North American Construction Group Ltd (NOA) 2012 Q4 法說會逐字稿

Good morning ladies and gentlemen, and welcome to North American Energy Partners fiscal 2012 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, 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 the participant's permission. I advise participants that this call is also being webcast concurrently on the Company's website at NACG.ca.

I would now like to turn the conference over to Kevin Rowand, Director of Strategic Planning and Investor Relations for North American Energy Partners. 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 twelve months ended March 31, 2012. All amounts are in Canadian dollars.

Participating on the call are Rod Ruston, President and CEO; David Blackley, CFO; Joe Lambert, Vice President, Operations Support; Barry Palmer, Vice President, Oil Sands Operations; Chris Yellowega, Vice President, Construction; and Bernie Roberts, 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 implied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information.

The business prospects of North American Energy Partners are subject to a number of risks and uncertainties that may cause actual results to differ materially from a conclusion, forecast or projection in the forward-looking information. For more about these risks, uncertainties and assumptions please refer to our March 31, 2012 Management's Discussions 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. As most of you are aware, this will be my final call to you as step down as CEO of North American Energy Partners and hand the reins over to Martin Ferron.

It is disappointing to be leaving on the back of such a poor year like fiscal 2012. But I'm more than two years past my original contract, and the time has come for me to return to Australia.

I will talk more about the management transition a little later in the call, but first I want to review the year and our results, starting with consolidated revenues.

Despite significant weather and operational challenges, we reached the CAD1 billion revenue mark for the first time in fiscal 2012, growing revenue [17%] year-over-year. The project development side of our business was particularly strong as economic conditions improved and new oil sands, industrial, commercial and pipeline projects moved forward.

Our recurring services revenue also grew during the year, but was not as robust as we had anticipated. The year got off to a good start with the award of the five-year CAD500 million [mark] services agreement with Suncor. However operations were subsequently interrupted by a number of unusual events, including a wildfire near Fort McMurray that virtually shut us down for three weeks during the first quarter, followed by the seven-month suspension of our contract with Canadian Natural as they repaired their fire-damaged plants.

Then at the end of the year, we were impacted by one of the warmest winters on record for Northern Alberta, coupled with sudden work stoppages at a couple of our client sites, resulting in a large volume of work we geared up for being delayed or canceled on very short notice. This led to a significant under-recovery of our equipment costs. Together with the losses of the two pipeline projects, we ended the year with a net loss.

Looking at the results by division, our revenue in our Heavy Construction and Mining division was largely flat year-over-year. However, if you include the impact of the activity of Canadian Natural -- sorry. However, if you exclude the activity of Canadian Natural, the [contract] on those periods, segment revenue increased CAD90 million or 18% compared to the previous year.

This reflects increased mining growth at Suncor and Syncrude, and higher demand for construction services at several sites, including heavy construction activity at Total's Joslyn North mine project and Petro-Canada's Dover SAGD project.

We also began executing above ground construction work at the Mt. Milligan Copper/Gold Project in British Columbia and grew our Pilings and environmental construction business during the year with increased activity levels at Suncor, Syncrude and Shell.

In terms of bottom-line performance, Heavy Construction and Mining segment generated a margin of 12.9% of revenue in fiscal '12, up from 7.6% a year ago. Adjusted to exclude the impact of Canadian Natural, however, the division's margin was 14.2% compared to 16.5% a year ago. This reflects the change in our work mix, with reduced percentage of higher-margin mining services work.

In our Piling division, revenues increased 76% year-over-year to CAD185 million, and profit margin increased to [24%] from 17.5% a year ago, a very good result for this division. The excellent results in Piling reflects one of the few benefits we get from a warm winter, seeing an extended construction season.

Improved market demand and solid execution both contributed to strong performance across all regions, exerting a profitable performance from Drillco in Ontario. Upon entering this market in 2009, we encountered much stronger resistance than what we expected from the local competition. Although it has taken a little longer than we anticipated, we have now firmly established our position in this robust market and we expect to sustain our profitability going forward.

The Piling division also benefits from a full year's operation at the Syntec business, which we acquired in November 2010 and which we have been very successful in growing. By cross-selling Syntec services to our own customer base, we are growing revenues by 60% compared to the 12-month period leading up to the acquisition day, while at the same time we have also improved margin performance.

In contrast our Pipeline division had one of its most challenging years on record. While revenues grew to CAD151 million from CAD85 million a year ago, we incurred a loss in the division. The key factors were cost escalation on materials and [slight] overhead on the two current year projects, as well as increases in the estimated cost to complete spring cleanup and warranty work on two prior-year projects in northern British Columbia.

