Shawcor Ltd. (OTCPK:SAWLF) Q1 2022 Results Conference Call May 13, 2022 9:00 AM ET

Meghan MacEachern - Director, External Communications & ESG

Mike Reeves - President, CEO

Tim Monachello - ATB Capital Markets

David Ocampo - Cormark Securities

Aaron MacNeil - TD Securities

Keith Mackey - RBC Capital Markets

Michael Robertson - National Bank

Matthew Weekes - iA Capital Markets

Good day, and thank you for standing by. Welcome to the Shawcor First Quarter 2022 Results Conference Call. At this time, all participants are in a listen-only mode. After the presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised, today's conference maybe recorded. [Operator Instructions]

I would now like to hand the conference over to Meghan MacEachern, Director of External Communications & ESG.

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's statement on forward-looking information is included in Section 4.0 of the first quarter 2022 earnings press release, and in the MD&A that is available on SEDAR and on the company's website at shawcor.com. [Operator Instructions].

I will now turn it over to Shawcor's President and CEO, Mike Reeves.

Good morning, and thank you for joining Shawcor's first quarter conference call. Today, Meghan and I are joined by our CFO, Gaston Tano, and our Chief Accounting Officer, Tom Holloway.

I'd like to begin by once again recognizing the commitment to customer engagement, innovation, and creativity of Shawcor’s employees around the world, their ability to safely and sustainably deliver infrastructure technology our world needs, despite the ongoing pandemic supply chain disruptions and inflationary challenges is a testament to the teamwork and culture of this organization.

Turning to business, 2022 has already seen further benefit from the company's continued strategy of simplifying our portfolio while investing to accelerate growth in less volatile industrial and other critical infrastructure markets. Our industrial and infrastructure focused businesses are benefiting from the expansion of global investment in communications, transportation, lower emissions energy, and water related infrastructure.

These tailwinds helped elevate revenues from businesses serving industrial and infrastructure end markets to 49% of total sales during the first quarter up from 36% in the prior year quarter. In parallel, our onshore oil field related businesses are experiencing higher demand as oil and gas operators seek to capitalize on elevated commodity prices and our offshore pipeline coating and inspection businesses which are later cycle and have weathered several quarters of low activity are poised to see activity rise over the remaining quarters of 2022 and the years that follow as new offshore pipeline construction ramps up.

These variables combined to underpin our confidence that a multi-year upcycle is evolving across Shawcor’s primary markets. As we position the company to generate maximum stakeholder value in this environment, we also remain committed to our 2030 greenhouse gas emissions reductions goals, continuing to identify and execute opportunities to lower overall energy consumption and improve energy efficiency across the company.

During the quarter, this included progress to eliminate energy consumption tied to excess infrastructure and advancements of programs to install onsite renewable solutions such as solar at several production locations. We will release our 2021 ESG report in the third quarter, which will provide a more complete update on progress towards our ambitions.

Looking a little closer at each of our business segments. Our composite system segment operational performance was modestly better than expected for the quarter with revenue climbing 50% versus the prior year as North American oil field consumption of spoolable composite pipe continued to rise and demand for high specification underground storage tanks in the water and retail fuel markets remain robust. In addition to growing overall market demand for spoolable composite pipe, Shawcor’s five inch product line, which was launched in 2021 has been very well received with adoption accelerating during the first quarter. We also remain on track to launch a six inch variant in mid-2022.

It's important to remember that the second quarter of each since Canadian onshore oil field activity drop due to soft ground conditions, excluding this effect, our outlook for the rest of 2022 remains favorable for growth in composite pipe demand across North America land. Our FlexPipe team have worked tirelessly to meet their customer's needs in recent months and are very well positioned to capture share as we move forward.

Moving to composite tanks. Order intake remains elevated, and we are bullish on both fuel station and storm water system construction activity in the coming years. The quarter, once again, saw Thermoset resin availability limit our manufacturing output. Although deliveries were more stable and predictable than in late 2021, and good progress has been made to qualify additional sources of supply.

