North American Construction Group Ltd (NOA) 2011 Q2 法說會逐字稿

Greetings, and welcome to the North American Energy Partners, Incorporated Fiscal 2011 Second Quarter Financial Results. (Operator instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Kevin Rowand, Director of Investor Relations. Thank you. You may begin.

Good morning, ladies and gentlemen, and thank you for joining us. On this morning's call we will discuss our financial results for the three and six months ended September 30, 2010.

All amounts are in Canadian dollars.

Participating on the call are Rod Ruston, President and CEO; David Blackley, CFO; [Joe Lambert], Vice President, Oil Sands Operations; and Bernie Robert, Vice President, Corporate.

Before I turn the call over to Rod, I would like to remind everyone that statements made during our prepared remarks or in the Q&A portion of the conference call with reference to management's expectations or are predictions of the future are forward-looking statements.

All statements made today which are not statements of historical fact are considered to be forward-looking statements. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection, as reflected in the forward-looking information.

The business prospects of North American Energy Partners are subject to a number of risks and uncertainties that may cause actual results to differ materially from a conclusion, forecast, or projection in the forward-looking information.

For more information about these risks, uncertainties, and assumptions, please refer to our September 30, 2010 management's discussion and analysis, which is available on SEDAR and EDGAR.

As previously mentioned, management will not provide financial guidance.

At this time I will turn the call over to our CEO, Rod Ruston.

Thank you, Kevin, and good morning, ladies and gentlemen. Thank you for joining us today.

We achieved a 38% year-over-year increase in consolidated revenue in the second quarter, which is a good indication of the improved demand we're experiencing across most parts of our business.

Importantly, we achieved these gains despite a temporary shutdown of sales operations and continued unfavorable weather conditions that hampered progress on some of their construction projects.

In the oil sands, demand for project development services was particularly strong as we executed on several new construction projects. These included pilings-related projects in our new environmental remediation business and mine development work for Canadian Natural and Exxon.

Demand for recurring services was not as strong this quarter, reflecting the reduced activity levels at Shell Albian during the commissioning of the Jackpine Mine.

However, increased demand from Canadian Natural and Suncor helped to minimize the overall impact on recurring revenues.

In the commercial and industrial construction sectors, we continued to see improving demand translate into increased revenues and new contract wins for our piling division.

Albian Pipeline -- we commenced work on two large projects in Northern BC and continued to make progress on a smaller river crossing project in Southern BC.

We also executed on a small pipeline maintenance job for Shell Albian on the Muskeg River Mine site, which we had to translate into additional pipeline maintenance opportunities in the region.

While our revenue performance was strong, second quarter gross profit and margins were impacted by a number of items.

First, we had low margin contracts in the project mix. In our recurring services business, work at Shell was replaced by lower-margin activity under our long-term overburden contracts with Canadian Natural.

On the project development side, two significant pipeline projects -- sorry, contracts that we executed during the period were secured at low margins. This reflects the continued high level of competition in the pipeline industry.

Secondly, the mix of work in the heavy construction and mining segment during the quarter affected the utilization of our equipment fleet. The predominant work undertaken in this period was related to construction, which calls for a large number of 100 and 150-ton trucks working on average around 10 hours of the day.

The amount of equipment required exceeded our own fleet capacity in this size of truck, necessitating the use of (inaudible) to augment that fleet. At the same time, there was a reduction in mining work that resulted in our largest 240-pound fleet being idle in the period -- in a period that would normally be well utilized on 24-hour-a-day work.

Third, challenges with weather reduced margins on a pipeline piling and other construction projects as a result of start-up delays and reduced activity.

According to Environment Canada, the precipitation levels in the prairies during June, July, and August of this year were 28% above the historical average for the region.

We anticipate that weather conditions that are more conducive to the operations of our business and improving demand for our large mining fleet in the oil chain will positively impact margins in the second half of the year.

Turning to our segment results, revenue in the heavy construction and mining segments were CAD172 million for the quarter, an 11% increase compared to the same period last year despite the slowdown at Shale Albian.

We continued to run at peak production on our long-term overburden removal contract at Canadian Natural. As you will recall, we were still ramping up at this time last year following a temporary shutdown situation at Horizon as the project underwent conditioning.

Our rental contract with Suncor and their master services agreement with Syncrude are also continuing to provide us with steady activities at these sites.

Our project development activity in the oil sands has also picked up as a result of new construction projects, including pilings-related development work at Shale Albian and construction of a mechanically stabilized earth wall or MSE wall, as we call it, for Canadian Natural and Exxon.

These walls are constructed next to the oil pressure, and they're designed to support fully loaded 400-ton trucks as they unload into the crusher.

