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Ladies and gentlemen, thank you for standing by, and welcome to the Shawcor Q2 2020 Results Webcast Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Mr. Steve Pierroz (sic) [ Paul Pierroz ], Senior Vice President of Corporate and Investor Relations. Thank you. Please go ahead, sir.
Sure. Good morning. Before we begin this morning's conference call, I'd like to take a moment to remind all listeners that today's conference 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 5 of the second quarter 2020 earnings press release that is available on SEDAR and on the company's website at shawcor.com. I'll now turn it over to Shawcor's CEO, Steve Orr.
Good morning and thank you for joining us on this morning's conference call. Yesterday, we released our Q2 2020 results. As expected, the factors that drive activity saw extreme pressure in the quarter as the result of dual impact of COVID-19 global pandemic and the halting or reduction of capital spending of E&P operators. For Shawcor, this translates into a quarter that was operationally very challenging and one that required extreme discipline to stay focused and execute on those elements that we truly can control. To this point, the individuals that make up this company have done an outstanding job in pivoting and taking actions on a set of priorities that are very different than what they were just a very short time ago. It is the commitment and support of the employees of this company that brings me the most comfort in these uncertain times that Shawcor will continue to be an industry leader. Our employees are truly appreciated, and I wish for all of them and their families to stay healthy. In our communications last quarter, we made it clear that we were seeing a rapid and substantial reduction in demand for the company's products and services. And we fully expected that this reduction would intensify in Q2. Additionally, although the future was and without question continues to be extremely difficult to predict, for Shawcor, we did expect the company's performance would improve from Q2 into the second half of the year if we were successful in executing on a very narrow set of priorities. With this as a backdrop, the priorities for Q2 2020 were: protecting the health of our employees; delivering the products and services needed by our customers; and strengthening the balance sheet through cost reductions and conserving cash. Though very -- through very early recognition that our COVID-19 response needed to be centralized, coordinated approach, together with local implementation, we were able to use the knowledge and best practices from across the company to greatly mitigate the risk to our employees' health. Far from over, and certainly a very dynamic challenge requiring daily management, I believe we've done well in providing our employees a safe environment. So they, in turn, can ensure Shawcor is able to continue to service our customers. Within the quarter, we've been successful in delivering products and services to our customers with minimum interruption. Not an easy task considering all of our businesses had to address COVID-19 risk in the workplace with reduced resources and in several businesses such as composite tanks, wire and cable and engineering and consulting services while demand remains strong or, as in pipe coating operations, was preparing to ramp up operations. Measured by the results this quarter, it should be very apparent that we have fully leveraged the execution strength of the company, have moved with speed and purpose to reduce cost and preserve cash. With little certainty in the profile recovering in the quarter, we took actions to reduce our workforce, exit facilities that do not have line of salt -- sight of volumes to support or have opportunities to deliver acceptable margins, reduce spending and capital expenditures to only those to support work that is visible, reduce working capital for receivables and inventories that we have within the businesses. As a result of the progress we have made, we have high confidence that we'll be able to reach our target of sustainable cost out of the company of $40 million on an annualized basis and more than $40 million generated from working capital reduction and asset sales. Now turning to Q2 2020. Adjusted EBITDA was $4 million compared to $6 million in the first quarter of 2020. The revenue quarter-to-quarter was $266 million, a decrease of 17% from the previous quarter. The quarter's results were in line with what we expected. The demand for the majority of the company's products and services dropped sharply as drilling and completing of oil and gas wells on land in North America was all but halted. Global automotive manufacturers suspended production and large capital projects related to North American transmission lines and offshore oil and gas development experienced operational continuity issues and delays. There were areas of resilience in demand that carried over from the previous quarters, such as those related to North American retail fuel station construction, communication infrastructure build-out and operating pipeline maintenance integrity programs. Also, late in the quarter, we started to see the positive impact of the execution of work the company has under contract related to offshore and international capital spending in the energy sector. Other important developments in the quarter centered around preparing the company for a very slow recovery and include the negotiation of our recently finalized debt amendment, reduction in SG&A expenses to achieve our targeted normalized $70 million per quarter rate and cash generation. Looking into Q3, we expect that we will see the start of stabilization and the first step of recovery from the unsustainable and very depressed levels of Q2. Although the future continues to be extremely difficult to forecast, we do expect that Q2 will be the low point in our performance and that we will see strengthening in the second half of the year and into 2021. Our view is supported by the expectation that our book and term businesses will see a gradual improvement in demand in the quarters ahead, that the work we have secured is set -- and is set to be executed in the next 12 months remains firm and the benefits of cost reduction actions we have already taken or are in the process of being carried out will be realized. Beyond this point, I would again highlight, it's unclear and very difficult to forecast. However, we do expect that our diversified portfolio, which has both early and late cycle oil and gas exposure and a growing non-oil and gas component has positioned the company to weather the storm and reemerge a stronger and more profitable organization when spending recovers in energy, transportation and infrastructure markets. I'll provide more detailed comments in a moment. I'll now turn it over to Gaston Tano, Shawcor's CFO, to discuss the numbers.
