North American Construction Group Ltd (NOA) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to North American Energy Partners' fiscal 2011 third-quarter earnings call. At this time all participants are in a listen-only mode. Following management's prepared remarks there will be an opportunity for analysts, shareholders and bondholders to ask questions.

The media may monitor this call in listen-only mode. They are free to quote any member of management, but they are asked not to quote remarks from any other participant without that participant's permission.

I advise participants that this call is also being webcast concurrently on the Company's website at NAGC.ca. I will now turn the conference over to Kevin Rowand, Director Strategic Planning and Investor Relations of North American Energy Partners Inc. Please go ahead, sir.

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 nine months ended December 31, 2010. All amounts are in Canadian dollars. Participating on the call are Rod Ruston, President and CEO; David Blackley, CFO; Chris Yellowega, Vice President Business Services; 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, which reference management's expectations or our predictions of the future are forward-looking statements. All statements made to date 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 a 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 December 31, 2010 management's discussion and analysis which is available on SEDAR and EDGAR. As previously mentioned, the 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. To open I'd like to say that while our net earnings for the third quarter were soft, strong revenue performance coupled with announcements made by a number of our clients are clear indicators that the oil and gas and construction industries in general in the Alberta Oil Sands, in particular, are back on a growth path that is likely to open significant opportunities over the next six, 12 and 18 months.

We achieved a 20% year-over-year increase in consolidated revenue in the third quarter with strong growth in project development revenues helping to offset a temporary decline in recurring services revenues. In the Oil Sands demand for project development services continued to gain momentum as we executed on several construction projects. These included tailings-related projects in our new environmental remediation business and mine development work for Canadian Natural and Exxon.

The increase in project development activity coupled with increased recurring services demand from Canadian Natural, Syncrude and Suncor more than offset the temporary slowdown in demand for recurring services that occurred as Shell commissioned its new Jackpine mine.

Outside the Oil Sands a strengthening economy continued to support improvements in the commercial and industrial construction sectors. This together with more stable weather conditions led to an increase in our Piling volumes during the quarter. Our Pipeline revenues were also higher year-over-year as we neared completion on two contracts in Northern BC.

While our revenue performance was strong, third-quarter gross profit and margins came in below our expectations. There were several influences at work including increased rental costs associated with client start-up delays on some of our winter reclamation and overburden more.

We typically supplement our own fleet with rental equipment during our peak demand winter season. This year start-up on some of our work was delayed after we had mobilized equipment to site in anticipation of this work getting underway in late November. This work was delayed until early January and, as a result, we incurred the full rental cost on lower volumes.

In addition, we incurred a loss on two pipeline contracts in Northern BC as a result of scope changes and the continuation of negative productivity impacts due to weather. As you may recall, these were low margin contracts to begin with, reflecting the tough competitive conditions in the pipeline sector. We're currently developing change orders as we work to recover the cost increases.

Turning to our segment results, revenue for the Heavy Construction & Mining division was CAD185 million for the third quarter, essentially flat year over year. Increases in project development revenues were offset by lower recurring services revenues related to the Jackpine mine commissioning.

I should mention that Jackpine is now in production and we expect volumes to begin to pick up as a result of our new three-year Muskeg removal contract and through other service opportunities that should open up as the mine expands.

We're also pleased to confirm a new four-year master services agreement with Syncrude which covers reclamation, overburden and general construction services and replaces our previous six-month agreement which expired in November. So we expect to see recurring services revenues building again starting in the fourth quarter.

You'll note that margins from the Heavy Construction & Mining segment were considerably lower than a year ago. This reflects the competitive pressures we've seen on margins over the last few quarters, an increase in lower margin overburden removal work, and the increase in equipment rental costs mentioned earlier.

Also impacting the current period was a margin reduction at Shell resulting from a contractual pain/gain sharing mechanism whereby we missed our safety performance targets. Although we achieved year-over-year improvements in safety across our business we missed our expectation at Shell's sites.

Turning to Piling -- revenues for the three-month period were CAD38 million, up 83% to last year. Improving market conditions, improving weather conditions and an increase in large-scale Oil Sands projects were key factors in the strong results. We were able to resume work on some of the jobs delayed by the bad weather in the previous two quarters and benefit from two months of contribution from our new Cyntech business.

While we were very encouraged to see our Piling margins rebound to 27% from 22% in the same period last year, it must be understood that this excellent margin includes the closing out of some change orders from work done in previous periods.

