North American Construction Group Ltd (NOA) 2011 Q4 法說會逐字稿

Good morning, ladies and women. Welcome to the North American Energy Partners fiscal 2011 fourth-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 and 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 NACG.ca. I will now turn the conference over to Kevin Rowand, Director of Strategic Planning, and Investor Relations of North American Energy Partners, Incorporated. 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 3 and 12 months ended March 31, 2011. 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 and Construction, 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 our 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 the conclusion, forecast, or projection of forward-looking information.

For more information about these risks, uncertainties, and assumptions, please refer to our March 31, 2011, 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. Fiscal 2011 brought a general improvement in the volume and types of opportunities we're seeing throughout our business, and an expansion of our relationships with a number of key oil sands customers. In our heavy construction and mining division, we ended fiscal 2011 with a significantly-reduced volume of work and no long-term contract in place at Syncrude. At the end of the year, with a new -- and ended the year with a new four-year contract covering reclamation, overburden, and general construction services at that site.

Over at Suncor, we've grown our business from renting this customer a small fleet of trucks to having a full complement of fleets on the site, executing a high volume of reclamation and civil construction services with the anticipation of signing an extensive a five-year agreement covering reclamation, site civil construction, and mining services in the near future. At Shell, we also expanded our site presence by signing a new three-year muskeg removal contract with this customer. This is in addition to our existing four-year market services agreement with Shell.

In a year where an excess of truck and shovel capacity existed in the oil ands, we greatly expanded our relationship with three of our four major oil sands customers in recent months. We believe this has been primarily achieved through our continued focus on safety, training of our supervisory staff, and excellent execution of our projects. Our volume division meanwhile achieved significant volume and property increases in fiscal 2011, as commercial and industrial construction markets demand improved. And our pipeline division grew revenues as it worked on two major projects in northeastern BC. Combined, these new opportunities contributed to a 13% increase in our consolidated revenues for the year. That was after giving effect to the CAD42.5 million revenue write-down related to our long-term overburden removal contract with Canadian Natural, no significant -- so a significant achievement.

However, our gross profit margin results came in below expectations. This was primarily due to the revenue write-down, which also impacted gross profit by CAD42.5 million. Excluding the effect of the revenue write-down, gross profit would've been CAD100.7 million, or 11.7% of revenue. The reduction in our fiscal 2011 gross margin reflects increased volumes of lower margin over burdened removal work, losses incurred on our pipeline projects, and the lingering impact of the lower-margin legacy contract signed during the economic downturn. Looking more closely at our segment results, revenue from heavy construction in the mining division was nearly flat year-over-year, after the write-down of the Canadian Natural contract.

Excluding the write-down, revenues increased CAD44 million, reflecting record volumes of overburden removal activity, and increased construction activity in the oil sands, partially offset by lower recurring services revenues as the Jackpine mine transition from construction to operation. For those of you who are longtime shareholders, you will remember a similar commissioning of the Canadian Natural's Horizon mine a couple of years ago. Margins in the heavy construction and mining segment were 7.6% of revenue, compared to 16.7% a year ago, reflecting the write-down. Excluding the write-down, segment margin was 13.1%, reflecting increased volumes of lower-margin overburden removal activity in the project mix. It also reflected increased competition and an increase in the use of higher-cost rental equipment during the year.

Turning to Piling, revenues increased 54% year-over-year to CAD106 million. Improving market conditions and an increase in the large-scale oil sands projects together with the contribution of our Cyntech acquisition were key factors in the growth. Piling profit margins also increased to 17.5% of revenue, compared to 16.5% a year ago, as a result of the improved market conditions. Although we lost some ground on margins in the fourth quarter, this was due to weather-related project start-up delays and margin reduction on one large lump sum project.

Looking at pipeline results for the year, revenues increased to CAD86 million from CAD25 million a year ago. This reflects our work on the two contracts in northern BC. The weather-related productivity issues on one contract and significant project scope changes on the other hampered profitability. We ended the year with a segment loss of CAD3 million and a number of outstanding change orders related to these contracts. So overall, a noticeable increase in activity in fiscal 2011, with significant, and we believe temporary, profitability impacts primarily as a result of the write-down of the Canadian Natural contract.

To put this year in perspective, I would characterize it as a profitable downturn in the mining and heavy construction segment, and we are now ramping up in the recovery phase. I now call on David Blackley to review our fourth quarter financial results. David?

Thank you, Rod, and good morning, everyone. I'm going to review results for the fourth quarter ended March 31, 2011, as compared to the fourth quarter ended March 31, 2011. Revenues for the period were CAD174.5 million, compared to CAD220.6 million in the fourth quarter of last year. The change in revenues primarily reflects the CAD42.5 million revenue write-down. In addition, we experienced a slight drop in recurring services and project development activity in the heavy construction and mining segment. The completion of a project in our Pipeline segment offset higher revenues in our Piling segment.

Gross margin was negative 10% in the fourth quarter, primarily due to the revenue write-down. Excluding the impact of the revenue write-down, gross margin would have been 11.6%, compared to 14.8% last year. The year-over-year change in margin reflects a loss on one lump sum pipeline project, and lower margins in the Piling segment due to project losses and start-up delays. We recorded an operating loss of CAD35.5 million in the fourth quarter, compared to operating income of CAD13.1 million last year. This again reflects the impact of the revenue write-down, partially offset by lower G&A expense for the three months.

For the fourth quarter, G&A was CAD4.7 million lower than a year ago, as a result of the reduction in the employee short-term incentive plan liability, partially offset by the impact of a share price increase in the stock-based long-term compensation plan. Net loss per share for the three months ended March 31, 2011, was CAD0.84, compared to a net loss of CAD0.03 during the same period last year. Backing out the impact of the revenue write-down, and various non-cash items, net loss would have been CAD0.01 per share for the most recent quarter, compared to nil last year.