You'll note that margins for the heavy construction and mining segments were lower than a year ago. This largely reflects the change in product mix mentioned earlier, the use of the 150-ton trucks, and the resulting 240-ton trucks being idle. However, margins have also been impacted by wet weather conditions and low utilization of that truck fleet.

Turning to piling, revenues for the three-month period were CAD27 million, half of 76% over last year despite continuing project delays caused by the adverse weather conditions. This revenue increase reflects improved activity levels in the oil sands, commercial and industrial construction markets, and our successful move into the Ontario market.

Piling margins for the three-month period rebounded to 18% from 13% in the same period last year, reflecting improved market conditions, partially offset by the weather impact.

However, in Pipeline, revenues of 37 million reflect work on the two new contracts in Northern British Columbia. A lower-than-expected margin performance in this segment reflects the costs associated with start-up delays and lower productivity on these contracts.

So, overall, we achieved good revenue growth across all our three segments this quarter, and we're expecting to see our margins return to normal levels starting in the third quarter.

Now, subsequent to the quarter end, we announced an acquisition that offers significant strategic value for our business. The company we acquired is Cyntech Corporation, a Calgary-based designer and manufacturer of screw piles and pipeline anchoring systems, as well as a provider of recurring tank maintenance services to the paper chemical industry.

While we plan to operate this new business under our Piling Division, part of the appeal of this acquisition is the way it complements all three of our operating segments.

In addition to adding new piling expertise and customers, Cyntech's tank services business brings us a new recurring services revenue stream, which complements tank bed construction and environmental remediation services in our heavy construction and mining division.

Overall, the acquisition is consistent with their stated intention to grow our less capital-intensive business and grow our high-margin service offering.

At this point, I'll call on David Blackley to provide more detail on our second quarter financial results. David?

Thank you, Rod, and good morning, everyone. I am going to review results for the second quarter ended September 30, 2010 as compared to the second quarter ended September 30, 2009.

Higher volumes in all three of our business segments contributed to revenues of CAD235 million, a 38% increase over last year.

Gross margin was 12.4% compared to 19.8% last year, resulting in gross profit of CAD29 million, which was down from CAD34 million a year ago. As Rob mentioned, the lower margin reflects a change in product mix and the impact of unseasonably wet weather on our business.

Our operating profit was CAD12 million in the second quarter compared to CAD19 million last year. This change reflects lower gross profit and a CAD1.4 million increase in our G&A expenses related to a partial restructuring of our stock option plan.

Interest expense increased to CAD7.7 million from CAD6.4 million last year. This CAD1.3 million increase in interest expense was offset by a CAD3.9 million reduction of swapped interest expense.

The CAD2.6 million net benefits reflects a lower cost debt resulting from the restructuring completed in the first quarter.

Our net income for the period was CAD0.06 on a diluted-per-share basis compared to net income of CAD0.12 per share on a diluted basis during the second quarter last year.

Backing out the impacts of various non-cash items, net income per share would have been CAD0.04 per diluted share in the current year compared to CAD0.19 a year ago.

Turning to capital, total expenditures for the second quarter amounted to CAD12 million, including CAD8 million of sustaining capital expenditures.

Looking at liquidity, as of September 30, 2010, we had approximately CAD69 million of borrowing availability and a cash position of CAD56 million. This was down from CAD103 million at the start of the year, primarily due to the settlement of our senior notes and the accompanying currency and interest rate swaps. We anticipate that we will generate a net cash surplus from operations at least through March 31, 2011.

That summarizes our second quarter results. I will now turn the call back to Rod to tell you about our outlook.

Thanks, David.

Looking ahead, we continue to see slow but steady recovery in our key markets and the gradual strengthening of demand for our services.

In the oil sands, we are currently working with all four of the active oil sands operators, and each of them is expected to be operating at full capacity through the balance of the year. This should drive a good level of demand for our recurring services.

In addition, we're continuing to develop our new environmental and pilings reclamation services offering, which over time should provide opportunities to further expand our recurring services business.

In fact, during the month of October, we undertook trials to test equipment that we have recently acquired (inaudible) from the surface of pilings ponds. Based on the success of these trials, we believe we have an opportunity for significant additional work.

Our outlook for project development in the oil sands also remains positive. We currently are executing piling and heavy construction-related projects at Exxon's Kearl site, and we see opportunities to continue to expand our business with this customer.

The recent approval of Total's plans for a 300,000-barrel-per-day upgrader is positive news for our business, and the approval process for Total's Joslyn Mine is currently underway.

Further out, several operators are developing cranes for expansions to existing mines, and these are expected to increase our opportunities as they reach the construction phase.

These currently include Canadian Natural's horizon expansion, Shell's debottlenecking projects, and Syncrude's Aurora South expansion.

Suncor is also expected to make an announcement on these plans for [fort fuels] mine sometime in the near future.

