile going forward, and that's why you take the hit. It does not, by any means, deter the strategic direction to continue to push for a stick large-diameter platform because it's spoolable. You're limited on how much bigger we can go. It just doesn't become economical to move the reels around, and internationally, it doesn't work. So we need, as a long term, as a company, to be successful in a stick large-diameter platform. But at this time, if we don't make it a priority to invest in and the market itself, it results in an impairment.

Okay. Understood. And then just maybe a little bit of clarity on the second half guidance being stronger than the first half based on some of the stuff that you've already mentioned. Does that guidance include the onetime fees for severance and restructuring? Or do you expect it to be worse flat, if you did include those fees? How should I think about that?

No. The guidance excludes those fees, Tim. It's a -- what we believe is really talking about the run rate that we expect to have in the second half, if you exclude the onetime items.

Our next question comes from the line of Matthew Weekes with Industrial Alliance.

My first question is just a bit of a clarification question, and I'm sorry if it's already kind of been answered. But on the cost reduction side, that kind of $60 million in targeted cost reductions, is that -- was that mostly on the G&A side? Or will a lot of that be reflected in the cost of sales as well?

Yes, the majority of it is in the SG&A side. There is a smaller amount in the cost of goods. But the majority of the $60 million will be seen through SG&A.

Okay. And looking at the automotive section again, and I know this was kind of talked about earlier, but I kind of just want to get sort of an idea of where that's going to go. Basically, is the idea that looking at China, kind of as the leading indicator and seeing what happened there, we can expect in sort of Europe and North America, essentially 1 month, let's say, April of 0 to kind of no sales due to total shutdown. And then looking at China, again, kind of can we expect that as economic activity restarts a little bit that it's kind of going to be the quickest segment to come back, albeit to lower-than-historical levels? Is that kind of the same trend we can expect in EMAR and North American regions?

Again, it's really hard to use the word expect. I think a point of reference certainly is the profile in China, as you have outlined. I think the challenge that we're already faced with is our automotive business in China is primarily a domestic supply into the Chinese market and a back office to our European and North America production. However, our Toronto and Germany facilities supply their international, call it, western world automotive. And so there's multiple variables in terms of countries of how they open up. So how does Germany open up, how does Mexico open up in terms of the production. But more importantly, how does the retail space open up for the demand for automotive? So it's really hard to predict right now. But I think what is certain is, for the first part of Q2, as the workflow happens, we are going to see the impact of 0 production on OEMs on the automotive. So does it strengthen as we go through Q2? As I said, we expect that the demand will start to grow beyond Q2 over Q3 into Q4. And based on China, that it won't be as high as it was before, but I think 70% is a safe number based on that profile. So we really -- we kind of wait to see how the economies open up. But it ultimately is driven by how many cars are purchased by the retailers in the market. There is other companies that have released their results, and they have made a run at what does the automobile production look like going into the year, and it's a huge band of uncertainty. So I'm not really certain on what's going to happen, but based on China, you've outlined it very nicely.

Okay. Appreciate the color there. And last question for me is looking at -- you talked about in terms of restructuring exiting certain low profitability markets. I was wondering if you'd just be able to provide a little more color on kind of which markets specifically you'd be looking at kind of product-wise and geographically?

So I'll give some direction. As I mentioned yesterday on the AGM, it's very, very difficult to identify a particular facility or a product line because as you go ahead on these action items, you have to manage your employee base, you have to manage your customers, you have to manage the competitive landscape. And pipe coating, in particular, shutting down a facility that's used as an alternative in a pursuit and you give notice may be a competitive disadvantage or relieve or leverage. However, there is businesses, and I've already alluded to it, which is the -- such as the anticorrosion line, primarily in North America, that if you don't have confidence in volumes and has historically not recovered since 2016, you have to question why you're going to stay in it if you have no ability or expectation that you're going to get a volume of work through these facilities. So one market that we certainly are looking at is, how to become much, much more paid for the value that we deliver, and it's not in the anticorrosion in North America necessarily. But it doesn't mean that we're going to pull out of all the anticorrosion facilities or markets in North America, but it certainly is a product line, for example, that just doesn't make any sense to stay.

Our next question comes from Greg Colman with National Bank Financial.

Just a quick follow-up, and apologies if you touched on this, but I don't believe you did. On the Channelview facility rework, you identified about $7.3 million of costs in Q4 and then mentioned that it had an impact in Q1. Did you quantify the Q1 impact? And also, do you expect that impact to persist into Q2 and beyond?

So the $7 million impact or accrual that was booked in Q4 related to the expenses that were incurred -- that were basically incurred in Q1. So the impact that we had in Q1 was directly related to the lack of being able to execute other work to generate revenue in that facility. So there was an under-absorption perspective. And no, we have not disclosed that, Greg.

Okay. Got it. So it was a lower revenue number because you were working on the rework.

Correct.

And is the rework wrapped up, do you still -- do you have that capacity back now? Or is it going to persist into Q2 and beyond?

The majority of it has been completed. There is some remaining work that will happen in Q3, Q4 time frame. The majority of it is done.

I'm not showing any further questions. I'll now turn the call back to Steve Orr for closing remarks.

Well, again, I thank you all for attending the quarter close conference call. And I look forward to speaking to all of you again as we close Q2. So thank you very much.

Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone, have a great day.