Shawcor Ltd. (OTCPK:SAWLF) Q4 2021 Earnings Conference Call March 10, 2022 9:00 AM ET
Company Participants
Mike Reeves – Chief Executive Officer
Gaston Tano – Senior Vice President, Finance and Chief Financial Officer
Meghan MacEachern – Director, External Communications & ESG
Tom Holloway – Chief Accounting Officer
Conference Call Participants
Michael Robertson – National Bank Financial
David Ocampo – Cormark Securities
Keith MacKey – RBC Capital Markets
Matthew Weekes – iA CapitalAndrew
Aaron MacNeil – TD Securities
Tim Monachello – ATB Capital Markets
Operator
Hello, and thank you for standing by and welcome to the Shawcor Q4, 2021 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, [Operator Instructions]. Please be advised that today's conference maybe recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today. Meghan MacEachern, Director of External Communications & ESG. Please go ahead.
Meghan Maceachern
Good morning. Before we begin this morning's conference call, I would like to take a moment to remind all listeners that today's call includes forward-looking statements that involve estimates, judgments, risks, and uncertainties that may cause actual results to differ materially from those projected. The complete text of Shawcor 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 SEDAR and on the company's website at shawcor.com. I will now turn it over to Shawcor's President and CEO, Mike Reeves.
Mike Reeves
Good morning. And thank you for joining Shawcor's fourth quarter conference call. Today, Meghan 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 Shawcor 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 Shawcor 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 sharpen this operational focus, lower net debt leverage, and create 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 enabled 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 for the multi-year upcycle in Shawcor's primary markets is developing. While the employees of Shawcor 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 Shawcor and our customers, as expected Q4 for resin availability limit off 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 the delays in the arrival of premium steel tubulars, which will further lower Shawcor'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, an 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 Shawcor 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. Shawcor'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 in direct impacts from the conflict. Potential consequences include a further slowing of Eurozone automotive production and elevated global energy input cost. 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 Shawcor's flex pipe, Western Canadian pipe coating, and oilfield asset management businesses.
Turning to segment specific business activity. 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 than 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 Walter management products and spoolable composite pipe.
Despite sustained retail fuel station construction and refurbishment activity, Q4 shipments of Shawcor's market leading underground fuel storage tanks were lower than Q3, Q2 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 hydro chain storm water management systems also remains high and revenue rose versus the prior quarter as hydro chains 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 products group 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 remain forceful 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 breakout. Shawcor supports its composite pipe business from a single production sign 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 Shawcor to better serve our customers in the year to come. This six-inch spoolable product effectively replaces a previous generation of non - scoolable product marketed under the Flex [Indiscernible] brand. Consequently, our Q4 results reflect appropriate impairment charges tied to the permanent retirement of the Flex flow product lines, 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 confidence system segment throughout 2022 and likely beyond, and are well-positioned to capture incremental margins as revenue rises.
Moving to Shawcor'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 wire and 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 microchips supply close 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 ShawFlex Wire and Cable business benefited from continued to 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 continued 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 slant to close during the second quarter of 2022. Mostly, our pipeline and pipe services segment revenue during Q4 fell by $15.1 million or 13% compared to the third quarter, with adjusted EBITDA of 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 close 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 low 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 start-up 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, and Shawcor'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, Shawcor'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 Shawcor inspection services business, which had historically form parts 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 great to focus on Shawcor's remaining business lines while improving overall margins and lowering organizational complexity. 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. Shawcor's 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.
Shawcor'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 Shawcor'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 1 and 2 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 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 well-being 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. To our technician on a typical offshore shift, this reduces the total amount lifted by about 7,000 pounds, reducing back-end repetitive motion injuries. Finally, late last year, we announced Gaston's position 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 Shawcor's long held practices. Ensuring minimal disruption to the organization's tactical and strategic initiatives. Gaston and Tom will now walk through Shawcor's fourth quarter and full-year 2021 financial numbers.
Gaston Tano
Thanks, Mike. As Mike mentioned, operational results were stronger than originally projected with the fourth quarter's adjusted EBITDA at $20.1 million on revenue of $266 million. This higher result reflects higher demand for composite pipe in North America and improved margin mix from shipments of 5G communication cable products and lower incentive-based compensation related to share price decline in the period. Consolidated revenue in the fourth quarter was $266 million, 18% lower than the fourth quarter of 2020. This reflects a decrease in the pipe and pipe services segment, partially offset by increases in the composite systems and automotive industrial segments when compared to the fourth quarter of 2020. The pipeline and pipe services segment revenue decreased by 46% primarily due to lower pipe coating activity in EMAR Asia Pacific, and Latin America, coupled with the absence of $17.3 million of revenue related to the products business sold in December 2020.