Over in Pipeline revenues were CAD42 million compared to CAD17 million last year as a result of continued work on two contracts in Northern British Columbia. However, as I mentioned earlier, reduced productivity on one contract and significant project scope changes on the other hampered profitability and we are currently preparing change orders on these contracts.

So overall we achieved good revenue growth across all three of our segments this quarter, but we continue to feel pressure on our margins. We anticipate some relief from that margin pressure going forward and I'll talk more about that in our outlook. But first I'll call on David Blackley to discuss our third-quarter financial results in more detail. David.

Thank you, Rod, and good morning, everyone. I'm going to review results for the third quarter ended December 31, 2010 as compared to the third quarter ended December 31, 2009. Higher volumes in all three of our business segments contributed to revenues of CAD265 million, a 20% increase over last year. Gross margin was 11.6% compared to 21.5% last year resulting in gross profit of CAD31 million compared to CAD48 million a year ago.

As Rod discussed, the change in gross margins and profits primarily reflect lower margins in the Heavy Construction & Mining segment and losses on the two Pipeline contracts. Operating profit was CAD11 million in the third quarter compared to CAD31 million last year. This reflects the lower gross profit and a CAD2 million increase in G&A due to the impact of a share price increase on the stock-based long-term compensation plan which was partially offset by a reduced payout forecast for the short-term compensation plan.

Net income was CAD0.10 on a diluted per share basis compared to net income of CAD0.41 per share on a diluted basis during the third quarter last year. Backing out the impact of various non-cash items, net income per share would have been CAD0.06 per diluted share in the current year compared to CAD0.38 a year ago.

Turning to capital, total expenditures for the third quarter amounted to CAD13 million including CAD2 million of sustaining capital expenditures. Looking at liquidity, as at December 31, 2010 we had approximately CAD73 million of borrowing availability and a cash position of CAD0.7 million. This was down from CAD103 million of cash at the start of the year.

Approximately half of the reduced cash balance is due to the completion of two strategic initiatives that we executed earlier in the year. The first initiative was the refinancing of our senior notes in April during which we successfully reduced our cost of debt and total debt outstanding.

The second initiative was our successful entry into the screw piling market through the acquisition of Cyntech in November. The remainder of the reduced cash balance is primarily due to the near-term higher working capital requirements.

Growing revenues have continued driving working capital higher through the last couple of quarters and we expect this to translate into increased cash flow through the fourth quarter of fiscal 2011 and the first quarter of fiscal 2012.

Last quarter we indicated that we anticipate a net cash surplus from operations through March 31, 2011. We believe this is still achievable, but will depend on the timing of contractual billings and collections. That summarizes our third-quarter results. I will now turn the call back to Rod to tell you about our outlook.

Thanks, Dave. Looking ahead our near-term outlook is cautious, but our longer-term outlook remains very positive. Momentum is definitely building in the Oil Sands. A recent report by Peters & Co. predicts Oil Sands investment will reach CAD180 billion over the next decade and anticipates a new high of CAD22 billion will be reached in 2014 following significant expenditures in 2011 onwards.

Syncrude has recently announced capital spending plans which include an investment of CAD480 million in 2011 on tailings management, it includes four mine train relocations between now and 2014 and the future development of the Aurora South mine. Similarly, Suncor has announced an investment of CAD670 million in 2011 on tailings management, as well as plans to proceed in partnership with Total with Fort Hills mine, Voyageur upgrader and the Joslyn mine, all three of which have regulatory approval.

As the past few quarters have demonstrated, we're already experiencing growth in demand on the project development side of our business. But as was the case when the market downturned -- but when the market downturn commenced the margins -- and margins declined over time it's taking time for margins to recover in spite of what is clearly a strengthening market. That is revenue impacts are immediate as work opportunities change, the margins lag as contract obligations are worked through.

Our outlook for recurring services also looks positive with our two new long-term contracts with Syncrude and Shell providing some increased visibility on demand. In addition, we continue to provide high levels of service to Suncor as we await the result of a bid for a five-year agreement we submitted back in September.

As most of you know, our client, Canadian Natural, suffered a fire at its Horizon mine recently. At this stage we're not aware of any requirement to alter our overburden removal activity under our long-term contract with this client. However, should this become necessary we believe we can profitably redeploy some of the equipment to other customers' sites while Canadian Natural completes repairs.

Over in Piling we expect activity levels will moderate in the fourth quarter as a result of the normal winter slowdown. But beyond that the outlook is very promising. We are continuing to see improving conditions in the commercial and industrial construction markets.