Turning to capital, total expenditures for the fourth quarter amounted to CAD5.5 million, including CAD2.6 million of sustaining capital expenditures. Looking at liquidity, as of March 31, 2011, we had approximately CAD69 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 reduced cash balance was primarily due to a near-term higher working capital related to the overburden removal contract with Canadian Natural and an increase in pipeline-related receivables and unbilled revenues.

One final note. As a result of the CAD42.5 million revenue write-down, and its impact on our EBITDA results, we recently sought and obtained an amendment to our credit agreement. Under the amendment, our lenders have excluded the CAD42.5 million revenue write-down from the calculation of consolidated EBITDA for the 2011 fiscal year and any future periods. This enables us to remain in compliance with our bank covenants, while we conduct change order negotiations at Canadian Natural.

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

Thank you, David. Looking ahead, we anticipate some initial constraints on our revenue, as a result of the suspension of work on our long-term overburden removal contract. As we've announced previously, work on our contract with Canadian Natural has been suspended until January 2012. This is related to the January 2011 plant fire that shut down oil production at their sites. We are currently working with Canadian Natural to see if we can deploy resources to other projects in the region.

We believe this could partially offset the expected decline in revenues. We also believe it would positively impact our margins and cash flow, as we would be redeploying into higher-margin products. The timing for this suits the increased demand we had from other customers under our new contract. As I mentioned at the outset, we are anticipating signing a new five-year master services agreement with Suncor. We have a new four-year master services agreement with Syncrude, and an additional three-year muskeg removal contract with Shell.

Demand for our equipment and services is currently very strong, although I should note that similar to last year, nature is impacting on us again this quarter with temporary shutdowns in the oil sands in the past two weeks related to wildfires near Fort McMurray. To date, we have already lost over a week of production across our sites, and we were sent off Shell again last night with an expectation of up to another week of shutdown at that location. We expect this could have a negative impact on revenues of approximately CAD10 million to CAD15 million in the first quarter. Longer-term, our outlook for oil sands is even stronger, with a number of new projects moving forward.

Suncor and Total have formed a strategic alliance to develop the Fort Hills mine, Voyageur upgrader, and Joslyn mine. The first tender related to the early earthworks at the Joslyn mine will be submitted later this month. Exxon continues with construction of its Kearl project, and Syncrude is planning a number of major mining projects, including the relocation of four mine trains. At the same time, our customers are significantly increasing their investments into tailings and reclamations projects. By way of example, Suncor has announced an investment of CAD670 million for tailings management in 2011. Syncrude is planning to spend CAD480 million on tailings projects this year. This has already been translated into opportunities for our tailings and environmental construction division.

Turning to our Piling division, the outlook for fiscal 2012 is also very positive. As a result of new oil sands projects and an upsurge in commercial construction opportunities across the division. We expect to see revenues and margins strengthen over the coming quarters, although similar to last year, rainy conditions across our areas of operation have hampered startup on some projects during this quarter. Conditions in the pipeline segment have also improved, with reduced competition and increased demand, allowing contacts to be beefed with better margins and lower risk.

Overall, our long-term outlook for the business remains very positive, and with our new contract in place, we are well-positioned to capitalize on many attractive opportunities in our core markets. With that, I'll turn back to the operator.

(Operator Instructions). Thank you. Our first question is coming from Matt Duncan from Stephens Inc.

Hey, guys. Good morning.

Hi, Matt.

Just related to the piling segment, so can you talk a little bit about on the weather and project start-up delays, how much of that negatively impacted your revenues and margins in the current quarter? In the March quarter?

In the March quarter, actually the weather impacts weren't as strong as -- a mostly start-up delays and award delays. So we found, Matt, was a lot of the work got deferred into Q1 this last year and some actually Q2 of this year and therefore just the volume is where we had the biggest impact. We also had one job that didn't go very well, and because it was a large percentage of the total revenue of the division through that quarter, it has an impact on the margins.

So did I hear you correctly, Rod, that the June quarter is being negatively impacted by weather for piling as well?

Yes, you did, Matt. We had very heavy rains through April and May in the whole Western Canada actually. I think across the whole of Canada. So basically, we've had rainy weather that's been -- that has impacted our piling and construction outside the oil sands. Then you go north and the area is so dry, tinder dry, that they had I think a 160 fires burning around the oil sands area, so it's been quite a difficult first month, and a half.

So then, Rod, as I look at that Piling segment, or the revenues there probably relatively flat March to June or should they be up a little bit just on activities picking up other places?

Matt, it's Chris. They'll be up a little bit. They're not as strong as we hoped, due to the weather, that they will be up.

Okay. But from what I've read you say, over the balance of the year things are looking very strong in pilings, so you want to kind of get back -- you put up a CAD38 million quarter back in the December quarter, so once we get past these short-term fire and whether issues, can you get back to that level?

I would think so. Our biggest issue now as soon as the weather clears up, we've got a lot of internal competition for equipment. The guys are scrambling now to get all of the jobs started.

Okay. And then last thing from me and I'll hop back in the queue, when I look at all the puts and takes in the June quarter, you've got the negative impact of fires, you've got piling business being impacted by weather, sort of how should we think about the revenue number, if I pro forma the March quarter to put the 42.5 back in, it would have been 217, so obviously you're down from that. I'm just trying to get a sense how much. And then I guess there's probably costs associated with you guys being negatively impacted by these fires and all this rain. So what do you think your margins are going to look like? And at the end of the day, do you think you can make money in the June quarter?

Yes, I think we can still make money. I think we probably need to take the revenues down around about CAD190 million, so take it down the CAD10 million to CAD15 million that we're going to lose because of the fires type work, maybe a bit more, depending on how much this week extends out, and then another CAD5 million to CAD10 million off the piling type number. Generally what happens in piling, unlike mining, if you don't minute, then it's not revenue that you get back again. Generally with piling, what Chris was talking about, all these guys want to play catchup and get back on schedule, so we should see, as the rains have cleared, a hard push by the fires in that area to get things going as quickly as possible, so might get it all done by the end of this quarter, it will flow into the second quarter, but I expect they'll be able to catch up.