Thanks, Steve. As Steve mentioned earlier, the second quarter was challenging due to the continued negative impact caused by the COVID-19 pandemic and the volatility of the oil and gas market. Consolidated revenue in the second quarter was $266 million, 35% lower than the second quarter of 2019. The Pipeline and Pipe Services segment revenues decreased by 37% compared to the prior year quarter primarily due to decreased activity levels resulting from the ongoing global COVID-19 pandemic and the lower demand for pipe coating and girth weld inspection services as a direct result of the significant capital spending cuts by North American E&P operators and continued delays in land transmission line projects. The Composite Systems segment revenues decreased by 40% compared to the second quarter of 2019, primarily due to lower demand for our composite pipe products as a result of the decline in North America drilling and completion activity across the segment's customer base as operators aggressively reduced their capital spending. In the Automotive and Industrial segment, revenues were lower by 20% primarily due to lower demand for our automotive heat shrink products, resulting from the impact of production shutdowns and government lockdown restrictions from COVID-19 that continued well into the second quarter at the majority of automotive OEM assembly plants in North America and EMAR regions. Consolidated results for the second quarter were negatively impacted by nonrecurring items outside of the company's normal course of business. The current quarter includes $17.1 million of restructuring costs as a result of the cost-saving initiatives completed in the quarter, a loss of $400,000 for Argentina hyperinflationary accounting, while the prior year second quarter benefited from the gain of $32.6 million from the land -- from the sale of land in Edmonton and $9.7 million gain on the redemption of an investment in associates, partially offset by ZCL acquisition costs of $12.1 million and a loss of $700,000 for Argentina hyperinflationary accounting. Adjusted EBITDA, excluding these items for the quarter, was $4.3 million, significantly lower than the $36.2 million reported in the second quarter of 2019. This decrease is primarily due to lower revenues in all 3 segments. The impact of lower production activity levels due to the COVID-19 pandemic, partially offset by lower SG&A. The decrease of $31 million in SG&A is primarily due to completed restructuring and cost control initiatives that resulted in decreases of $9.5 million in compensation costs, which includes a $5.5 million reduction in incentive-based compensation and a $3.6 million in travel and entertainment expenses. SG&A in the quarter also benefited in the receipt of COVID-19-related government subsidies of $7.5 million and the absence of nonrecurring acquisition costs related to the ZCL business in the current quarter compared to the $8.7 million incurred in the second quarter of 2019. Adjusted EBITDA margin for the second quarter was 2% compared to 9% in the prior year second quarter due to the reasons mentioned earlier. The Pipeline and Pipe Services segment margin decreased to a negative 2% compared to a positive 6% in the prior year. The Composite Systems segment also experienced a decline to 12% in the current quarter compared to 17% in the second quarter of 2019, and the Automotive and Industrial segment declined to 12% compared to 18% a year ago. The company experienced positive cash flow in the quarter. Cash flow provided from operating activities for the second quarter was $27 million, an increase compared to the $21 million used in the second quarter of 2019. This increase in cash flow is primarily driven by the positive change in noncash working capital and in noncash items, partially offset by the loss in the current quarter. The change in noncash working capital in the quarter was a cash inflow of $46 million, which includes $11 million increase in restructuring of liabilities compared to a cash outflow of $39 million in the same period for 2019. The cash from working capital was primarily driven by lower receivables and inventories and larger contract liabilities, offset by lower accounts payable and foreign exchange losses. Cash used in investing activities in the second quarter is -- was $1.5 million, reflecting $3.7 million of purchases of property plant equipment, offset by $1.6 million in proceeds from sale of assets. This is significantly lower than the $225 million used in the prior year quarter, which reflects the acquisition of the ZCL Composite business, partially offset by the $69 million of proceeds received from the sale of land and redemption of investment in associates. During the second quarter, cash used in financing activities was $5.7 million, reflecting the payment of our quarterly lease obligations. This is also significantly lower than the $271 million provided in the second quarter of 2019 that reflects the debt for the ZCL Composite acquisition, partially offset by the dividends paid of $10.5 million. Net cash flow for the second quarter in 2020 was positive $17 million compared to $25 million in the second quarter of 