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Good day and thank you for standing by. Welcome to the Shawcor First Quarter 2023 Results Webcast Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, 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 2023 earnings press release, and in the MD&A that is available on SEDAR and on the company's Web site at shawcor.com. For those that have tuned in via webcast, you may follow the visual presentation that accompanies this call.
I'll 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. Meghan and I are joined today by our CFO, Tom Holloway.
The first quarter of 2023 saw Shawcor continued to execute on its commitments to elevate margins, lower volatility, and focus resources on high-growth opportunities serving industrial and critical infrastructure end markets. The company delivered strong operating results across all segments, added to its fast-growing Stormwater Solutions business, committed capital into high-return organic growth opportunities, accelerated its share repurchase activity, and continued the mobilization of its large Southeast Gateway Pipeline Project. All three of our operating segments reported meaningful revenue and adjusted EBITDA growth during the quarter when compared to the prior year.
Our industrial and infrastructure-focused businesses continue to benefit from significant global investment in transportation, low-emissions energy, electrification, communications, and water-related infrastructure. In parallel, our energy-oriented businesses are experiencing rising market demand, with sales or larger diameter composite pipe accelerating, and pipe coating activity remaining robust as offshore pipeline infrastructure expansion continues its multi-year upcycle.
Q1 also saw the organization continue its focus on environmental, social, and governance-related enhancements. We believe firmly that taking sensible business improvement actions, such as more efficiently utilizing resources and expanding the talent pool from which we recruit can deliver substantial economic value to the company in the near and long-term, while also driving achievement of our stated 2030 ambitions to lower greenhouse gas emissions and elevate senior management diversity.
Shawcor's Annual ESG Report will be released later in the year, and in addition to revealing strong progress towards our long-term ambitions, we'll show this pragmatic approach has resulted in approximately 30% lower energy consumption in 2022, compared to our 2019 baseline. I'm proud of our practical approach to ESG, and of the continuing commitment demonstrated by our employees in this important area.
The hard work completed across Shawcor in the last few years to substantially strengthen our balance sheet and our cash generation profile positions us to pursue a disciplined capital allocation strategy, balancing share buybacks with investment in high-quality growth to generate elevated returns for all stakeholders. Consistent with our previously shared full-year capital guidance of $160 million to $180 million, during Q1, the company commenced two substantial growth capital investments in our Composite Systems segment. These investments will enhance production capacity, efficiency, and proximity to key markets, and are expected to accelerate mid and long-term revenue growth, elevate margin profiles, and deliver attractive overall returns.
The company also continues to be active under its previously launched Normal Course Issuer Bid, taking the opportunity to repurchase shares at an accelerated pace during Q1. In parallel, we remain alert to strategically aligned, attractively valued acquisition opportunities. During the first quarter, the company supplemented its storm water product offering by acquiring the assets of Triton Stormwater Solutions, which has subsequently been incorporated into the company's Xerxes business, part of our Composite Systems reporting segment. This acquisition brings in house a portfolio of unique composite-based infiltration chambers, which are a crucial component in many storm water management systems.
We expect this transaction to enhance margin in our storm water business, provide access to markets beyond our current North American core, and position Shawcor to significantly increase chamber manufacturing output, enabling an accelerated growth profile in this key market sector. Finally, our previously announced strategic review process for the remaining businesses of our Pipeline and Pipe Services segment is ongoing. And we remain on track to rename the company from Shawcor to Mattr by midyear, establishing a new exciting brand trading under a new TSX ticker symbol that more fully reflects our capabilities, our purpose, and our future.
Looking a little closer at each of our segments, during Q1, Composite Systems revenue climbed 25%, and adjusted EBITDA margins rose 610 basis points compared to the same period last year, reaching a new record level of first quarter performance for the segment. Overall segment revenue in Q1 was modestly lower than the prior quarter due to the absence of the segment's oilfield asset management business, which was sold partway through Q4. With this sale complete, there are no further business divestitures currently contemplated from within the Composite segment.
North American sales of the company's spoolable composite FlexPipe products remained robust during the quarter, with further acceleration of large diameter product adoption and new customers onboarded in multiple operating basins. First quarter performance in this business benefited from an unusually late onset of break-up conditions in Canada, which extended product delivery to Canadian customers further into March than would ordinarily be expected. The normal slowing of Canadian FlexPipe sales tied to the break-up season will impact second quarter results to a modest degree, but our expectations for strong year-over-year growth in the FlexPipe business remain unchanged.
