Mattr Corp. (MATR) Earnings Call Transcript & Summary

Hello, and thank you for standing by. Welcome to Mattr's Special Update Conference Call. [Operator Instructions] I would now like to turn the conference over to Meghan MacEachern. You may begin.

Good afternoon. Before we begin today's conference call, I would like to take a moment to remind all listeners that this call will include forward-looking statements that involve estimates, judgments, risks and uncertainties that may cause actual results to differ materially from those projected. In addition, this call and the visual presentation for today's call include non-GAAP measures that do not have standardized meanings under IFRS. Likewise, the complete text of Mattr's statement on forward-looking information and statement on non-GAAP measures, including the reconciliation of such measures, is included in Section 4.0 of the second quarter 2023 earnings press release and in the MD&A. For those joining via webcast, you may follow the visual presentation that accompanies this call. I'll now turn it over to Mattr's President and CEO, Mike Reeves.

Good afternoon, and thank you for attending today's call, during which myself, Meghan, and our CFO, Tom Holloway, will provide additional details of the company's Pipeline Performance Group, or PPG, sale transaction, which was announced last night. In mid-2021, Mattr committed itself to a fundamental transformation designed to elevate margins, lower volatility and focus our resources on high-growth, high-value businesses which enabled the expansion and renewal of critical infrastructure. We have moved with pace to meet these commitments, completing the divestiture of multiple non-core business lines and excess assets, utilizing the proceeds to strengthen our balance sheet and to invest in high-return organic growth of our Composite and Connection Technologies segments. We've accelerated this growth through selective acquisitions while also buying back approximately $22 million of our stock under the normal course issuer bid. In September of 2022, we announced the initiation of a strategic review process for the remaining components of our Pipeline and Pipe Services reporting segment and the Oilfield Asset Management business. In the fourth quarter of 2022, we completed the divestiture of the Oilfield Asset Management and Argentine pipe coating businesses. In the second quarter of 2023, we completed the divestiture of Shaw Pipeline Services and our U.K. specialty coating businesses and also signed an agreement to sell our Pozzallo, Italy real estate. Last night, we announced that Mattr has entered into a definitive agreement to sell most of our remaining pipe coating business to Tenaris. This transaction is valued at USD 166 million, or approximately CAD 220 million at today's exchange rate, and includes the entire PPG business, including the Shawcor brand name, with the exception of our legal entities in the U.K., Italy, Malaysia and Brazil. We'll talk more about these exclusions later. Tenaris is a highly respected leader in the global onshore and offshore energy sector. And we believe their scale, customer relationships and technology focus will bring added value to the PPG business, both for employees and customers. The transaction is subject to regulatory approval in several jurisdictions, including Norway and Mexico. While we cannot provide absolute certainty of timing, we anticipate receiving all required approvals within a 6-month period, enabling transaction closing in that time frame. The purchase price is subject to customary working capital adjustments, which will occur approximately 90 days post closing. During the period between transaction signing and closing, Mattr will retain all earnings associated with the PPG business, including from the Southeast Gateway Pipeline, or SGP project. The net impact of these two elements is currently expected to be modestly favorable. The company expects to move through a separate sale process for its operations in Serra, Brazil, yielding additional proceeds, although no specific timeline has yet been established by the company for this process. As of Q2, the Brazilian business represented less than 10% of trailing 12-month PPG revenue. The company considers a future Brazilian business sale to be immaterial to its overall financial results and therefore will not be providing additional updates until a transaction ultimately closes. Mattr's commitment to the safety of its PPG employees at all sites and the delivery of superior-quality products and services to customers around the globe shall remain unchanged during the interim program -- period. The world-class leadership, technical staff and operational experts within PPG remain intensely focused on safely executing their day-to-day responsibilities. And Mattr will continue to prioritize all necessary support to these teams during this interim period. Tom will now walk through the financial and accounting impacts of the transaction.