The composite system segment revenue increased by 29% primarily due to higher demand for composite pipe products driven by improved drilling completion activity in North America and the continued strength in North America retail fuel market demand for FRP tanks. The automotive and industrial segment revenues increased by 10% primarily due to increase shipments of wire and cable products in North America, partially offset by lower near-term demand for heat shrink tubing products resulting from the extended shutdowns of automotive manufacturing facilities due to the premium microchip shortages. On an annual basis, consolidated revenue in 2021 was $1.14 billion, a decrease of 3% over 2020, primarily due to the absence of $87.4 million of revenue related to the products business. Excluding the products business, consolidated revenue reflects increases in the composite systems in the automotive industrial segments, partially offset by a decrease in the pipeline and pipe services segment when compared to 2020.
The composite system segment revenue increased by 17% on stronger North American demand for composite pipe products, continued solid demand in North America, retail fuel and water markets for FRP tanks, and higher activity in the tubular management services in Western Canada. The automotive and industrial segment revenue increased by 33%, primarily due to strong demand for heat shrink tubing products in all regions. Despite shutdown to automotive manufacturing facilities in the second half of the year, caused by the premium microchip shortages faced by our automotive customers. The segment also benefited from increased shipments for wire and cable products in North America, driven by increased industrial and infrastructure investments. Consolidated results for the fourth quarter were impacted by non-recurring items outside of the company's normal course of business. The current quarter included $8.9 million of net restructuring costs, reflecting cost saving initiatives completed or committed, which included the right sizing of our salary workforce, senior executive changes, and business portfolio optimization.
The company also recorded $45.7 million in impairment charges related to our annual asset impairment testing turned by your wish for specific assets, and the decision to abandon of flexible pipeline and decline outlook for a small equity investment. Lastly, the current quarter also included a loss of $1.6 million for Argentina hyperinflationary accounting, as well as the positive effects of a gain on the sale of the Shawcor inspection services of $3.2 million. The prior year fourth quarter included $52.1 million gains from the sale approximates a $2 million gain on investment associates, a gain of $1 million from the sale of plant equipment in Toronto partially offset by $5.9 million of impairment charges, $2.8 million of restructuring costs, and a loss of half a million for Argentina hyperinflation accounting. Annual results reflect a negative impact of $57.3 million of impairment charges, $16.4 million of restructuring costs and a loss of 6.1 million for Argentina hyperinflationary accounting.
This was partially offset by $1.8 million gain on investment associates and a $3.2 million gain from the sale of Shawcor inspection services business. The prior year included $212.6 million of impairment charges, $32.6 million of restructuring costs, and a loss of $1.8 million for Argentina hyperinflationary accounting. This was partially offset by $52.1 million gain from the sale of products business, as previously mentioned, couple of gains of $10.1 million on investment associates and a $2.2 million for the sale of land and plant equipment. Adjusted EBITDA for the current quarter was 20.1 million lower as anticipated than the 46 million reporting the fourth quarter of 2020. The decrease from the prior-year quarter was attributable to lower pipe coating activity, the absence of any contribution with approximates, and the absence of $6 million in COVID related government wage subsidies, and the seasonal effects within the automotive and industrial segment, which was exasperated by extended holiday shutdowns at automotive facilities due to the premium microchip shortages.
These declines were partially offset by the continued steady demand of composite tanks, increased demand for composite pipe products, and a strong activity levels in infrastructure and industrial markets. Adjusted EBITDA for the current year was $105.6 million, higher than the $74.3 million in the prior year. Primarily due to increased demand in the composite systems in automotive industrial segments, partially offset by negative impacts of raw material price increases, and cost inflation. Despite this increase in raw material costs, the company on an overall lower operating cost base, and as a result of completed cost control and headcount reduction initiatives that began in 2020. At year-end our global salary workforce stood at 28% below March 2020 levels and SG&A expenses for the fourth quarter of 2021 were 48.6 million, were significantly below our previously community guidance of 53 million per quarter, which included lower discretionary spending and incentive-based compensation.
As a result of the continued portfolio optimization and the cost-saving initiatives the company expects the SG&A quarter run rate to be 50 million going forward. I will now turn it to Tom to discuss cash flow and debt position.