2019. With respect to cash and debt, the company has cash and short-term investments of $104 million, debt of $435 million and $45 million of standard letters of credit as at June 30, 2020. Subsequent to the quarter end, the company successfully negotiated an amending agreement with its banking syndicate that provides covenant relief through December 2021. In addition to completing the amending agreement, the company obtained a waiver of compliance for second quarter financial ratios under the credit facility prior to June 30. Despite this waiver being obtained, the debt was required to be presented as a current liability as of June 30 under IFRS, because the waiver was conditional on completing the debt amendment by a specific date, which meant that the company did not have the unconditional right to defer the repayment of debt beyond 12 months. As of July 29, 2020, the date of completion of the amending agreement, the debt will be presented as a noncurrent liability. In addition to the successful completion of the debt amendment, the company's liquidity position has benefited from the significant progress made to date on our targeted $60 million in sustainable annualized SG&A savings, and $40 million in incremental cash generation. As Steve mentioned earlier, this includes significant reductions in compensation of salaried workforce, closure of several facilities and branches to optimize our working -- our operating footprint and significant cuts to other operating costs and capital budgets. As a result, the company remains on track to meet its goal of a quarterly normalized and sustainable SG&A run rate of $70 million, which includes target incentive compensation costs. The company has also delivered today positive cash flow of $44 million from reduced working capital, excluding the impact of restructuring liabilities and $11 million from proceeds of asset sales. Based on these actions completed and planned, its diversified business and current backlog, the company expects to generate sufficient cash flows to fund its operations, working capital requirements and capital program. I'll now turn it back to Steve for some additional commentary on the company's performance and outlook.
Thank you, Gaston. I'll first start with providing details on Q2 by segment. The Pipeline and Pipe Services segment revenue is closely tied to the capital spending of exploration production operators in the upstream and match-up transmission line companies in the midstream of the energy sector. With the rapid reduction in capital programs in the upstream, now forecasted to be greater than 50% and 20% year-on-year for North America and international, respectively, demand for girth weld inspection services, pipe coating fell sharply. Additionally, due to the combination of operators revising budgets and adjusting plan schedules, COVID-19 interruptions and regulatory uncertainties, the quarter had many delays in both offshore developments and in North American transmission line projects that further reduced results. Engineering consulting services demand as in Q1 continued to be resilient as North American transmission companies look for expertise to move forward with integrity programs on existing assets. Substantial progress was made in the quarter to improve the long-term sustainable margins of the segment through a reduction in overhead costs and the exiting of markets that will not be able to deliver acceptable returns. To this point in the quarter, we finalized the closure of 4 facilities that deliver fusion-abundant epoxy anti-corrosion coating into the oversupplied North American market. We will continue our efforts to reduce our pipe coating footprint with additional facility exits in the second half of the year, including selected ones servicing international markets. One other point pertaining to the Pipeline and Pipe services segment for the quarter that is important to note is the work that we completed in preparing for the ramp-up in activity in the second half of the year. With projects secured holding firm in both EMAR and Asia regions, pipe is inbound and we are now ready. Composite Systems segment results in the quarter provided and proved how diversification based on a core strength can leverage scale and provide derisking while retaining positioning for when activity returns. With ties to 2 very distinct markets, Q2 revenue for the Composite Systems segment was 1 of 2 extremes. On one hand, demand for composite pipe and downhole tubular products and inspection services experienced record low demand. These offerings -- and they're close tie to North American rig count with the U.S. dropping into the 200s and Canada into the teens, explains well what happens to demand as operators halted and slashed capital spending. On the other hand, demand for composite tanks remained very strong, and our efforts to address facility inefficiencies resulted in an exceptionally strong quarter. The high demand for underground composite tanks is being supported by the urgency to replace retail fuel tanks that are beyond their design life, and the build-out of large consolidated service centers by convenience store operators, and the increased