In addition, the Cyntech acquisition is providing new opportunities with the addition of tank services, pipeline anchors and screw piling capabilities. These technologies and services provide us with access to new markets and a broader service offering in the SAGD construction.

In Pipeline we anticipate a low level of activity in the fourth quarter now that two projects in BC are substantially completed. While we expect that the extremely competitive market conditions that have existed over the last two years will start to ease, generally our medium-term outlook for this segment remains cautious. WE anticipate significantly higher volumes of work being tendered in 2011 and as a result we believe this will benefit overall market conditions.

Moving forward we will be pursuing our growth strategy with a focus on smaller acquisitions that can complement and broaden our current service offering. We think there are some good opportunities to expand what we can do for our customers and we intend to pursue those opportunities. With that I'll now turn the call back to the operator.

(Operator Instructions). Matt Duncan, Stephens Inc.

Good morning, guys. The first question I've got is with regard to the Pipeline segment -- the adverse weather conditions and projects, scope changes. Is there any way to quantify what kind of impact that had on your earnings this quarter? And in terms of the change orders that you have filed, can you give us some sense of how large those are in dollar terms and when those might flow through?

Sure, Matt. In terms of quantifying the exact impacts of the weather-related issues and scope, it's a little hard for me to break that out. What I can say is that between the two projects we're looking for up to CAD4 million in recovery on the change order side. So if we get all of that, that should bring us back into a profitable position.

And those should theoretically flow through when, Dave? Probably in the March quarter or could it maybe be June?

We're certainly targeting to try and bring as much money as we can into the fourth quarter, but it all depends on the timing of negotiations. So either Q4 or Q1.

Okay. When we look at the extra equipment you guys had added in anticipation of contract wins, obviously you ultimately did win contracts at at least two of the three sites and it sounds like Suncor still hasn't awarded a contract for theirs. I'm just trying to get a sense how much extra costs you carried sort of November and December time frame from those equipment additions?

Yes, in terms of the incremental cost, just because of the timing of when work started, there's really two components to it. So the one is on the rental cost side. That impacted the Heavy Construction & Mining profitability by just over CAD1 million -- I think about almost CAD1.4 million. When we look at the lower than anticipated equipment utilization, that added about another CAD3 million in extra costs.

And where did those flow through the P&L? Would it have been in the equipment cost line, Dave?

Yes. A lot of it would've -- most of it would've gone through the equipment cost line. Some of it would've, as I said before, gone right through on the Heavy Construction & Mining side.

Okay. And then on cash flow, it sounds like you guys are expecting that to pick up fairly nicely in the next couple of quarters. I'm just trying to can sense sort of, how much cash flow do you think you ought to be able to bring in. And as we look out to fiscal 2012 and beyond do you feel like you're now in a position where you've got enough equipment to handle the work you're winning so the cash flow should pick up? Or are there still equipment needs? Just help us understand what cash flow ought to look like going forward.

Okay. So in terms of this fourth quarter, as you've indicated, the timing of when the cash comes in is a little hard to predict because a lot of our cash sort of flows in at the end of March, so we may see some of that delayed to the early part of April. But what we're anticipating for a positive cash balance by the end of this quarter is somewhere between about CAD20 million and CAD30 million.

In terms of our capital needs, we're currently assessing what our needs are for this upcoming year and we'll have a better picture of that I think as we get through this next quarter. But right now we're not anticipating a significant investment in capital.

Okay. And the last question I've got and I'll jump back in queue. Rod, can you give us an update for how the market for tailings reclamation work is developing? We've seen CNRL and Suncor both announce very large spending plans on Directive 74 spending in 2011. Just trying to get a sense when you think you might start to see contract wins for 2011 spring and summer tailings work and then any guess as to what type of contributor you think this business could be on your top line?

Yes, I'll answer the first piece and then I'll put Joe Lambert on who manages that piece for us. I'll do the general piece. There's no doubt that everyone up here in the Oil Sands is looking at ways that they can treat their tailings. Obviously this is an expenditure by the various organizations up here that really doesn't add anything to the bottom line at all, in fact it takes away.

The issue really belongs to the older operators, so that's Syncrude, Suncor and Shell. The other operators as they come into the market, CNRL for example, they have to do something about it, but they don't have the legacy of the older operators. So it's those three that have got the big volumes that need to be cleared up over the next number of years.