Thanks, Mike. As mentioned, proceeds for the transaction will be approximately CAD 220 million with closing currently expected to occur within 6 months. The assets now under contract will be accounted for as held for sale. And since they represent the expected disposition of a major business line, the Pipeline and Pipe Services segment will now be reported as discontinued operations beginning in the third quarter of 2023. This change in accounting to discontinued operations implies that the historical and future results of the Pipeline and Pipe Services segment, including PPG results, will be reported through a separate line on the income statement from those of the continuing operations of Mattr. Given the relatively small size of the PPG components excluded from this transaction compared to the overall remaining business, these remaining components, including Brazilian pipe coating operations, will now be reported through the Financial, Corporate and Other segment. Additionally, and as previously highlighted, the approximately $8 million of cost historically allocated to the PPS segment will be reported as selling, general and administrative costs in the Financial, Corporate and Other segment under the continuing operations of Mattr. For a period of time after closing of the PPG transaction, there will likely be a transition services agreement in place which will serve to offset a portion of these costs. Due to the nature of the remaining businesses, Mattr will continue to report only the total backlog for the entire company. This will not be provided by segment nor will it be provided broken down between continued and discontinued operations. The company will no longer disclose bid or budgetary balances, the maturity of the total backlog for the remaining businesses for delivery in the coming 12-month period. The forward outlook previously provided on the remaining business remains unchanged despite the structural changes outlined in this discussion. As Mike mentioned earlier, in addition to the transaction announced yesterday, we have successfully completed several smaller transactions of peripheral businesses over the past several years. In consolidation and excluding any assumed proceeds from the eventual sale of our Brazilian pipe coating business, upon closing of the transaction with Tenaris, Mattr will have secured gross proceeds of approximately $142 million from the exit of its PPS segment, various excess real estate assets and several other businesses, including Oilfield Asset Management and Global Poly, including approximately $235 million from the exit of its pipeline coating business. Our liquidity position has benefited from these initiatives with repayment of $202.5 million of outstanding net long-term debt since the start of 2021. As of the end of the second quarter, the company's net debt to adjusted EBITDA ratio was 0.54x, significantly below our ceiling of 1.5x. Additionally, our 2023 [ capital investment ] guidance of [ $160 million to $180 million ] includes significant growth capital for the businesses remaining within Mattr. We have also made two small acquisitions and continue to be active in searching for additional strategically aligned inorganic opportunities to further enhance our businesses. We continue to purchase shares under our normal course issuer bid, and through August 11, have repurchased over 1.7 million common shares, deploying approximately $22 million. With the recent removal of the dollar limitation and extension of the buyback program, we are positioned to deploy additional capital in [indiscernible] as market conditions allow. Proceeds generated by the transaction being discussed, which are expected to be received in around 6 months, will be utilized to strengthen the company's balance sheet, organically and inorganically accelerate the profitable expansion of our higher-margin, less volatile Composite and Connection Technologies segments and continue to return capital to shareholders as conditions permit. I'll now turn it over to Mike for some final remarks.

Thank you, Tom. The PPG pipe coating business has been central to the Shawcor and now Mattr organization for decades. Its global success has been built on a foundation of highly differentiated coating solutions, extraordinary project management and high-quality execution in some of the most difficult environments around the globe. The employees that PPG have, in some cases, given their entire professional careers to support their customers in the pursuit of delivering reliable, affordable energy, powering global development and improving the lives of countless families around the world. We could not be prouder of what our PPG team have accomplished. And I'd like to take this opportunity to thank every member of the PPG organization, past and present, for their many contributions to this business, particularly Kevin Reizer, whose leadership before and during this period of strategic review has been inspirational. As I noted earlier, closing of this transaction will effectively conclude the company's strategic review process. Our remaining Composite and Connection Technologies reporting segments will propel Mattr forward, continuing to drive profitable growth as they deliver market-leading technologies to enable responsible, sustainable renewal and enhancement of critical infrastructure. Our corporation has elevated its margin and operating cash flow profile, has lowered its overall volatility and is delivering greater full cycle value to all stakeholders. Upon receipt of the proceeds from this transaction and working within our currently established net debt to adjusted EBITDA ratio ceiling of 1.5x, we expect to have access to very significant dry powder, which we will deploy opportunistically, aligned with our all-of-the-above capital allocation strategy to create the highest possible value for all stakeholders. Normal seasonal cycles will continue to drive some movement quarter-to-quarter. However, the underlying trends for each of Mattr's remaining businesses are favorable and expected to remain so for several years. The forward outlook for our remaining business segments shared during our recent second quarter earnings call remains unchanged. I'll now turn the call over to the operator and open it up for any questions you may have for myself, Tom or Meghan.