acceptance of composites for water and wastewater applications. The book and turn element of composite pipe sales contributes greatly to the speed that this business will see demand swings. With adequate inventory on hand and clear signs that our customers would be ordering very little in the near term, we took the measure to halt all pipe production in the quarter and reduce support overheads. One of the challenges on the tank side of the business has been to ensure the health of our employees while increasing output and quality. In the quarter, we continued to book work at a rate higher than our production output, but did have success in adding additional shifts in several of our plants, while implementing measures that mitigate the risks to the health of our employees. My last point on Composite Systems segment is that pipe orders did see some improvement as the quarter closed. And we are approaching a point and have restarted the pipe production. This supports our expectation that Q2 will be the low point, and there will be some return in levels of demand in the quarters ahead. The lower results in the Automotive and Industrial segments were primarily due to the rolling shutdowns of vehicle assembly plants in North America and Europe and lower production in China, reducing the demand for heat shrink products. Partially offsetting the decline in heat shrink products was an increase in orders for wiring and cable products from electrical utilities and communication providers. In fact, the wiring and cable products business posted one of the best quarters, an outstanding achievement considering they too experienced production challenges related to COVID-19. Like the Pipeline and Pipe Services and the Composite Systems segment, the Automotive and Industrial segment has also taken measures to reduce its cost base. I'll now turn to Q3, Q4 and early quarters of 2021. Based on what we are seeing today, but with the full recognition that we continue to be in a period of extreme uncertainty, we believe that Q2 will be the low point and that our performance will strengthen the second half of 2020 and into 2021. The improvement is based on expectation that the start of recovery that we are now seeing from the gradual lifting of restructuring will continue, and there will be a return to a minimum level of spending from our customers. This will positively impact our book and term businesses, but it will also result in revenue generation from the execution of work that we have secured and is captured in our $553 million 12-month backlog. Additionally, the actions we have taken to date, such as reducing the salaried headcount by over 15%, closing facilities and aggressively reducing variable costs to much, much lower forecasted, together with actions that are in progress, will assist improving the bottom line. In terms of project activity, our backlog is holding. And we have yet to have a project canceled that was already booked. New pipe coating awards in Q2 were very muted as expected as our customers put tremendous effort in reviewing their capital spending programs. A general observation is that reviews are resulting in project FID decisions being pushed out 12 to 15 months. Overall project opportunities really has stayed very high with our bidding budgetary at over $2.3 billion. There is strength in our bid at just over $790 million, although it was impacted by delays in project sanctioning. It also has increased from bids submitted in the quarter. I would note that our bid at the end of Q2 does contain over $180 million that we have been awarded but is conditional on FID. We are expecting to see decisions in the upcoming quarters that will determine when we can formally book this work. One final note is the return of projects removed from our bid and budgetary that are being reconsidered due to positive changes in local investment conditions. An example of this is a large East Africa land pipeline that is not in our bid or budgetary at the end of Q2, but we anticipate we will bid or rebid in late Q3 or early Q4. Before we open up for questions, I'd like to make the following points. Shawcor's diversified portfolio of late- and early-cycle oil and gas and non-oil and gas businesses provides a hedge that will benefit in these very uncertain times. Shawcor has a substantial book of work for execution over the upcoming 12 months, and the work is holding firm. Shawcor has and is taking the necessary and difficult actions to reduce the cost to preserve cash, which is needed in these very uncertain times. And finally, Shawcor's future success continues to be underpinned by supportive long-term fundamentals, which will drive investments in energy, transportation and infrastructure. With that, I'd now like to turn the call over to Cindy, the operator, and open it up for questions that you may have for Gaston or I.
[Operator Instructions] Your first question comes from Michael Robertson from National Bank Financing (sic) [ National Bank Financial ].
Just a couple of quick ones for me. How should we think about the impact from the CEWS going forward? I think you guys noted like a $7.5 million contribution during the quarter.