Tom Holloway
Thanks, Gaston. Turning to cash flow in the quarter. Cash flow provided by operating activities for the fourth quarter was $42.3 million, an increase from the $10.4 million in the fourth quarter of 2020. This increase was primarily driven by a higher inflow from a change in non-cash working capital and foreign exchange, partially offset by a lower net income. On an annual basis, cash provided by operating activities in 2021 was $64.7 million compared to $44.4 million in 2020. This variance was primarily due to a lower net loss, partially offset by lower inflow from a change in non-cash working capital and foreign exchange. Cash provided by investing activities in the fourth quarter was $1.5 million, reflecting $10.2 million from the sale of Shawcor Inspection Services and $1.6 million in proceeds from the disposal of property, plant, and equipment, and offset by a $9.9 million of purchases of property plant, and equipment.
On an annual basis, cash provided by investing activities in 2021 was $3.8 million, reflecting $10.2 million from the sale of Shawcor Inspection Services, $9.3 million of income from investment and associates, and $8.7 million in proceeds from the disposal of property plant, and equipment. This was partially offset by $25.1 million of purchases of property, plant, and equipment, of which $9.8 million was related to growth capital expenditures to increase production capacity in the automotive and industrial segment, as well as production process and equipment improvements in the composite systems segment. During the fourth quarter, cash used in financing activities was $37.5 million, reflecting $33.3 million in net long-term debt repayment and $4.2 million of lease payments.
On an annual basis, cash used in financing activities for 2021 was $163.5 million, reflecting $143.5 million in net debt repayments and $20 million of lease payments. Net cash generated in the fourth quarter of 2021 was $7.5 million compared to $107.7 million in the fourth quarter of 2020. Annually, net cash used in 2021 was $90.1 million compared to net cash generated of $116.3 million in 2020. The decrease is primarily due to the $105.4 million of proceeds received from the sale of the products business in the fourth quarter of 2020. With respect to cash and debt, we have a cash balance of $124.4 million, debt of $292.1 million and $44.1 million of standard letters of credit as of December 31, 2021. Our liquidity position has benefited from the significant initiatives undertaken in 2020 and continued focus on reducing the operating cost base. We've repaid $153.5 million of outstanding net long-term debt since the start of 2021, which includes the $33.3 million repaid in the fourth quarter and $10 million repaid subsequent to year-end.
In the fourth quarter, we revised our debt structure by issuing $150 million of senior notes in Canada and use the net proceeds to repay amounts under our existing credit facility and reduced the maximum credit facility borrowing availability from $500 million to $300 million. Subsequent to year-end, we renewed our credit facility for a term of four years with revised covenants. This revised debt structure provides us with additional flexibility to execute on our strategy of portfolio optimization and begin to explore M&A opportunities. Based on the actions completed and confidence in our outlook, we expect to generate sufficient cash flows and have continued access to our credit facilities to fund our operations, working capital requirements and capital program. I'll now turn it back over to Mike for some final comments.
Mike Reeves
Thanks, Tom. With a constructive outlook for the fundamental drivers of our primary business lines, a strong and continuing focus on operational and cost efficiency. The commitment to simplify and high-grade our portfolio, a substantially de -risked balance sheet and significantly greater flexibility on our debt structure. Shawcor is positioned not just to successfully navigate any near-term market volatility, but to thoughtfully deploy capital both organically and inorganically in order to spur accelerated profitable growth over the coming years. Thank you for your interest in Shawcor. I'll now turn the call over to the Operator and open it up for questions you may have for myself, Gaston, Tom or Meghan.
Question-and-Answer Session
Operator
Thank you. As a reminder to ask a question, [Operator Instructions]. Our first question comes from Michael Robertson with National Bank. You may proceed with your question.
Michael Robertson
Hey, good morning all and thanks for taking my questions. Mike, in your opening comments there, you spoke to some of the easing Microchip or semiconductor chip supply concerns. You also noted some of the headwinds in Russia and Ukraine for some of your automotive clients. I was wondering, speaking to those clients if there is any broader concerns right now, maybe a bit longer term with respect to semiconductor chips given that a lot of -- what are the critical war materials for their production are sourced in that region?
Mike Reeves
Good morning, Michael. Thank you for the questions. Obviously, the mid-to-longer-term impacts of what's evolving in Eastern Europe right now are very difficult to pinpoint. So, I'd say that the first thing is we are working very closely with our customers and with various points of contact throughout the various industries that we support to try to stay as well educated as we can possibly be on what may evolve here. I think it will depend greatly on exactly the nature of the ongoing conflict, the duration, and obviously the severity for the sanctions. What I'd say to you is that this point in time, the supply of microchips into the automotive market has improved as we have moved into the first part of 2022 compared to where it was in the late portion of 2021. Our particularly European auto manufacturing customers certainly are working through an assessment and appropriate action plan to address any challenges that may be tied to particularly Ukrainian parts and supply.