Yes, there are some costs involved. We haven't laid off any employees with respect to either division. In the piling group, what it means is that employees go out there and while it's not raining, they do as much work as they can, so there's a cost to retaining those employees on-site, ready to work, similarly with Fort McMurray, there's a cost there because with respect a large number of the camps in Fort McMurray have closed down because of the fires, not just at Shell but other locations. So typically been bussed into Fort McMurray town and put up in hotels. And bussed back in the morning. So there's a productivity loss to just due to the time you're losing of having employees on-site. Plus of course the cost of taking them there. So you can probably take the margins down in both of those areas by maybe a percent or two.

You do think you'll be able to earn a profit in the June quarter on that CAD190 million of revenue?

I think we can, yes.

I thought. I'll hop back in queue.

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

I just wanted to touch on your bank covenants again. I understand you did get the waiver from the bank, but, if things didn't go well with CNRL on the negotiations, you didn't indicate that there is another CAD72 million that would have to be written off. What would happen to the covenant at that point?

Greg, was not a waiver it's an amendment to the covenant, but we have had discussions with the bank, and they've indicated to us that should we need to come back for our another adjustment, they would be willing to review it. Clearly, they're not going to sign off on that today, but I'm pretty confident that they would continue to support us.

And if it was upwards of this CAD72 million?

Yes. I would believe that they would continue to support us but I mean, again that's a hard thing to predict right now.

Okay. The other thing is, just can you talk about the change orders and on the pipeline and how much, if you were successful in getting those changed, how much you could get back next year, how much you could realize?

Well sure, Greg. It's Chris, I'll answer that one. Under the pipeline change order process, we're seeking change orders to bring us back to even. Success rate, I expect would get close, but we probably ran up short of about CAD1 million.

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

Think you. I next question is coming from Bert Powell of BMO Capital Markets.

Thanks. Rod, you talked about the legacy contract and you've talked about competition. Outside of CNRL and mother nature, can you give us a sense as to what the profit margins would look like going forward? I think historically, you've talked about gross profit in the 15% range. Given the new dynamics, is this something we should be thinking about closer to 10% to 12% going forward, given what's going on?

I go right to the middle. It's more of 13%, 14%. We'll head back up, it'll take a little while before we get into the 15% and 16% set we were before, but we're certainly seeing some margin movement in Fort McMurray, now, but there's still in oversupply of the equipment t. With our equipment they actually working pretty solidly, but you've got to remember that Exxon has still got the Total Harbor fleet out there that is going to get to work at some time. Suncor coming off the Kearl, the major earthworks projects there.

And interestingly, our original thought was that Kearl would be replaced with the early earthworks of Total in size, but in fact, Total's initial contract of bid material they've come out with so far is relatively small, like in the CAD60 million to CAD100 million size, so it won't absorb a lot of equipment in the early stages. It will ultimately go to a very large contract, but the initial one is going to be pretty small. So there's still some pretty clear competition out there. As I said before in the market, this year is a year when bidding opportunities are going to come out where construction opportunities are going to come out but the real construction and growth in the industry is going to start probably from round about December, January, this year December last year.

David, just on the G&A, I assume part of the reduction is part of the reduction of accruals in the fourth quarter?

Correct.

Okay. So what's the right way to think about G&A? Is CAD15 million a quarter the right way to think about it?

Yes, I think somewhere in that sort of CAD15 million, CAD16 million a quarter range is reasonable.

Right. Thank you very much.

Thank you. Our next question is coming from Ben Cherniavsky of Raymond James.

Good morning, guys.

Good morning.

I'm hoping you can elaborate a little bit on some of the headwinds that you noted in the various segments. The lump sum contract in the piling segments, summer cleanup costs on the pipeline division. Are those just provisions for expenses you anticipate after the job shuts down? And I think there was also use of some lower activity on Shell side, it's so can you just walk through each of those and give us a little more color?

Sure, Ben, it's Chris. On the piling business, we often take lump sum contracts, and they're just in the mix within each quarter. In fact, a fairly good number of lump sum contracts are in that business, and we tend to like them. But once in a while, we will run to some conditions that were either unknown or more difficult than we expected. And we ended up with lower productivity is and therefore we take a hit on our profitability on those particular projects.

In the last quarter, I think that there was a combination of having one of those projects being a fairly large component of the total mix as well as a slowdown in activity levels when those two things came together, it reduced the margin in the piling business, and that does happen to us once in a while but it's not something that is very common, so we tend to actually really like the lump sum projects in that business. On the pipeline side, most of the summer cleanup work and so, it's closes out projects that we did last year.

The biggest impact that those ones has had is that we've had to carry a cost on the summer cleanup work that is greater than what we expected to be the revenue, what is why we show a loss in a couple of those projects. Those are where a lot of the change orders come into play, because that summer cleanup work is a different scope of we had did, and those are the components that we're negotiating with the client and that's why expect to recover some of that.

This is Joe Lambert. On the activity at the Shell side, what Rod hinted to in his discussion earlier is one a project transitions of from construction into operations, but we really go from the peak of constructions support to a mine support that starts building over time, so it is just a transitional phase on that site. When that occurs, and you have to move equipment between sites, there is some reduction in your efficiency during that transition, and it's just a natural progression of a mine site to go from the start up into the mine support sites. Similar to what we see in CNRL.

Right. Good. That's all very helpful, thanks for the color. If I could have one follow-up, in the last quarter, I believe there were some change orders that you are expecting to recover in future quarters and the pipeline business, if I recall correctly, and correct me if I'm wrong. I think they amounted to about CAD4 million that you anticipated recovering imminently. Did that impact you? It doesn't look like that impacted you at all in this quarter but maybe you can shed some light on that.