Yes. So Michael, we're -- at this point in time, our current forecast doesn't include any of the CEWS for -- subsidy that we can receive in future periods. What we reflect to date is only what we've received in the quarter. We are in the process of applying more -- applying for additional periods. But as you can may be aware is there is some nuances in respect to what's qualifying revenue to calculate exactly how much you will collect and the recent changes have also changed the ability of it being extended to December, and there is kind of a threshold of declining basis based on things. So right now, although we do expect to have it, it's very difficult for us to estimate the level of the wage subsidy. So at this point, our forecast that -- do not include any of that.
Okay. Fair enough. Switching gears, you guided to about $40 million to $50 million in CapEx this year. So far, it seems you're sort of on a conservative pace relative to that being evenly distributed throughout the year. Should we be expecting a lumpier quarter in the back half? Or do you think sort of the balance would be roughly evenly distributed?
So I think 2 things is, I think we had provided some guidance between around $40 million to $50 million. Right now, we are tracking slightly below the bottom of that range. As you can imagine, the second quarter was challenging to spend CapEx and to implement CapEx. So we do expect about an even amount of CapEx in the back half of this year to get us closer to that -- the bottom of the range that you mentioned in around the $40 million mark.
Okay. Got it. Got it. That's very helpful. Lastly, on the backlog, it was good to see it hold up relatively well sequentially given the severity of the challenges in the quarter. Based on -- and maybe just even broader than the backlog itself, looking at the -- your budgetary analysis, based on the current sort of portfolio of projects you're looking at and assuming commodity prices remain relatively tight to current levels, would you have -- would you say you have a high degree of confidence in the bulk of those projects going forward eventually? Or would you need to see a material increase in commodity prices or the underlying economics of the projects to feel more confident about them moving forward?
So Mike, let me answer your question in kind of different components. So first of all, the backlog we have high confidence for. So the backlog, there has been some movement in timing. Mostly because of the supply chain, not because of the decisions of operators. So all of the backlog and booked work is holding. So I have high confidence in the backlog number at the end of Q2. I also have increasingly high confidence that the $180 million that we have in the bid that we will have some decisions shortly. And those -- and a component of that, I think everybody is probably watching is Payara and the news in the elections will translate into the backlog. So I'm quite confident in that work.And the bid is an interesting phenomenon that's happening. So the bid is quickly moving where projects that are moving ahead are really -- are narrowing around gas related to domestic consumption in the Middle East. There are several large projects that are in the bid that are moving ahead and they're not slowing down. And they will be very important for us as we move into the second half of 2021. The other area, of course, is offshore, in particular, in areas where governments are making it more attractive. And the one that stands out for us, where we have a very nice position is Norway. Norway has changed the fiscal terms of how operators can write-off taxes. So we see an increased bidding and project visibility in that area. And the other one I would mention, and there's also a component of where regulations are changing. And I did mention a project that was very visible not that long ago, that was in our budgetary that moved to bid and then the bid elapsed. It's now back in the works again because regulators have provided assistance to the operator to make it more attractive. So my confidence is increasing that the slug of work that we were expecting to have secured and be FID-ed that has stalled in Q2 is now -- it's moved, but it's moved 12 to 15 months, and governments are standing up and making it more attractive. So I do think that as we get to the latter half of 2020, we're going to see acceleration of confirmation of work. And it will impact the latter half of 2021 and 2022. So I hope that answers your question. Very, very comfortable in the backlog, increasingly more positive on the $180 million that's in our bid. I am also increasingly more positive that we are going to see sanctioning moving ahead as we get to the end of 2020. And there is a factor that I never really considered in March time frame of this year, where regulators are making it more attractive so that there is investing.
Your next question comes from Aaron MacNeil with TD Securities.
I'm thinking about the EBITDA profile for the back half of the year in light of your new covenants. And so given that you've waived covenants in Q3, you reintroduced covenants in Q4 with EBITDA annualized, should we be thinking about higher EBITDA in Q4 relative to Q3? Or am I just reading too much into that?
No, you should expect -- and if you just think about the project announcements that we've made, Aaron, and you think about, okay, Baltic Pipe, it started now in Q2. And as we go through pipe production, things ramp up. So yes, definitely, Q4 is setting up to be a nice quarter, just alone from the pipe coating.
