Release Date: August 09, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Mattr Corp (MTTRF, Financial) reported $254 million in revenue, $43 million in adjusted EBITDA, and adjusted earnings per share of $0.31 for Q2 2024.
- Order visibility for the rest of the year and into next is improving across multiple business lines.
- The company's MEO program has made considerable progress, with new production sites commencing operations on time and on budget.
- Mattr Corp (MTTRF) has a strong balance sheet and cash generation profile, enabling a flexible but disciplined capital allocation strategy.
- The Xerxes business saw a robust sequential rise in tank shipments and production during Q2, indicating strong customer demand.
Negative Points
- Adjusted EBITDA from continuing operations decreased by 15.6% compared to the prior year's second quarter.
- The company recognized a $0.3 million restructuring charge related to the closure of the Xerxes manufacturing facility in Anaheim, California.
- A substantial international Flexpipe project was deferred, impacting Q3 revenue and margin expectations.
- Cash used in operating activities was $9 million, compared to cash provided by operating activities of $67.3 million in the prior year's second quarter.
- The connection technology segment reported modestly lower sequential revenue and adjusted EBITDA compared to the prior year.
Q & A Highlights
Q: I just wanted to touch on your guidance first. I think you guys are alluding to Q3 being lost in Q2 on an EBITDA basis. But if I take a look at your commentary for the full year, you guys are expecting underlying profitability to be similar to last year. So that does imply quite a bit of growth in Q4 to hit those levels. So just curious what's giving you the confidence to reach that target, or am I looking at the numbers incorrectly there?
A: So perhaps, I'll start, and then I'll pass to Tom. So to make sure that we have clarity around the term underlying profitability that was referenced in the press release, when we look at our full-year 2023 adjusted EBITDA and exclude the fairly modest MEO expenses we incurred in the second half of 2023 from that number, you are looking at an underlying EBITDA number of around $168 million. So when we talk about year-over-year underlying profitability being similar, we are attempting to refer to that comparison. Obviously, this year we have far more substantial MEO expenses that are working their way through the income statement. And as Tom has indicated before, we continue to believe those numbers are in the $20 million to $25 million range for the full year, but they are not evenly distributed quarter to quarter. So as we look forward, we expect Q3 MEO expenses to be lower than they were in Q2, and Q4 MEO expenses likely to be similar to Q2. So there is some movement in the MEO side of things that, perhaps, causes a little confusion as you look at quarter-to-quarter performance. But what I would say to you is that we are continuing to see underlying demand for our products remain strong. We see it in our outlook for revenue this year, being above last year. And we see it across all of our business lines. We've seen Flexpipe continue to perform at extremely high levels, despite a very substantial drop in their underlying North American market activity levels. We have seen stronger-than-expected rebound in customer demand for fuel tanks this year, which we expect will continue until the very late Q4 typical seasonal slowdown period. And we continue to see the connection technology segment have very robust demand for their products, although the mix of where that demand is coming from is moving around just modestly. And consequently, we see slightly lower margins in that segment in the second half of the year than we did in the first half of the year. But I would tell you, I think that is a temporary effect. And the first half of next year is far more likely to have a margin profile similar to the first half of this year than the second half of this year. Hopefully, that provides some clarity, David. Tom, anything you'd add there?
Tom Holloway: Yeah, I mean, I think Mike's commentary around MEO cost is really what's causing a bit of a skewing in Q3 and Q4. So just to be clear, I think the profile of Q1 and Q2 look similar to Q3 and Q4. So Q1 similar to Q3, Q4 similar to Q2, in terms of MEO cost. And then, as he said, adding those back to get to underlying profitability is what we were referring to.
Q: Next question is just on the deferred large international Flexpipe order. I think it was supposed to be delivered sometime in Q3 or Q4. It does sound like you have to re-bid on that contract now if it does come back to market. But just curious if you have any work in progress that was related to that previous business won.
A: No, so we certainly have not incurred any direct expense associated with that order that we would have to recognize. I think this is a great moment just to comment. The Flexpipe international business is really no different than most international oil field service and oil field product businesses. We tend to be serving projects. At this point, we've expanded our international Flexpipe business to the point where we have, I would say, a fairly healthy underlying foundation of projects that are smaller. And therefore, as those projects move around, they tend to cause relatively little consequence to quarter-to-quarter performance. But every now and again, there are really substantial opportunities. These are occasional, and I wouldn't guide you to expect that these things will be a frequent occurrence. But in this particular case, a very large order in the Middle East that originally we thought was going to contribute to revenue in the second quarter of this year, it moved to the third quarter and has now moved out of the year. But it's driven entirely by our customer's reassessment of their levels of current inventory. And the timing of when they will come back to market with that particular order is not perfectly clear, but it's probably in 2025. But until they confirm to us, we obviously can't confirm to you.
Q: Can you give some perspective on distributor inventory levels for Xerxes and when you might expect production to more closely follow shipments going forward?
A: Yes. Xerxes has been a bit of a roller coaster the last 12 months. As you recall, mid-year last year, it became clear that our customers were really wrestling with some extending timelines on securing permits for their fuel construction projects. And we saw shipments start to fall materially below normal yearly trends, and we saw inventory start to rise. That rising inventory pattern continued for most of last year. We curtailed production in the fourth quarter of last year. And we maintained production at relatively low levels in the first quarter of this year in order to manage that inventory level. But what we've observed is our fuel customers, while they still face the same significant timelines to secure permits, acted very quickly in the middle of last year to begin procuring greater volumes of real estate to file for permits earlier than they normally would and in greater volume than they normally would. And what we've seen as we've moved into the construction season this year is that they clearly have found ways to work around the permitting issue. The underlying issue hasn't gone away, but their behavior has adapted. And it has driven a much more substantial rise from Q1 to Q2 than we would normally have expected to see. It has caused us to ship substantially more tanks in the second quarter than we built. which is why the rise in shipments is a little bigger than the rise in revenue. Some of those tanks were built and recognized as revenue last year. I think we see our inventory balance today sitting within a normal range, but I think our inventory balance will continue to move down for the rest of this year. Our distributors, who tend to serve smaller fuel station construction customers, have themselves relatively low levels of inventory. So I think we are now into an environment where demand is rising; inventories are shrinking. And if I look forward, I think even with the addition of our South Carolina production facility, which is just starting to produce products, I do not envision a scenario where we are lacking for demand across the entire Xerxes production network as we roll through the rest of this year and into next. So I'm very pleased with the decision we made to build
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
