North American Construction Group Ltd (NOA) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to North American Energy Partners fourth-quarter fiscal 2013 earnings call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, there will be an opportunity for analysts, shareholders and bondholders to ask questions. The media may monitor this call in listen-only mode. They are free to quote any member of management, but they are asked not to quote remarks from any other participant without that participant's permission. I advise participants that this call is also being webcast concurrently on the Company's website at nacg.ca.

I will now turn the conference over to Kevin Rowand, Director Strategic Planning and Investor Relations of 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 months ended March 31, 2013, which represents the fourth quarter of our 2013 fiscal year. All amounts are in Canadian dollars.

I would like to remind everyone that statements made during our prepared remarks or in the Q&A portion of the conference call that 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 a conclusion, forecast or projection in the forward-looking information. For more information about these risks, uncertainties and assumptions, please refer to our March 31, 2013 Management's Discussion and Analysis, which is available on SEDAR and EDGAR. As previously mentioned, management will not provide financial guidance.

I'll now turn the call over to Martin Ferron, President and CEO.

Thanks, Kevin, and good morning, everyone. We have a lot to cover today, and so my formal remarks will be as succinct as possible, leaving plenty of time for questions. Firstly, I will make summary comments about our Q3 -- Q4 performance and fiscal '13 highlights. Then I will take you through the rationale for the sale of our Piling business, together with my views on our future as a focused pure play heavy construction and mining contractor.

On the last call, I was cautious about our Q4 outlook, as I did not expect performance to be as good as achieved in Q3. This is the way it turned out, as [Piling] is extremely slow for all of our activities, and we made most of the CAD80 million of consolidated EBITDA for the quarter in February and March. As anticipated, winter weather led to a seasonal decline in Piling activity, and demand for mining works stayed pretty flat with Q3 levels.

G&A costs were almost CAD3 million higher sequentially, due to increased stock-based compensation and short-term incentive program costs. And we incurred about CAD1.3 million of additional cost to close out legacy pipeline projects. Also, mining and equipment costs were higher as we ramped up for the Kearl contract. Without these financial impacts, consolidated EBITDA would have come in around CAD23 million.

Profitability was impacted by a CAD3 million impairment charge related to certain underperforming older equipment. In conclusion on Q4, we did our best -- sorry, we did the best we could with work available to us in a tough winter. And our cost-cutting initiatives, along with good risk management, allowed us to produce CAD10 million more EBITDA than in the corresponding quarter last year, from 40% less consolidated revenue.

In regards to full-year fiscal '13 performance, I was here for just under 10 months, and I'm extremely pleased with our business turnaround achievements in that time. In essence, we made a seismic cultural shift from a head-long pursuit of revenue, to a relentless dedication to [spending] and risk mitigation. This fundamentally new approach allowed us to meaningfully lower our debt, while also improving gross and operating margins. We also won a significant new contract at a [fresh] mine site, and improved our relationship with our bank lenders. Most importantly though, I believe we demonstrated that the turnaround was sustainable, even in poor marketing conditions for mining services. Pro forma for a full year of turnaround cost savings and one-off restructuring charges, I estimate that EBITDA would have come in around CAD95 million.

Despite the fiscal '13 achievements, both our debt level and cost of debt service remained as key areas to address. We paid over CAD30 million of interest last financial year, and we're faced with a similar cost in fiscal '14 of probably around CAD75 million in total for the next three years, even with a concerted effort towards gradual debt reduction. This situation led us to explore the sale of our Piling business, especially as we were also capital-constrained to fund future growth opportunities, and the associated growth projects would have put further strain on our working capital liquidity.

After an exhaustive sales process involving many potential industry and private equity buyers, and a thorough review of our strategic options, we decided to execute a purchase and sale agreement with the Keller Group plc out of London. Under the terms of the agreement, we will receive CAD227.5 million at closing, subject to customary adjustments to working capital and capital leases. After also deducting transaction costs, we anticipate that cash proceeds on closing will be around CAD210 million.