Perfect. And that's kind of tied into a question I'm going to ask later, but the backlog was quite resilient on a sequential basis given the broader industry challenges. Can you maybe give us a sense of what new bookings were in the quarter? What was brought forward from beyond the 12-month time period and what relates to ZCL, so we can kind of get a quarter-over-quarter review in a bit more detail?
I'll refer to my prepared remarks. So first of all, we -- I was very clear that bookings in the quarter were very muted, okay? The second component, that affects the backlog, of course and again, referring to my prepared remarks, we had delays throughout the workflow of pipe coating that kept the resilience in the backlog because we didn't execute the work. If you then think about the major projects that we've announced, they do go on, and a good example would be Baltic Pipe that has started and will run into 2021, and that would have came into the backlog. So it's a combination of -- we didn't chew through the backlog as much as we could. We never booked -- very little work in the quarter went into the backlog. So it's really a pull-in backlog component that was outside the 12 months that gets you there.
Understood. And then this ties into what you had said earlier. But based on the project and revenue profile that you're seeing, do you expect segment EBITDA for the pipe-coating segment, for margins to improve back into positive territory in Q3, another ramp-up in Q4? And then longer term, can you keep those margins elevated without material backfilling of large projects based on the cost-cutting you've done over the last couple of quarters?
So let me -- there's 3 questions there. So Q3 margins will improve, and they'll improve again into Q4. And then the cost reductions that we're taking out are sustainable cost reductions such as exiting facilities and consolidating structural or, call it, management structures. So we will see improved margins in the PPS segment over historical levels. So -- and I think Gaston has mentioned it several times. We're targeting sustainable cost reductions, particularly in the PPS segment.
Yes. So if you -- let's say there's a bit of a delay before you get some new, major, other large projects, do you think you can sustain the margin levels you'll hit in Q4 with Baltic Pipe without major backfilling of -- with new projects?
I don't…
This will be a longer-term question.
Wait. So if you think about what's happening in the PPS segment, what's hurting margins is the North America pullback, which, in particular, are helping -- hurting our IM field service. If we get any recovery in North America because it was very, very weak, and we're not forecasting it to strengthen. So if that goes up, that will be very, very positive on the PPS segment. But of course, if you're referring just to pipe coating, we have to backfill projects to keep the rate up, but our burden rate of cost will be lower. So to answer your question, when we look forward into Q4, into early 2021, we think the margin that we'll achieve in Q4 will carry into 2021. I hope that addresses, so yes, we have visibility on work to keep going. And it doesn't mean that we need to win a $50 million project. There's enough work that's coming in, for example, Sangomar, which is in that range, kicks in, in Q1 2021. So all my comments are around Q3, Q4 and into 2021, right? We have -- I think in terms of pipe coating, the -- potentially, the same thing that we were speaking about in March where the PPS segment will start to contribute, is still very true. Maybe the magnitude of contribution won't be the same, but it will run nicely in Q4 and into 2021.
Okay. Great. You had mentioned additional facility exits in the back half of the year in your prepared remarks. Can you give us a sense of magnitude? Or is that -- is it too early? And when all the dust settles, can you remind us of how much you intend to shrink the overall footprint of your global pipe coating business? And I'll leave it there.
So I think we have to be very careful on what we disclose on what regions because as you're very much aware, we bid work using multiple combinations of facilities. The facilities that I -- we've already closed, I'm okay discussing. So we've closed the 4 that are in North America or serve North America, low or -- and Anti-Corrosion Coating. I did allude in the prepared remarks that there are several more to go. These are much more and in geographies that are difficult to close. They serve primarily the offshore markets. And we will close them. And we have to be very careful. Some, in particular, one still has work to finish up. And we're bidding the -- another one for a project as a backup facility, but we will move ahead in actually this quarter with 1 and in the fourth quarter, we'll pull the trigger on the second one. So 2 more to go serving the international market that's lined up.
Okay. And then maybe this is a final question for Gaston. The restructuring charges of $17 million was quite a bit higher than the guidance you gave on the Q1 call of between $10 million and $11 million. Did you end up making larger-than-expected cuts than you were intending at the time of the Q1 call? And would these additional facility closures result in further restructuring costs in the back half of the year?