We are pursuing the recovery of cost impacts through the claims process. However, in light of the continuing risks in the Pipeline business, we have downsized this business and shifted its near-term focus to lower risk maintenance and integrity work.

So, overall it was a challenging year for the Company financially. The year also brought some remarkable achievements, the most important of which was the restructuring of the Canadian Natural contract. The amending agreement settled all past claims to the original contract through the payment to us of CAD38 million.

Fixing the past, however, was only part of the resolution. Equally or even more important was amending the contract, which was originally signed in 2004, to make sure the ongoing work with Canadian Natural was both profitable and cash positive.

Under the new [target cross] structure, we earn a positive margin for all future work. There's opportunities to earn additional margin by achieving mutually agreed-upon productivity and safety targets, which are as established using historical performance data.

The agreement also included bringing forward the Canadian Natural option to buy out certain contract assets. By accelerating these options on about 30% of the contract assets, we have received an additional net proceeds of approximately CAD40 million, with a further CAD6 million or CAD7 million of net proceeds to be received as the final two units of this planned asset sale are completed over the next six months.

This is a great result. By the end of April, North American had received cash to the tune of CAD80 million. Return to high-risk unit price, cash negative contracts into a low risk [target] price, cash positive contract with a guaranteed minimum margin using (inaudible) over-burdens with new contract structure is expected to deliver between CAD10 million and CAD15 million of EBITDA per year for the remaining three years of the contract.

Importantly, we achieved this outcome through a new contract structure that also delivers cost reduction to Canadian Natural through a combination of significantly better operational flexibility and substantially lower equipment operating costs. And just to make things completely clear, we sold equipment to Canadian Natural, but we're still the operators of that equipment. The basic work in the original contract has remained unchanged.

We view the outcome of the negotiations as extremely positive. And we believe this contract, coupled with significant contract wins, including Syncrude's mine relocation, the Suncor master services agreement, and Total's early earthworks has set the stage for sustainable improvement in performance going forward.

At this point, I will call David Blackley to discuss the fourth quarter financial results.

Thank you, Rod, and good morning everyone. I will begin by reviewing the results for the fourth quarter ended March 31, 2012 as compared to the fourth quarter ended March 31, 2011.

Revenues for the period increased to CAD282.5 million, up 62% from CAD174.5 million in the fourth quarter of last year. Gross margin was 0.3% in the fourth quarter, primarily reflecting unallocated equipment costs of CAD26.6 million compared to CAD3.7 million in the same quarter last year.

The increase in unallocated equipment costs resulted from lower utilization of our larger-sized heavy equipment fleet due to the unexpected work stoppages and unfavorable winter weather conditions that Rod mentioned, which negatively affected our ability to deploy our equipment fleet during the period.

Current quarter consolidated gross profit also reflects a CAD9.4 million loss in the Pipeline segment.

Partially offsetting these negative impacts on profitability was an CAD11.5 million increase in the fourth quarter Piling segment profit compared to last year.

On a consolidated basis, we recorded an operating loss of CAD15.8 million compared to an operating loss of CAD35.3 million during the same quarter last year. Excluding activity from the Canadian Natural contract from both quarters, operating loss would have been CAD19 million compared to operating income of CAD4.2 million during the same quarter last year.

Fourth quarter G&A increased [CAD5.3 million], reflecting higher employee costs partially offset by a reduction in stock-based compensation expense, resulting from a decrease in our share price year-over-year.

Excluding the impact of non-cash items from both periods, and the [CAD42.5 million] Canadian Natural revenue write-down from last year, net loss per share for the three months ended March 31, 2012 was CAD0.50 compared to a net loss of CAD0.01 during the same period last year.

Turning to capital, total expenditures for the fourth quarter amounted to CAD20.3 million, including CAD13.7 million of sustaining capital expenditures. Looking at liquidity, as at March 31, 2012 we had approximately [CAD70 million] of borrowing availability and a cash position of CAD1.4 million compared to CAD0.7 million at the start of the year.

On May 27, 2012, we received lender approval for amendments to our credit agreement. The amendment extends the maturity dates of the credit agreement by six months to October 31, 2013 and provides relief from the agreement's consolidated EBITDA-related covenants by temporarily amending them. Under the amended agreement, we are required to generate about CAD30 million to CAD35 million of consolidated EBITDA during the first two quarters of fiscal 2013 in order to remain on-site with these new covenants.

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

Thanks, David. Turning now to our outlook, we anticipate steady activity levels and improved profitability throughout fiscal 2013. In our recurring services business, however, near-term demand for some of the mine services support -- mine support services could continue to be impacted by two trends, both relating to generating cost savings for the owner.