We've already done some work on them -- on the various sites for that, but I've got to say each of them are still in the experimental stage -- each of them are still getting some surprises as to the cost that some of the projects that they're getting into are looking like. And so they get a higher cost than they expect. They're going back and saying, well, can we redraft, can we look at it again? Okay, can you give us a budget estimate on this alternative and that alternative?

So suffice to say for me that we've still got a group of people that are generally heading down the idea that they need to spend the money. They've got their general plans and ideas in their mind what they want to do, they're now getting into the detailed design and finding out exactly how they're going to do it. Joe, do you want to talk about what sort of work we're likely to get in the next 12 months?

Matt, we see a lot of work starting this spring and summer. Most of what we talk about on the tailings side is -- it's moving fluid materials and water and mud basically. So we expect the project to start after spring breakup and that we would start seeing contracts come out here in February and March for awards to start in April and May.

With the tailings group itself specifically we see revenue -- top-line revenue in the range of CAD10 million to CAD30 million potential with these contracts that we see visible at this point which are dredging, skimming, using our [cell cats], some barge and pump house capabilities.

There's also significantly more revenue than that when we look at the associated revenue of the civil works that our Heavy Construction & Mining division can do and associated with the same tailings projects. So a division isn't just all its own revenue, it's also the associated revenue we can pick up in our Piling, our Pipeline and our Heavy Construction & Mining division that gives us that full range of service in the tailings that we think creates a great advantage and opportunity for us.

Okay, thanks. That's helpful, guys.

Greg McLeish, GMP Securities.

Good morning, guys. I just had a couple questions. Just on the two contract wins, one of them looks like it was a renewal from Syncrude; I guess it ended in November 2010. Could you give us what the incremental revenue impact will be on a year-over-year basis?

Specific to the Syncrude contract, Greg, it's a four-year master services agreement. We had a six-month extension on our previous one and so this actually renews that to more of the fuller term that we're used to. With the master services agreement there is no commitment work, it's awarded individually over time.

So right now we have about CAD45 million of contract awards underneath that master services agreement for overburden, reclamation and other small civil work. Most of that -- well actually all of that work is to be completed in 2011; it's not over the whole four years.

The overall master services agreement has a revenue and term limit. The revenue limit is CAD250 million and the term is the four years. However, you can modify any time during the contract to extend the revenue or the term to fit the work that gets awarded.

Okay, what I was just trying to figure out -- is it an expansion of the work that you were doing under the previous master service agreement?

No, it's a renewal of the master service agreement. If you -- this is actually a great win for us because if you think back in November 2009, Syncrude had gone out for the master services agreement renewal and we and [Klemke] both missed out on work under that award issue. You'll remember also it was at that time that Cow Harbor was awarded a large amount of the work.

We were sort of readying ourselves to move off the site when Syncrude came to us and said they needed us to stay for a while longer and so they extended the existing contract that we had. And then over the last year Joe and his team have worked very closely with Syncrude and we've executed to some work really well for them.

We've got a close working relationship with them, an understanding of their needs and working together well to the point where they came to us and extended the then six-month contract into a four-year master services contract. So, basically we were back on the win part of the contract that they let out last -- in November 2009. I think this is Rod Ruston. So it's regaining that position.

To add to that, Greg, our revenue right now on the Syncrude side is higher than it's probably been in the last 12 to 18 months.

Great. Just on that, you said that should add about CAD45 million in revenue in the three-month period for Q4. Does that mean I can take your CAD185 million out of Heavy Construction & Mining and just say here's an extra CAD45 million so we'd take it greater than CAD200 million here?

No, that CAD45 million is what has been awarded in calendar 2011, not our fiscal 2011, so --.

I sort of got the impression that there was -- CAD45 million was supposed to be done in the winter period.

There is a significant amount of that that needs to be completed in the winter, which could extend into April.

Okay. But suffice to say, I guess what we're seeing is that your Heavy Construction & Mining divisions should do much higher revenue in Q4 with this contract?

Yes. But Greg, we were doing this work at Syncrude last year as well. So what this contract has done is replaced a short-term contract. So some of the work that we're doing this year is included in last years and some of the -- it's not just straight additive onto what we did last quarter or what we did last year.

Okay. And just look at your recurring revenue, when I took a look at it it was down about CAD100 million on a year-over-year basis. And I'm just trying to figure out if the majority of that is associated with the Jackpine mine?

Some of the work -- the large proportion of it will be for sure, yes.

And when that mine comes back -- well, it's back online; does that mean that you're going to be able to replace a lot of that revenue that you lost last year?