Demand for Xerxes underground storage tanks in the fuel market and our full range of storm water management products also remained high in Q1, although normal seasonal slowing of shipments was observed during the quarter as ground conditions across parts of North America were unfavorable to underground installation operations. This impact is expected to abate in the second quarter. With robust demand across the Xerxes portfolio, enhanced by the completion of the previously mentioned Triton acquisition, we believe our fuel and water-oriented businesses are well-positioned to continue their recent trends of significant annual growth.
Our favorable long-term outlook for markets served by the Composite Systems segment underpins the growth capital investment to establish two additional production sites in the U.S., one for FlexPipe, one for Xerxes tanks, which was announced subsequent to quarter end. Further details of these investments may be found in the company's press release issued on April 26.
The Automotive and Industrial segment delivered a new record quarter, with 19% revenue growth versus the same quarter last year, and adjusted EBITDA margins exceeding 20%. This performance was driven by continued strong North American industrial and infrastructure demand across the segment's product portfolio, robust deliveries of heat shrink products into the European automotive market, significant deliveries of premium wire and cable into aerospace and nuclear projects, and normal seasonal restocking by distributor customers. Consistent with the normal seasonal cycles of this segment, we expect Q1 to be the strongest quarter of the year.
We currently anticipate full-year demand for DSG-Canusa heat shrink products to be modestly higher than 2022 as total vehicle production remains depressed in the face of elevated interest rates, but electronic content in vehicles of all drive types continues to rise. Despite the impact of high interest rates, we continue to anticipate year-over-year business growth across industrial and infrastructure markets for both ShawFlex and DSG-Canusa, particularly in North America as long-cycle infrastructure expansion activity continues.
Despite this favorable underlying business progression, the remaining quarters of 2023 are likely to yield segment adjusted EBITDA similar to the same quarters of 2022 as revenue expansion is offset by incremental costs incurred to spur future growth acceleration, including costs recognized in advance of North American production facility relocation investment and expansion. We remain vigilant to the potential impacts of energy cost and availability in Germany later this year, and continue to take steps which lower the company's risk tied to this possible issue.
Overall, we maintain a constructive view of the long-term market trends which impact the ShawFlex and DSG-Canusa businesses, and we will continue to invest growth capital to enhance our product offering, improve our manufacturing capacity, and elevate our production efficiency, including the previously announced intent to relocate, expand, and modernize our North American production footprint.
Lastly, our Pipeline and Pipe Services segment saw revenue rise by 65% compared to the first quarter of 2022, delivering an adjusted EBITDA margin of nearly 11%, compared to a loss in the prior year quarter. Sequentially, segment revenue and adjusted EBITDA rose slightly compared to previous expectations of modest declines. This strength was the result of very robust Canadian small-diameter pipe coating activity, which benefited from the unusually late onset of break-up, and particularly efficient operational execution of larger projects in our Latin America and Asia-Pacific regions. Coating activity in all regions remained at elevated levels during Q1, and the company is starting to observe tightness in pipe coating capacity in certain geographies for late-2024, and beyond.
Mobilization activities for the Southeast Gateway Pipeline Project continued during and subsequent to the first quarter, with capital deployed in accordance with the company's previously laid out 2023 guidance. The company continues to expect coating activity to commence midyear. Pipeline and Pipe Services segment adjusted EBITDA during the second quarter of 2023 is expected to be modestly lower than Q1, impacted by the timing and mix of specific pipe coating projects.
Coating activity on the SGP Project, and others, will accelerate entering the third quarter, and the company continues to expect a substantial step-up in segment revenue generation during the second-half of 2023, with segment profitability expected to reach previous peak cycle levels during this period.
The combination of a substantial high-quality backlog, elevated volumes of bid and budgetary quoting activity, favorable energy fundamentals, and continued successful new technology adoption support our belief that the pipe coating business will benefit from significant activity levels for several years to come.
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 was suggest over $1.3 billion, an increase of $79 when compared to the prior quarter. Healthy order intake prevailed across our composite systems and auto and industrial segments while the PPS segment secured several smaller pipe coating projects.