[Operator Instructions] Our first question comes from the line of Aaron MacNeil with TD Cowen.

As we think about potential proceeds on the remaining facilities, am I right to think about Brazil as sort of an ongoing business and the other three is more of an asset sale commensurate with the transactions we've seen recently?

Yes, I think you're thinking about it the right way, yes.

Okay, perfect. And then as it relates to the contract liability and asset balances, I assume that when you -- I think in your prepared remarks, you said something that the contributions for the business would be modestly positive. Is that a function of those balances sort of declining over the, I guess, the next 6 months?

Yes. So maybe I'll offer some higher-level thoughts on this one and then I'll pass it to Tom for more precise accounting discussion. So the way I would encourage everybody to think about this is that we have a an undefined period between signing and closing. As we said, we do not expect it to be longer than 6 months, but it could be less than that. And as with all aspects of our business, we work with a midpoint of our range of outcomes. So when we think about the approximate closing duration and the midpoint of our expected outcomes, that's what leads to the comment that I shared earlier that the combination of cash generated between signing and closing plus any effects of an ultimate net working capital true-up would, in combination, yield a modestly favorable outcome. Obviously, execution matters deeply in this period between signing and closing. There is a range of operational outcomes, whether it's within the SGP project or in any other aspect of the PPG business. If we perform above the midpoint, then you would expect the favorable economic results for Mattr to move upwards and likewise, vice versa. So a great deal of focus on operational execution as we sit here today. Tom, could you comment on the accounting side of things for me?

Yes, of course. So Aaron, as you think about the deferred liabilities, I think what you said is correct. Those deferred liabilities will work their way down over the course of the next couple of quarters. And of course, timing matters here, where we are in the project execution at the time of close will be a factor. And that's why, as Mike said, there's a lot of factors in the commentary we've provided. But in general, that's how we expect this to work. And we do expect to generate positive cash flow over the course of the period between signing and closing.

Makes sense. I had one additional point of clarification before I turn it over. Just because adjusted EBITDA is a non-GAAP measure, will your next couple of quarters include contributions from the segment in the adjusted EBITDA figure? Or will it be excluded?

Yes, we'll end up having the adjusted EBITDA numbers for the PPS segment shown at the discontinued operations. So they will be excluded from the normal continuing ops number, so you'll be able to see kind of the pro forma business and the discontinued ops separately.

Our next question comes from the line of David Ocampo with Cormark.

Tom, I just wanted to focus in on the accounting part of it, just so I understand this correctly. If the sale gets delayed and it closes beyond the 6 months, there is a pricing adjustment down on the $220 million, but you're picking up more incremental cash flows. Is that the right way to think about it and net-net, it should be a wash?

So the only pricing adjustment to speak of -- so the $220 million wouldn't be adjusted. The only pricing adjustment would be a working capital true-up. So working capital would be the factor to consider there. And I would say if it extends, let's say, beyond the entirety of the SGP project, virtually all of that cash will have made its way in the door and the execution will have been completed. And that may end up being [indiscernible] from a working capital perspective. Because the deferred liabilities will have also worked their way off the balance sheet. So a lot of factors there. But does that help, David?

Yes, that helps. And then maybe how should I think about it? If you guys win any large contracts, anything that's in the pipeline, is there an adjustment on the $220 million on that? Or does that all flow through to Tenaris?

I'll answer that one. The way to think about this is, as you know, the offshore pipe coating arena is one where things tend not to appear unexpectedly. So as you can imagine, over the course of the diligence period that's lasted multiple months, Tenaris has, I think, a very fulsome view of our -- obviously, our backlog but also our bid and our budgetary numbers. It would be enormously surprising if something materialized in the time between signing and closing that was not already in our bid or budgetary numbers. And those numbers have been incorporated in the ultimate negotiation of the purchase price. So I think the short answer to your question is you should not expect to see any movement in the purchase price.