The first trend is increasing variability in activity as some producers simply deferred planned work while others reengineer mine plans. These actions are being taken in an effort to reduce costs by putting work off completely, or by eliminating or at least minimizing scope changes during the execution phase of their projects. The results for us as a contractor is increased volatility in the work, and therefore less certainty regarding the scheduling of our fleet.

We believe that the impact of these cost control measures will likely be short-term, as the delay in deferred activities are also required for continued operation of the mine.

The second trend we have experienced is some of our customers attempting to insource certain mine support services that would previously have been outsourced. As we have said to the market in the past, our largest competitor in our Heavy Construction and Mining division is our own customer. However, our past experience suggests that producers who experiment with insourcing mining services typically return the outsourcing, as they recognize the true value afforded by the contractor in the areas of increased flexibility and overall lower cost.

In response to these trends, we're actively working to right-size our equipment fleet and optimize our equipment up-time and operating costs. We intend to size our fleet to match the demand in an effort to increase equipment utilization. We also looking to reduce fixed costs where possible, and we intend to continue to monitor utilization to match our service levels and cost structure accordingly.

While we expect to see lower demand for mine support services in some areas of our recurring services business, solid demand in other areas should (inaudible) offset the impact.

At Suncor we expect to maintain volumes with a variety of projects under our five-year market services agreement, while at Syncrude we expect to ramp up production on the construction of the shear key foundation as part of the first phase of the mine relocation project at Base mine. As this project nears completion this summer, we're scheduled to transition into the second phase of the relocation with construction of the mechanically stabilized earth wall.

At Canadian Natural, we expect to operate continuously throughout the year and we will be generating positive margin and generating positive cash flow from this work under our amended overburden removal contract. We also expect the implementation of pilings regulations to continue to create new opportunities in both wet piling and mine reclamation activities.

Exxon's Kearl project is expected to begin production in 2012 and they create additional bidding opportunities for mine support services.

On the project development side of our business, we expect to continue executing initial earthworks at the Joslyn North mine project under our recently announced contract with Total.

Suncor has also announced 2012 capital spending plans for initial site development activities at Fort Hills and we intend to pursue opportunities to work on this site as they arise. Our industrial construction work at the Mt. Milligan Copper and Gold Project in northern British Columbia is expected to continue through the end of the year.

In addition, we were recently awarded a site development contract with Petro-Canada's Dover SAGD project and we intend to pursue these parts of opportunities from other SAGD projects. The outlook for our Piling division's business remains positive, with strong fundamentals and a large project backlog supporting our expectation of continued strong performance from this segment in fiscal 2013.

And we do not anticipate a significant contribution from the Pipeline division of fiscal 2013 as a result of our decision to downsize the business and reduce risk. The division expects to continue executing pipeline integrity dig programs under an existing multiyear time and materials contract.

It also intends to contend continue pursuing small oil sands projects, and will consider opportunities to construct mid to large inch diameter pipelines, but only on a cost reimbursable or time and materials basis. We believe opportunities for lower risk projects will increase over time as contractor supply becomes more constrained.

Overall, North American Energy Partners is moving into the fiscal year with a healthy backlog of work. With a continued focus on performance, efficiency and risk management, the Company expects to improve profitability and continue to strengthen its balance sheet in fiscal 2013.

That covers the year's performance and outlook. Before handing back to the operator for questions, I will take a moment to talk about recent changes in the organization.

As I mentioned at the outset of the call, I will be stepping down after seven years as President and CEO. I will be returning to Australian to take up a new business opportunity, and will be succeeded by Martin Ferron, with the change being effective at the close of business today. Martin brings a long track record of achievement, of achieving strong financial and operational performance for companies in the oil services and construction industries, and I expect he's going to do a great job for North American.

I would like to take this opportunity to welcome him to the Company.

In addition, Chris Yellowega has recently announced his resignation as Vice President of Construction, also effective today.

Chris joined us in 2008 and has been instrumental in helping us create and implement a number of successful new business development strategies. I want to thank Chris for his contributions, and wish him well in his future endeavors. We have not yet appointed a replacement for Chris.

With that, I will turn the call back to the operator.

(Operator Instructions) Ben Cherniavsky, Raymond James.

First of all, on the Pipeline business, in the past press release you mentioned that was up for -- you were considering your options including a divestiture of that business. Can you update us on how you are thinking about those operations right now?

Yes. We did say we were considering our options with taking the business down just to a size that is doing integrity work. We are taking on actually a reasonable amount of integrity work and we see that as a growing business opportunity.