So, while we've not yet seen a material change in their near-term forecast for vehicle production, we remain alert to the possibility to that could occur. The longer-term impact in terms of critical material availability for both microchips and a variety of other component parts for vehicles and quite broadly, lots of consumer goods is something that we're keeping a close eye on. But at this point, I think it'd be premature for me to tell you that we have a clear vision or that we have a specific impact. What I'd tell you is that our close relationship with our customers means I have very good confidence that we will know what to expect when they know what to expect, and we can take appropriate action at the appropriate time. To just more broadly comment on Russia, Ukraine, as I said in my opening statement, the direct impact to Shawcor is really fairly nominal or our annualized sales to customers across all of our end markets in Russia, Ukraine, and Belarus is substantially less than C$5 million per year. Hopefully that provides some context.
Michael Robertson
No. That's really helpful color, Mike. I appreciate that, and also the fluidity has the situation. The other thing I want to touch on, you guys have made a lot of changes over the past few years and judging by your opening comments prepared to make a few more over the coming 12 to 18 months. Looking at the impairments recorded in the quarter, specifically. How sort of far along do you see this in terms of where you're at in making potential further impairments down the road? Do you feel like you've pretty much close to kitchen sink that at this point or is this something that we should expect more moving forward?
Mike Reeves
So, I'll offer some thoughts and then actually pas it to Tom for a bit more detail here. So first I appreciate that we've had a number of impairments spread over a number of quarters here. I realize as a source of certainly focus for the investing community. What I'd tell you is I think the team have done an extraordinary job of really looking very, very closely at the assets on our books and thoughtfully evaluating whether the carrying value is appropriate or not, given what we know today and what we expect going forward. Obviously, it's hard to say there will be -- never be any more impairments, but what I'd tell you standing here today is I think we have got our carrying values for our assets appropriate at this point and time. So, I would not anticipate a continued stream of impairments. Tom, any added color you'd like to put on that?
Tom Holloway
Yeah. Morning. I would just echo what Mike said. I think we've cleaned out the things we needed to be adjusted and marked everything to the proper fair prices at this point. So, we wouldn't anticipate future impairments, but as Mike said, as the business evolves, we'll have to evaluate it each quarter, but nothing anticipated.
Michael Robertson
Got it. That's really helpful color. I appreciate you taking my questions and I'll turn it back.
Operator
Your next question comes from David Ocampo with Cormark Securities. You may proceed with your question.
David Ocampo
Thank you. Good morning, everyone.
Mike Reeves
Good morning.
David Ocampo
You guys have sold, I think nine plants down and a couple of assets. Do you guys now feel like you're at the optimal size? And then probably as a follow-up to that, as we're heading into this multi-year cycle that you guys are talking about, how much of the peak can you capture relative to say 2014 and 2015 as 80% or 90% on a level. Just curious to hear your thoughts on that.
Mike Reeves
Yes, I appreciate the question. Thank you. So obviously, specifically, when we talk about facilities that have been closed or sold over the last couple of years, we are talking about our pipeline and pipe services segment, specifically our pipe coating business. What I'd tell you is I think that business is now at or very close to the appropriate size for the market that we foresee going forward. And obviously we continue to expect that that market will have some volatility quarter-to-quarter, year-to-year. It is inherent in that business. But when we contemplate having a, as efficient to cost basis, we could possibly have to weather periods like the current quarter. I think we're close to that. Still some work to do and we work very hard on a daily basis to ensure we pursue those opportunities. But equally well when we look forward to the levels of activity that we anticipate as we roll into the second half of 2022 and into 2023, which will be substantially higher than they are today.
I think that facility footprint is perfectly capable of taking advantage of those opportunities. I would caution you that I personally don't think that the offshore pipeline construction marketplace that we will see in this coming up-cycle is quite to the extreme that we may have seen in the 2013, 2014 time-frame. But regardless, I think we are well-positioned geographically. We have retained all of the capabilities that are so essential to both win and execute projects around the world. And I don't believe that any of the actions that we've taken in the last 24 months have impaired our ability to win against our competition, regardless of the location.
David Ocampo
Right. That's -- that's helpful commentary. And then you guys brought up your balance sheet is in much better shape now and -- and there might be some potential M&A opportunities on the horizon. Is there a particular area that you guys are focused in on, um, maybe perhaps more so tilted towards industrial type acquisition?