David, let me -- sorry, David, if I can just add one quick thing on that. So if we were to get a new project and get a prepayment, obviously that would be for future execution. So that would go into the working capital true-up conversation, right? As we get in the door, that cash is redesignated through the working capital to the buyer. So that's the only idiosyncrasy there.

Got it. That makes sense. And then lastly, is there a tax impact on the $220 million? I know book value is hovering closer to $180 million. But that was for, I think, the entire PPS group.

Yes, there is a modest tax impact, which we're in the process of doing the allocation across the jurisdictions, nothing significant or super material kind of being worked through. So there will be a slight tax impact though.

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

Can you guys say what the EBITDA generating run rate is of the Brazilian business currently?

I'm afraid that's not something we feel comfortable sharing. Obviously, we have a competitive position there in Brazil. And one of the reasons we've never broken out by specific plant our financial performance in the PPG business is because we'd rather not share that with our competitors. All I can say is to reinforce what I said earlier, which is the trailing 12 months, Brazil has reflected less than 10% of the revenue of the PPG business.

Okay. It's a relatively large range. So that will be accounted for in the corporate segment going forward?

That's correct.

Did I hear that correctly? Okay. And maybe just to simplify things a little bit, can you guys give a range, like based on your scenario analysis in terms of when this deal closes, on what you think your leverage or net cash position will look like after the -- once you had closed?

Tom, would you like to comment there?

Yes, I can comment there. We wouldn't want to give a complete range. But I think if you follow our commentary that we've said we expect it going to be towards 0 towards the back half of this year, excluding proceeds. And then you add the proceeds to it, I think you could expect us to have a cash on balance sheet net debt position close to the proceeds' number as we near close. That's how I would think about it, Tim.

Okay. And then potentially, you might have a positive impact relative to that if you execute well. Is that the right way to think about it?

That is correct. If execution goes well, there could be a positive impact to that number.

Our next question comes from the line of Keith MacKey with RBC Capital Markets.

First, just wanted to start off on CapEx. Can you just discuss a little bit more about how much run rate CapEx, or I'm assuming it's mostly maintenance CapEx, will come out of the Mattr business in total?

I can take that if you want. Yes, we expect the Mattr pro forma business, the ongoing business, to have about, call it, $10 million to $15 million run rate annually. So that's where I would guide you, Keith.

Perfect. And just secondly, so Mike, you touched on it a little bit. You're going to have potentially net cash position coming out of the sales process. And then you, Mike, touched on a little bit about the high-level priorities for that. Can you just maybe run us through a little bit of a -- I know it's early, but a little bit of a preview, say, on what you expect to discuss high level on your -- at your Investor Day in December related to capital availability and then ultimately potential uses for the capital as you continue the journey on building out the high-margin critical infrastructure business?

Yes, I'll certainly offer what I can, Keith. I mean, for those who perhaps are newer to the Mattr name, or formerly Shawcor name, in December, we'll be hosting an investor event in downtown Toronto. And it will be the first time in 4 years that we've had an in-person Investor Day. So a lot has happened in that time frame. The company has fundamentally transformed. So our intent for that day is to try to make it as helpful as we possibly can for those who attend. There will be obviously a fair amount of direct interaction with the management team, members of the Board, et cetera, et cetera. And our goal is to provide people with at least some reasonable visibility of how we see the coming 3 to 5 years unfolding for the business now that we have effectively completed our strategic review process. And obviously, we will talk about where we see opportunities for capital deployment. And I don't think that it will deviate from the messages that we've shared fairly consistently over the last several quarters, which is, a, that we will continue to pursue an all-of-the-above capital allocation strategy. We believe having that flexibility to be opportunistic and take advantage of the highest return deployment opportunities is the right thing for the company. We will continue to be a consistent returner of capital to shareholders. Obviously, with a net cash position, the focus will skew away from debt reduction, and we'll largely focus on taking advantage of a fairly lengthy list of high-return organic growth opportunities. But obviously, with additional firepower, you start to lean just a little bit more into M&A opportunities. But you should expect that for the foreseeable future, they will continue to be bolt-on in nature and very, very tightly strategically aligned with the businesses that we have within our portfolio. We have not moved through this transformation to a fundamentally simpler business only to turn around and acquire our way into a complicated portfolio again. So I realize that the details will follow. And we look forward to hosting everybody that can attend in December. But hopefully, that was helpful, Keith.