In addition, we will receive up to CAD57.5 million over the next two years, if the purchaser generates EBITDA of CAD45 million in each year, which is less than the level achieved in fiscal '13. Even if EBITDA were to fall to [15%] to CAD37.5 million in each of the years, we would still receive almost CAD29 million in additional proceeds. Finally, we will also share in the cumulative EBITDA for the next three years, over CAD135 million. This extra payment would max out at CAD35 million if the cumulative EBITDA for the period was CAD205 million.

In addition to the direct cash flows from the deal over the next three years, we will benefit from saved interest payment, around CAD60 million, if all of the initial proceeds are used to pay down debt; lower capital expense requirements, around CAD25 million; and reduced overhead costs, CAD18 million over the period. The transaction, which is subject to majority approval of the purchaser's shareholders, and antitrust clearance is expected to close in Q2, hopefully around mid-July actually. All of the key piling personnel will transfer to the purchaser at closing, with [Bernie Robert], our long-time Vice President, and Jim Humphries, General Manager and a 25-year veteran of the piling division, playing significant management roles in the purchaser's divisional organization.

We at North American Energy Partners will move forward as a highly focused, specialty Heavy Construction and Mining business, with a strong balance sheet and much lower overhead structure founded on simplicity and leanness. As the Piling transaction involves less than 20% of our equipment assets by book value, we will still have a fleet with replacement value and annual revenue-generating capacity both over CAD700 million. Our operational leverage to any sort of demand recovery in the oil sands will be very high. As we remain cautious about such an oil sands mining pick-up in fiscal '14, we will look to other resource industries across Canada as potential alternative sources of equipment utilization.

Now, I'm sure that many of you will be wondering how the remaining Heavy Construction and Mining business will perform financially. We will hopefully be able to [sift] and to see that we have structured our strategy year-end filings to show heavy construction and mining as the continuing operation, while Piling and Pipeline activities have been classified as discontinued operations. Then you can use the CAD95 million estimate of normalized consolidated EBITDA that I mentioned earlier for fiscal '13, and deduct the contribution from the Piling and Pipeline divisions.

Alternatively, you can look at the five-year business performance table shown on page 8 of the MD&A, and normalize FY performance for a full year of turnaround benefits, remove one-off restructuring charges, and add the incremental CAD6 million of G&A savings, detailed on page 7 of the MD&A. These two approaches will provide a similar answer for this low point in the demand cycle. But the reference table also clearly shows the extra revenue and EBITDA potential of the continuing operation as demand recovers, especially as we'll have a much lower cost structure when that happens.

In relation to the long-term debt, I suggest that you look at pages 5 and 39 of the MD&A, where you will see that we had CAD317 million of debentures, term loans, revolver draw and capital leases on the balance sheet as of March 31. The Term B facility at CAD5.6 million has since been paid off, and the capital lease balance will be reduced by almost CAD20 million in fiscal '14 by the Piling transaction and regular payments. Therefore, if we apply the net [cash] proceeds to debt reduction, we will be left with a very manageable level of term debt, which will then be addressed with saved interest payments and/or contingent cash payments from the transaction.

Overall, I'm very excited about the future, as I've dealt with cyclical demand conditions throughout my career. We will seek to remain profitable once we've deployed the initial transaction proceeds in the worst and best of demand scenarios. Our emphasis will be on operational excellence in order to become the low-cost provider in our distinct business area. Measured growth will be achieved organically, and we will look to play a leading role in solving the problems of equipment overcapacity in the hands of too many competitors in the oil sands mining sector.

Before we take questions, I'd like to confirm one more change. With that being -- we will report earnings on a calendar year basis starting next January 1. Therefore, we will have a transition period of nine months from last April 1 until December 31. We really want to be a transparent and easy-to-understand investment story, and believe that this switch in reporting period will assist greatly in that regard.

With that, Christine, I'd like to open the floor for questions, please.

Thank you. We will now be conducting a question-and-answer session.

(Operator Instructions)

One moment please while we poll for questions. Chirag Patel, Jefferies.

First, I was reading through the press release and I saw that you guys are looking to offer expand the support services of the business. Wanted to get a feel for how much the capital allocation would be to that?