In the piling division, activity levels are ramping up as weather conditions in Western Canada improve. We're seeing increased activity levels and backlog, and this should result in strong revenues and improving margins in the next couple of quarters.

We're also having some good success in the Ontario market, where we recently run our first significant commercial development piling project.

Our recent acquisition of Cyntech is expected to further expand opportunities for the piling segment with the addition of screw piling design, manufacturing, and installation capabilities.

Screw piling is [stated] on [zag D] and payout transmission projects because of its low cost and high efficiency.

The piling segment is also expected to benefit from the addition of revenues related to Cyntech's patented pipeline anchoring systems business. Cyntech has established an international market for its anchoring systems with customers in Canada, the US, Malaysia, Thailand, Indonesia, and Russia, and we are now positioned to cross-market this technology with our existing pipeline customers.

Cyntech's tank services business is expected to further expand recurring services revenue with the addition of inspection, cleaning, repair, and relocation services for large-diameter petrochemical tanks.

The scheduled inspection integrity tests of these tanks is regulated by provincial governments. In Alberta, the Energy Resources Conservation Board, ERCB, requires inspections of large above-ground storage tanks every five years. We believe that the regulatory requirements of the testing and inspection of these tanks, coupled with a multi-year master services agreement with a major integrated oil and gas producer, create a stable and recurring source of revenues for this business.

Although highly complementary to various parts of the business, Cyntech will operate under the piling, and the activity (inaudible) will be reflected in this segment's results going forward.

In part one, we expect to see a similar level of activity in the third quarter as we finish up two projects in Northeastern BC that are currently underway. Those projects should be completed by the end of November 2010. Overall, we are encouraged by the improving market conditions and by our increased backlog of work.

Before I open the call to questions, I want to bring you up to date with some organizational changes, as well.

Kevin Mather, Vice President, Supply Chain and Estimating, has resigned his position effective December 7. Kevin has spent the last 13 years with us, during which time he played a key role in the growth of the company.

I'd like to thank him for his important contribution to our success and wish him similar success in his future endeavors.

Going forward, Chris Yellowega will assume responsibility for the supply chain and estimating roles in addition to his continued oversight of our piling and pipeline divisions.

We've also appointed [Joe Lambert] to the newly created position of Vice President, Oil Sands Operations. Joe was previously general manager of mining and heavy construction. In his new role, Joe will be responsible for all existing and new mining and construction projects in the oil sands. This includes industrial construction projects associated with the oil sands, as well as our new pilings and environmental construction services.

This reorganization comes at a time when we're preparing to bid on a diverse range of new oil sands contracts, and we believe our new structure will help us compete very effectively for that business.

With that, I'll turn it back to the Operator. Thank you very much.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. (Operator instructions)

Thank you. Our first question is coming from Matt Duncan of Stephens, Incorporated.

Good morning, guys.

Hey, Matt.

The first question I've got, and I understand this may be difficult to quantify, but Rod, is there any way to quantify the impact that adverse weather conditions had on your earnings this quarter?

It's very difficult because the impact was a multiple effect, and part of it, I think, we'll recover with some change orders that are out there. But basically what happens is -- we could put some photos actually on our website. It might be worthwhile -- but Saskatchewan was (inaudible).

The difficulty is that when we're doing the piling projects out there, for example, it wasn't like we could just say, "Well, it's way too wet and we're going to send everyone home." We actually had to keep people available because we had to get in and do the piling work whenever we could. That meant that we had people sitting around in work sheds and all the rest of us. We did training, and that sort of stuff as much as possible, but to actually quantify the impact is very, very difficult.

Okay.

It was a big hit.

And maybe another way to add to that is sort of what you think. You said you think segment margins returned to normalized levels over the winter. Remind us what you feel like the normalized segment margin should be for your three segments over a winter season.

I would think that the piling division, which we saw at 18% this quarter, should bump up above 20 again, and that's a combination of those costs of retaining employees that (inaudible) of the work, but there's also -- the market itself is starting to move, so that should be at about 20.

Our pipeline division will continue to stay tight. Basically, what's happened there is part of the impact of the weather is it pushed the pipeline work into winter, where you're tapping into harder ground. So that's part of the impact there.

And the mining division should over time start to push back up into sort of the 15, 16%.

Is that on an annual basis, or is that what the winter margins ought to look like (inaudible)?

Well, the winter margins, the mining group will tend to be pretty steady over the year. The issue there is largely competition, although it was -- we had 30 or 40 days of the summer period where, for example, our CNRL project was stopped in some way, now not necessarily for the whole day, but the continual rain up there, when you've got a 400-ton tractor or 300-ton (inaudible) material, it doesn't take a lot of rain before you've got to stop that equipment. So we had I think it was 45 or 50 days impacted in one way or another, some of them full days, some of them part days.