Actually, yes, because we didn't get the final signatures on by the end of the quarter, Ben, so we weren't able to book any of that.

So that will come in future quarters?

Yes, that's still expected. There's a lot of those e negotiations are still ongoing and you can imagine, when the project is done, those negotiations can get little difficult.

So is that then in addition to the change orders of -- what you were just referring to previously in the pipeline business was summer cleanup, those are additional change orders that are unrelated to the ones you noted in previous quarters? Is that correct?

No. They're largely the same. There' s also other components outside of summer cleanup that are carrying over.

So how are we supposed to think about that in terms of -- terms of the revenue line, then? Obviously, those change orders, I believe they come with, very high profit margins. Just recovery on costs you already incurred, so can you help us at all in how we anticipate the piling segment to look in the next couple quarters? Should you recover those costs, those change orders?

Well, they'll be contributing -- I think what we'll find is most of our pipeline activity is not scheduled -- we do have a couple of awards now, but those don't look like they're going to start until the August, September time frame. So should we get those change orders complete and executed, a bit of work in the summer cleanup period before the August to September time frame, I think you'll see a very low volume of work within a fairly high margin attached to it within the next quarter.

You don't want to quantify that at all?

No.

Okay. Well, that doesn't help much, but okay, thanks.

Thank you. Our next question is coming from Graham Morris of Contrarian Capital.

Hello?

Yes?

Hi. A quick question. If you were to -- PP&E and be on your balance sheet is depreciated. Is there market value of the equipment that you own? Or an insured value?

We haven't done a true market assessment for quite a while. Yes. At least three years, so I'm not sure I would have something reasonably current.

The other thing is we're not going to sell it --

I just wonder if your stock price is trading below the intrinsic value of your equipment.

My off the cuff would say yes.

Okay.

Certainly below the intrinsic value of the equipment --

So below liquidation value? I realize this is a theoretical exercise and that you're not selling it, I'm just more curious than anything else.

Again, given the demand for equipment in the world market at the present time, you could probably get a pretty good sale price for it, so yes, probably say that.

Great. Thank you.

We're pretty close.

Great. Thanks.

Thank you. Our next question is coming from [Stephen Nirren of Brill Securities].

Yes, could you give us some idea of how you expect the environmental work to start rationing up? Specifically, do you have any specific numbers on how much the tailing cleanup should be this year and in the future?

I read the numbers that have been quoted by our clients. But some of the value of those quotes will be our own clients doing their planning or doing some of the work themselves, or getting tests done at universities and the rest of the stuff. The sort of work that we're doing at the present time is fairly wide-ranging and goes everything from preparing drying pads for drying the material, once it comes out of the dams to developing and assisting clients in ways to actually install the pumps and dredges within the piping dams as we can actually get materials out of them. And all the experimental work in between, so the work will be highly varied this year, it will be focused towards experimentation, new ideas, things that the clients are trying and preparing lay down areas, and I would expect next year there will be a real push on actually pumping material out and doing some drying.

Do you expect to actually do the work on these projects, and would you manage the entire project?

That's certainly our model. That' s what we've been approaching the client with. We believe we are the only organization that has take it from the plant right through to put it back into a dry state type of model for our capability. We have a joint venture with Boskalis, one of the biggest dredge operators in the world. In fact as we speak, we're leading the first significant size job for a Boskalis dredge working with us in a joint venture with one of our clients. And so we're getting some good traction now or after about a year of marketing, we're getting some very good traction now on clients recognizing the extremely broad range of scope that we've got within our organization.

Last question. Could you give us some ideas of the size of the money that's going to be spent cleaning up the ponds and how much could that add to your annual revenue?

Steve, this is Joe Lambert. Rod represented some of the numbers our clients have announced, the CAD600 million as being the kind dollars for the putting into tailings here and there. What we're looking at is a lots of that work is work that we currently do in the heavy construction mining, piling, and pipeline divisions, and isn't necessarily growth side. On the growth side we believe in the near-term m opportunity is in the tend to CAD20 million range in our tailings and environmental group per annum. And we see that as a growing steadily to be able to have that opportunity and access to possibly a range of around CAD100 million annual within the next five years.

Thank you.

That CAD100 million annual, that will come from the start up of the pumping the material out and doing the actual drying process. Will be a big contributor to that.

Okay. Thank you.

Thank you. Our next question is coming from Jeremy Lucas of Scotia Capital.

Hi. When I take a look at the unbilled revenue account on the balance sheet, I see that CAD30 million that's not associated with CNRL, is there any one customer that represents a significant portion of that balance?

No. It would be made up of a number of customers.

Okay. So there's no large one in there? With respect to some of the legacy contracts, do any of them have similar inflation indices comparable to the CNRL contract is currently being reworked?

No. The CNRL contract is the only one of its type that we have in our business. Spec is the only one of its type in the world.

Okay. Understood. And then finally, have you had much success relocating resources from the CNRL site to other sites? I fully recognize that it's a bit early and perhaps the fires are impacting things a bit, just wondering if you had any discussions with your customers regarding your new increasing capacity?

Jeremy, is Joe Lambert again. We've already moved some equipment off-site. Actually, we received the suspension notice about two days after the bulk of the fires started in the Fort McMurray area, so we've actually been somewhat hindered getting the equipment off-site. Our non-contract committed fleet off-site just because of the fires and the impact of the fires. So we have taken all of our non-contract fleet extra equipment that was just down there doing other work pretty much off-site now, and we're currently looking at the demand side and in discussions with CNRL to see if we can come up with some mutually beneficial scenarios to use other equipment support our work and other sites.

Okay. So just focusing with CNRL right now, sort of retool the relationship, other than perhaps other customers, is this what you're saying, right?

Sorry. We, first of all, we don't have any bad relationship with CNRL. It's a very good relationship. We've worked with them now for five years. As I said on the call when we announced the loss on that site, this is a change order.