The support side of the business, I'm not sure what you're referring to there, to be honest.

I was looking through the Outlook section and one of the things you guys had commented on was I think in the [seventeenth] paragraph, NAEP anticipates an increase in operating support services to help offset the potential reduction in construction services. So in doing so, you -- it looked -- it sounded as if you're going to expand that business operation.

It's different areas of the same work, like project work versus operations. So at the same fleet of equipment that would service either of those areas. It wouldn't be (multiple speakers) --

Would there be any need for additional fleet?

No.

All right, and then also on the equipment side of things, I was looking for how much was the underabsorption in this quarter? I think there was about CAD2.1 million last quarter.

It was around CAD7 million this quarter. Mainly because of the ramp-up in equipment costs of the projects that I mentioned.

Okay. And if we're looking at about CAD7 million for the last quarter, how can we think of the overall fleet as it stands in the region? Is there a significant amount that needs to still come out of the overall capacity, I guess?

Yes, we gradually are getting better at this underutilization cost. I saw -- you saw gradual progression through last year and I expect that to continue. We do have other mining assets left to sell if we choose to pursue that. So, we're on the same path as far as rightsizing our fleet is concerned.

All right, and then just one final one, if I could just sneak it in. You said the timing of the transaction was in this fiscal second quarter. So are we talking next year or are we talking this July right here?

This July right here.

Okay.

It's subject to shareholder approval on the purchaser side, but that [hold] is at the end of June. They raised some equity to help fund the deal this morning, so hopefully, we can get it done by mid-July.

And then a piece that we are working on getting [competition general] approval. We don't believe that's going to be, as you can tell, is a small [agency] in Canada, but we've gone through that process.

(multiple speakers) That's when you'll be paying down debt almost immediately then?

Correct.

Greg McLeish, GMP Securities.

I just trying -- a little confused with what's going to happen next year just as it related to EBITDA. I think you said that if you normalized, it was CAD98 million.

CAD95 million.

Yes, so if I take a look at you had EBITDA from continuing of CAD28 million, so to normalize that, I'd add probably another CAD20 million so you'd be at about CAD48 million and then you're going to have G&A savings of, I think, CAD6 million from CAD44 million.

I think you're going a little bit high there. So if you use the first approach, that I mentioned, take the continuing operations EBITDA from the CAD95 million, it gives you a good indication of this.

Okay but it looks like you could still generate a loss at that point, wouldn't you, from continuing? I mean, you did have a large loss from continuing this year.

Yes, I guess it depends on how quickly we can get rid of these interest payments.

Okay, but to get rid of the interest payments, would that have -- would you have to do anything on the -- your long-term facility, the CAD225 million due in 2013 -- Sorry, 2017?

Yes, we're looking at all the options to use these proceeds in the most effective way right now. Clearly, those debentures are very expensive and we're looking to possibly do something there.

Ben Cherniavsky, Raymond James.

I just wonder if you can elaborate on the SG&A savings that you see from the business through this divestiture. It sounds like a fairly substantial amount. Is that just corporate overhead or how do you reduce the SG&A -- how is that reduction related to the divestiture here specifically?

Well, I want us to be a much simpler and leaner organization going forward. We did make significant G&A savings last year upon my arrival. I've had time to scrutinize what we need going forward as a pure play heavy construction and mining contractor. We are a lot simpler now than we were. We're not in Pipeline anymore and we're going to be out of Piling shortly. So that enables me to simplify the structure considerably and therefore, leads to this additional CAD6 million round number reduction in G&A going forward.

Is this a physical footprint reduction in terms of branch infrastructure? Some of that goes with the, presumably goes with the Piling business as well as the human resources like some of the people and support staff. I'm just trying to get an idea of where the specific savings are identified on that line item.

It's a combination of facilities, savings plus personnel. The G&A that goes with the Piling transaction is shown on the continuing operations table and off the top my head is around CAD12 million. So those are the numbers.

Okay. And the gross margins now for the mining business, we can see what they were in the quarter and the year on your continuing operations statements. What do you see as the potential margins there? What would be target margins for that operation?