The general run of mining margins should be in the 14 to 15%, some popping up to 16. What we'll see over time I think over the next 12 months is -- we'll see a lot of the overcapacity of equipment in the oil sands will start to be absorbed.

Okay, so that's a process that probably takes, I would assume, until next winter to really fully play out?

Yes, definitely.

Okay. And then on the contracts that are out there right now that you guys are bidding on, we're aware of one fairly large-size services agreement that's out there. I know there's a number of construction opportunities out there, as well. How soon do you think you guys might be able to add one of these bigger contracts to backlog, and when would work begin on some of those?

Well, in fact, none of them will actually go to backlog because all of the contracts that are out there, [the unit right] mostly, but there's no defined scope, so it makes it a bit difficult to put (inaudible) in the backlog.

However, three out of their four customers have contracts out at the present time. Obviously, we're working with the customers on each of those. The drop-dead date to really get started on them would be mid-November, so we're expecting information on all three is imminent.

About how many of those are you the incumbent on the contract, and how many of those would be new customer sites for you?

We're not the incumbent on two of them.

Okay.

And on the third one, we would head up contract with that company for a number of years and this would be a rollover of 15 -- a rollover (inaudible).

Okay, moving on to pilings for a minute, talk a little bit about what type of work predominantly is driving the rebound there. Is it more oil sands, or is it more just big construction activity across Western Canada Is it broad based? Talk a little bit about what you're seeing. That business is obviously bouncing back nicely here.

Yes, it's really across Canada. The two things that we're seeing is that, first of all, construction is coming back in all parts of the business, so there's some oil sand projects that really haven't [burned] at this point, but we see them coming.

We've got a very large construction project here in Calgary that we're involved in, and that's a public works project of extension of a rail line and we're seeing public works and residential construction in Ontario, so quite across the board.

The second thing that we're seeing is that there seems to be a demand for larger piles, so we're seeing the lower-margin small piles being less [focal] and our big equipment in that piling group is working hard.

We've also then acquired Cyntech, and we've done screw piles before, but the acquisition of Cyntech will really put us into the screw pile market, and that's an important big market for us, particularly in Alberta.

Okay. And then sort of when you look at what Cyntech may be able to do for you guys on SAGD, I know screw piles were used extensively there. Do you feel like that might give you some opportunities to increase your revenue potential on a SAGD project in other areas, as well?

I think there's always the potential for industrials, [large] industrial construction and piling groups that feed off each other, we certainly saw a lot of that in projects that were done here in Alberta and in Saskatchewan, where the reputation of their work in one part of their organization assisted us in getting work in the other part. So the answer to your question is yes, (inaudible).

Okay, the last thing I've got here, and I'll jump back in the queue, can you give us an update on your progress for the (inaudible) reclamation work? Have you won any new business there? I think on the last call you said you had about CAD20 million of backlog for that. Just talk about how that new opportunity is shaping up right now.

Well, we did do the [drawing] area for Shell. We also did the [Parkline] corridor for Shell, and in fact, Shell asked us to accelerate over the -- over last few months, so we've been doing that.

We've developed or picked up, I should say, probably more the word, a very effective scheming technology, and it's obviously closed down now because it's not the sort of thing you do in winter, but we had a very, very successful trial at Syncrude. We also had a smaller trial at Suncor, and we see good opportunities for that so it gets an ongoing revenue stream for us once we come back into spring next year.

There's also a project here with Suncor that we bid on, however, we don't know the status of that bid at this point in time.

All right. Thanks for the answers. Appreciate it.

Thank you. Our next question is coming from Greg McLeish of GMP Securities.

Hi, guys. Most of my questions have been answered, but a couple of things here. Just sort of trying to look at your -- your depreciation has been down all year. Is that sort of going to run at the same level through the balance of the year?

Greg, we may see a bit of an increase here obviously as we use more of our heavier trucks as we go into the busier season.

Remember, our depreciation -- we depreciate on hours of operation. The depreciation being down reflects the fact of, what we've stated earlier, that part of the impacts of our business over the last couple of quarters and particularly last quarter was the significantly lower utilization of our heavy truck fleet, our 240-ton truck fleet.

(Inaudible) connect that to one 240 got utilized (inaudible) expect it to go back up.

Hey, exactly. We fully expect to be -- to have every one of our 240-ton trucks on the road and pushing hard out of the (inaudible).

Okay. There's also -- it looks like there's been some changes or there will be some changes at Kearl just the way they're going about doing that project. Is that going to impact any of the work you're doing?

It won't impact any of the work that we are doing at the present time, but -- but we'll just continue to bid work as it comes up with whatever changes they make.