Consequently, we still anticipate incrementally higher resin availability and tank production as we move into the second half of this year with a robust backlog providing strong demand visibility for the rest of ‘22 and much of next year.

Our automotive and industrial segment traditionally benefits from seasonal customer inventory restocking during the first few months of each year. And this annual pattern continued in both our wire and cable and heat shrink tubing businesses during Q1, including stronger than expected demand from North American nuclear and industrial customers for Shawcor’s market leading wiring cable products. This segment continues to improve the trajectory of its revenue, EBITDA, gross margin and backlog profiles, with new records set for revenue, EBITDA and backlog this quarter.

While the availability of microchips has shown modest improvement year to date, effects from the ongoing war in Ukraine and more recently, significant COVID-19 driven lockdowns in China, continue to present challenges to our automotive customers. With some vehicle production sites idled during the quarter and broader supply chains disrupted. These disruptions have so far had nominal impacts on our business with growth in industrial markets, which represented 70% of total revenue during the quarter, offsetting deferral of automotive revenues. And we currently believe our outlook appropriately reflects the likely impacts to this market for the remainder of 2022.

Despite this, we remain vigilant and are engaged with our automotive customer base, ready to quickly respond to either further disruption or an acceleration of demand should [disruptionties]. Overall, the automotive and industrial segment’s first quarter performance causes us to have a slightly higher full-year outlook for the segment and a constructive view of the mid and long-term market trends which impact this business. We will continue to invest growth capital to enhance our product offering and improve our manufacturing capabilities, including the previously announced intent to relocate, expand and modernize our Toronto production site, enabling profitable growth for the next decade.

Lastly, our pipeline and pipe services segment, while delivering an EBITDA loss for the quarter performed better than originally expected as our teams successfully captured incremental onshore coating work in Western Canada, while accelerating the execution of several offshore pipe coating projects that were originally scheduled for later in 2022.

This pulled forward of activity helped to limit the EBITDA losses within the segment during a quarter which saw a normal seasonal slowdown in our girth weld inspection and engineering services businesses toppled with the lowest level of offshore pipeline coating activity in many years. While still tubular supply challenges pose some risk to new project FID timelines, we expect the PPS segment to experience sequential business growth moving through 2022 with second half activities substantially higher than the first half, as several offshore coating projects currently in backlog, including Scarborough move into the execution phase.

Backlog within the PPS segment grew during Q1 with the capture of several smaller projects and we expect further backlog growth over the course of 2022. A combination of the expected 2022 year end activity run rate and a healthy backlog mean this segment is positioned for meaningful year-over-year earnings growth in 2023, while substantial offshore project coating driven by increased energy demand continues to indicate a multi-year upcycle in offshore pipeline construction and coating activity.

Turning to consolidated 12-month backlog. At the end of Q1, the company's committed backlog of work to be completed within the next 12 months stood at $702 million, an increase of $113 million when compared to the prior quarter. This improvement was the results 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.

Total backlog, including committed work beyond 12 months also rows in Q1, reaching $804 million versus the prior quarter level of $744 million. 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 Q1, the bid balance was $946 million, an increase of $103 million when compared to the prior quarter, despite movement of several projects from bid into backlog. This expansion primarily reflects continued growth in bidding activity for offshore pipeline coating projects, as customers move forward with new and previously contemplated projects in the face of elevated commodity prices and growing needs for more efficient movement of natural gas. Included in the bid number is $56 million of conditional awards, pending the client's final investment decision unchanged from the prior quarter.

Shawcor's budgetary number reflecting the value of indicative pricing submitted to allow customers to build a project budget ahead of former procurement activities remain relatively unchanged versus the prior quarter at $1.5 billion. This further supports our expectations, that pipe coating activity will continue to rise in 2023 and beyond.

Finally, last year we announced Gaston's decision to step down from the company at the end of May, 2022, after transitioning his CFO responsibilities to Tom. This extended thoughtful executive succession plan is progressing as expected and is consistent with Shawcor's long-held practices, ensuring minimal disruption to the organization's tactical and strategic initiatives. This will be Gaston's last earnings call with Shawcor and on behalf of the entire team, I wish him the very best in his post Shawcor endeavors and thank him for his tireless work to create value for all Shawcor stakeholders.