We just talked a little while ago on the conference call here about a number of change orders in the pipeline division that Chris's team is negotiating with our clients there. This is really the same thing, just the fact of the matter is, this is a very large change order. The two parties are working very well together. We've submitted, as we should and as is our responsibility, our view of the impact of the change in circumstances that CNRL had looked at that change, and had come back to us and said, basically, okay, we understand where your client's coming from.

Obviously, we want to concern the number were putting in and the two parties have come to an arrangement where they will together, go to all the places where the new indices valuation is being based on, and review the work that we've done before to confirm or change or whatever the submission that we've put in, and then negotiate it out. We expect that to be done over the next few months with a view towards finishing by the end of August. The relationship is very good.

Our choices ha been, as a separate issue altogether, CNRL had a fire in their coker last year, earlier this year, and have made the decision that they should shut us down because they don't want too much exposure to oil by having excessive overburden removal. So they have that right within the contracts. They've done it before, when they were doing the commissioning of their plant. And we could, at that point say okay, we understand, we shut down.

And submit them continued invoicing for the cost of retaining that equipment and leaving it on site, so they would cover the fixed cost. Now, it's common sense as far as we're concerned, and as far as they're concerned, to save him a well, if we can take one of those pieces of equipment and move it elsewhere, move it elsewhere and move it from a low-margin jobs into a high-margin job, and have that, CNRL doesn't have to pay for that piece of equipment and we get the benefit elsewhere, then we should do so and that's what Joe is working through with the client right now.

Okay. Great. Thank you very much.

Thank you. The next question is coming from Matt Duncan of Stephens Inc.

Hey, guys. I just want to stay on CNRL for a minute. So on the equipment that was on that site, if it was doing roughly CAD50 million a quarter in revenue at Horizon, how much of that equipment can you reallocate -- so what I'm getting at is that CAD50 million in the quarter from CNRL, how much revenue can you generate from the equipment you reallocate?

Matt, is Joe Lambert again. It depends on how much -- it's going to be mutually agreed with our client as far as the contract fleet. There was some equipment, like 777 trucks doing muskeg work, and there weren't contract-committed equipment, and some stuff we had doing extra work that we moved out already. That equipment wouldn't be generating CAD50 million a quarter. Maybe CAD5 million a quarter, kind of number. But the bulk of the equipment in the larger-sized equipment really, depends on how much we can find work for it, and whether it's of mutual benefit to us and CNRL to get their agreement on doing it. And it'd be how long is a piece of string kind of question that until I know what the demand and what the willingness of the client to participate in the demand is.

Okay. Rod, back to the comment you made about gross margins earlier, I guess with the mix within your revenue is obviously shifting in the near-term to much higher margin business, given that CNRL was such a low-margin piece of business, and that goes away through the balance of this calendar year. So shouldn't in theory, maybe beginning in the September and December quarters, shouldn't your margins run higher than that 13% to 14%, just given that A, the contracting environment is a little bit better, but B, the mix is shift into a much our business?

You're probably right, Matt. Certainly, with the large impact of the CNRL taken away, the margins should be up a bit. I left that out there for you to dig out and come back at me at.

I guess a lot of the things that you've won recently is probably more in the 12% to 15% range on heavy construction and mining comp and then piling should be in the low 20s, so that would suggest a mix more like 16, 17, maybe 18% margins in good quarters, while you were off these CNRL side. Does that sound pretty close?

Yes, it should be up a bit. I want to be careful here that we don't -- you are asking me to put a lot of numbers out of the air here in prior, saying how much did the rain hit you, and the fires and all the rest of it from margin and I said 1% or 2% down, and now with CNRL, 1% or 2% up, just be careful. But yes, sort of in the 14%, 15%, 16% is probably a good run rate. Hopefully we can go a bit higher than that, and we're certainly concentrating our business toward getting better margins, but I don't want to overstate it.

Matt, keep in mind that we are also working through some of the lower pricing on legacy contracts, so that will provide a bit of a drag. Obviously, as we get toward the end of this fiscal year, then the margins are trending back up to the low end of those more historical levels that we talked about.

Last thing I've got is that CNRL, I know that there production plan for their plant, just to have that backup and running by the end of August, but you guys are off that site until January, so does that suggest that you are four months ahead of schedule at this point, and is there any chance that January restart date could move up once they begin production, as long as they don't have any problems restarting their facility?

Matt, this is Joe Lambert. I believe the restart, if you look at the information, it to get half their cokers running in that first estate set up.

I should change that I think, early last week, is to say that they're going to start the thing by the end of August.

Since January, we've been mining in overburden, along with their mining in overburden, so they basically been moving two months of waste without any ore since the January, so we would see them being possibly somewhere around 10 months ahead of schedule on their overburden, and believe that will take them pretty close to their January start date.

We also believe, Matt, from discussions that they've indicated to us that some further exploration and mapping of their site is indicating some lower overburdens for the next number of years as well, so you've got the combination of significant amount exposed and lower demand going forward.

Okay. Thanks, Rod.

Thank you. I next question is coming from Jeff Fetterly of CIBC World Markets.

Good morning, all. I'm looking for some color on pricing and margin expectations in the other segments. You talked about some pipeline project wins starting this summer or early fall. What is the pricing dynamics on that relative to previous contracts?

It's Chris again. Pricing is actually a lot stronger this year. We are seeing the demand increase. A number of our competitors are struggling or reevaluating their r position in the marketplace, so pricing is stronger and the risk profile under the contracts is lower.

So would you say risk profile, are they still lump sum contract?

Pretty much all unit rate type contracts, with some lump sum components in them.

The difference is that t we are able to qualify more things out than we were able to do, so we're able to hand some of the resources back to the client in some weather risk, and those sort of areas. So that reduces the overall risk profile of the job. The other thing is that the actual margins are being somewhat higher than they were last year.

So those contracts are in hands for work to be done this summer, fall?

Yes, we have a couple in hand, so we're hoping to hear more on --

So what revenue visibility do have for the pipeline business in fiscal 2010?