The target -- the initial target here, the demand is still a little challenged obviously. But I'm hopeful that with further direct cost savings and other indirect savings, we can get to around 10% EBITDA margins.

10% EBITDA.

Yes.

Jeremy Lucas, Scotia Capital.

I just want to go through the waterfall of the asset sales covenant in the indenture for the notes. If I'm reading it correctly, your first step would be to take out some of the term debt and perhaps the credit facilities. Following that, with any excess proceeds, if you were to not apply them to capital expenditures, you would then make an offer to purchase the notes at par; is that correct?

Correct. So, obviously, in terms of the indenture agreements, we have up to 365 days to redeploy or reinvest those proceeds back into the business, either through an acquisition or debt pay down or something else that reinvests that back into the business. We do have the requirement in the indenture agreement that if we are not going to do that or we don't do that within that timeframe, that we have to offer those proceeds back to the debenture holders. They have the option to accept that offer and it will be offered at par if we were to follow that route.

Okay. And just listening to some of the dialogue, if you're leaning one way or the other versus acquisition CapEx or debt pay down, it feels like you're leaning towards addressing leverage as a priority. Is that a correct way to characterize that?

Yes.

Okay. And as a part of the transaction, were there any tax implications associated with this -- cash taxes?

We've been able to, with some very good debt planning from our tax advisors in our internal tax group, we've been able to use a lot of our losses that we have on the books right now and mitigate any taxes, but we don't expect to pay very much in the way of tax [on the deal].

Okay, that is good to hear. And just a little bit of housekeeping. You mentioned that, Martin, I think you mentioned that the capital leases would be reduced by CAD20 million in 2014 through the proceeds of the transact -- or as a result of the transaction and through future cash payments. How much of that CAD20 million was related to the transaction?

Around about CAD5.6 million.

Yes, it will be to somewhere between CAD5.5 million and CAD6 million.

So CAD5.5 million or CAD6 million of capital leases go to the new or will go to Keller, I guess.

Yes.

And then your other CAD15 million or CAD14 million was cash payments that would happen through '14.

Yes.

(Operator Instructions)

Maxim Sytchev, Dundee Capital Markets.

Just -- I mean obviously right now, the priority is addressing the balance sheet, but I was wondering if strategically, you can maybe think out loud in terms of where you want to be positioned in the next 24 to 36 months? Whether it's an all out bet on the oil sands dynamic or if you feel there are additional resource base industries where you can feel you make inroads? So if you just maybe could address that, that would be very helpful for us.

Yes, sure. It wouldn't be sensible to have an all out bet on just the oil sands market, although I do think that we will see increased activity there over the next two to three years. Even this year we've already started to bid in other areas, other resource plays, other activities, any source of utilization for our fleet would be welcome right now. And we are stepping up our business development activities in order to improve value utilization.

Okay and then actually on utilization, do you still feel that there is some excess fleet that you have on the balance sheet or you feel that right now, you're rightsized for the opportunities available right now and also on a perspective basis?

No, we still have some excess assets for the demand we see over the next year or two. But, after this Piling transaction we are not compelled or -- we're not going to sell them at perhaps what the market will pay right now.

Okay.

We'll see on that one.

But do you mind the -- can you put a number? Is there like maybe 10% of excess capacity left in NOA that maybe you can wring out over the next 12 to 18 months?

Yes, it's around that number.

Around that number. Okay. That's great. Okay, that's very helpful. And then in terms of, again, hypothetically speaking, if the revenue run rate remains where it is on the legacy operations, what CapEx should we be thinking about as a reasonable number?

Gross CAD40 million, net CAD25 million.

Net CAD25 million. Okay. That's great. And then can you just repeat also what you said in terms of the interest rate savings? Because you said if you were to deal with the term debt credit facility and also the publicly traded debentures, that it was a CAD60 million saving over the three-year-time frame; is that correct?

In round numbers, [implying] CAD210, CAD210 million.

Okay, excellent. All right, well, that's it for me and congrats, I think that's cleaning up the structure of the firm will definitely position you for the future.

Well, thank you, Max. I appreciate the comments.

AJ Strasser, Cooper Creek.