Tom and Gaston will now walk through Shawcor's first quarter financial highlights.

Thanks, Mike. Operational results were stronger than previously expected as a result of increased demand for higher margin wire and cabling products and composite pipe products, and accelerated timeline for pipe coating projects and a foreign exchange gain, partially offset by legal and other professional fees. The first quarter's consolidated revenue was $268 million, a 4% decrease compared to the first quarter of 2021.

Adjusted EBITDA was $20 million, an 8% increase from the prior year first quarter, primarily on stronger demand for composite pipe products and FRP tanks in the retail fuel and water markets, coupled with higher revenue and profitability for wire and cabling products, from increased infrastructure spend partially offset by lower pipe coating and girth-weld inspection services activity. The company expects its quarterly normalized SG&A run rate will remain at approximately $50 million throughout 2022. Although it is subject to movement depending on overall business performance and related incentive-based compensation cost, as well as any M&A opportunities.

Consolidated results for the first quarter included non-recurring items outside the company's normal course of business. The current quarter included $1.2 million of net restructuring costs, reflecting cost savings initiatives completed or committed, which included additional headcount reductions and the sale of assets related to recent site closures. Subsequent to the quarter, the company also completed the sale of its previously closed pipe coating facility in Adria, Italy.

Turning to segment results. The composite systems segment revenue was $106 million, a 50% increase compared to the first quarter of 2021 and adjusted EBITDA was $14.7 million, a 72% increase from the prior year first quarter. These results reflect improved demand for composite type from an increase in drilling and completion activities in the Permian basin and Western Canada, and continued solid demand in the North American retail fuel and water markets for the FRP tanks.

Additionally, the segment’s improved results also reflect higher activity in the tubular management service business in Western Canada and a roll out of price increases to help offset the increase in raw material and labor costs in all businesses. Lastly, during the first quarter, the segment recorded approximately $2 million related to legal and professional fee costs.

Automotive and industrial segment revenue was $78 million, a 23% increase compared to the first quarter of 2021, and adjusted EBITDA was $16 million, a 27% increase from the prior year first quarter. These results reflect increased shipments and profitability for wiring cable products, continued strong demand for heat shrink tubing products in the North American industrial sector, and a rollout of price increases to help offset the increase in raw material and labor costs. Pipeline and pipe services segment revenue was $84 million, a 42% decrease compared to the first quarter of 2021 and adjusted EBITDA was a negative $7.5 million, a 286% decrease from the prior year first quarter.

These results reflect lower levels of pipe coating activity in EMAR, Latin America and Asia Pacific, and the absence of revenue attributable to the Shawcor inspection services business sold in December, 2021. Despite the decrease in revenue and adjusted EBITDA, the company's cost reduction and site optimization initiatives have substantially lowered fixed expenses for the segment, which in turn partially offset the lower activity levels in the quarter.

I will now turn it over to Gaston to walk through cash flow.

Thanks, Tom. Turning to cash flow in a quarter, cash user operating activities to the first quarter was 12.8 million reflecting a 22.7 million investment in working capital excluding impact of restructuring liabilities. This investment in working capital was driven by an increase in accounts receivable from increased activity and a timing of billings and collections, an increase in inventories and preparation for higher business activity in the coming quarters and the impact of higher raw material costs partially offset by an increase to accounts payable related to the timing of purchases and payments. Cash used in investing activities in the first quarter was 9.4 million reflecting 10.4 million of capital expenditures partially offset by 1.1 million in proceeds from the disposal of property plan equipment.

During the first quarter cash used in finance activities was 17.3 million reflecting 10 million in long term debt repayments, 4.7 million of lease payments and a 2.6 million payment of financing costs related to the company's credit facility renewal and senior notes issuance. Net cash used in the first quarter of 2022 was 38.7 million based on the actions completed our diversified business and the confidence center 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.