The changes they're making are really based on concentrating their efforts on building the first stage, very, very well indeed, bottlenecking. So there wasn't any impact to that -- of that change for a number of years.

The original plan was to build one, build size one, build size two, and then do a live debottlenecking project. Really all they've done is they've said they're going to build size one, debottleneck, and then build size two. So that decision won't have any impact for the work involved in building size one.

Just one more thing. Just looking at your G&A for the quarter, I mean it was -- you did indicate it was up over the first quarter. Is that sort of -- and that was on the back of -- I think it was an option expense. Is that sort of a one-time thing, or is that going to continue through the balance of the year?

The option expense, that was a one-time adjustment, that CAD1.4 million. It will obviously move depending on things like our share price, volatility and how we value those options. Then in terms of the run rate on G&A, we expect it to track pretty much as we've indicated in the past.

Okay, great. I'll get back in the queue. Thanks, guys.

Thank you. Our next question is coming from Bert Powell of BMO Capital Markets.

Hey, thanks. Rod, on the piling side of the business, you seem pretty optimistic in terms of what's going on, it sounds both on the activity and the pricing side of things. And if I just go back in history kind of in the peak years, excluding Cyntech, which I guess will kind of add at least 25 million to the sales, you're in CAD150 million range. Is there anything that you're seeing on your radar that tells you that the ramp rate is going to accelerate back to that level in the near term, or is this just you were growing off a low base here and the numbers look pretty good?

Well, I think there's a couple of large projects coming up. I'm not sure if they'll take us back to that level, but certainly up in the oil sands, there's some quite significant projects coming up that will probably bring our rent back up in the piling division quicker than what it has been, but it certainly won't be a (inaudible).

And if you go back to that timeframe, that would've been a lot of oil sands pilings, correct?

Yes.

Okay.

In one year there, we did I think it was about 20,000 piles for Suncor just on a single job, and that's not counting the other smaller jobs that we did around (inaudible).

Okay. And so the margins in that business when you were talking about 20%, that's reflective of a mix being less oil sands and more broadly spread into sort of industrial/commercial, correct?

Absolutely. The margins outside the oil sands are better than the margins inside the oil sands. Margins inside the oil sands, we do everything on unit rate inside the oil sands. Outside the oil sands, we can do a fair amount of fixed price type work, and in fact, fixed price type work is very profitable and attracts good margins.

Okay. And then, Rod, in your comments when you talk about the significant opportunity in the environmental side of the business, can you just give us a sense -- your heavy construction business is, round numbers, an CAD800 million or CAD900 million-a-year business. I know you don't want to give forecasts, but can you just give us a sense as to what -- once you start to hit stride in some of the initiatives that you're undertaking there, what can that business look like? Is it a CAD300 million-a-year business or is it a CAD50 million-a-year business?

I'm just trying to put your comments in terms of significant opportunity into some context relative to the business you're currently doing in your heavy construction business.

How long's a piece of string?

Yes, no, I appreciate that. I'm just trying to get a sense as to how you're thinking or gearing the resources in that organization.

Okay, well, first of all, the resources that we use in that part of the organization other than a little bit of specialist equipment [that's actually there] (inaudible), are generally drawn from other parts of their business at this stage anyhow, so there's certainly no deep capital piece to go there.

We do have a (inaudible) in the oil sands that we're getting in a position to rent out and use, but probably the best way I can give you an example is Suncor announced that they're going to spend CAD1 billion -- that's one company alone -- on their pilings reclamation. Certainly, Syncrude, as you're aware, has had some issues, and that's caused a -- resulting in a significant focus on getting these dams cleaned up as quickly as possible.

We last year went to our board and said to our board, look, we see an opportunity here and we think we should buy four pilings dozers. We bought those four pilings dozers on the basis of the opportunity, not on the basis of actual (inaudible) work, but those -- two of the (inaudible) piling dozers have now been delivered, and before they touched the ground off the delivery truck, they had work and they've been working ever since. So the demand for anything we can do is very high.

We've just done a -- working with our joint venture partner, Boskalis, we've just done a review for Suncor on the operation of their dredges and submitted a report to them.

From what I understand, they're very pleased with the work that we did there, and they're looking to -- for opportunities to improve the work they've got. They're the only ones that actually own some dredges themselves, and they're looking for opportunities to improve the effectiveness of those dredges, and I think we can be heavily involved there.

So every one of their clients is talking to us. The clients have generally all stated or in some way agreed that it's really because it's a seasonal business, it's not really something that they'd prefer to do themselves, so I think it's an ideal contracting opportunity for them.

If you think that Suncor's going to stay in the CAD1 billion, you've got to say that each of the others, in particular, the ones that have legacy piles, so that's Shell, Suncor, and Syncrude, in particular, are just (inaudible) to spend similar large dollars, and a very high proportion of that CAD1 billion would be the contract work of constructing (inaudible) in the first place and then operating it.