Congrats on an excellent sale here. First, just a small detail on the quarter. Did you say that the CAD18.5 million or so of EBITDA was impacted by a CAD3 million impairment in Q4?

Not EBITDA; that was profitability. What I mentioned on EBITDA was that we had some one-time sequential increases in cost over Q3. So, part of that was CAD1.3 million for some close-out costs on pipeline projects. Also G&A was almost CAD3 million higher due to increased stock-based compensation with the stock price actually going up, right? So -- plus short-term incentive program costs.

Okay, so there was about CAD4 million or so of one-time cost that hit EBITDA.

Yes, CAD4 million or CAD5 million.

Okay, that actually would have been a pretty decent quarter. And then the other question is, I just wanted to make sure I heard you right. Did you say the run rate business that's remaining, the mining business, you think is a target here is a 10% EBITDA margin?

That's the target, yes.

Okay. And do you think you could achieve that target possibly or get close to it in fiscal '14? Is it within reason?

We are going to try as hard as we can. We might not get there in the first quarter or two but in the third and fourth, hope to get there.

Okay, and then lastly, and just curious, maybe if you could just take us through. You're a shareholder yourself. You've been accumulating stock all the way up to, I think the CAD4.50 range, and it's great to have you as co-shareholder. Can you talk about your view here and value creation because based on my numbers, it looks like you are able to sell a business on certain metrics at a 7 times EBIT/EBITDA multiple when stock is trading at roughly 4.5 times off trough numbers. Now I'm just curious to maybe just walk us through that this was, in your opinion, certainly a value creating exercise. And again, just would love any back story analysis that you can give us here.

Yes, sure. The Piling business is a very good one. It generated around CAD45 million of EBITDA last year. But as a Company, we paid over CAD30 million in interest and the capital requirements for that business were going to be CAD10 million plus going forward. Plus it was going to take increasing room in our revolver. So, using those numbers, based on the price we were able to achieve, especially as I think we are going to get at least some of these continued payments, I'm pretty convinced of that, then I think to pay down on most of our debt and go forward as a focus on Heavy Construction and Mining Company is a compelling story for me.

We still have a fleet that's capable of, as I mentioned on the call, generating CAD700 million of revenue as we've done in the past. Also EBITDA margins will be a lot higher than 10% at that point. I am a patient, long-term shareholder who will wait for those conditions to come around and position us as strongly as possible for when they do.

That's great. I mean just by our math, it looks like you created CAD2 or CAD3 of shareholder value here so phenomenal job. And then did you say correctly you were keeping 80% of the book value of the Company pro forma for the sale here?

Equipment assets, yes.

Okay.

Again, that makes it a pretty nice deal for us, I believe.

That is great. Well, congratulations again and again, a phenomenal year here of turnaround. Thank you again.

Thank you, AJ.

(Operator Instructions)

Greg McLeish, GMP Securities.

Just a couple of follow-up questions. Just looking at the EBITDA from discontinued; it was CAD49.5 million. So did -- if you're saying that Piling did about CAD45 million, does that mean that pipeline did have some positive EBITDA?

Yes, pipeline did have some positive EBITDA, but Piling did better than CAD45 million -- it was around CAD47 million, but there was some one-offs in there, maybe CAD2 million of one-offs benefits in there.

Perfect. And just in Q3, you mentioned that you had CAD33 million of working capital tied up in the Pipeline business and that you're expecting to receive a reasonable amount at the end of Q4. Did you receive any of that money?

We got probably 60% of it. I mentioned on the last call that some of it is tied up in dispute resolution. So I figured that -- (multiple speakers)

Do you think that there's a potential to get any more of that money?

Yes, we certainly are going to follow this resolution as best we can and are hopeful of the outcome.

Mr. Ferron, it appears we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Well, I appreciate everybody listening in this morning. As I mentioned, I am super excited now. I think we're in a great place. [Okay] demand for mining services is still a little slow but it's going to get better. I'm starting to see that and becoming more confident in it. And we are going to be very well-positioned when that happens. So thank you for your interest in North American and we'll speak to you next time. Thanks.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.