What we're also seeing is a lot of the other pipeline constructors are tending to go in the same direction as we are, and that is moving away from bidding high-risk contracts. At the same time, we're seeing opportunities for work increasing.

So there is going to be a large number of pipelines built in the next five to ten years. We actually see the market as getting better, and we don't see any reason at this time to get out of the market. What we want to do is just keep our fleet stable, busy, keep our small fleet busy as much as we can and be in a position where we can bid work, where it's a lot lower risk in the future as it comes out.

How do you control that risk? I would say throughout the organization I suppose the Piling margins have been strong, but in heavy construction margins have been difficult.

And a lot of that obviously would be a function of the contracts you negotiate and enter into, in addition to other things that may be more beyond your control. But how are you changing the way you've been on business to make sure that you can raise your margins on future projects?

Well, [it differs] very greatly, the Heavy Construction and Mining division that you just pointed out there. Yes, margins have come down.

What you see is that margins will tend to have a merger that follows revenue growth. So after 2008, if you look at our margins, they remained fairly high; trend down over a period of time, and as revenue was dropping or flattening out. And what we're seeing now is an opportunity coming up.

But a lot of the work we are doing is work based on contracts that were signed in the past where, because of the competitive nature of the business, the margins are somewhat lower. So, as work grows in the oil sands over time and new contracts are signed, old ones are run off, you should see some improvement in margins.

At the same time, what we've said in the forecast is that there is a fair bit of competition. There is actually an oversupply that remains an oversupply of equipment in the oil sands. That oversupply is sort of twofold. It is in part because in the past there was a bit of an excess supply built amongst the contractors. But on top of that, we've got the client doing some self-perform now that they weren't doing in the past.

So, that will still depress margins for a little bit. I don't see them going down any further, but I don't see them coming back up in a hurry.

The aim there, as we said, is to balance off our truck fleet to suit the work that is available and make sure that we complete our equipment and work. As we balance off our truck fleet, other organizations are doing the same. Not just (inaudible) also their loading capacity.

So, we have actually sold some loading capacity. Other organizations that competitors have also sold loading capacity to reduce the oversupply in the area, and that will help bring margins up (inaudible).

In the Pipeline group, then, what we'll do is just be diligent on our target to stick with the time and materials or cost plus type work in the short term. With the demand for work coming out, it will enable the organization to be very selective on what work they do. And by bidding only cost plus or time and materials work, we can make sure that we get a fair margin out of the work that we did.

But just back to the margins on Heavy Construction side and the overcapacity, I mean trucks are notoriously in short supply as labor and corporate (inaudible). So where are your customers getting the capacity to bring this in-house? And how are they rationalizing it?

Presumably they must have been -- I mean, for lack of a better word, unhappy with what you were doing, or said -- realized in their own view they could do it more cheaply, which would imply something about the value you were delivering to them. What is going on there that would cause them to bring all this activity in-house at a time when projects are just starting to get rolling again and activity levels are high?

What happened in going up until 2008, and even running into 2009 because there was a bit of inertia there, is that the demand for contractors in the area just grew. Everyone wanted contractors at the same time. Prices and costs went up for the owners.

And [seats] coming out of there and knowing that the region is going to grow again, we've had a concerted approach by the owners to really focus on -- rather than schedule, which is what they were focusing on before 2008, to get it done by a date, they are focusing very much on cost.

In our large organizations, this is not just the oil sands, by the way; this is any mining operation in the world where they use contractors. Every now and again, you get a tendency for someone within the organization to do an analysis to say, we're using a contractor for 365 days of the year. If you're employing someone for 365 days of the year and you are paying them a margin to be employed for that period of time, why don't we use our own people and not have to pay margin.

And if you do that analysis in the simplistic terms that I just gave it to you, it is easy to prove that -- or to demonstrate that in fact it's cheaper to do it yourself. What doesn't come into that analysis is usually they miss the cost of capital. But to some extent, more importantly, what they miss is the -- is recognizing the value of flexibility in the analysis.

So, mines do this all the time. They make the change, they do some self-perform over a period of time, then it is not their front-line work. Their front-line work is production. Production takes priority. The self-perform work tends to fall aside and the contractors come back.

What we've got in the oil sands at the present time is one client in particular has gone in that direction for a period of time. Another one has got -- done a little bit of it. It's not throughout the oil sands, but it is one of those things that is impacting us. It is a cycle.

Okay, thanks very much.

Greg McLeish, GMP Securities.

Good morning guys. I just wanted to sort of drill down on the -- it looked like there was a depreciation cost in Q4. Can you sort of explain why that happened and if that is going to normalize out through next year?