Mike Reeves
Happy to address that. At first, I'd just reinforce what are our areas of focus for capital. The first is to continue to ensure that our balance sheet is tight that our net debt leverage is as close to our target of 1.5 as we can get to. And beyond that, it is to invest in the organic growth of this business to take advantage of obvious growth potential, primarily in industrially oriented markets, which means primarily our composite and automotive and industrial operating segments. Then obviously to look at interesting M&A opportunities that may bring additional adjacent capability, whether it's geographic or technical. Again, focused specifically on expanding our industrially oriented businesses. And then of course, at the point where we have an appropriate degree and stability of EBITDA and cash flow, looking at ways to return cash to our shareholders.
So going back to the M&A piece, I would just say while we are now positioned to take advantage of opportunities and we certainly have started to invest a modest amount of time in assessing opportunities, you should not expect to see any substantial M&A activity in the near-term. We're focused in smaller tuck-in, highly valuable opportunities that can flow through the existing infrastructure of the organization and create substantial value to shareholders in that process.
David Ocampo
Just one last clarifying question for maybe Gaston. The 2022 guidance that you guys put out that it's going to come in above 20 or come in relatively in line with 2021, does that include the Qs as well? Government subsidies that you guys have got.
Gaston Tano
So, for the 2022, we don't expect any weight subsidy at all. We basically haven't received any after Q1 of 2021, so there is no expectations to have additional wage shops is in our forecast for 2022.
David Ocampo
I meant you guys are going to be flat '22 to '21, '21 including your subsidies
Mike Reeves
Sorry, yes. That is the expectation. My outlook right now is the 2022 Adjusted EBITDA will be substantially similar to 2021 and that includes the impact of Qs.
David Ocampo
Okay. Perfect. Thank you, guys.
Mike Reeves
Yeah.
Operator
Thank you. Our next question comes from Keith MacKey with RBC. You may proceed with your question.
Keith Mackey
Hi, good morning. And thanks for taking my questions. Maybe first, just to start off, I realize there are exceptional circumstances in the current environment, but Mike and Tom, as your tenure with the business grows, and you continue to sharpen the focus of the business, I'm just curious if you have, say developed a broad EBITDA margin targets for the different business lines within the business or the company as a whole?
Mike Reeves
Good morning, Keith. So, the answer is yes. I think it would be a little premature for us to share those publicly. Obviously, there's a pathway to reach our objectives involves a few items that are not yet in the public domain. But the answer is yes. And our focus, as I said in my opening statement, are to take actions through the course of the next 12 to 18 months that deliver a higher margin profile, higher cash flow profile, lower volatility, and more consistent returns to all stakeholders across this business.
Keith Mackey
Got it. Okay. And just maybe turning to the pipe delivery delays that you discussed, can you -- can you just give us a little bit more color or detail on what regions those may have been associated with? Was it one or two specific projects or were they more broad-based geographically?
Mike Reeves
Yes. So obviously limit to what I can share here because our customers have us under confidentiality. But what I'd tell you is, it was a relatively limited number of projects, low single-digits. The challenge was primarily euro zone sourced steel tubulars, but the projects themselves were associated with more than one geographic regions.
Keith Mackey
Got it.
Mike Reeves
But it was delays associated with some very specific higher tier steel tubulars, not kind of a broad tightness in let's say, average tier steel tubulars.
Keith Mackey
Got it. Got it. Makes sense. And as your backlog grows and we anticipate a level of pipe coating up-cycle in the next couple of years Scarborough included, what level of capital expenditures do you think you'll need to spend in the pipe business and then the broader company as a whole for say, 2022 and if you have 2023?
Mike Reeves
So, the 2022 guidance on capital spend hasn't changed, so we shared that prior quarter. It's $40 million to $50 million for the year. So, no changes there, while we did announce the award of the -- or final investment decision on Scarborough. Post our prior earnings call, we had fully anticipated that it would occur and it was incorporated into our capital plan. '23, it's a little soon to say. There are a number of relatively large pipe coating project that have not yet been fully awarded. I would expect that we'll have visibility on 2023 more clearly as we roll into the third quarter of this year.
Keith Mackey
Perfect. Thanks very much. That's it for me.
Operator
Thank you. Our next question comes from Matthew Weekes with iA Capital, you may proceed with your question.
Matthew Weekes
Good morning. Thanks for taking my questions. Just a little bit on the composite tanks and you talked about moving into the new more modernized facility for automotive and industrials to support growing demand there. It seems like composite tanks similarly there's pretty strong demand generally, positive macro trend. I'm just wondering what sort of the limitations that you've seen on supply in this environment. Are you looking at through maybe part of your tuck-in strategy or organic growth, expanding a little bit of capacity on the tank side of the business, and maybe building out some redundancy in the production capacity?