Yes. What we believe will happen -- and we've already secured a reclamation contract on Jackpine. And what we believe will happen is, as I've gone out and talked to you guys in the market before, the mine is in an embryonic state. As the mine expands then Jackpine, similar to the other mines that we work at, will require roads to be built and culverts to be dug and all that sort of stuff. So there will be a growth of the sort of services that we continually provide to a generally operating mine.

Yes, Greg, just to clarify, I think what you're looking at is a trailing 12-month number. So what you would be picking up in there is not only impacted this quarter was the Jackpine slow down while they went through that commissioning, but we also saw an extended period here where they brought their Muskeg River and Jackpine mine sites down for overhaul and maintenance and some of that we talked about in the last quarter.

Okay. And then what was this gain/pain impact that you had and what was the margin reduction?

Greg, it was -- one of those things we do in some of our time and materials contracts is we put some margin at risk for some areas that are important to both us and our client. And in this area -- in this contract with Shell in particular we put some of our margin at risk with our safety performance.

And although we did exceed our targets as a business on that particular site we didn't hit our target and it resulted in -- I believe we had a CAD600,000 margin that we gave back to the client. It's a margin hit, but one of the things we gain from this is that our client really sees our commitment to safety and that we don't just put words to it, we're willing to put margin at risk to demonstrate that we're committed to that performance.

And we do generally have a very, very could safe performance. It's a very, very strong area of focus for our business. We are absolutely determined to run a business where all our people can recognize that they can come to work and they can go home in the same manner as they came to work.

Doing this was not a requirement of the client, it was something that we offered up. And given the particular clients themselves are very, very focused on safety, it was a meeting of minds, let's say. And so we made that commitment under the contracts that we do here.

The safety event that occurred was not life threatening in any way, but it was an event that occurred that resulted in some lost time by one of our employees. We were very disappointed to see it happen. The mine itself -- and there's a couple of other smaller ones that went with it.

The operation itself we shut down for a period of time. We went through with all our people. We worked with the client and we put in change procedures and talked to all the employees to make sure that they understand the need for safe work approach here.

And just two more quick questions. I just wanted to clarify on the Suncor delay or the resulting delay with the equipment. That was about CAD4.4 million. So the rental was about CAD1.4 million and lower utilization was CAD3 million for the impact to margin?

Yes, in terms of our own equipment utilization plus the impact of bringing in those rental equipment units earlier than the revenue flow.

Okay. And then my final question, you did say that revenue is going to grow faster than margins. I found that a little fluffy. Can you elaborate a little bit on that, just what you think your margin performance could be and --?

Yes, in terms of the margins for this upcoming quarter, what we think is a number that's somewhere between the 13% and 14% at the top end is a realistic number, assuming that we don't have any unusual surprises. But that would be the number that we'd be targeting for this upcoming quarter.

Not just for the Heavy Construction & Mining but for the whole group?

No, I was talking about specifically the Heavy Construction & Mining. When we look at the Piling side, I think as we've indicated, we expect margins to be round about that 20% range, those low 20%s. It's come back more to historical levels. We don't expect it to get back to the 27%, 28% any time soon. And then there's not a not a lot of activity planned for Pipeline here in this coming quarter. So the only pickup we'll get is whatever we get on the change orders realistically.

Okay.

And Greg, we're never fluffy. If you look back a year or 18 months ago when the world started to slow down you'll see basically the reverse was happening. Our revenues were going down but margins were staying up. And this is because the margins do tend to lag revenue movement in the organization.

If you think of where we are now, some of the contracts that we will be executing over the next period of time were bid initially back in June, July last year when the bid documents were put together and they were submitted and all that sort of stuff. So in particular the unit rate parts of those contracts for large earth moving and that sort of stuff, those rates will go through until a point in time when they'll be reviewed.

Within those contracts also there's some time and materials type work which is not identified, it's just we put in a price to say, look, time and materials will be done at X sort of pricing.

Now with those each -- because the work isn't actually defined in the contract, each piece of work comes out piecemeal. And as they come out piecemeal you get the opportunity to say, well, now that the market has changed a little bit the price of that will be X or the price of that will be Y and you can actually move your margins.

So you'll see some margin improvement over time and then as new contracts, large contracts come out, then the next lot of rate type bid numbers will come out at a higher price and so on. And that's why the margins lag the revenue to some extent.

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

Chad Friess, UBS.

Good morning, guys. So the near-term revenue looks like it will be driven in large part by more work at the legacy mines. But I was wondering if you could provide some rough time lines for the various new mine developments that are out there that you might be bidding on. Specifically when there could potentially be a revenue impact from say Kearl, Joslyn, Fort Hills -- do you have any visibility there?