These new awards coupled with movement of expected revenues from previously awarded pipe coating project into the forward 12-month window most notably the SGP project in Mexico, caused the PPS segment to represent a bigger majority of the company's 12-month backlog balance at the end of Q1 than it did at the prior quarter end. We anticipate consolidated 12-month backlog will begin to decline as execution of the SGP project commences which is expected later in Q2.
Total backlog which includes committed work beyond 12 months was similar to the prior quarter at just under $1.4 billion. Shawcor's bid number reflects the value of work where the company has issued a firm price with proposed contract terms against and explicit scope work with a defined timeline for execution. At the end of Q1, the bid balance was $847 million. An increase of $54 million when compared to the prior quarter as the volume of new bidding activity in our composite systems and PPS segment more than offset the movement of projects from bid into backlog.
Bidding activity levels remain strong across the energy spectrum and are clear indicator that customers are committed to moving forward with new and previously contemplated onshore and offshore field developments in the face of elevated commodity prices and growing global demand for natural gas. The quarter end bid number included $168 million of conditional awards pending final investment decision, up from $150 million at the end of Q4.
Shawcor's budgetary number reflecting the value of indicative pricing submitted to allow customers to bill the project budget ahead of formal procurement activities was $2.5 billion at quarter end, up from $2.1 billion in the prior quarter as new budgetary quoting exceeded the movement of several projects from budgetary to bid. This growing budgetary number further supports our expectations that offshore pipe coating activity will remain elevated for several years to come. It is important to note that the vast majority of Shawcor's bid and budgetary balances are attributable to the PPS segment.
Tom will now walk through the company's first quarter financial highlights.
Thanks, Mike. The first quarter's consolidated revenue was $364.4 million, 36% higher than the $267.8 million in the first quarter of 2022. Adjusted EBITDA was $54.5 million. A 177% increase from the prior year first quarter. Primarily attributed to demand growth experienced across the company's reporting segments, further enhanced by continued margin expansion arising from favorable product and project mix and the divestiture of loan margin businesses.
Consolidated results for the first quarter did not include any material non-recurring items outside the company's normal course of business. Additionally, there were no restructuring charges in the quarter. In future quarters, however, we anticipate taking a low single digit million non-recurring charge related to the anticipated sale and exit from our inactive pipe coating site in Southern Italy.
Turning to segment results, the composite system segment revenue was $132.5 million. A 25% increase compared to the first quarter of 2022. And adjusted EBITDA was $26.7 million. A 79% increase from the prior year first quarter. These results reflected growth in demand for composite type products as completion activity levels in North America remained robust.
The business also benefited from continued growth in demand for large diameter pipe products which saw sequentially higher quarterly sales. Additionally, the segment continues to experience robust demand for underground fuel tanks and water management systems. The rise in segment revenue was further bolstered by price increases aimed at offsetting the inflationary increases in raw material and labor costs across the segment.
The Automotive & Industrial segment revenue was $93.5 million, a 19% increase compared to the first quarter of 2022 and a new quarterly record for the segment. Adjusted EBITDA was $19.2 million, a 19% increase from the prior year first quarter. The increase was driven by seasonal restocking by distributors, along with elevated demand for wire and cable products from North American industrial markets stemming from ongoing infrastructure spending, nuclear refurbishments and product shipments into the aerospace market.
Additionally, continued demand for the company's heat shrink tubing products in industrial markets and within the automotive sector, along with the implementation of price increases aimed at mitigating the impact of inflationary increases in raw material and labor costs, further solidified the segment's strong performance.
Pipeline and Pipe Services segment revenue was $138.4 million, a 65% increase compared to the first quarter of 2022, primarily resulting from the successful execution of pipe coating project activity already in backlog across the segment's global facilities, along with robust activity in Western Canada. This was partially offset by the absence of revenue associated with the Lake Superior Consulting business sold in August of late last year.
Adjusted EBITDA was $14.9 million, a 311% increase from the prior year first quarter, reflecting the aforementioned higher revenue, a more profitable pipe coating project mix and the impact of higher activity on manufacturing absorption.
Turning to cash flow in the quarter, cash used in operating activities in the first quarter was $31.6 million, reflecting an $85.9 million increase in working capital. This increase in working capital is largely related to the mobilization of the SGP project, as expected, and an increase in accounts receivable across all segments driven by increased activity levels.