Revenue visibility should be similar to last year, although I would say we still have some other contracts we're trying to close.

Okay. So sorry. Just to be 100% clear, the visibility you have is for revenues to be the same in 2012 as 2011? An d then there's upside with more contract wins?

No. The expectation is with a couple of contract wins we're working on it should be similar to last year's revenue.

Okay.

Better margins.

What about the piling side per from a pricing and contract structure standpoint?

We're seeing our pricing has been improving. Our contract structures tend to be similar because it's largely driven by the construction business and commercial business. Margins benefit because of activity levels, and that also help those in our business, where we get lower kind of overhead costs in the business driving down overall margins, and we are seeing revenues continuing, a pretty strong increase versus last year.

And you're expecting margin expansion, combined with that?

Yes. Versus last year.

Okay. Cyntech. What is your initial thoughts of the contribution of Cyntech? It looked pretty skinny in the March quarter.

Actually, we are pretty happy with Cyntech contribution in the March quarter, but I think our into expectation of Cyntech is that it should -- it's going to add approximately 15% to the piling revenues.

Jeff, it's Kevin Rowand here. Cyntech is a seasonal business as well, so especially the tank services, it ramps up. They do 80%, 90% of their work in the summer, fall timeframe. On the tank services side, so they don't do a lot of work during the winter timeframe.

Okay. Is it safe to say that 15% top line is a 15% bottom-line impact as well?

Margins are similar. We tended to find take services because of the structure and the locations that can be a little bit higher, but they're fairly similar to the other piling divisions.

Okay. Last two components. In the heavy construction mining side, the three -- sorry, two agreement and one potential agreement, from a pricing standpoint, and margin standpoint, how would you say that compares to what is rolling over against and obviously the incremental work that's coming in?

Our master services agreements would be typical to what our historical margins were in mining. They're not being compared to previous ones because we didn't have a previous one at Suncor. And the Shell one is a monthly contract, it's not a master service rate job, and again, we would expect it to be a historical type margins in those.

I guess when you put it all together, do you expect it to be accretive to margins in that segment? Relative to where you have been the last 12 or 18 months?

Yes.

So getting back to Rod's comments earlier, with the Joslyn coming in smaller than you had originally expected, with Kearl rolling off, with Cal Harbor in the market looking for business, why do you expect possibility to improve and pricing to improve in the near term in the business?

Those are actually opportunities -- Rod was just talking about the first bid package we got from Total. Being smaller than the what we thought in the scope of what it's doing. That doesn't mean more is coming out and will be -- meet those expectations later, just the first one we got wasn't. As far as Kearl, as an example, it's an opportunity, because it's been locked up under a contract with the K2 joint venture of Keeven and Klempe of for the last three years, so with them going into operations, we believe it's going to provide opportunity for new tenders to come out here in the next six to 12 months in support of those operations. The increase in margins is, we believe that the excess capacity in the equipment fleet is and will be -- is in process of being consumed, and we believe that will probably happen as it usually does every winter, but more so this winter. And that demand will be what drives margins up higher.

So you've got the Tankey fleet coming off the construction of Kearl, and remember what Jay talked about earlier, when you move up a large construction and you start moving the operations side, it's a sudden move off and a slow move back. Then Kearl will start, we believe, looking for contractor services proverb the early to mid-next year. That'll help absorb some of that fleet. You've also got Suncor with Fort Hills. You do have Joslyn, which will start up and Joslyn will go in and out of startup in January next year. You've got Syncrude doing four mine train relocations over the next few years, half this summer, half next summer, that will absorb a large amount of truck capacity over the summer, so what we're seeing is generally the there's a lot of work out there and the work is growing.

So the -- unlike the three years ago when Kearl came out with their earthworks and there was a CAD700 million earthworks contracts let in a single go absorbed a large piece of fleet, pretty quickly, we don't see that happening. But what we do see is a number of diverse growth opportunities coming that will absorb the fleet over time. And as Joe said, by December this year, we expect most of the excess fleet in the market to be absorbed. Now, I believe our clients are probably seeing the same thing. And in fact, as a result, as I said, this year is the year where there's a lot of opportunities coming out from clients to bid work and get things in place.

What do you expect for pricing between now and the end of the year though? Is there risk that pricing actually softens at some of this equipment comes out before it gets absorbed?

No, I don't believe so, but I want to say is it's not going to be a sudden boom back up in margins, some people as it would have expected. And a lot will depend on the type of work that goes in. So for example if it's just straight dirt work and there are a lot of competitors, just loading and hauling heavy trucks and dirt moving, such as overburden and clearing type work, if it's construction work, then the number of competitors reduce and the availability of the couldn't reduces so your margins will tend to go up.

Okay. Thanks, guys. I appreciate it. I'll turn it over.

Thank you. Our next question is coming from [Glenn Malgi of Dantonio Park.]

Thank you. I have some questions related to the negotiating positions of both sides. The first component is how significant is this site to CNRL in terms of absolute revenue and profits? And what would be the implications to them if the negotiations don't go as you anticipate and the project is stopped, i.e.,, will they still be able to go at full capacity, and how much of -- and for how long would they be able to operate if it is at reduced capacity at those levels?

This is Joe Lambert. As far as the implications of CNRL, ultimately, as their are coker comes back online and they need to produce ore to feed the processing plant, they need to move overburden to process that, so the implications of them is they need a contractor, they need -- or they need to build up their own capability to be able to move that material. So they have to uncover the ore at some point in time. Right now, it's not a big demand because the coker is down but obviously once they start producing ore again, the implications to them starts to increase. As far as the revenue and profit numbers, I'll leave that to Dave here to put the details around.

As we indicated in our press release, the revenue contribution has been somewhere in that sort of 20% to 25% range, just depending on other activities on our sites. Because it's such a low margin, we've seen the contribution ago from anywhere, like, 6% to maybe 10% of our profitability within heavy construction and mining. It just depends on what happens with other sites.