Greg, as part of our review and analysis of our costs and fleet structure, we did identify some units that were overvalued and have been underperforming. So we made the decision at the end of March to deal with that through a write-down of the depreciation. Those units we'll be looking to sell here in the coming year.

Does that mean -- is there any other units in your fleet at risk of this?

No, we don't anticipate any more write-downs at this stage. But as Rod indicated earlier in the call, we are taking a wholesome look at our whole fleet structure, making sure that we've got the right fleet and the right mix of equipment to meet the demand going forward.

So, if we were to strip that out, that would be sort of your normalized -- we could make sort of an assumption that would be pretty well normalized depreciation run rate?

Correct.

And just -- could you sort of walk me through the CNRL? I was taking a look at -- are a lot of the CNRL issues tied up in the accounts receivable and payables increases in the Q4?

Yes. So, if you look at accounts receivable it has gone up just over CAD60 million. The bulk of that CAD60 million is essentially a reallocation between unbilled and inventory. And there is a net increase coming into working capital out of fixed assets, and that is for the assets that CNRL was looking to buy. And that is about CAD20 million.

And the same thing on the payables side because we've obviously got operating leases that we need to acquire as part of that.

Normalize out to sort of regular levels after this is all said and done?

Yes.

I think it says the [CAD47.9] was paid on April 30. Does that relate to the CAD47 million of net proceeds in final closing?

No. The CAD47 million net proceeds would cover off anything in accounts payable.

You still have about CAD47 million coming in this year which will positively impact cash, don't you?

Yes. And the way the cash flow works, as we indicated, was we received the CAD38 million at the end of March. We have received a further CAD40 million here in April and we expect to receive another CAD7 million here throughout the balance of the year, I think a portion of it in September and another payment in December. And that is tied with when operating leases expire.

And just one more thing. It is just -- according to your new revised credit agreement, you have to generate between CAD30 million and CAD35 million in consolidated EBITDA in the first two quarters of this year?

Correct.

So that is hypothetically your guidance?

We don't give guidance.

Hypothetically, yes. (laughter)

All right. I will get back in the queue.

Bert Powell, BMO Capital Markets.

Good morning. It is actually Jason calling in for Bert. So, first question, I just wanted to talk about the -- you mentioned obviously some overcapacity with the equipment. I was just wondering. Is that having any effect on the timing of the fleet maintenance?

No, the timing of fleet maintenance is driven by decisions like when did the hours for that particular unit required to have whatever level of maintenance it is for that period. Obviously if we're not using equipment, then we don't need to necessarily do that maintenance. That gets deferred out. But we typically would be spending more of our costs in the first quarter doing maintenance to be ready for the coming season.

The other question is with ACORN now up and running, how has that affected the dynamic within the market? Is that really one of the issues that really exacerbating excess capacity or--?

No, not particularly. ACORN are a significantly better competitor than the organization that they bought the equipment from. They are a public company like us. They're out there to make a profit, and so they are out there bidding margins that are competitive margins, but the same sort of margins we bid, we assume.

Really all that has happened with the result of ACORN coming in is that a recalcitrant competitor that would just beat any margin and just get work has disappeared out of the oil sands, and a good quality competitor has come into the oil sands. The change in actual equipment capacity as a result of that has been minimal. In fact, if anything, some of the equipment capacity has actually dropped because ACORN has also sold some of the equipment that they bought from [Cal Harbor] out of the oil sands.

Okay, that's great. I will get back into queue.

[Steven Ricard], Stephens.

Steven in for Matt this morning. Quick question on the Piling segment. Another nice quarter. Do you see the segment margins continuing in the mid-20%'s range going forward? Or how were you thinking about that?

Yes, there is no reason for us to see those dropping. Early to mid-20%'s is what we see as the ongoing margins for the business. It has about 60% of its budget already booked at this point in time. So we're fairly confident that it will be a strong year for that division.

Okay, great. And I guess on the recent decline in oil prices, are you seeing any kind of customer change in activity in the oil sands area, maybe some color around that?

The decline has been quite sudden, so there will be a bit of a merger in things actually slowing down. But what we are seeing in the oil sands, as I mentioned in my talk, is that any project that in the past would've just come out and said let's get going, start digging and we will give you the plans later, is 180 degrees reversed now. It is very careful planning by the client, very careful analysis of what they want to get done so they don't have to do it twice. So there tends to be a much slower letting of the work that is coming out.

Okay, thanks. And I guess last question on the Pipeline segment, is most of the unit price contract work now completed? Or I guess just trying to get a better sense of going forward what we should expect from that segment. I know you mentioned the downsizing there, but I guess some more color there. Can we expect maybe some profitability in 2013 or kind of a [pause]?