Yes, we do. The general information that's out at the present time in the market is that Total will look for early earthworks bids and request the proposals in around about the April/May/June time frame of this year. They'll will follow that up with a request for proposal on contract mining sometime in the June/July/August time frame.

The contract mining would take a long time before it's [let], so there will be a lot of discussion with the various bidders. However, our expectation for the initial earthworks is that they want to get started with the initial earthworks in the winter season of calendar 2011.

Fort Hills, which will also be done in joint venture with Total, we haven't got any specific timing on it other than what's been announced by Rick George recently in his capital plan and expenditure plan saying that they expect to restart the project sometime this year.

Now because of the fact that that project had already been started there is road access in and the ability to get onto the site in the summer period. Whereas, for example, Joslyn you really would only want to start it in the winter. So there's potential for work to start on Fort Hills even as early as this coming summer.

Other ones that are on the drawing board, you've got the Aurora North relocation. We expect that work will start in summer, that will be quite substantial construction work. And we expect the next stage of Kearl, which will be the start of work from handing over from the construction group to the operating group, will occur in the September/October/November sort of time frame this year ready for start -- that's when the contract request for proposal will come out ready for start-up of work sometime in 2012.

Okay, great. And you mentioned that some of the operators are surprised at the capital cost they're seeing, which is a familiar refrain from a few years ago. As activity in the Oil Sands picks up and the construction market tightens, to what extent is North American exposed to cost inflation?

I think everyone is going to be exposed to cost inflation. We've been told there's going to be a tightening of supply on tires. We're working with the tire manufactures to make sure that we're fully covered; we've already done a lot of work in that regard over the last year and a half.

There's already a shortage in the Oil Sands of heavy-duty mechanics. So there's going to be a fair bit of searching for those. And there could be some labor inflation there. Pleasingly, just recently, about three or four months ago, we have signed a three-year agreement with our operating engineers. So our long-term labor agreement is in place for a period of five years.

Okay, great. Thanks, guys.

The other thing that you should be aware of too -- and that is that equipment supplies are going up quite substantially. So delivery time on a 150 ton or 200 ton truck now is out around about 14 or 15 months.

Here we go again.

Yes well, one of the fleeting things in there is as -- responding to a question from Matt Duncan earlier, Dave said we don't have a high demand for equipment in the short term. We have already put some equipment -- put our equipment supplies on notice and given them an indication of some requirements in late 2011 calendar or early 2012 just to make sure that we're on the production line.

I see. Okay, thank you.

Bert Powell, BMO Capital Markets.

Thanks. David, I'm just wondering, can you give us a sense of what the claims revenues were in the quarter for the Pilings business?

Bert, I don't have that detail right in front me, so I couldn't give you specifically for Piling.

Okay, but that revenue would be booked in this quarter and that would be pure profit, correct?

Yes.

Okay.

You did see in the second quarter those margins were down roundabout 16%-17% in Piling and that was -- and as we said at that time, a large proportion of that was the fact that we had claims out there and change orders out there and so on. So --.

Yes, no, I'm just trying to get a sense, Rod, of where the run rate margins are for the business. I mean, you guys gave us a sense saying sort of in the 20% range for Pilings is what you'd expect going forward. I was just wondering if you were there this quarter and what impact Cyntech would be having on that in terms of its margins. So just trying to get a better sense -- really that's kind of what's underlying the question.

Yes. In terms of the impact that Cyntech may have on the margin, Cyntech's margins historically from the information that we've seen, have run similarly to Piling.

Okay.

Would be in the low 20s.

Okay.

So we wouldn't expect to see any significant variance there.

Just in terms of CapEx, historically you guys have run I guess as high as CAD100 million and down around CAD50 million. Just reading between the lines in your comments, is the expectation for this fiscal year that you will do minimal -- you have minimal CapEx needs and that really starts to fall into fiscal 2013?

I can see depending -- a lot depends on what you win.

Yes, fair enough.

So the entire initial earthworks for Total for example, if we were to win that we could certainly -- and that would start in December this year. We could start that work with the equipment that we've got, but probably over time we'd have to be building the equipment fleet. So, yes, we'd have to start buying some stuff in 2012, or fiscal 2013, late fiscal 2012, in order to service that market while keeping our business going on all the other projects because it's a brand-new piece of business.