As at March 31, 2022, we have cash balance at 85.8 million, debt of 278.6 million and 56.8 million of standard letters of credit. Our liquidity position has benefited from the initiatives undertaken since 2020 with a continued focus on reducing our offering cost base as well as repayment of 153.5 million of outstanding net long-term debt since the start of 2021. Overall, the company's net debt has decreased by 42% since the start of 2020, bringing our net debt to adjusted EBITDA to 2.29 times at the end of the quarter. The company continues to focus on the repayment of outstanding credit facility to reduce overall net debt and will target a net debt to adjusted EBITDA ratio of 1.5x.

In the middle of the year, we'll form a close depending sale and lease back of our current Toronto footprint, a transaction that will yield at least $45 million of net proceeds, which will be used to further lower debt. As mentioned earlier, the company spent 10.4 million of capital expenditures of which 3.2 million related to growth expenditures to increase production capacity in our automotive and industrial segment and improved production processes and equipment in our composite systems, and pipe and pipe services segments. Our capital spending guidance remains unchanged at 40 million to 50 million for the year. We will continue to prioritize capital spending to drive growth in our most differentiated, high value and material based solution in support of our industrial and critical infrastructure end markets.

The above strategic actions and others that will evolve over the coming 12 to 18 months are intended to enhance over time, the company's margin operating cash flow profile, lower overall volatility and drive greater full cycle value to all stakeholders as our market leading technologies enable responsible, sustainable renewal enhancement of critical infrastructure.

I will now turn it back to Mike for some final comment.

Thanks, Gaston. In summary, the underlying trends for each of Shawcor’s primary businesses are favorable and expected to remain so for several years. With particular near-term opportunities in the North American industrial infrastructure and onshore energy markets, and longer-term opportunities in the offshore oil and gas pipeline market. With modestly improved full-year expectations for our automotive and industrial business and continued cautiousness regarding the impacts of geopolitical events, COVID-19 and broader supply chain risks, our full-year adjusted EBITDA outlook is now slightly above 2021, but the second half of 2022 substantially stronger than the first. Q1 is expected to be our lowest quarter of the year.

In this environment, we remain committed to tightly controlling fixed costs, optimally deploying capital, lowering net debt and securing full fair value for our differentiated materials-based products and services. Our strategic approach to portfolio management is unchanged. We believe opportunities will exist to make strategic acquisitions that move Shawcor’s composites and automotive and industrial segments further up the value chain, and improve our ability to enable responsible, sustainable renewal and enhancement of critical infrastructure.

With substantially financial flexibility, we stand ready to take advantage of these opportunities at the appropriate moment. Our commitment to enhance over time, the company's margin and operating cash flow profile, lower volatility and deliver greater full cycle value to all stakeholders is paramount and we will continue to carefully evaluate appropriate options for any element of our current portfolio, which is poorly aligned to this commitment.

I'll now turn the call over to the operator and open it up for any questions you may have for myself, Gaston, Tom or Meghan.

[Operator Instructions] Our first question comes from Tim Monachello with ATB Capital Markets.

First off, congrats Gaston on last conference call here. Thanks all for your guidance throughout the years here.

So I just want to talk about the visibility in the business, because the guidance came at basically 80% through the quarter that, the quarter was going to be down, 50% quarter-over-quarter. And then, the result comes in basically flat. Is there a structural issue in, I guess internally in visibility or was there just something that happened right at the end of the quarter that, that changed the outlook? And I'm just trying to, with that in mind and there is been some, I guess, earnings risk on the story and some variability quarter to quarter, and I think that's largely, an impact of the operating leverage and perhaps the sort of cyclical lows that we have been at. But I guess, how much -- how big is the range on your view for 2022 and how much could slip?