And what about, though, how significant it is to them, i.e., if you were no longer associated with the project, how much revenue is being generated out of that site for them? And if they ran it at a reduced rate, what would that rate be? And for how long would had they have to read on at that reduced rate until they could build a function themselves or find someone else to do it?

You wouldn't run the plant at the reduced rate, because we weren't there. We would be there or someone else would be there or they would be doing it themselves. But it would be nonsensical and extremely expensive to have a CAD10 billion or CAD12 billion plant running at 50% capacity just because they couldn't pay us CAD40 million to be a contractor. You know that mean? That's one point. I've got no idea what contribution Horizon put into the overall center of business. But it is a very significant project for them.

The other thing is that, basically, they can't run without a contractor. They can't do it themselves without a contractor, providing swing supplies service, so their choice is have a contractor continue what they're doing now, which is have a contractor do the overburden removal for them, and they do the ore mining, or they also have a choice to say, well, we're going to buy North Americans trucks and we're going to it ourselves. But if they do that, then they'd really start picking up the Shell Suncor Syncrude model, which is, they do the base load of overburden removal but they'll still require a contractor and Syncrude Suncor and Shell for muskeg removal, mine reclamation, site services and the rest of the stuff. Because if they took over our couldn't what they'd be taking over is the heavy overburden mining equipment. That's 300-ton trucks, shovels, electric and hydraulic shovels, and some other ancillary equipment. They would not get any 100-ton trucks, 150-ton trucks, small dozers, graders, because they aren't part of the contract fleet.

So the choice is, but the big heavy mining fleet off North American and go after a contractors to do site services, or deal with North American and come up with an arrangement they've suggested which would still be a very economic outcome for them, or the third one is go out and find someone else to do the same thing that North American is doing at the present time. It would be unlikely they could do that at a cheaper price than they could get, so they deal with us. So we've got a lot of confidence between the two parties working together will resolve this issue, and in fact, will be the ongoing contractor on that site.

Okay. And sorry, just to clarify, so if they were to choose one of those other options, if things don't go the way we expect, so either they build internally or they could find another contractor, how long would it take for them to kind of effect that change? Basically reflect the -- and basically implement it at the site?

That depends what strategy they took. If they took the strategy and said, we're going to do it ourselves. North American, go away. We don't want you or equipment. I t would probably take them two years to assemble a fleet of the capability of the same size as what we've got right now to do what they want to do, so you got to say that would be a very unlikely scenario.

If they said, OK, North American, we don't need you but we will bite your fleet, then under the contract, if they tell us to go away, they have the option to buy our fleet. If they bought that, then they can go out and tender for a new contractor to come and that would probably take them about three to four, maybe six months to get it negotiated and put in place, so what exactly they wanted to do. That would be pretty hard negotiations, because the new supplier certainly if I was the new supplier, I'd be saying you need us probably more than we need you, so I think you'd the looking for some pretty substantial margins, probably take them six months to get another contractor change over.

So they're going to be -- and then what kind of inefficiencies would there be if the new service provider came in?

Well, -- is

You've been there for five years, right?

If it was us as the new services provider there wouldn't be any inefficiencies, because we're damn good at what we do. If it was someone from outside, I'm talking about us, and the general operators up in Fort McMurray, all of us know what happened to handle muskeg and overburden. If there was someone from outside of the oil sands, there would be probably quite a few efficiencies.

Okay. Thank you very much.

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

Hi, good morning.

Hi, Maxim. How are you?

Good, yourself. I just have a question -- I do realize that the CNRL negotiations are still in very early innings, but can you provide I guess any update on what's going on behind the scenes and what's the initial reaction is from CNRL?

Maxim, it's Joe Lambert again. Our discussions with that working group, we've got -- we've already had meetings, we've also had some meetings planned as early as next week with some of our primary vendors to start doing some of our marketplace assessments, and we've had discussions as far as how we meet our end of August goal, which we at this point don't see anything hindering our ability to do that.

Okay. That's all for me. Thank you.

Thank you. Our next question is coming from Robert Murray of Credit Capital Investments.

Yes, just a follow-up on an earlier question about the two new contracts you have signed, and reconstruction of mining segment, as well as the third potential five-year contract. Can you give us a sense of what the total revenue picture would be, assuming you get all three contracts in place?

Two of the contracts are in place.

Two are in place, yes.

And for instance, there's not backlog associated with the master services agreement, because it's a four-year master service agreement at Syncrude. It's really providing pricing and the scope comes as they supply it, so at any one time, we might have CAD25 million to CAD60 or more million that's been awarded under the contract. The contract itself has -- the limits are the term and the dollar amount, so you either hit CAD250 million or four years, whichever you hit first, you have to amend the contract at point.

Okay.

And then we don't have the final numbers on the Suncor one we believe is imminent, but we believe it is five years, and we believe we have numbers of around CAD400 million is what we anticipate, but it depends on what that dedicated scope is before we would consider it backlog or not.

Okay. And all three contracts are unit production based?

No. The master services agreement has units rates for muskeg and overburden and general conditions that you adjusted depending on what the scope is. And it's predominantly a series of hourly that you can put to any scope. The muskeg contract the three-year muskeg contract at Shell is a unit rate contest, but they had the opportunity to do it as time and materials is what they pursue this year so we actually conducted that work on time and materials this year, and that's in addition to the existing Shell master services agreement, so it's -- and the Suncor contract will be both similar to Syncrude's master services and it will be both rates and hourly rates that have been agreed to for the term contract, and they applied particular areas of that scope provided.

So potential CAD400 million, that's the total over five years, correct?

Yes.

Great. Thanks very much.

Thank you. We do have another question coming from Matt Duncan of Stephens Inc.

Hey, guys. Just two quick things. First, what was the revenue contribution from Cyntech in the quarter?

I have too --

I'm not sure I have that on the top of my head.