Mike Reeves
Good morning, Matthew. Thanks for the questions. So, on the tank side, we serve the North American fuel and water tank market from six facilities. So, we are nicely distributed geographically with a fair amount of overlapping capabilities between those facilities. So, I would tell you that our current production footprint for tanks is not today and is not expected in the future to be a limitation on our ability to serve that market. The one thing that is slowing our production output right now is this continuing limited availability of very specific thermoset resins, which have been a challenge since the middle of last year, were a challenge during the recently announced quarter, and will continue to be a challenge as we roll through, certainly most of the first half of this year. I think the corrective actions that we have been taking in partnership with existing vendors and with soon to be qualified vendors gives me confidence.
That as we roll into the second half of the year, our access to that resin will be improving and, in that circumstance, even with the very substantial backlog that we have in that business, I do not foresee that our production footprint will be a constraint. So, at this point, we have no plans to specifically invest in adding production capacity. Although we reserved the right to perhaps do that in the future if we see even further growth in demand. On the automotive and industrial side, the facility here in Toronto is bursting at the scene. It's an older facility, decades old, fill [,] the time and not necessarily configured, the way we would choose and therefore, not as efficient either in layout or in energy consumption as we would choose.
So, the announced sale leaseback, and the associated relocation to a more modern facility here in the Toronto area will give us the opportunity to position ourselves to that business for longer-term growth, more efficient growth, more efficient manufacturing, more efficient energy use and quite frankly a nicer environment for our employees to work in. So, we're excited about that. And as I mentioned, expect to close that sale leaseback transaction during the second quarter.
Matthew Weekes
Okay thank you. I appreciate the commentary on that. And just a quick follow-up on the tanks. I was wondering if you could just provide a quick comment on how you're seeing demand trend and how you're seeing the penetration go in terms of supplying more tanks for the water wastewater markets.
Tom Holloway
Yeah, it's an exciting area of our business, one that we talked about a few times over the last year. The water market, particularly the stormwater market is one that is a substantial market to start with. It is growing rapidly with continued tightening of expectations around the quality of water that's allowed to enter municipality systems or reenter groundwater. So, the pace at which that business is growing has accelerated as we moved into the early part of this year. And as a reminder, that business while still fairly modest in comparison to the fuel business, is a combination. It is tanks, but the majority of revenue associated with a stormwater installation for Shawcor is actually tied to other technically differentiated patented technologies associated with filtration, separation and infiltration. So, while it does consume our tanks and that's good. It's a system and it involves a number of other components that allow us to differentiate ourselves from our competitors on a number of phases.
Matthew Weekes
Okay, thank you. I appreciate the commentary. I'll turn the call back. Thanks.
Operator
Thank you. Our next question comes from Aaron MacNeil with TD Securities. You may proceed with your question.
Aaron Macneil
Hey morning, all. Mike, just building on a few earlier questions. I'm also trying to understand where you're at from a business line optimization perspective. You gave us the balance sheet perspective, the M&A perspective, but maybe you could also give us current footprint perspective. And specifically, do you think we'll see Shawcor exit or sell more businesses or product lines in the next 12 to 18 months as part of your longer-term plan?
Mike Reeves
No. Good morning, Aaron. Thank you for the question. Obviously, it wouldn't be appropriate for me to comment publicly on too specific of a response to that question. But what I'd tell you is that as noted over the course of the last several quarters and reinforce this morning, we continue to look very closely at our portfolio. I think Shawcor has for a number of years been quite a complex organization with a really broad portfolio of businesses and products, perhaps a little broader than an organization of our size should or could reasonably support. So, the portfolio simplification began with the sale of the pipeline products business in late 2020, has continued with the sale of our SIS business here in 2021, and a number of smaller businesses being either sold off or shutdown.
And I just tell you, we continue to be very focused on those businesses that have the closest connection to long-term growth, which includes the majority of our portfolio. But there is a minority of our portfolio that perhaps doesn't quite fit as well. And we will continue to look closely at those businesses and determine whether we are the right owners or not. So obviously, we'll share information as soon as we are in a position to do so. But we are still looking at the portfolio.
Aaron Macneil
Understood. I guess I'm just trying to understand the revenue progression for pipe coating it better. I know there's probably some uncertainty there. Can you give us any sense or any insight into the second quarter and in terms of when you might see deliveries of steel and an inflection point in coating activity and then maybe you could also comment on what your maximum quarterly revenue through put could be for the segment. And do you think you'll get there in Q3 and Q4 given the pent-up demand and higher backlog?