Okay, thanks, Rod.

And, David, just on the financials, I assume the project costs are up because, as Rod mentioned in his prepared remarks, the rental and the equipment costs are down because the larger tonnage trucks sat more idle this quarter?

Yes, certainly, the rental is one component of that, but keep in mind that we've ramped up in pipeline particularly, and there's a lot of subcontractor and material costs that would go in there.

Okay, so project costs will look similar next quarter in terms of margin, but equipment costs come back up as the larger stuff goes back to work? Is that the way to think about it?

Yeah, some of that mix will change a little bit because I know that depending on what we get in terms of further pipeline work, a lot of that pipeline activity, I think, is scheduled to start winding down here in Q3.

Yes.

So it will change a little bit again.

Okay. So if I'm reading your comments, your expectations for Q3 are gross profit margins kind of back in the 20% range, net-net?

Gross profit margins in the 20% -- I don't think -- no.

No? Okay.

I don't think we ever had 20% at the gross margin level.

(Inaudible). Q3 last year, you did.

Yes, that Q3 is a bit of an outlier. I think what you need to keep in mind that some of the type of project work that we did in Q3, we had some very successful lump-sum-type projects where we made -- we had good productivity, the jobs went well, and we did -- everything kind of aligned perfectly for us --

Okay.

-- to realize good margins, so that's a bit of an outlier.

Okay. Thank you.

Okay.

Thank you. Our next question is coming from [Theoni Pioranils] of Raymond James.

Hi, guys. I have two questions. The first one, maintenance costs were a big issue last quarter, and I was under the understanding that they were going to still be high. It was just part of scheduled maintenance cost. Is that impacted by the weather and the use of the heavy ton trucks?

Yes, the maintenance costs -- there's two parts of the maintenance cost. One is the actual dollars we spend on maintenance, and the second is the amount of equipment hours over which we've disbursed that spend. Because equipment hours were down quite substantially, particularly in our heavy trucks, you'll see the maintenance costs were up. So what you should see over the next two quarters, you should see that equipment expense drop.

Okay. And can you just talk a little bit more about the Royal Boskalis partnership, the JV, and what they bring to the table and how--?

Royal Boskalis are one of the biggest and most respected rigs operators in the world, and the recovery of the material out of the existing pilings dams in [Port McMurray] requires a dredge-type operation.

Basically, what happens in the process is the material comes out of the plant as a slurry. It goes into the back end of the dam. Obviously, the heavy material settles first and the middling material settles and so on down towards the dam. Besides the dam wall, you've got about 80 million feet of dirty water. Over a period of time, a lot of the very fine particles in suspension might drop out of suspension. They'll tend to migrate towards the bottom of the water. So what you need is a dredge floating on the top to suck that material out of the bottom of the 80-millimeter deep dam and pipe it down to the drying area where (inaudible) to dry.

Royal Boskalis are the ones that can give us that dredge, bring us that dredge technology.

Okay, great. Thanks.

Thank you. Our next question is coming from John Day at KDI Capital Partners.

Good morning. If the CNRL project is lower margin at this point in time, does it become better margins over time? Or, related to that, how do you get back to your normal mining margins, if not?

No, it's never been the same as the margins that we get in the short term -- shorter-term-type mining jobs. Any job of that length of time, a 10-year project, will never attract a (inaudible) margin. We lease the equipment on that site, so in fact, there's the total capital exposure there is in the order of about 30 or CAD40 million. Sorry, I've just been told it's about CAD60 million now, but that's a relatively low capital per CAD1.2 billion overall revenue contract.

So we don't expect the margins to come up. It wasn't part of the plan. We know what the contracts-like margins are in the sort of 5% or 6%, 7% top number.

What gives you confidence then you'll get back to normal mining margins then when you're carrying that contract?

Because the work that will -- the work that's going to rebuild -- so basically that contract has been going on and on forever. The only time (inaudible) -- forever's a bit longer than that. The only time where that contract has actually slowed down was during the commissioning last year, which resulted in slightly (inaudible) about nine months.

A contract that is going to [knock you out] for the next five years, around about CAD160 million of revenue, and it won't particularly grow. It will stay pretty stable, so the reason that mining license will come back up is it's the other areas of our business that will grow. That is the recurring revenue side of the big -- other than earthmoving, the onsite construction of roads and all the rest of it, it's the ongoing business but for the operation of the mines.

And that goes for CNRL, as well. The CNRL contract requires the removal of overburden and the construction of (inaudible). Work outside of that is done at higher margins than the overburden contract itself.

Okay, thanks.

Thank you. Our next question is coming from Maxim Sytchev of Northland Capital Partners.