I guess the other way to look at the question is, what's the utilization rate in the fleet today? And I'm talking about the heavy equipment fleet, not the -- forget the Pipeline stuff (multiple speakers) and the Piling.

Yes, Bert, very, very difficult to quote a utilization rate because with our 320 ton trucks we can say our utilization is in the high 80s. And because those trucks are 100% focused on the mining business and the mining business tends to operate 24/7, 365 days of the year.

Once you get below the 320 ton truck, 240 ton truck predominantly [big] dirt and mining. So can work 365 days of the year, 24/7, but on other occasions will go and do construction type work where it'll only work for 10 hours a day, five days a week and that becomes more so as you get into the 150 million tons and then down to the 100 ton trucks.

In a normal construction job you won't run 24/7 and so therefore you're -- the base that you're measuring your utilization over is sort of fuzzy. So it's hard to say what the utilization is. At the present time I can say our utilization would be -- for our entire fleet would probably be running at around about 120%, because we're not only utilizing every piece of equipment that we've got and own, but we've got a very significant rental fleet in at the moment doing the work over the winter, which is our normal way of working over winter.

Right. So if I -- maybe just to look at it from another angle yet again is if -- historically the CapEx has kind of mirrored your growth. As you grow and get new projects you're buying equipment. And so am I interpreting it, subject to maybe you win this or win that, that a more modest plan this year is going to triangulate against a more modest revenue growth profile in the Heavy & Mining business for fiscal 2012?

We're attacking the equipment demand from two points. One is we're spending significant money at the present time on product -- on reliability improvements, availability improvement of our equipment, quite a substantial increase in preventative maintenance type programs that we're putting in place. We've been doing this for about the last two to two and a half years, so that by increasing the availability of our equipment we can increase the utilization of our own equipment and therefore reduce capital spend.

That can only go a certain distance. With the amount of work that's coming out over the next 12 to 18 months or two years there is definitely going to be a need to increase our fleet. So capital spend -- our capital spend will go up over the next couple of years, higher than it was in the fiscal 2011 year. But I don't think it's going to go back to where it was two or three years ago where we were upward of CAD150 million, CAD200 million in a year.

Okay, so real acceleration as you head towards 2013.

That's right, yes.

Okay. And lastly, can you just give me -- do you have a sense if you look at your expectations out over the next 12 months, what's the split between what would be time and material work versus -- and I assume that's the site services time and material versus the lump sum unit price side of the equation?

It can change seasonally, Bert. This is Joe Lambert. The CNRL contract obviously is a long-term unit rate type contract. But when it comes to Muskeg and typically our unit rate type work comes in as either winter -- large volumes of winter Muskeg or large volumes of overburden. So currently the work at Syncrude sites would both be on unit rate type contracts.

But conversely, even though we bid unit rate on the Jackpine Muskeg work, they actually awarded it as time and materials, there was an option for both because they had a lot of confidence in the people and the execution we had on that site.

So, if you put a range, I'd say because CNRL locks up a chunk of that, probably 20% to 25% of your revenue as unit rate, there's probably another I'd say 15% to as high as 40% at any one time that can get locked up into that. And the rest of it is typically the time and materials type work.

And the time and materials, you have a better ability to pass along price increases. So if we get back into the tire situation, fuel, any other inflationary pressures that come along, the time and materials, you have a better ability to pass that along than you do in the lump sum unit price side of it? Correct?

Sure. In any of the master service type agreements where really the client doesn't have any obligation to award to you other than what they want to award to you, and you don't have any obligation to accept it unless you want it. So even though you have an agreed rate and things like that, they have a choice to award you it and you have a choice whether to accept it. So if you had a huge variation in say your tire price, and it wasn't coming through in your equipment rates, then you wouldn't have to accept the work.

Okay. So it's not embedded in the contract, it's sort of implicit in how the whole process works?

There are rates set up and they're set up and some of them have methods of annual escalation different than others. But ultimately you have a choice whether to accept it or not, as do they.

Okay, perfect. Thank you very much.

John Morrison, CIBC World Markets.

Good morning, guys. Just a follow-up on the back of previous questions -- your outlook where you talked about revenue growth outpacing margin growth. Can you help us better quantify near-term? So is this a two quarter phenomenon or do you see it carrying into the back half of fiscal 2012?

I'd say that the revenue growth that we're seeing, the announcements of work that the clients are putting out in the market at the present time says that there's going to be a steady tightening of supply. So we're talking about six to nine months behind revenue you'll see the growth in margin.