As a reminder, milestone payments received in late 2022 are in process of being utilized on the SGP project and will largely be consumed by midyear 2023. Cash used in investing activities in the first quarter was $30.4 million, reflecting $22.8 million of capital expenditures and the $8.6 million cash purchase price to acquire Triton Stormwater Solutions.
During the first quarter, cash used in financing activities was $39.8 million, reflecting $25 million in debt repayments, $7.8 million of lease payments and $7 million in share repurchases under the Company's normal course issuer bid. Net cash used in the first quarter of 2023 was $102 million. Based on the actions completed and planned, its diversified business, current order backlog and confidence in the outlook, the Company expects to generate sufficient cash flows and have continued access to its credit facilities, subject to covenant limitations to fund its operations, working capital requirements and broader capital allocation program, including share buybacks.
As of March 31, 2023, we had a cash balance of $162 million, debt of $186.4 million, and $69.2 million of standard letters of credit. As of the end of the quarter, the Company's net debt-to-adjusted EBITDA ratio was 0.46 times significantly below our target of 1.5 times. We also continue to purchase shares under our normal course issuer bid and have repurchased slightly over 626,000 common shares during the quarter.
As mentioned earlier, the company spent $22.8 million in cash on capital expenditures of which $21.9 million was related to growth expenditures. Customer funded facility mobilization spending in support of the SGP project was the largest single capital expenditure during the quarter, with remaining spend focused on infrastructure improvements to increase production capacity in the Composites Systems and Automotive & Industrial segments.
Looking ahead to the remainder of the year, the Company still expects to spend $160 million to $180 million of capital expenditures as previously communicated. In order to complete growth projects initiated within the Composites and A&I segments during 2023, the company anticipates spending an additional $50 million to $70 million of growth CapEx in 2024.
Subsequent to the quarter, the company announced further details on a portion of the expected capital spend, including two new production facilities for the Composite Systems Segment in the U.S. The investments in these high-return potential opportunities are expected to create further revenue generating capacity of approximately $100 million once these facilities approach efficient utilization levels, which is expected to occur in 2026.
We will continue to prioritize organic initiatives to drive growth in our most differentiated high-value materials-based solutions in support of industrial and critical infrastructure end markets, while ensuring that sufficient capacity is available to execute on our pipe coating projects in backlog. The company's strategic actions, and others that will evolve over the coming quarters, are intended 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 enable responsible, sustainable renewal and enhancement of critical infrastructure.
Moving and remaining below our net debt to adjusted EBITDA target ratio of 1.5 times has enabled the company to further focus on a disciplined capital allocation strategy which includes significant organic growth investments, targeted inorganic growth, and return to shareholders as evidenced by the repurchase and cancellation of over 1.1 million common shares from the initiation of the Normal Course Issuer Bid to the end of Q1.
I'll now turn it back to Mike for some final comments.
Thank you, Tom. Since the start of 2023, we've taken significant steps to increase average margins, lower volatility, and elevate cash flow. We remain committed to tightly controlling fixed costs, optimally deploying capital, and completing the strategic review of our remaining PPS segment businesses. We have substantially reduced outstanding debt, are returning cash to shareholders, and leaning into high-value organic growth opportunities, taking advantage of our unique technology portfolio and strong long-term customer demand to deploy significant growth capital and deliver elevated returns for our stakeholders.
The underlying trends for each of Shawcor's primary businesses are favorable, and expected to remain so for several years. Long duration North American critical infrastructure activity remains robust. Fundamental energy demand drivers persist, and the offshore oil and gas pipeline market has entered a multiyear upcycle. Our simplified portfolio of high-value materials-based products has limited exposure to consumer discretionary spending, and we believe has resilience in the face of recessionary forces. While we remain vigilant towards the potential impacts of geopolitical events, supply chain risks, and higher interest rates, we also remain confident our momentum will continue.
We expect to adjusted EBITDA in the second quarter of 2023 to approach the levels achieved in the first quarter, before rising very substantially in the second-half of the year driven by continued Composite Systems growth and significant pipe coating activity, including elevated margin contributions from Southeast Gateway Pipeline Project.
I'll now turn the call over to the operator and open it up for any questions you may have for myself, Tom, or Meghan.