We still have some summer cleanup work to do from previous jobs. And we need to take into account that we didn't just straight switch from that summer cleanup work into a large volume of integrity work. We had to build up the integrity work piece of the business.

So (inaudible) we didn't just switch from unit price jobs into this integrity work in a single bound. It required turning off of the bidding of work in the unit price work and then the steady buildup of the cost reimbursable work of the integrity stuff.

So, the combination will be -- there is a bit of cleanup still to do. We have accounted for that in our numbers. But there is also probably a bit of period of carry of the core workforce while we build up the integrity side of the business. You want to add to that, David?

I was just going to say, as Rod mentioned, we have booked all the loss that we believe we'll incur on those projects in the fourth quarter. We do have to do the summer cleanup work.

We don't anticipate any more losses as of right now, but obviously we won't recognize any margin on that revenue that we record over the summer. And as Rod indicated, we will have some holding costs near term as we look to ramp up and get other work to offset the lost revenue and the unit rate work.

I would say overall, Pipeline isn't -- we wouldn't expect Pipeline to be a big contributor or a big drag on our results.

Okay, thanks for taking my questions. Rod, best of luck going forward.

Thank you.

Jeremy Lucas, Scotia Capital.

The Mt. Milligan contract, just wondering if you can give some more color on scope, size and timing?

Yes, Chris, can you answer that?

Sure. On the Mt. Milligan contract, scope is largely for the erection of a number of the mine service and process buildings. It continues through until late fall of this year. And right now, from a schedule perspective, our expectation is we will be wrapping up the bulk of that contract work in the fall and then working to extend our presence on site on other works.

Okay, great. Thanks. And just regarding mining, non-oil sands mining in general, can you give some color as to opportunities you are seeing going forward?

There are potential opportunities across Canada. Certainly the Baffin Island iron ore project is looking like it might go ahead and come out for a tender in the near future, so that will be one we will be looking at seriously. And there's other opportunities in coal labor on the West side. So, certainly as an organization we are looking at any opportunities just to make sure that we maintain a balance of our business outside of the oil sands with prime business inside the oil sands.

Would you be looking to de-risk any of your overall business mix away from the oil sands going forward?

Only -- well, the answer to that is yes at any time. We do, for example, piling business inside and outside the oil sands with a very good balance. We do industrial construction inside and outside of oil sands. So that is -- sort of balance is off the two areas.

And the one place where we haven't been outside the oil sands is with our heavy fleet, but we are certainly looking at opportunities there. In fact, we have been actually talking to some of the coal mine operators, for example, on potential opportunities.

Okay. And then just turning to the CNRL contract, I guess this will be one less time for me on this. But I'm just trying to quantify the margin going forward, the split between the guaranteed minimum and the performance upside. I think you may have discussed this on a previous call.

Yes. Basically it's a -- there is a minimum margin, but we operate at higher than the minimum margin. So we operate in the early double digits with a plus or minus 5% risk/reward margin. Risk/reward -- positive performance, negative performance margin.

Okay. So, early double digits is sort of a baseline and then plus or minus 5% depending upon performance and safety?

Correct.

Great. Finally, turning to the capital structure and the credit facility, so at the end of the quarter you would have had CAD105 million available under the revolver. It looks like you didn't need the CAD25 million temporary amendment for the quarter ending. Is that correct?

Correct. But we did take a cautious approach, just because of the timing of when funds were going to come in. So we want to make sure that we had sufficient availability. And what we agreed with the banks was, as we received the second tranche of funds from CNRL, that that increase in availability would be drawn back.

Right. So with the CAD40 million coming in, in April, and another CAD7 million through the balance of the year, there is no requirement, David, on NOA to pay down the revolver because you will be under the CAD85 million threshold at the end of the quarter.

Yes. Outside of the reduction of the increase, so taking out the remaining CAD20 million, there is no specific requirement to pay down anything else on the revolver. But we would obviously do that as part of our normal cash management. [If we got separate cash], we would pay down the revolver.

Of course. Great, thank you very much.

Jeff Fetterly, CIBC World Markets.

Good morning guys. A couple questions across the spectrum. First off, given your commentary on rightsizing and adjusting the scale of fleet, why the guidance in the release for capital spending to be higher in fiscal '13 than it was in '12?

Jeff, some of what we obviously need to do is -- we know there is equipment coming up and is aging and needs to be either replaced or a major overhaul. As we look at our rightsizing our fleet, that will be one component that we will need to assess.