Given the cost creep that will happen over the next call it 12 to 18 months as accelerating capital goes to the Oil Sands, have your margin expectations in the heavy equipment segment changed at all as you face increasing costs? Do you feel that 15% to 17% long-term is achievable?

Yes, we do.

Just going back to the tailings management, you've referenced Suncor and CNRL's work. Just wondering, I realize that operator's plans are fluid at this point, but do you have any idea of how much of their budgets you'd have the potential to be bidding on? And on the flip side, how much capital you might have to allocate to that opportunity set to take advantage of it?

Yes, John, we see -- I mean the jobs split it differently, but generally if you think about the flow of their tailings it goes from dredges to cell cats. And we cover areas either directly or through our other divisions in that tailings group. So I believe we would have access to somewhere around half of that. And I'm just running it off in that half -- maybe more related to vertical growth.

But that revenue we have access to isn't specifically within our tailings group, it would also be opportunities in our Heavy Construction & Mining on the earthworks side of it with our Piling group and putting piles in for the construction work and in our Pipeline group because this is all fluid. So it's not a direct relationship to that tailings group, but those opportunities or those bids coming in, I would say roughly about half of them we would expect to see tenders on.

Okay. That's all I had.

So we've done things in the last 12 months like the pipeline corridor for Shell. And that pipeline corridor is very specifically a tailings project. But it was done within the Mining group.

And the Pipeline group.

And the Pipeline group, yes -- the Mining group and the Pipeline group. We've done some preparation of drying areas that was also done under the Mining group. We've done some skimming of the surface bitumen, some trials for skimming, that was done directly under our environmental group, tailings group. Similarly we've done a finger dike into a tailings dam for one of our clients and that also involved the Heavy Construction & Mining group.

But these were all -- everything else quoted there is absolutely related to the tailings. And where the clients are at the present time is they're in the construction mode, construction and trial. No one has a full blown this is what we're going to do, here's where the tailings dam is and here is the next five years of reclamation of that tailings damn. No one has that actual plan in place yet.

What they've got is some construction of part of the work to drain the tailings dam and dry the material there, some ideas of how they're going to dry it, some trials going on, etc. It will be probably another year before you'll actually see a number of tailings dams being round-the-clock work -- or actually it will probably never be around-the-clock, it will be nine months of the year work on to actually do the reclamation.

Do you feel that's at least minimum a year out before anybody gets to that stage of development?

By the time you get the whole sequence in place, yes. The whole sequence being you've got your dredging there. You've got that all set up, it's got all its pump stations in, it's taking the material down to a drying area, that drying area is operating through the summer and late spring, early fall periods. And then that material is being picked up and deposited and reclaimed. To get that whole sequence in line and running is probably another year away.

Okay. That's all I had. Thanks.

Matt Duncan, Stephens Inc.

Hey, guys, I just want to circle back again to an earlier question about the sort of sequential change in revenues we should look for from the December to the March quarter. And I know there are a lot of puts and takes on the Heavy Construction & Mining side, I'm sure there were some construction projects that would have been finished off in the December quarter.

So just looking at from December to March how should we think about the progression of total revenues for Heavy Construction & Mining, taking into account new contract wins and things that were worked off?

Yes, I think, Matt, in terms of the overall number it should be fairly flat to where we're at for Q3. There may be a small incremental increase but it wouldn't be very big.

But probably less than CAD200 million but somewhat a little bit more than you had in the December quarter is the range to think in?

Yes, that's probably a reasonable estimate.

Okay, that's helpful. And then last thing I've got in terms of Cyntech, can you give us an idea how much revenue it added to Piling this quarter?

You know, I can't remember the number off the top of my head. I don't know if somebody else has got that?

Okay, we can circle back on that later, Dave.

Yeah, I know. I don't remember off the top of my head. Sorry, Matt.

Actually I can help you with that, Matt. It's Chris Yellowega. Cyntech, a lot of its work is still seasonal, so they book tank services and screw piling work. And so I don't expect it to have a large impact on Piling revenues in this quarter, it will be incremental.

Okay. Thanks, Chris.

Matt, Kevin just gave me the information here -- it was CAD3.5 million is what we recognized here in this last quarter.

Thank you. There are no further questions at this time. I would like to turn the floor back to management for closing comments.

Thank you very much, everybody. We'll be on the road down both the East Coast of the US and the West Coast of the US and in Toronto and Montreal over the next week. And happy to catch up with anyone that needs to talk to us. Thank you very much for being on the call, we'll talk to you later. Bye.

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