So, if we start with the first part, I think the ability to understand what's happening in this business is very solid. What changed in the quarter was the tail end of the quarter, the month of March turned out to be a formal robust month, then we envisioned at the time that we provided that guidance. And as we have noted in the materials, there were really three drivers there. We were able to pull forward and deliver and recognize revenue on some pipe coating activity that was scheduled for later in the year. There is not always a guarantee that customers will accept early delivery. So at the time of the guidance, we were uncertain whether we were going to be able to recognize that revenue. So, obviously provided guidance on what we felt was appropriate at that point in time.

The second piece was the incremental performance of the automotive and industrial business, which primarily was driven by the Shawcor’s expiring cable business. We had some requests for early delivery, that we had not expected to receive, but the product was in hand and we were able to make those deliveries. So again, not something that was fully visible to us at the time, but well within the range of variants that you might expect for a business of this size, and the third piece was foreign exchange movement, which obviously, these things can shift without any warning. And those three elements combined led to the Delta between guidance and actual. So I think we -- from a percentage perspective, obviously the Delta was quite large.

In a dollar term for $1 billion organization, the dollars were not that significant. And I think, having some upward and downward range on the Delta between actual and expectations is normal for any organization. So, I think we are well positioned to provide reasonable guidance, but we live in a world where things do shift quickly. And I think that's the one thing I would encourage you to remember as we look forward here. We have got three operating segments, with really businesses that fall into two categories, those that are in industrial and infrastructure focused and then those that are oil and gas focused, and the oil and gas piece, particularly the offshore project-oriented piece of oil and gas, can have some movement quarter-to-quarter, depending on a variety of factors.

So, if we turn to the second part of your question and the outlook that we have provided here for the rest of the year, which is now modestly above EBITDA of 2021. I think the range of outcomes there is we have more upside than downside is how I would describe it. The timing of specific projects commencing will determine exactly where the pipe coating business lands this year. But I think we've taken a conservative approach to that in the guidance that we are providing and we'll work very hard to try to accelerate things beyond that. So there is some range, but I think we've factored in those things that are likely to drive us to the low side, and have tried to be appropriately conservative with those things that may drive us to the upside. So hopefully that provides you some visibility of how we're viewing things here.

I guess that there's a little bit of commentary and perhaps part of the reason that it was stronger in the first quarter than expected was that you mentioned that there was some request for early delivery in A&I segment and then some early revenue recognition earlier than expected revenue recognition, the PPS segment. So does that mean that Q2 is going to be lower than you had originally expected?

No, I think we feel confident about Q2. The magnitude of the pull forward on the pipeline coating side was not material was approximately $3 million of EBITDA impact. And it we think that the segment has remains at roughly the same level of full year performance that we'd originally anticipated. In the automotive industrial business, while we pulled a little bit forward into the quarter, we've also secured incremental purchase orders. You've seen a record backlog reported for that segment. So we think that business now will perform at a higher level than we would've previously anticipated. So I don't -- my expectation is as we have guided that first quarter is our lowest performing quarter of the year that we see a step up as we move from the first half to the second half. And very excited by the opportunities for all three of these businesses in the second half of 2023.

Okay. It's a good segue, because the automotive industrial segments probably a record quarter there $78 million of revenue. How should we be thinking about that business for 2022 on a quarterly basis? Can you put some bookends on where you might expect revenue to come in?

Yes, I think obviously we try not to put too much detail out there in a world where things can change. But just to remind you that business is two components. It is the ShawFlex wiring cable piece of the business, which serves non-automotive in markets entirely industrial and infrastructure markets like communication power generation, et cetera. And then we have the DSG -- tubing business that serves both industrial and automotive markets. So, both of those businesses tend to have higher Q1 than the average quarter, as our customers stock up for the year. And they both tend to have lower Q4s than the average quarter as our customers destock for their year-end. So I would generally tell you that we would expect that pattern to unfold through the rest of this year. But as you've seen year-over-year Q1 was substantially higher than last year's Q1. And we would certainly anticipate that the business continues to outperform prior year quarters. Even though there will be this movement Q1 into Q2, Q3, and then down in Q4, most likely.

And then the last question I had is just around supply chains. I was wonder if you can go through sort of an update on how supply chain issues across the businesses are progressing compared to where they were at the end of the year?