So if we have, for example, a truck that is coming out for a major overhaul, but that fleet of trucks is being underutilized, we need to make the decision is the truck is coming up with a major overhaul, one that we don't want to spend the money on and that is one to get rid of, and that will be obviously potentially a double benefit for us. It saves us on the maintenance expense. It potentially reduces some of our capital expense, so we are assessing both of those things right now.

Okay. So just to clarify that, and so CAD70 million to CAD90 million is not necessarily where you are going to be for the year. There's a potential downside to that number?

There is potential that we may be able to reduce some of that number.

Okay. But from an overall standpoint, you would expect to reduce the size of the fleet in fiscal '13?

That would be the expectation if we're looking to right size, but we need to assess it within the context of the longer term demand. Just because these truck is not being used this month, we need to assess does that mean it won't be used for the next year or the next couple of years.

Okay, covenant-wise --

I think just to answer that, by the way, this is a normal process of any contractor, mining contractor that uses heavy fleet or midsize fleet. Markets change, and in fact the important thing for the contractor is to have the flexibility to be able to do the things that we're doing and adjust the fleet.

What we're doing now is we are rightsizing to a market that is a little bit tighter. Obviously what might happen in a year or two years' time is we will be rightsizing up again to a market that will probably change to a different shape. So it won't necessarily be the same equipment, but some different sort of equipment because there will be a market opportunity for that different equipment.

The important thing is to understand is that we do have the flexibility and the capability to make these adjustments as part of our regular business process.

Covenant-wise, the CAD30 million to CAD35 million of EBITDA you need to generate for the next two quarters, is that specific to your senior debt to EBITDA covenant? Or does that also, in your mind, get you on side with the interest coverage and the current ratio?

Actually the -- it's mainly on the interest coverage. That is the one that we are monitoring pretty closely.

Okay.

The senior debt is fine.

So my model is not too far off when it says you will be very tight, in theory, on the interest coverage side for the next few quarters.

Yes, that would be a fair assessment.

Okay. Pipeline, Rod, just your commentary around the market getting better, seems quite a bit of deja vu versus 12 months ago when you talked about an improvement in the overall market. And obviously the performance in Pipeline has been very disappointing. Is it-- are things different today than you saw 12 months ago or is this a vicious cycle?

How long is your piece of string? What we're seeing is that over the next five or so years, we have pipeline owners indicating a level of around about CAD5 billion of pipeline. We know, for example, there has already been requests for information in regards to the Gateway pipeline going to the West.

I believe, everyone believes, after the US election it is quite possible that there might be a pipeline go to the South. And there is also a lot of internal pipeline required in the Alberta/Saskatchewan area. So when we're looking out at the combination of two of the remaining suppliers in the business and what's the pipeline load that looks like coming up, we're certainly seeing that the demand should exceed supply in the not too far distant future.

The thing that we're going to do at North American is be rigid in our position on how we bid or which projects we bid for, and what sort of risks that our business will take. And those risks won't include all-weather risks and doing large pipelines across the prairies on a straight unit rate basis.

Is the sale of that business totally off the table now?

It would be, in my view, and I've got to be careful here because I am an outgoing CEO, so, obviously an incoming CEO may have some different view. But generally speaking, rather than point particularly to North America, in my view we are right at the very bottom of the pipeline cycle.

And with demand coming up, the decision of whether North American should stay in the pipeline or not stay in pipeline is one side, and that will be up to the new management team. But to sell at this point in time right at the bottom of the cycle when there is opportunity coming up, I believe would not be the right thing to do.

Okay. The Dover contract that you've disclosed in the release and talked about on the call, from a pricing and term standpoint, how does that contract look? Is it reflective of the challenging dynamics today? Or are you starting to see any improvement in terms of contract terms broadly?

Barry, can you answer that please?

Yes, it looks about what is going on in the industry right now. There's really no change.

Last question for me, the CAD23 million or so of change orders outstanding at the end of the quarter, what is your confidence in collectability? I know you have booked the associated costs with those. But what impact from a margin standpoint could that have in fiscal '13, and what is the probability of realizing that CAD23 million?

I think before I answer that probability, I would just explain our process. We do go through a very rigorous process with both internal and external counsel reviewing these large claims. We only book it if we get that legal confirmation that we have entitlement to those claims.

So, based on that, I would say that we are confident that we will collect the money. But obviously it will depend on a number of factors. So, for example, if it goes to arbitration or goes to court, then who knows where it will end up? It gets a lot harder to predict at that point.

If we can settle with the client and negotiate something, then we would expect to get all of that claim. There's actually a lot more out there in claims that we would be looking to get, but we only book what we believe we can claim and collect on.