Yes, so the increase is really related to the timing of when we complete the restructuring activities or what we thought we were going to complete at this point in time. We accelerated a bunch of different things and found other opportunities during the quarter to accelerate certain initiatives that we wanted to do and with respect to our ability to target that normalized sustainable $70 million SG&A run rate. We expect that we have further restructuring costs in the range of $10 million to $15 million for the back half of the year. And that, again, will be determined based on the timing of when we're going to complete the remaining initiatives that we've identified, and a lot of that refers to some of the international pipe-coating facilities that Steve just mentioned on your previous question.So we're -- no, it's all about timing. It wasn't necessarily -- maybe there's a little bit there in respect to estimates in respect to what cost to do certain initiatives. But the majority of the variance really is focused on the timing of the execution.
Your next question comes from Matthew Weekes from Industrial Alliance.
First question was just kind of a clarification. I'm just wondering what that long-term SG&A target of $7 million -- $70 million annualized, does that include expected R&D expenses in that figure?
No, it does not. That's a separate line in our financial statements. So -- and then -- but it does -- just to be clear, that $70 million does include incentive compensation at target. So to be clear, so that is our expected normalized and sustainable SG&A run rate with incentive compensation at target.
Okay. And just another, and this may sort of just be sort of a rephrasing of a question that was maybe asked earlier a little bit. But looking at how backlog -- the quarter opening backlog was pretty strong and how it kind of converted in the quarter was sort of a bit lower than expected. You had mentioned that it was difficult to complete some international work. Was the kind of low conversion of the backlog more so due to that and sort of the impacts of COVID-19? Or was it more to do with a greater weighting of the backlog towards composite tanks?
No. Primarily, it's in, call it the PPS segment where work has booked and inefficiencies when the COVID-19 within our operations are within the pipe delivery or the logistics of getting the pipe to us.And then the second component, as I mentioned, there was a movement from work that's outside of the 12 months, just based on the project awards that we have announced that had moved into the 12-month period. So that's why the backlog was resilient.
Your next question comes from Tim Monachello with ATB Capital Markets.
First question just on the East African crude oil pipeline. You guys mentioned -- I assume you guys were referring to that one -- has come back up for bidding. Has the timing materially changed on it? Sorry. Can you -- like you hear me?
Tim, you're -- yes. Can you try again? Sorry, you broke up at the beginning.
Sorry about that. In terms of the East African crude oil pipeline, which I assume you guys are talking about, when you say that there's that project going back up for bidding in the third quarter here. I'm just curious if the time line for that project has materially shifted given COVID or if you expect to sort of pick up where it left off.
Difficult. So of course it shifted from the original time that we bid it. The operator has signaled strongly that upon the agreement with the government, and again, you've identified a project, it's difficult for me to tell you, yes, but I think you've got the region and everyone can follow what's in the press, is that the operator now has an arrangement that is conducive for him to make the -- for them to make the investment. They have signaled to all the suppliers of the time frame of when they would like to go in and revise material that's already sent in. And as far as we write, we know right now that their execution time frame to get in the country remains the same, about 18 months.
Okay. Got you. And is there a size of that project or a relative range that you might be able to provide?
We've always stated that it was over -- much, much over $100 million. So it was always a large project, right? We never really discussed, but it was much over $100 million.
Okay. Just as a follow-on to Aaron's question regarding restructuring.
Tim, maybe I'll clarify a little bit. If you go back through some of the transcripts over the previous call, when we actually we moved the project out of our bid, we actually said it was greater than $200 million.
Got you. Just a follow-on is my second question to Aaron's question around the severance and restructuring, and the acceleration of some of the initiatives that you guys have done. My understanding was that international closures were sort of slated for end of the year, if not, 2021.So I'm curious if there's any other projects you expect to flow into 2021 and if there would be any further restructuring costs that you expect past 2020.
There may be a little, but restructuring, the way it works is when you have contractually served notice, you take the cost right away. So for example, when you serve notice to an employee that the termination has happened, you take the cost. Our intention is before we finish the year, the high-cost items of shutting down international facilities, we will have served notification, and then we will be in a position to book the full cost. So the biggest ones to come are actually shutting down the facilities. But there may be a little leakage into the first quarter of 2021 because you can't take the cost until you're able to serve notice. And there is right now -- because of COVID-19, we probably would have been advanced in some regions, but the government has restrictions on how or when we can release employees.