Yes. So if we start with the composites business, we've talked ad Norum about the challenge of thermostat resin, which is used in the tanks side of that business. So, as noted in the prepared comments, what we've seen is that supplies of that material have certainly become more consistent, more predictable in total volume. They haven't changed very much from where we were at the tail end of last year, but we are moving through the final stages of qualifying additional vendors. And we would expect as we commented several times that as we move closer to the middle of the year and then into the second half of the year, that -- not only will we see this, this consistency of delivery but we will start to see a higher volume of delivery, which will allow us to move much closer to unconstrained production on the tank side. And there's a strong backlog there to fill. So that's encouraging.

At this point, we are not constrained by supply chain on the pipe side of our composites business, but of course, continuing to work very hard to ensure that stays the case, freight, transit times, general availability continues to be a point of friction across almost all raw materials. On the automotive and industrial side, at this point, we are not envisioning being supply chain constrained. We keep a close eye on our largest single component part, which is copper. Obviously, we've seen price fluctuation there, but availability has generally continued to be good.

And then on the pipeline of pipe services side, the biggest raw materials we consume there are effectively the components that make up cement and then polymers. And again, while we've seen fluctuation in pricing, we have not seen any substantial risk in terms of availability. So I don't see our internal supply chains disrupting us at this point, but I would caveat that, that if we see a much, much larger impact of COVID-19 lockdowns in China, as we progress through the year, or if there is a substantial shift in the impacts of the Ukraine, Russia conflict, then we would have to continue to take close look, and there may be some impacts, but openly that gives you a view of where we are at this point in time.

Our next question comes from David Ocampo with Cormark Securities.

It's been very helpful working with you for over the last little bit. I just want to zero back in on Tim's questions relating to automotive and industrial, when I take a look at the quarter, I think revenues were up north of 20%. I guess I'm just trying to break down how much of that is from rising raw material price and how much of that is from volumes?

So generally, I'd say David, that is mostly the result of volumes. The impact of raw material price movement was modest during the quarter.

And then kind of just looking further ahead, you guys do seem a little bit capacity because trained in Rexdale, is that volume growth that we can expect over the next two or three years where you can grow a certain percentage and then you get capped at that three-year mark or you're going to be hitting capacity constraints in a year's time from now.

So what I'd tell you is that, obviously one of the drivers for the sale lease back process that we are nearing completion on is, to ensure that we are not capacity constrained in the longer-term for the A&I I segment. But what I tell you is that, in this coming period, while we are moving through the sale lease back, I'm confident that, we will not be constrained in our ability to serve our customers in the high-end wiring cable market. It's important to remember that, the mix in this business currently includes some lower margin elements. And in a perfect world, we would choose to have all of our production activities directed to the high end of our product spectrum, and when those opportunities arise and they will, as we move through the coming three years, we will redirect our production activity to those higher end products and see less of the lower end products in the portfolio and the revenue mix. So, I don't believe that we will see the Rexdale footprint via constraint to continued improvement in the A&I business. And certainly, we will ensure that when we relocate from a new site, that we have contemplated the required space for growth in the years to follow.

I guess, on that, you take a look at the margins in the quarter on A&I, it's quite strong. And if I look back, even three or four years, the margin profile is just pretty generally stable. So is that the mix that you are alluding to just moving to higher end products and should that continue going forward?

So, yes, that's the impact. I think, two things that that impact margins during the quarter one is the mix of product and the base margins associated. The second is volume and the impact on absorption in manufacturing sites. So, obviously with Q1 tending to be our most robust quarter, we would anticipate that that, it's where we get the biggest volume impact. So that element will vary quarter-to-quarter, depending on total volume. But as we think about the portfolio mix during Q1, we had a healthy degree of the portfolio skewed towards the higher end of the margin range, nuclear deliveries, some communications deliveries. There is going to be fluctuation quarter-to-quarter in the margins of that business. It just depends on exactly what we are delivering during a quarter. But I was very pleased to see that, segment get to this level of margin. I think it reflects the hard work of the team and the very explicit strategies that they are pursuing to grow the high end of their portfolio. And I think, it's probably not reasonable to believe that, we will see that level of margin every single quarter, but it does demonstrate the capability of that business as we grow.