Yes, hi, good morning. I actually have a question on sort of the competitive landscape right now in the (inaudible).

I mean the fact that (inaudible) harbor right now is under [Akon']s ownership, and I assume management's sort of trying to figure out the strategy there, does it open up a window of opportunity for you for the next, let's say, six to nine months, or how should we interpret this?

Yes, I don't believe that [Kale Harbor] yet have their fleet in a condition that it would be able to bid into the three contracts -- so sorry, three areas of bidding that I mentioned to Matt Duncan earlier in the conference call.

Matt asked the question of what's out there, and I said three of our core clients have some fairly large contracts out for bid or renew, and I think it will probably be maybe another four to six months before [Kale Harbor] are really in a position -- or [Akon] are really in a position where they'd be able to bid a significant fleet into any single job.

Okay, that's helpful. Thanks a lot. And the last question I had pertains to the pipeline division. I mean I understand that the results and the backlog can be quite volatile for this division. I'm just wondering, can you please remind us what are the synergies exactly between the pipeline and the remainder of, I guess, (inaudible) assets?

There's actually not a lot of synergies in mainline pipeline to the rest of our assets. And that's actually one of the reasons why we've been focusing some of our bidding for pipeline work up into the oil sands.

In the oil sands, as you can imagine, there's a lot of pipeline work that goes on. We recently did some maintenance work up there for Shell, and we're looking to expand that part of the pipeline business.

Okay. Okay, thank you very much.

Thank you. Our next question's coming from Jeff Fetterly of CIBC World Markets.

Morning, all. Question on the pipeline side. Your expectation from a revenue perspective for fiscal Q3 compared to Q2, and what do you see margins doing?

Well, I think it's -- as we've indicated in the past, we anticipate that pipeline revenue will be somewhere around about that CAD70 million margin. As Rod indicated earlier, we're going to continue to be pretty (inaudible).

CAD70 million for the year, not just for Q3.

Yes.

So when you say your margins are tight, is that tight as in 3% like Q2, or is it better than 3%?

We think we'll do a little bit better than 3%, but it's not --

We do have some change orders that we're looking to negotiate and process here with the [customer], so we may get a little bit of upside in Q3, but generally, we don't get those. We're anticipating margins to be pretty much in that sort of 3 to 4%.

What's the outlook -- I guess, broadly speaking, what's the incentive to bid on a contract that's doing a 3 to 4% margin, and what's the outlook for future contracts there from a profitability standpoint?

It's a business where the barriers to entry are at the present time not large but obviously are going to go up. And the reason they're going to go up, it's just going to become harder and harder at a time for all the very small mom-and-pop players to play in the pipeline business as focuses on such things as training and safety, etcetera, become greater in the eyes of the owner.

With one of these pipeline jobs, we have moved to mechanized welding, and it's our first mechanized welding job. That also takes out the smaller players. And so what we're doing is we're moving the pipeline business into an area where the number compared to those is reduced.

The real upswing for pipeline will actually come when someone announces a large pipeline construction job to be done, which will take a lot of the excess capacity out of the market. That could still be another year (inaudible).

What's the visibility heading into fiscal 2012 for that business in terms of contracts and potential opportunities?

The visibility in pipeline is not high at any point in time. Basically, in each year, the heating season is in the summer season, the discussion season is the fall, and the construction season normally runs into the late fall and through the winter on the prairies.

However, in BC, where you're a bit higher and you're not on the prairies and you can do the work in summer because you don't have the big (inaudible) plays that you've got to go through, it's actually the reverse. You now do as much work in the winter as you do in the summer. But in the same location, the season -- (inaudible) season for bidding, and you'll probably do the work in the next summer season after that. So the whole -- a whole job will take -- from bidding to completion of the job would be done in about, say, six to eight months.

So let me ask that a different way. Are you bidding on stuff for next year at this point?

No. Where there's some indication of some work that will be coming up, we're (inaudible) jobs, but there's not a lot of indication of large jobs that are going to take place on the prairies. But any jobs on the prairies that are going to happen next year won't happen until next winter -- not this winter we're in now but the one following, so there's no need for them to go (inaudible) at the present time.

There's some work up in British Columbia that we're certainly keeping our eye out on. That will be summer work for next year, and there's a couple of projects there where we see some opportunity but not a lot.

Is that TransCanada's or on [River] Pipeline?

It's not necessarily only TransCanada's, but the work that we're talking about is majority around the Horn River area.

Okay. Your comments at the AGM a few weeks ago in terms of weather impacts and potentially seeing some work that you had secured being re-tendered, is that still a potential threat, or do you see visibility to make up that weather-related work? You (inaudible) earlier change order stuff (inaudible)?