Thank you. [Operator Instructions] Our first question comes from Aaron MacNeil with TD Securities. You may proceed.
Hey, good morning, and thanks for taking my questions. Mike, you obviously touched on it in your prepared remarks, but I'm hoping you can give us a bit more detail on your updated views on the potential timeline for both the sale announcement as well as the transaction close for the pipe coating business? And maybe it's my interpretation, but you've previously linked the timing of the sale with the corporate rebranding. So, I'm wondering if you'll go ahead with that rebranding without a sale announcement or is midyear also indicative of when you intend on announcing something.
Thanks, Aaron. Good morning. So, as we said before, the process surrounding our strategic review for the remaining businesses of the PPS segment is continuing and is generally following the pathway that we would have expected. We've always indicated that some kind of announcement around the middle of the year was most likely. I still think that is the best guidance that I can provide. Unfortunately, I can't be more specific than that at this point. I would say that the precise moment of rebranding of the corporation isn't necessarily tied explicitly to announcing or consummating a transaction.
So, I still would guide you to expect that we rebrand the corporation before the end of the second quarter and that may be a little before there are announcements on transactions. But as I said earlier, continuing to follow the pathway we had expected and looking forward to being able to share more information as soon as that opportunity arises.
Makes sense. Another phase of Exxon's offshore Guyana development has been sanctioned. I'm wondering if you could give us a sense of what the pipe coating opportunity is there, what you can say about your involvement or the status of that contract?
Yes, there's not a great deal I can share there. Obviously, there's some confidentiality obligations that we and everybody else would have to our customer. But what I would say is that, to this point, Shawcor has earned the right to do 100% of the pipeline coating for Exxon and other Guyana development projects. And we certainly feel very well-positioned for this coming phase and others that will follow. But we respect the fact that we need to continue to demonstrate both extreme capability around health and safety, quality, and technology to have that opportunity. And we would expect that there will be awards and related communications that will occur here in the coming months.
Fair enough. I'll turn it over.
Thank you.
Thanks, Aaron.
Thank you. Our next question comes from Yuri Lynk with Canaccord Genuity. You may proceed.
Hi. Good morning, everyone.
Morning.
Good morning.
The revenue growth in the quarter, very strong, and I know you've got substantial investment plans to expand capacity in FlexPipe, and Xerxes, and A&I. I'm just wondering if how much capacity you have left with the current footprint, and is there still room to grow before these new facilities come in? I'm just wondering if they might get tapped out, if you will, from a capacity perspective before the new facilities come online, which might lead to a pause in growth next year. Anything you can share on how they line up?
Yes, appreciate the question. So, the large projects that we've so far announced and will continue to announce as we cross appropriate thresholds on the A&I side, certainly will be very important to establishing the next phase of major growth. But there are smaller capital investments that are occurring and had been occurring over the course of the last couple of years, and will occur this year, and next, to ensure that we are able to continue to grow while we wait for these larger facilities to come online. Our position versus absolute maximum production capacity varies a little depending on the business.
And obviously, it would be a little inappropriate for me to comment in too much detail there because I'd rather not provide that info to my competitors. But I would say that we are confident in our ability to continue to move our year-over-year revenue upwards from '22 to '23. But we are certainly looking forward to having the substantial increase in production capacity that will come online staggered between '24 and '25.
Okay. With regards to the Composite Systems expansion plans in the U.S., this is your most cyclical end market of the go-forward business. What's the plan? Is the plan there to take market share in that region or is the market growing to such an extent that it can absorb the $100 million of sales that I think you're targeting there?
Yes, so when we talk about the North American onshore gathering line market, which is primarily what we serve with the FlexPipe product line, it's a market that's still in transition from steel to composite products. And we certainly expect that transition to continue. So, I think if there were no change in activity levels, we would still expect to see some increase in demand for composite products there. Really, the substantial component of our growth over the course of the last 12 months, and as we look forward, is this introduction and expansion of our larger diameter offering.
As I've said before, there was approximately 50% of the existing composite pipe market in North America that we could not address with our product portfolio until the recent introduction of the 5-inch and 6-inch products. Now, we are positioned to address that, obviously, effectively doubling our addressable market. And we see the combination of composites continuing to take share from steel, and our ability to take share, particularly in these larger diameter product markets, as being the primary drivers for the consumption of the extra revenue capacity that we will bring online.