Our next question comes from Aaron MacNeil with TD Securities.

I don't know if I want to put two final point on this, but in terms of the guidance for the year, are you essentially just suggesting that we flow through the entire Q1 beat on the original guidance, or is there some additional lift to your Q2 expectations, just given that you had previously said that it might be subdued? Are there offsets in the other direction that we should be thinking about even if it's anecdotal, maybe you could just give us a sense of some of the puts and takes when you think about how you prepared your guidance this quarter versus last quarter.

Yes. Hey Aaron, it's Tom. Thanks for the comments. So what I'd say is I think what your initial comment about flowing through the current quarter is about right as is a full year. As Mike said, the ShawFlex business is very strong for the year. We expect that to flow through to the year. We expect the kind of the pipeline segment to be about flat to where we expect it to come in. And then the FX, of course we don't forecast FX to come in every quarter. So generally speaking, I'd say that's correct. If you think, just take that, add it into the full year, and that gets you to where we're thinking we come in. I would say on the Q2 question. Mike has already kind of addressed it. Q1 being the lowest point of the year. So we see some growth in Q2, and significant movement upward in the second half of the year. So I mean we're not really changing a whole lot for the rest of the year. We do see robust demand and we also are making sure that we're being prudent around potential supply chain issues that could arise. So again, just to echo what Mike said, I think you're seeing a prudent forecast, but we believe, will be about that 10 million number.

In terms of facility footprint and cost rationalization measures obviously you mentioned the -- facility in your prepared remarks, but could you give us a sense of if you're sort of satisfied with the steps you've taken to date or if there's more to go and how you're thinking about your footprint in the context of rising activity levels particularly in the energy sector?

Yes, I think generally speaking, we're pretty satisfied with the exercise we went through last year and the year before to get our costs in line. There are always things we're looking at doing. So we're looking at efficiencies in the real estate area. As we're talking about rescale, we're looking at other things that we could consolidate or be more efficient across the portfolio. But in general, I think the large exercise of cost reduction and optimization is completed. And now we're kind of working around the edges to get more efficient in various product lines.

No I think you you're right. What I'd say is our ability to produce is probably about where it needs to be. We look across the portfolio, I think exactly what we do where, there's still some room to be more efficient and to enable our businesses to deliver incremental improvements.

Understood. Just given the expectations for growth in the back of the year, what should we be thinking about in terms of working capital build over the coming quarters?

Yes, Aaron I'll take that one too. So working capital, we saw the build in Q1 really in anticipation of a strong second half of the year. I think Q2, Q3, we see that unwind a bit and perhaps Q4 there's a little more pressure as we move up on the revenue side of things. But in general, I think the large build has happened for the year. And we'll work that down over the course of the year.

Understood. Maybe you'll sneak one more in. You mentioned the lockdowns in China in your prepared remarks. How are you thinking about them in terms of uptime at your facility in the country?

Yes, so I I'll take that one out. Our facility hasn't actually been directly impacted during the quarter. We were not in an area that was subject to lockdowns. The facility in China is focused on the production of heat, shrink tubing. We have three facilities globally, one here in Toronto, one in Germany and one in China. The one in China tends to be the smallest of the three in terms of its production output. Although, it certainly has the capacity to grow and the products that we make in China are consumed or could be consumed in multiple sites around the world. So even though, our direct customers in China were definitely impacted by lockdowns during Q1, our production activity in China was relatively unchanged, the product was simply redirected to alternative end uses both in terms of going to industrial end markets instead of automotive in some cases, or just simply going outside of China or even outside of the Asia Pacific region and being consumed in either Europe or the Americas. So impact to China was nominal for us.

Our next question comes from Keith Mackey with RBC Capital Markets.