Yes. And just finally, on the $8 million of cost that will go into the corporate segment, is it fair to assume that a portion of that will be offset by the Brazil facility? Is there anything else to be thinking about there in there as well?

So I think a portion of it will be offset by a transition service agreement [indiscernible]. And then what we've been saying and are committed to is bringing that number down over time. But I don't think there's any other major offsets I can think of.

Perhaps to add there, Keith, the Brazilian business has historically been a profitable business and is certainly in a position in the market cycle where they will be busy. And we would expect that profitability to continue. So that certainly will have a favorable impact on that portion of our P&L.

[Operator Instructions] Our next question comes from the line of Zachary Evershed with National Bank Financial.

So just to get a sense of the magnitudes that we're talking about, would you also describe the proceeds from the Pozzallo and Ellon sales as immaterial?

Yes, we would. I mean, I think we just -- we disclosed the Pozzallo one in our press release, but we would call it immaterial.

Understood. And would you be able to give us a better idea of what working capital intensity will look like with the bulk of PPS gone?

Yes. Mike, do you want me to take that one?

Yes, please.

So that [indiscernible] if you exclude the prepayment nature of some of the projects, PPS is our most capital-intensive business. So capital intensity will generally come down. The businesses are going through some growth phases, of course, as you've seen in our results over the last several quarters. So there isn't a [indiscernible] going on. But I think we're looking at going into a much more efficient working capital cycle as this business gets [indiscernible]. I'd point you to -- we'll give numbers over the course of the next few quarters as we get more clarity. But a lower working capital efficient or a lower -- a more efficient, lower working capital percentage of revenue is what I'm trying to point to.

Got you. And then you did mention that prepayment on -- at PPS. So we saw revenue and EBITDA ramp up in a big way on SGP before the sale closes. Can you remind us if free cash flow is going to follow up in lockstep? Or did those prepayments we saw that spiked cash flow a couple of quarters back mean a lot of that has been collected already?

So for the SGP project specifically, which is really the big mover there, there was a lot of cash collected end of '22. And recall, we laid out the cycle of how that cash would be spent. So it came in at the end of '22 and we were working it down to virtually 0 by the midpoint of this year. And I'd say we've generally gotten to that point. So now that we're pipe coating, we would expect that cash flow to turn positive again. And that's kind of where we are in the cycle. I think, Zach, what I would say is the cash flow nature of that project in the business is in a positive cycle over the next several quarters.

So fair to say that as revenue and EBITDA ramp up, free cash flow will follow pretty closely?

Free cash flow will follow, although some of the EBITDA will be recognized as part of the deferred revenue that's going to be amortized. So it won't be a 1:1 if that makes sense.

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

With respect to the balance sheet, I just wanted to clarify a comment that was made earlier. So do you believe you're going to be in a slightly net cash position by year-end, and then once the asset sale occurs, you think you put an incremental $220 million on the balance sheet? Or is the working -- there'll be some working capital release between now and then and could be an incremental number put on top of that?

I think there will be an incremental working capital release over the course of the balance of the year. But I don't think we quite get all the way to 0 from a net debt perspective by the year without the proceeds. So we're approaching 0, I think what I see. And then when the proceeds come in, you assume those will remain clear of debt, if that's helpful.

No, that's helpful and it helps clarify it. Switching gears a little bit, as I think about your senior unsecured notes and what's -- and some of the limitations around the NCIB, I know you've dealt with that to some extent already. As these proceeds come in the door, do you believe you can get that covenant completely removed from the notes to kind of give you free rein to allocate capital there as you see fit?