Are your competitors also adding composites capacity in the U.S.?
To my knowledge, they have not made a public statement to that effect. And so, a little hard to know what they may be doing out of the public eye. But I don't think so is the answer.
Okay, great quarter. I'll turn it over.
Thank you.
Thanks.
Thank you. Our next question comes from Keith Mackey with RBC Capital Markets. You may proceed.
Hi, good morning, and thanks for taking my questions. Maybe if we could just start out on that budgetary number, a nice jump from last quarter up to about $2.5 billion now. Can you just talk a little bit, Mike, about the nature of what's in that work, maybe region-specific or product-specific or timeline-specific if there's any larger projects within that or if it's just a confluence of a bunch of small-to-midsize projects all coming together at once?
Yes, happy to share a few bits and pieces there. So, as I think we've said before, the budgetary category is almost exclusively the domain of our offshore pipeline coating business. So, you should just assume that near 100% of that budgetary number is tied to that part of our business. And that part of the business is certainly the driver for the move up quarter-over-quarter, largely eastern hemisphere, rather than western hemisphere, and some fairly large projects on the horizon there with a scattering of some small and midsize ones as well. So, I think, generally what we see is customers continuing to look very closely at large, primarily natural gas-oriented [trunkline] (ph) additions to feed either existing or planned LNG facilities. And typically the eastern hemisphere has been the leader in that space. So, that's generally what's driven the number this quarter.
Okay, thanks for that. Maybe just to go back to Composite Systems, can you talk about what you're seeing from oil and gas customers? I know one of your competitors talked about soft orders in Q1 from oil and gas customers in the composite segment. Have you seen that on a relative basis or has that been, again, insulated by the factors you just discussed?
Yes, we have definitely not seen a softening. I do think that it's important to bifurcate oil versus gas, particularly in North America land, as I'm sure you see the relative strength of commodity prices has been a little different for those two commodities. That the bulk of our business with the FlexPipe product line is oriented towards oil production rather than natural gas production, not that it necessarily will stay that way forever, but today that's the case. And as a consequence, the modest decline in gas-directed rigs has not had a material impact on our business. So, we're feeling very confident that our outlook for the rest of this year is solid for that business line.
Okay, got it. I'll leave it there. Thanks very much.
Thanks.
Thank you. Our next question comes from Matthew Weekes with iA Capital Markets. You may proceed.
Good morning. Thanks for taking my question. Just wondering, obviously it's hard to tell and still early at this point, but a lot of announcements to some temporary production shut-ins happening in Western Canada as we have the wildfires in Alberta here. I'm just wondering if there's potential any impact on sort of the short-term Composites business in Western Canada may be attributable to that.
Yes, I mean always difficult to predict what may happen with kind of natural occurrences like wildfires. At the moment, we do not see or currently anticipate an impact, but obviously new fires spreading to new areas could certainly have an impact more likely than anything would be a deferral of the installation of our product, which may or may not defer the actual sale of the product. So, little early to know whether there will be, but at the moment we don't see anything.
Okay, thank you. And just on the balance sheet side, just a little bit of granularity here as you sort of ramp-up and continue to mobilize the SGP project and then work through that over the subsequent quarters. I'm just wondering if you can provide commentary on kind of what the cadence of sort of working capital investment and then sort of reaping that working capital as time goes on might look like over the next, say eight to 12 months?
Yes. So, Matthew, the working capital is progressing kind of as we had expected. So, coming to net debt moving up as we spend working capital in the first quarter, we expect a similar trend in the second quarter as we spend the remainder of the SGP milestones that we had. And then we will see it start to improve and working its way down over the course of the back half of the year. So, I would expect, speaking in terms of net debt, I would expect again similar to what I said last quarter, nothing higher than one times by mid-year and then coming back down from that, approaching the zero number, probably not getting all the way there by the end of the year.
Okay. That's helpful. Thanks. I'll turn it back.
Thanks.
Thank you. Our next question comes from Zachary Evershed with National Bank Financial. You may proceed.
Good morning, everyone. Congrats on the quarter.
Good morning, thank you.
So, if we're thinking about the relative magnitude of the weather impacts to Flexpipe and Xerxes tanks, how should we weigh how that will move the levers as we move from Q1 to Q2?