Okay. And the second question is looking at cash flow generation, Dave, can you talk about what sort of your expectations are over the next 12 months and then specific to the CNRL negotiations, if you guys end up resolving that discussion around the margin that you were targeting, what would that mean in terms of the amount of cash owed to you by CNRL that is in the on builds on the balance sheet?

I think in terms of the cash flow, generally I think we've kind of -- going to see some build in our working capital this year, so that is going to inhibit some of our cash flow growth. When it comes to CNRL, I think in the -- our expectation would be to get as much cash obviously as we can up front. I think that the way it's going to actually work, though, is that will be incorporated into our negotiations with them, as we work through the escalator issue. I'm pretty sure that they're going to want to talk to us about the coming of cash flow. I mean, for them, if everything gets resolved the way we believe, they have a number of options. One, they can us one lump sum check for all the parts amount owing and then we move on with a new rates reflecting the new escalators. They could give us a smaller amount upfront and then pay the balance over time, with an increased unit rate, or they could work with us and have a really inflated unit rate.

Dave, what is the total amount you were owed from CNRL currently?

Are you talking about outside of what's on our balance sheet?

If you end up getting this resolved around the margin you're targeting, I guess my understanding is going to reverse the entire write-down, you just don't -- CAD42.5 million back on the balance sheet in unbilled revenues, so if that happens was what's in the unbilled from CNRL to the balance sheet now, how much would you be due to collect from them when this gets settled?

I think if we were to bring all of that CAD42 million back, then clearly we would be back up to the full amount of unbilled for the CAD110 million, CAD115 million range. The receivables, as of the end of March, it was around CAD18 million, CAD19 million. That will obviously vary just with the revenue. I would expect that receivable number to come down pretty significantly as we go through the shutdown, because we're not doing in volume.

So in theory when this gets settled in August, you guys have a cash infusion coming?

Potentially, as I laid out in the scenario I just gave you, if there is agreement that they give us some or all of the payment for the impact of escalators in the past.

Okay. Thanks. That's what I need.

Matt, it's Chris. Just to answer your earlier question just to the contribution of Cyntech in the quarter, it was just under CAD4 million.

Okay. Thanks, Chris.

Thank you. Our next question is coming from Graham Morris of Contrarian Capital.

Hi. My questions been answered. Thanks.

We like those questions. They're easy.

Thank you. We do have another one coming from Bert Powell of BMO Capital Markets.

Thanks. I just want to go back on CNRL and make sure I understand your comment. There's two components of the contract, one is overburden and one is site services. And that the overburden is what is under contract, the 10 year contract, have I got that right?

Bert, we have a ten-year overburden contract. We also do occasionally do side work on that site, that's extra work. It's a, typical of any lump sum unit rate type contract is that you have an opportunity to actually add scope to it and do it under hourly rates or agreed unit rates of other types, and that -- that's what I was talking about the other work, but the contract itself is a ten-year overburden contract. It doesn't include anything else.

So based on the -- I'm trying to get a gauge in terms of for the next, whatever, seven months, what the revenue impacts going to be from not being there. For the site being basically idled.

Yes. So we -- it doesn't go to zero, because we continue to get our fixed costs covered, but that depends on how much -- if we move more equipment off, then we reduced those fixed cost also.

Can you give us a sense of what I would be, just from a revenue perspective?

It will probably drop to around CAD2 million to CAD3 million a month. Assuming we don't pick up any extra work or summer construction work that they would like us to do outside of the contract.

So CAD2 million or CAD3 million is what they're going to pay you per month for the fixed cost?

Approximately, yes.

Perfect. Okay. Thank you.

Thank you. Our final question is coming from Jeff Fetterly of CIBC World Markets

Sorry, guys, not to belabor the point, but just two follow on questions. In the past you've talked about once you carried a good amount of cash on the balance sheet for flexibility, you've talked CAD50 million to CAD100 million, with basically no cash today, what is your perspective on the balance sheet? Is that still a target from a cash perspective?

Yes, I think when we are talking those numbers, that was more during the downturn. Where we wanted to preserve a good cash balance, just to have our powder dry. I think as we see our business ramp up and as I mentioned earlier we see some of our working capital build, clearly in the short-term, we're not looking at a huge cash balance here.

But at the same time, we are focusing on cash. One of the things Chris talked about earlier is changes in the risk profile of some of the outline contracts and one of the areas that we look at there, for example, wouldn't have been available a year ago but now is becoming available is a greater upfront cash that we're not doing the mobilization on -- us on so much so those are the things we are attacking.

So net-net with CapEx, with lease cost, with working capital consumption, do you expect to add cash to the balance sheet over the coming year?

Yes. I think it'll be a small increase over the year, and I think what we would see is that would tend to be more in the fourth quarter. Again, keep in mind the seasonality of our business, right? We go through summer construction. That put some pressure on working capital. As that winds down, we start to ramp up with a lot of our winter activities up in the oil Sands. That really draws that cash back and again, into working capital. And as Chris mentioned, we are looking at some pipeline project in sort of that August, going into the fall periods. That would tend to be working capital demand type projects in the short term. So our expectation is that we see any positive cash, it would be more in the fourth quarter.

Okay. Last thing, Rod, the CAD190 million of revenue you talked about for fiscal Q1 2012, is that incorporating or excluding CNRL overburden incorporating the issues with the weather and the fires that you've seen?

Yes. That was off the cuff, I must say, estimate of what the impact of the weather and the fires would be. That also includes the fact that CNRL isn't there.

Okay. Great. Thanks, guys, I appreciate it all.

Thanks.

Thank you. At this time, I'd like to hand the floor vac to Mr. Ruston for any closing comments.

Thank you very much, everybody, for your time. We will be on the road on the East Coast next week and on the West Coast in the week following. And we look forward to seeing those of you who have meetings arranged. Thank you very much.

Thank you. And this concludes the North American Energy Partners conference call. You may now disconnect your lines.