Is it realistic that the CAD23 million could be realized in fiscal '13?

That would be our expectation, but I would expect that there would be collected more towards the end of this calendar year.

Or even slower over the next year, particularly if it goes through an arbitration [thought] process. It tends to take a little longer.

Thanks guys, appreciate the color. Good luck, Rod.

Thank you very much.

Greg McLeish, GMP Securities.

Just one follow-on question on the debt. I think at the end of the year you ended up with about CAD303 million of debt. What are you sort of thinking year-end debt for next year is going to be?

We would anticipate just to have the term loans with obviously the regular paydown, the CAD225 million of debentures. We're not anticipating any draw on the revolver. And we've got our capital leases, which would be somewhere between CAD10 million and CAD20 million.

What are your maintenance capital expenditures each year?

Greg, I think as we talked about there, we would expect it to be somewhere in the CAD50 million to CAD70 million. So in total we would be looking to spend, if you had added in any development capital, at CAD70 million to CAD90 million.

Getting back to an earlier question, why would you go out and spend additional capital considering the strain on your balance sheet and the covenant issues? And in a market that is sort of saying that there is too many trucks out there, why wouldn't you downsize more aggressively here?

That is something that, as I indicated, we're going to be assessing. So as we start assessing our fleet requirements going forward, if there's trucks or loading capacity that needs to be moved out, we will look at that. And that will obviously have an impact on how much we plan to spend on capital in the coming year.

But keep in mind that we also have some capital requirements, although it is not as significant as heavy construction or mining in our piling area. And we have seen some growth there, so that is where we would expect some of the growth capital to be going.

Thanks.

AJ Strasser, Cooper Creek.

Hi guys. Thanks for taking my question. Can you tell us what the underutilization charge for this fiscal year was?

Yes, the total amount under-recovered was CAD60 million.

And is it fair to consider that as you right size your fleet and work on underutilization that that number would come down considerably?

I'm hesitant to say it would come down considerably, because it is something that we need to assess and figure out is it going to come down because we right size, or because we get utilization up, or because we look at what we can reduce in terms of cost within that spend. So there is a number of factors that will come to play.

Part of the reason for rightsizing the fleet is to get three trucks working full-time rather than five trucks working half-time. So if you are doing that, then yes, there will be some improvement in the recovery of parts and labor costs of maintenance, etc. So, yes, it should improve.

Where has that number been historically?

Yes, we've been anything from over recovered to significantly under recovered as we have seen this year. So it has moved around a lot, and it will depend on a number of factors like the age of the fleet, the timing of when maintenance needs to get done, and (multiple speakers) further utilization and availability.

Right, but just going back to what you can do and what's sort of a base case scenario for bringing that underutilization charge, the most time seeing in the last couple of years is about an CAD20 million underutilization charge, which is CAD40 million less than you had this year. Is that within reason to assume it could come down to that level?

At the time it is reasonable. It grew (inaudible) one that requires a rebalancing of the fleet. And secondly it requires an increase in the work. So you could get the combination of the two, if -- and work that equipment to its full level of expected utilization, then we could bring it back up to the solid numbers you are talking about.

Okay. And then on the CapEx plan, I know that you mentioned that there is some wiggle room to that CAD70 million to CAD90 million. Can you give us a sense of your priority to be free cash flow positive this year?

Yes, AJ, I think in terms of priorities, obviously our first priority is to get our margins back up overall. And when I look at that through a combination of things as we've talked about, structuring contracts going forward, dealing with our losses in Pipeline as we've already discussed on the equipment side, looking at what we can do there to improve our utilization, get our cost structure down, so that is one of the key areas for us.

Secondly, as we already talked about, looking at our capital spend and as we right-size our fleet, what opportunities do we have to save there will be another focus for us.

In fact, all the key performance requirements of the executive and divisional leaders this year is very, very focused on cash generation.

Okay, thank you for taking my questions.

There are no further questions at this time. I would like to hand the floor back over to Management for closing comments.

Well, thank you very much for joining us today. As this was my last conference call as CEO, I want to take this opportunity to thank you for your interest in the Company during these past seven years. It has been a pleasure to talk with you on the quarterly calls and to meet you on the road.

I'm leaving behind a dynamic Company with a major role to play in the development and operation of Canada's resources. I'm also leaving behind a management team that I've been proud to be involved with, and a Board that has been supportive of our direction throughout my tenure.

Most importantly, I am leaving a group of employees whose knowledge and ability to execute major mining and construction projects efficiently and safely, I believe is second to none.

I thank you very much, ladies and gentlemen. And I look forward to maybe coming in contact with you in other business opportunities in the future. Thank you.