So, typically, the impact of the breakup season in Canada is the fake low to mid-single-digit EBITDA, probably low the Q1, particularly Q1 weather conditions that impact the installation of underground tanks, again, probably low to mid-single-digit EBITDA, which typically will ease off as we roll into Q2, and at this point in Q2, that's been the case.
That's helpful. Thanks. And then any change on how you're weighing Greenfield versus M&A opportunities for an entry into wire and cable production in the U.S.?
So, no change, I think that we continue to believe that what we have in front of us this year and into next year and perhaps a little further into the future, some really, really attractive, high return, relatively low risk organic growth opportunities. We obviously, in parallel, continuing to evaluate are there ways to secure fairly priced, strategically aligned acquisition opportunities that would accelerate that growth pattern to the benefit of our shareholders in our company.
So, the philosophy hasn't changed. As we've discussed before, we do believe that at the appropriate moment, having a wiring cable footprint in the U.S. is going to be a valuable next step for that business. But it's not something that we are planning to invest capital dollars to establish here in 2023, a little early to rule it out for 2024, but Tom, anything you'd add or change there?
Yes, I think Mike laid it out well. You should expect 2023 to be focused on organic, getting those projects up and running, getting them executed and done on time, on budget, et cetera, while we continue to scour the market and look and see if there's a strategic fit for some adders. So, as Mike said, probably more of a '24 type of item, in terms of inorganic growth like that. But the other piece, just to round it all out, is we will be continuing to focus on our capital, our share repurchase program through our NCIB. So, we've got enough cash to do all of those things. We'll be very disciplined with it, but you should expect us to continue to do all those things.
Great color, thanks. As we look ahead to the rest of 2023, the margin mix at Composite Systems was pretty sweet. Is there an opportunity for an even larger proportion of large diameter pipes?
Short answer is yes. We certainly are very pleased with the progress that the Composite segment has accomplished on the margin front, but we don't think that that business has reached maturity in that respect. So, we have a positive outlook for the progression of their margin profile over the course of the rest of the year.
Great, thanks. And just one last one, could you remind us of your approach to the magnitude of potential price hikes, their delay in flowing through to P&L, and whether your market leading position gives you some leeway there to lead on pricing versus competitors?
Yes, obviously our market position and the nature of the contract relationship with our customers vary slightly from business-to-business. But generally, we would expect to see price increases flow through to revenue within a quarter or two, depending on the business. And yes, when we have what we feel is a high value product, and we feel that that we are a business that can offer substantial value to our customers, we feel that it's our obligation to all stakeholders in the company to price those products fairly. And we typically don't wait for our competitors to move.
That's great, thanks. I'll turn it over.
Thanks.
Thank you. Our next question comes from David Ocampo with Cormark. You may proceed.
Thanks. Good morning, everyone.
Good morning.
I just wanted to loop back on Zach's question about Composite system margins, because when I think about large diameter pipe, how accretive are those margins compared to the base business, because if I take a look at one of your peers, they're generating margins in the high 20% range. Is that kind of a fair number to use for you guys, or how should we be thinking about that?
Yes, I think that's in the right ballpark.
Okay. And to Zach's point, what's the percentage of the business now that's large diameter versus kind of your old legacy products that are under four inch?
Yes, I think we need to be a little bit careful what we share there, because obviously our competitor would love to know those things as well. But what I'd say is that for the majority of last year, I would describe the large diameter products as making up probably less than 10% of the revenue of that business. I certainly expect that it will make up more than 10% of the business this year.
Okay, that's perfect. And for capital allocation, I think the high yield notes that you guys have limit what you guys can do on the NCIB and potentially even on SIB. I think the number you gave before was $25 million, any changes to that number this quarter, just given the strong print, and how does that number change if you guys ultimately sell the PPS asset call it mid this year?
Yes, good question. So, the NCIB, just to kind of level set, it was set at $25 million because we had an initial basket under the high yield of $25 million. So, we've capped our first year at that number. That's what's approved currently, as you're alluding to, we do have a builder's basket which effectively allows us to grow that number as our earnings grow and our earnings have indeed grown. So, we do have some additional capacity at this point, if we were to go back and get approval to increase that number. We're looking into that. We've not made that decision just yet, so I think you should expect us to make that decision, since our program expires in September anyway, our first year, we'll be making that decision over the next quarter. Sorry, go ahead, David.