With some of the work, and this wasn't a lot, but with some of the work, what happened was that the staff delay got so bad -- the work needed to be done over the summer, and the staff delay got so bad that even if the work had started out in the late summer, it would've run through into the winter, and once it's into winter work, it costs a lot more, and it was not critical for the client, so they just decided they'd stop it all together and delay it till next year.

Now, that might be rescinded or it might be just (inaudible) those that want to work say go ahead and do it now. We don't know.

How meaningful is that (inaudible)?

(Inaudible), piling in the light industrial group.

Okay, okay. And sort of lastly, and I'll turn it over, from a piling perspective, you commented about seeing strength in the Ontario market. How meaningful is Ontario to the revenue stream of that segment right now?

It hasn't been [bid] up until now, but we see it as a very significant growth market. Basically, the Ontario government is putting a lot of money into construction over there, and that's where we're also seeing some of the residential construction come back.

The opportunities for work out of there are quite substantial. That's why we went over there in the first place. [We say] there's a good market.

Sure. Thanks for the color. I appreciate it.

Thank you. (Operator instructions)

Our next question is coming from Matt Duncan of Stephens, Incorporated.

Hey, guys. Dave, I want to get some clarity from you on the gross margin from an earlier question. What type of gross margin should we expect over the winter? I mean historically, they run 16 to 18%. Is it more in the kind of 15% range right now? Or just give us a little clarity on sort of what your gross margin level should look like.

Yes, I think what we're going to see, Matt, we typically indicated in the past that we try to target at sort of 14 to 15% level. We think that just given the mix of work that we've got, that the margins are going to probably trend more towards that lower end of the scale, sort of the 14, 15, as Rod indicated earlier.

Okay.

Even the work -- (inaudible) still somewhat oversupplied with heavy trucks and equipment, Matt, so as we're going into the bidding process of this winter as compared to previous winters, I think all the -- our competitors have been bidding a little bit lower margins than had been in the past.

So I think it'll average out a little bit lower than the past, but as I said earlier, I see the capacity -- the over-capacity being absorbed over the next 12 months or so, so I think you can probably draw a line and say what we've come out with this winter is probably as low as it's going to be.

Okay, that's helpful. And then looking at Total and Joslyn for a minute, you referenced that particular site as an opportunity. I know you guys have had a relationship with Total that goes back at least a couple of years. What would your expectations be in terms of timing of when construction might start? And then in terms of dollar amount of opportunity for that site, what do you anticipate that could ultimately be for you guys?

Well, I wish I had John-Michel Gires on the call. I could get him to answer this question -- it'd been an interesting one -- he, being the CEO of Total.

But, yes, we do have a good relationship with Total, but I'm sure our competitors have similar. We have put in their initial request that they put out for basically an expression of interest. We've certainly expressed that we're interested in the pre-qualification, expressing that we're capable.

The work, I think it likely to start in winter of next year, so winter 2011. And that work will be just initial (inaudible), which is removing the trees, (inaudible) removal, getting the initial (inaudible) work done.

The real work on the construction of that project will start in 2012, and I think probably the best analogy that you could draw is have a look at Kearl and the Kearl project for an (inaudible) project is probably in the CAD800 million area for -- in the revenue base.

Okay, that's helpful. Then moving on to --

That CAD800 million is over about three or four years from (inaudible).

Sure. Moving on to pipeline, when you wrap up the two contracts you're working on right now in BC at the end of November, what is behind those contracts for the remainder of this current fiscal year? Do you expect to have any pipeline revenue after that this fiscal year?

No, we expect to wind down. We're moving into the winter period, which is not the best period for the Horn River area, which is where we're working, and we don't have any jobs on the prairie, so we won't be doing any winter work (inaudible).

Okay. And then last thing I've got is on interest expense. This was the first quarter, sort of clean quarter, I guess, post the reworking of your balance sheet. Is this the right quarterly interest expense for us to use on a go-forward basis?

Yes, I think this fairly represents what we'll track. Keep in mind that the amount that we've taken under our line of credit, that is a variable interest, so it will move a little bit depending on where things like LIBOR tend to trend, but I think it's a fairly good indicator.

Okay, thanks, guys.

Thank you. There are no further questions at this time. I'd like to hand the floor back over to management for any closing comments.

Okay, thank you very much for your attendance, everybody. I've just been notified that my daughter-in-law is in labor, so in a little while if you want to find me, I'll tell you whether we've had a granddaughter or a grandson.

The outlook looking forward, as I said earlier, just to reiterate, we're certainly looking at things rebounding. We're looking at a good winter period, and I think our Cyntech acquisition is going to add considerable value to our business.

Thank you very much for joining us today, and we'll talk to you as we get out on the road so (inaudible). Thank you, everybody.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you, all, for your participation.