Mike Reeves
No, I appreciate the questions and I'd love to give you that information, but I'm not sure that I -- it would be appropriate for me to give you quite that level of detail. What I can tell you is we are very confident that the second quarter performance of our pipeline coating business and Shawcor overall will move upwards from what we've guided for the first quarter. The first quarter is an unusual combination of timing on a variety of pipeline coating projects that causes us to be at the low point I suspect for -- certainly for the last several decades of that pipeline coating business and we expect to build from here. So Q2 will be a step up from Q1.
Aaron Macneil
Maybe I'll ask the Q3, Q4 question differently. Do you think you'll be able to get to all the work through your facilities?
Mike Reeves
Yes.
Aaron Macneil
Okay.
Mike Reeves
I think the work -- the pipeline coating business is particularly in the offshore arena, is a marketplace where projects are identified, engineered, awarded, well in advance of work starting. So, we have very clear view of the projects that we expect our customers to initiate over the course of this year. Obviously, there are times when they run into challenges, like this challenge with supply of steel tubulars here that's impacting a couple of projects in the first half of the year. But notwithstanding that element, generally we have a good view, with perhaps plus or minus a month of when projects are going to start coating activity. And based on everything that we see in the schedule for 2022, I have no concerns in our ability to be ready and to execute on those projects through our network of fixed facility footprint.
Aaron Macneil
Okay. Great. One more question from me on steel prices, I think Tenaris this quarter talked about OCTG prices up a 124% or something crazy from October 2020. So, I guess I'm just wondering from a demand and price perspective, the pluses and minuses for your composite business, your pipe coating business, like maybe just walk us through how high steel prices are impacting Shawcor.
Mike Reeves
Steel is not a component that we are a particularly big consumer of. So, in terms of our own supply chain, our own input costs, the impact is fairly nominal. The composite business really doesn't consume steel.
Aaron Macneil
If you thinking more in terms of competitiveness with convention steel tubulars?
Mike Reeves
Yeah. So, what we do see is that those customers who have held out perhaps and are continuing to use steel in terms of underground storage tanks or steel line pipe for gathering lines in North American oil and gas markets, I would expect that while we are certainly elevating our selling prices to reflect the inflation and raw material and labor costs, I think we will find ourselves in an even more competitive position versus steel alternatives across all industries. So, I think it bodes well for our composites business broadly. I think the only place where there is a potentially negative consequence of high cost of steel is to our customers on the pipeline coating side. But I think at this point projects that are scheduled for this year are highly unlikely to see deferral or delay because of steel costs. So hopefully that provides some helpful guidance.
Aaron Macneil
Exactly what I was looking for. Thanks. I'll turn it over.
Operator
Thank you [Operator Instructions] Our next question comes from Tim Monachello with ATB Capital Markets. You may proceed with your question.
Tim Monachello
Hey, good morning, everyone. First question here, just on the Russia-Ukraine conflict. Obviously, there's some supply disruptions and potentially long-term supply disruptions to the global oil Macro. Are you hearing any initial indications from your customers regarding potential for higher activity offshore? Some of the majors within the service space are talking a little bit about that. And then also on the same topic, are there any projects that you're falling in the region that could be disrupted by the conflict?
Mike Reeves
So good morning, Tim. Thanks for the questions. I'll answer the second question. First, we do not have in our backlog budgetary or our bid, any pipeline projects that were associated with Russia or Ukraine. So, there's no expectation of disruption there. The potential for both onshore and offshore oil and gas exploration activity to rise in the face of elevated, certainly near, probably mid potentially long-term oil and gas prices is definitely there. We are continuing to hear customers talk about the need to thoughtfully expand production, which I think means we're unlikely to see a rush. And in fairness, even if customers wanted to rush, to put a huge amount of extra exploration and development work in place, I think they would struggle to find capable equipment and people to do so. So, I think what we are likely to see is a slight upturn in the pace of growth that we've been seeing over the last several quarters. And certainly, I think that goes well for us as an organization.
One of the things we look very closely at in North American land in particular is the activity around completion. Because when you think about our flex pipe product that is used to connect completed oil wells to existing midstream infrastructure. And there are still several thousand wells drilled but not completed here in North America land. So, I do think that could be an additional spur of near-term demand. But what I would tell you is I think we see an expectation of an uptick in activity and we are certainly geared to take full advantage of that. But I don't think we're going to see an explosion in activity.
Tim Monachello
Okay. Thanks for that. Now, the market has been extremely volatile on the macro front for some timing. And obviously, timing is tough to call on the project front, but end up being pretty important to investors and meeting guidance and through their expectations for Shawcor, especially given the operating leverage in the business. In terms of steel in tubular availability, what gives you the confidence or gives you confidence that supply chain challenges won't persist and project do you have scheduled for the second half of the year won't get pushed?