Yes, I'm sorry. Does that number ratchet up if you do sell a business? Or is it only tied to earnings?
So, it's tied to an adjusted earnings calculation, which pulls out one-time. So, I don't think the sale of business would actually necessarily factor into that. It would be added back as a one-time item.
Okay. And then, Tom, just a quick one for you, I'm just curious why the PPS assets aren't held for sale on your financial statements. Is there an accounting reason for that?
Yes. So, in order to be held for sale, that we have to cross certain thresholds, which provides a level of certainty and signing documents, which if we had done that, we would have announced it and we've not crossed those thresholds. So, that's the simple answer. It doesn't change anything with regards to where we are on our strategic though.
Okay, that's perfect. I'll hand the line over. Thanks a lot, guys.
Thanks, David.
Thank you.
Thank you. [Operator Instructions] Our next question comes from Tim Monachello with ATB Capital Markets. You may proceed.
Hey, good morning.
Good morning.
Good morning.
Second follow-up to Zach and David's question, just a clarification, when you say large diameter products, are you talking about five and six inch or are you talking about four, five and six inch?
Five and six inch.
Five and six inch. Okay, in terms of the stormwater management systems, you guys are targeting a lot of growth in that business. I wonder if you can give a progress update how Triton is working out in that strategy, and I guess, can you provide some bookends on growth expectations for 2023?
Yes. So, the Triton acquisition was closed in early March, so we're roughly 60 days into that process, and I'd say the process is either on or ahead of our pre-acquisition expectations. The team members that joined us through the Triton acquisition have been extremely helpful and have really embraced becoming a part of our team. The products are great products and I feel very confident that this acquisition will position us to really accelerate both the revenue and the margin profile of that business as we roll through 2023 and the years to come. I think a little premature for me to provide explicit guidance on the scale of the water business. What I would tell you is that, I'd be very disappointed if we're not announcing new quarterly records for that business as we roll through what's left of 2023. Q1 tends to be the quietest quarter because installation activity is down due to weather conditions and ground conditions, but as we roll Q2, Q3, Q4, again, I'd be disappointed if we don't have a record year for that business.
Okay, that's helpful. And then last one for me just around the rebrand, and I'm curious if you can provide some insight into the potential changes that you might see in terms of the Investor Relations and reporting metrics, things like that. When you rebrand, is that something that's going to change after you sell the pipe coating business, or should we expect to see a new reporting methodology at the time of the rebrand?
So, I'd say you should not expect any substantive changes in reporting methodology at the time of the rebrand. It's not our intention to complicate things. You may see a renaming of the reporting segments, but you should not expect any movement of businesses between reporting segments, and you shouldn't expect to see any change in the metrics that we report for each of those reporting segments or the company in consolidation. There will be some adjustments that will be necessary at the time that we close the transaction of the PPS segment. We've spoken before there will need to be some modifications to our corporate cost allocation methodologies. And there's one or two metrics that we report today. For example, our bid and budgetary numbers that really aren't relevant once that business has been sold. So, you'll see some tweaks at that point in time, but I don't expect anything at the point of the rebrand.
Great. I'll turn it back. Thanks.
Thanks.
Thank you. Our next question comes from John Gibson with BMO Capital Markets. You may proceed.
Thanks. I just hope to sneak one in at the end here. Just wondering what you're thinking about in terms of target leverage ratios post the PPS sale. I mean, you'll likely be in a net cash position post sale, and I know there are a lot of moving parts, but just kind of wondering what you think the pro forma business could handle in terms of leverage, just given its greater stability going forward.
Yes, great question. So, I think we will continue to target one and a half times just simply to be conservative with not in COVID proofing, right, is the way we think about it, COVID proofing the business. But I think the pro forma business we will likely be able to handle more of a 2 to 2.5 times if we were to choose to do it. We have no intention of doing that at this point though, but to answer the question directly, that's how we are thinking about it.
Okay, great. I'll turn it back. Thanks.
Thank you. And this concludes the Q&A session. I would now like to turn the call back over to Mike Reeves for any closing remarks.
Thank you for joining us this morning, and for your interest in the company. This is the last earnings call under the Shawcor name. So, another milestone. We look forward to talking to everybody again next quarter under our new name. And wish everybody a great weekend. Thank you very much.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.