Okay. And then just sort of a housekeeping item. I understand you have waivers on the covenants for the current quarter. But just curious if the EBITDA for covenant calculations would have been equal to that, sort of that $4 million-ish number that you guys provided -- or if there are some other adjustments that need to be done for your covenant EBITDA.
As we always disclose, Tim, the EBITDA calculation for covenants also excludes foreign exchange. And then it is also adjusted for the new accounting of IFRS 16. So that's directly related and disclosed in our covenants and in the -- our debt agreement on -- that we post on SEDAR.
And what would that IFRS 16 adjustment has been in the quarter?
You can look at our lease obligations, and that will tell you what the number is.
Your next question comes from Keith Mackey with RBC.
Just a question here on confirming the additional 2 plant closures. I know we've talked about it a lot. But can you just quickly confirm for me that these additional closures are included in your stated cost-saving target? Or would this be incremental to the $60 million?
It was always in, right? And if you go back through even last quarter's transcript, we were very clear that there was facilities that we're going to take out of the international offshore serving market.
Got you. Okay. Perfect. And just on this Africa pipeline, you mentioned the -- it could be upwards of $200 million now. Do you expect the bid to be one single chunky bid? Or is there a potential that it's broken up into multiple bids that may be awarded to multiple parties?
So far, there's -- no, there'll be -- for the pipe-coating portion, there's -- there will be only one supplier. So it's a digital -- I guess my response, it's in the digital award. So you either get it or you don't get it.
I see. Okay. And this would be through an EPC-type arrangement as well? Or is it a direct bid?
The operator -- today, we bid to the operator, but he has reserved the right to push the pipe coating contract into an EPC arrangement, but we bid today to the operator.
Okay. Okay. And just one other question here. Can you maybe give us a target or an indication of what portion of your revenue today comes from non-oil and gas industries?
Yes. Give me one second. We -- as we stated at the end of the fourth quarter, it was around 25%, I -- give me one second. Why don't you go ahead if you have another question, and then we'll confirm the number here?
Okay. Maybe one more. Just on composites. You mentioned the restart of some of the pipe manufacturing, which we expect to influence Q3 results. And Q2 had a very strong quarter for composite tanks due to the retail fuel demand. Do you expect the retail fuel demand to continue into Q3 as well as the -- as a bit of an uptick in the return in moderate return, I guess, in oil and gas?
So let me clarify composites. So I'll answer your first question. So around 29% is now non-oil and gas for the company. So that's the first one. So let me clarify some comments around composites. So composite tanks runs at a very pronounced cycle performance. And so it's expected that Q2 and Q3 are strong quarters for this business. And they're having very good performance, partly because of the synergy extraction of costs from the acquisition that was targeted, also from efficiencies in production, but the incoming orders are holding very, very strong. So we do expect it to continue, and it will drop off as we get to the end of the year as per the normal profile. Composite pipe and to demonstrate how extreme, we went several weeks in Q2 with 0 orders. So -- and in my prepared remarks, I kind of boxed it in in saying that operators, not only stopped their operations, and then there's multiple reasons why they did it, but they also burned up inventory that they had on hand. We knew that was coming because it was signaled to us quite strongly as we exited Q1, so we shut the plant down. The plant -- in my prepared remarks, the plant is now working, and we've had a return of demand already in the month of July. So we are not forecasting a business in the composite pipe in North America to even reach the low levels of 2016 and the remainder of the year. So we're being very, very conservative on the output. So what you should expect and as this cycle continues, as you get into Q4 and composite-tank normal performance goes, the Composite segment and less pipe coating in North America, and there is some positive signs -- I want to make that clear -- that completions will lead drilling and completions are good for us, that we may be in a position where the pipe -- composite pipe makes up for the drop in tanks, not in revenue but in profitability, because our margins in the pipe business are higher than our margins in the tank business. So I hope that boxes in kind of the model for you.
I am showing no further questions at this time. I would now like to turn the conference back to Steve Orr, CEO.
Well, I'd like to thank everybody for joining us on the call this morning. And myself, Gaston and Paul look forward to meeting with you again as we close Q3. So thank you very much. And please, everyone stay safe.
Ladies and gentlemen, this does conclude today's conference. Thank you for participating. You may now disconnect.