Mike Reeves
Well, I think the first thing I'd say is obviously we recognize that there are -- there's volatility there and things could evolve but the specific causes for the delays of delivery of the steel tubulars that have impacted us here in Q1 were really nothing to do with the macro, it was to do with some very specific vendor issues that have been addressed. I think the availability of things like nickel and other component parts to higher tier steels could certainly be impacted if exports from Russia can be overcome from other places. But when we look at what our customers have in place for their plans, when they placed orders for the steel tubulars for projects that we expect to coat this year, I think we have a clear line of sight on their ability to deliver those steel tubulars, enabling us to coat those steel tubulars. I'd say subject to some unforeseen change, that's the current expectation. We'll keep you fully informed because we certainly recognize that your ability to assess the expected performance of this business and your clients ability to assess that matters deeply. It matters deeply to us. And we try to be as transparent as we can in these conversations to ensure you have everything that we can possibly provide.
Tim Monachello
Yeah. Understood. And also understood that a lot of the steps outside of your control. Third question here. Just on I guess, your view on inventory management, obviously there's been some augments supply chain challenges you are big consumers are certain inputs. Are there any opportunities to be more vertical integrated in certain core inputs or increased storage? Are you thinking about that, is that part of your capital plans as you go forward?
Mike Reeves
So generally, vertical integration down to kind of raw material production is not part of our strategic plan. We have in select cases made those decisions in the past. So for example, we are the owners of Parabeam, which is a 3-dimensional carbon fiber material manufacturing facility in the Netherlands, which is a key contributing component to our underground tank production. But outside of that, what we consume as raw materials, we tend to be a relatively small percentage of the total sales of our vendors. And I think it would be a substantial step away from our strategic areas of focus, and probably a distraction from our core business for us to head in that direction. Instead, we rely on continuing to expand and improve relationships at all levels of our key vendors to ensure that we get what we need from them in a timely manner and manage carefully cost escalation that may occur in those raw materials. So you should not expect to see us deploy capital to vertically integrate into raw material manufacturers.
Tim Monachello
A little bit on the storage front. Can you just increase storage you have or how much inventory you carry of raw inputs?
Mike Reeves
So, I think our inventory levels are appropriate for where we sit today. There was some modest expansion in terms of days inventory that we hold in a couple of key products over the course of the last 12 months to ensure that that sheer shipping time does not create an issue for us. I think we have relatively short supply chains for most of our raw materials. And we're probably carrying a little more raw material in almost every category than we would've been two or three years ago because of the supply chain concerns. But I don't expect a substantial step-up. We talked about working capital probably being consumed this year, and it's far more to do with just the nature of sequencing in activity levels from the front of the year to the end of the year than it is about a strategic expansion of inventory measured in days of inventory on hand.
Tim Monachello
Okay. And then last one for me, you spoke a little bit in your prepared remarks about the 6-inch flexible pipe replacement, the distinct length, the FlexFlow. But if my memory serves me, that sort of FlexFlow was going to be -- or at least the larger diameter pipe was going to be a core product line when you move in to the Middle East. What are the plans? Can you update me on the plans there?
Mike Reeves
Yes. So the Middle East continues to be an area of interest for us. In fact, I'm headed there next week. We have a large contract that we're delivering flex pipe against in Oman. And there are a number of other large contracts that are up for tender, as we speak, for flexible spoolable pipe. At this point in time I -- clearly because we've made the decision to move out of the Flexwell product line. We do not believe that the demand level for the discrete link composite pipe justifies that product line continuing to be an active area of investment for us. Instead, as technology has evolved, including our own, those markets that needed larger diameter pipe are now capable of being served by spoolable pipe in most cases. And that's where we are focused, it is at the core of our technology capabilities and we expect to roll out the six-inch product here as we move through to roughly the middle of the year and build upon the early success that we've had with the five-inch product over the last several quarters.
Tim Monachello
Understood. Appreciate all the commentary. I'll turn it back.
Operator
Thank you. I'm not sure of any further questions at this time, I would now like to turn the call back over to Mike Reeves for any further remarks.
Mike Reeves
Thank you very much. So we all appreciate the interest in this company. And once again, like to thank the employees of Shawcor for their hard work and dedication on a daily basis. We appreciate the partnership with our customers and our vendors, and we'll look forward to welcoming you all to the next quarterly update call in a couple of months. Thank you so much.
Operator
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.