So what I would say on that is I don't believe we'll have the need to do that because the way the high-yield note works is there's a builder's basket that it builds from a point in time to current earnings. And we're able to deploy a percentage of the earnings towards capital -- shareholder returns. That basket has grown substantially over the course of the last several quarters and continues to grow. So I believe there's honestly no need to remove that limitation at this point. If we were to look to do a refinancing of that note, we might ask to do that. But I don't think there's any need to do that currently.

Okay. That's helpful. And then the last one, I think this follows on a previous question. If we're trying to bridge EBITDA from that PPS segment to some sort of discontinuing ops number on the income statement, is it effectively EBITDA minus the depreciation of that business? Or would we view depreciation of that business to be part of taxes? Or is there a piece I'm missing along there?

Sorry, can you maybe rephrase that question? I'm not sure I quite got there.

Yes, so I'm just thinking about transferring the EBITDA of the PPS segment to some sort of discontinued ops figure. And is that bridge for the EBITDA from the PPS, is it really just deducting depreciation and that should get you close to the correct number for what should be discontinued ops?

Yes. Because you stop depreciating assets once they go into discontinued ops. So I think generally, that is a fair statement. If you took the EBITDA and added back depreciation, that's likely what you'll see in that discontinued ops.

We have a follow-up from the line of Tim Monachello with ATB Capital Markets.

Just a quick follow-up. Can you guys talk a little bit about the reason that some of these facilities in the Brazilian business, especially the Brazilian business wasn't included in the sale? And is there a potential outcome where you have to walk away from some of these facilities for no cash or perhaps there's a liability involved with closing them?

So thanks for the follow-up, Tim. Happy to take that one. I think the first thing to point out is that the only one of the four legal entities that I listed earlier that has an operating facility is Brazil. So you should think of the other three generally as nonoperating entities, so relatively immaterial process that will be followed there. Brazil, I don't think it would be appropriate for me to comment on specifics of exactly why Brazil is not incorporated here. I think all I'd say is that we remain entirely committed to transitioning Brazil into the hands of an appropriate owner at the right moment, obviously looking for the best structure of deal for our business. And as soon as we've got something that we can share, we'll certainly do so. And as I've also mentioned, we consider Brazil in the big scheme of things to be effectively an immaterial part of the remaining corporation. So it's just not something that I'm expecting to focus a great deal of time and attention on in our go-forward earnings calls. So we'll certainly provide updates when there's something to share.

Okay. And then the other operating entities, are there any liabilities associated with that? Or do you think you'll actually -- I guess, will you -- do you think that the most likely outcome is the sale of those or just stepping away from them like an exit?

Again, exactly how we navigate through the final steps with those entities, we'll share that when we can. But I think the way to think about it is that however we ultimately divest of those entities, you should not expect it will have a measurable effect on the balance sheet or on the income statement.

Okay. And then just one more for Tom. Can you talk a little bit about the longer-term strategy around the note and if you'll look to refinance that over the next 12 to 18 months? I don't know when it's callable, but maybe you can talk about that.

Sure. So that note is callable. This is a 5-year note with a 2-year non-call period. The first call period is December of this year. Given market conditions currently, I wouldn't anticipate really doing much with it. I think we're happy with the note, where it sits today in the grand scheme of market rates. 9% at the time, it felt a little high, currently doesn't feel too bad. But we will take a look, once we get through the transaction, we're going to be very measured and thoughtful about this. But we will take a look at in the market and see where it sit and whether it makes sense to refinance that in the coming, say, a couple of quarters. I don't think we pay that note off. Because I do think it makes sense to have some level of that in our capital structure, a more permanent type of note. But we'll evaluate that. So market conditions will dictate that a little bit. But like I said, taking the proceeds of this and just paying down that note, I think we have enough uses of capital to generate high returns that we can do that effectively.

I'm showing no further questions in the queue. I would now like to turn the call back to Mike for closing remarks.

Thank you so much, and thank you, everybody, for joining us at short notice this morning. And thank you for your interest in the company. We're looking forward to talking with everybody again when we report our third quarter results. But until then, we wish everybody a very good day. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.