Just curious about the pipe services segment, within your outlook for a more constructive second half relative to first, when approximately should we be expecting that segment to sort of pass the EBITDA neutral point throughout the year?

Hey, Keith, it's Tom. So our forecast show is turning likely close to break even in Q2 and then positive from there plus or minus a bit in Q2, depending on projects, but generally break even in Q2.

And just, can you remind us on the timing of the, of the Scarborough project when you expect that to hit? How long, how long it should take and, and maybe an updated revenue estimate, if there has been any change with respect to inflation and so forth on that project?

Yes. So in terms of the revenue side, we're, we're not in a position to be explicit in terms of the revenue type to Scarborough. Other than to -- continue to tell you it is classified as a large pipe coaching project for us, which as you know, means it is at least a 100 million in revenue.

The timing of commencement there is in the latter portion of this year. So, late Q3 to early Q4 in that timeframe, and the total coating activity will last about 12 months.

Our next question comes from Michael Robertson with National Bank.

Just wanted to follow-up, maybe given some of the inflationary pressures out there and supply chain challenges, I guess in general, how do you feel about the margin profile security of the opportunities that you've got in both the backlog and the bed book?

We feel good about that particular aspect and that's really, because I think in all of our businesses, we are in a position to convey inflationary elements through in our pricing to our customers. For those items that are relatively short cycle, we obviously are re-voting on a constant basis and incorporating expected costs. So we can ensure that we are not caught between rising costs and our selling price. And then in the longer cycle businesses, which is primarily in the pipe coating and pipe services segment, particularly the pipe coating piece, all of the contracts we sign there are either fixed price with fixed cost or floating price with floating cost. So it ensures that, we have, I'd say a very good view of margins and I believe we are taking all the right actions to ensure that, we protect those margins as we roll through the rest of the year.

Just one more from me. I seem to remember you guys having pretty good insight on the sort of field levels of inventory for the spoolable pipe, given that you track like the spools itself. What are your sort of thoughts on that right now? Like what do you seeing out there and which way do you see that trending, I guess?

Yes. So North America obviously activity in the oil field space has risen a little faster in the U.S. than it has in Canada, but across the board onshore North American new well construction is up and we think it continues to trend upwards. In the spoolable pipe sector, there was significant inventory on the ground, certainly in the second half of last year, that started to unwind. And at this point I would say, there is very limited excess inventory in the system, probably certain sizes and types. There is a little bit of inventory, but largely orders that are received now are being met, with new production, and I think that's across the industry. So lead times obviously have some potential to stretch in that environment. And we are starting to see backlog in that piece of the business build, which is what you would anticipate at this point in the cycle.

[Operator Instructions]. Our next question comes from Matthew Weekes with iA Capital Markets.

I think I just have one, and it's a bit of a macro question. Seeing some kind of improving sentiment on nuclear power a little bit, just globally, given everything that's happening in the world and the need for more base load, clean energy, a lot of countries that were previously talking about, maybe reducing and now talking about refurbishing, building new reactors. I'm just wondering how you are seeing that play out over the medium and long-term for your industrial business and sort of capturing that higher margin business going forward.

I think certainly we view that as a favorable trend for the ShawFlex arm of our automotive and industrial segment. I think we are uniquely positioned to provide extremely high-quality product into the nuclear industry. We have got a long history of doing that here in the Canadian markets and slowly growing history of doing that outside Canada. So I think we are well-positioned to see a benefit from that. Obviously, it depends on exactly where and what style of nuclear reactor is being constructed or refurbished. We are qualified for some but not for all. Although working to be qualified for more and more as we roll forward here. So difficult to quantify at this point in time, but certainly a favorable trend and one that we think will benefit the business over the coming years.

I'm showing no further questions in queue at this time. I'd like to turn the call back to Mike Reeves for closing remarks.

Well thank you for joining us this morning for the first quarter earnings call. We appreciate your interest. Certainly, appreciate the questions, and look forward to getting together in another three months to talk about the second quarter earnings at that time.

Have a great day, everybody.

This concludes today's conference call. Thank you for participating. You may now disconnect.