North American Construction Group Ltd (NOA) 2013 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to North American Energy Partners earnings call for the three months ending June 30th, 2013.

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 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 David Brunetta, Senior Financial Manager, Investor Relations, of North American Energy Partners Inc. Please go ahead, sir.

Good morning, ladies and gentlemen, and thank you for joining us.

On this morning's call, we will discuss our financial results for the three months ended June 30th, 2013, which represents the first quarter of our transition reporting year, as we move to a December 31st, calendar year-end reporting cycle. 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 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 applied in drawing a conclusion or making a forecast or projection are 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 most recent management's discussion and analysis, as well as our March 31st, 2013, management's discussion and analysis, which is available on SEDAR and EDGAR.

On today's call, David Blackley, CFO, will first review our results for the quarter, and then he will hand the call over to Martin Ferron, President and CEO, for his remarks on our strategy and outlook. After prepared remarks, there will be a question-and-answer session. For your information, management will not provide financial guidance.

I will now turn the call over to David.

Thank you, David, and good morning, everyone. I'm going to review consolidated results for the first quarter ended June 30th, 2013, as compared to the first quarter ended June 30th, 2012.

Revenue from continuing operations for the period was CAD115 million compared to CAD174 million in the first quarter of last year. The significant rainfall throughout June, along with associated flooding, led to lower equipment productivity across all activities in the oil sands, from heavy civil construction to overburden and reclamation activities.

Construction activity on the Mildred Lake mine train relocation, the construction of the MSE wall at this site, combined with new mine services work at Kearl, lessened the effect of lower construction work on SAGD projects, and the declines in work at the Jackpine and Muskeg River mine sites.

Gross margins for continuing operations were 7.3% in the first quarter, compared to 4% for the same period last year. Lower operating lease expense, resulting from the refinancing and debt reduction activities over the last year, combined with the focus on reducing equipment spend, offset the effect of lower activities and drove the improved margin.

We recorded operating loss from continuing operations of CAD2.3 million in the first quarter, compared to operating loss of CAD7.1 million last year. The planned cost reductions from our business restructuring activities saw G&A, excluding stock-based compensation, contribute approximately CAD4 million in savings compared to last year. Prior year G&A included a CAD2.5 million restructuring charge.

Operating income from discontinued operations was CAD1.7 million for the first quarter, ended June 30th, [2012], as compared to operating income of CAD7.3 million for the first quarter, ended June 30th, 2012. The high rainfall and flooding throughout Alberta in June led to significantly lower activity levels for our piling operation, which saw earnings decline compared to the first quarter, ended June 30th, 2012.

On the debt side of our financials, we completed the repayment of our Term B facility in April 2013. With the completion of the sale of our piling assets in mid-July, we have no repaid the Term A facility, and have initiated the repayment of at least CAD150 million in our debentures are the call price of 104.563. Once this redemption is completed at the end of August 2013, we will have achieved CAD225 million in debt reduction since March 2012.

We are pleased with our debt reduction efforts, and look forward to an improved bottom line and cash flow position, resulting from reduced cash interest payments.

Turning now to capital, total capital additions for continuing operations for the first quarter amounted to CAD3.9 million, including CAD3.5 million of sustaining capital, and CAD0.4 million of growth capital additions. We also realized CAD2.6 million in proceeds from the sale of assets.

That summarizes our first quarter results. I will now turn the call over to Martin for his remarks.

Thanks, David, and good morning. The corresponding conference call a year ago was my first, and then I sought to set out a clear business improvement plan. As I look back now, I'm very pleased with the efforts of the team in achieving meaningful success in both lowering costs and making great strides in strengthening our balance sheet, despite a challenging operating environment.

David mentioned several key numbers, but the quarter of a billion plus reduction in debt by the end of this August stood out as I listened to him.

Another number that I want to cover is the CAD7 million improvement in EBITDA from continuing operations this quarter, compared with Q1 last year. This is achieved from 34% less revenue, and was based upon cost savings made on every relevant line of the income statement, with G&A cost reductions contributing CAD4.4 million.

On the last call when we presented full-year FY '13 results and announced the sale of our piling business, I pointed out that the CAD28 million of EBITDA made from continuing operations is not a guide to future performance. This is because it did not reflect a full year of the impact of our business improvement steps. Well, the CAD7 million of extra EBITDA produced this quarter goes well to support my contention.

A large reason for the year-over-year revenue decline was the unprecedented washout situation that prevailed for most of June. Unfortunately, these extremely wet conditions continued into early July. And also, due to the timing of incremental work opportunities, we are expecting similar financial performance in the July through September quarter.

Looking further forward, we anticipate continuing delays in oil sands mine and project spending as clients still focus on their cost-control efforts. However, overall activity levels are projected to remain steady. We will continue to work at Mildred Lake and expect to benefit from increased work at Kearl.

Activity levels at Base Mine, Steepbank, and Millennium Mines, together with the ongoing overburden at the Horizon mine, and construction work at Joslyn, will provide a base level of work for operations through the balance of the year.

We will continue our dedication to controlling costs, and will be able to realize the benefits of our debt reduction activities. In addition, we continue to pursue heavy construction contracts in the oil sands and other resource companies in Canada. I'm cautiously optimistic that market demand recovery will gather steam as the year progresses.

Obviously, the announcement of the Energy East pipeline was great news yesterday, and if the long-awaited Keystone pipeline is finally blessed in the fall, this could lead to positive sanctioning decisions on two new mine sites, being Joslyn and Fort Hills. We believe that we are very well placed to benefit from any go-ahead decisions about these new mine sites.

Finally, as I wrote in the shareholders letter of the Annual Report, David and I will be spending more time in front of investors in the coming months after 14 months away. To that end, we have posted a new investor presentation on our website, and, hopefully, it is well worth a look.

With that said, I'd like to now take this opportunity to hand the call back to Melissa, and we'll take some questions. Thank you.

Thank you. (Operator Instructions). Our first question comes from the line of Jeremy Lucas with Scotiabank. Please proceed with your question.

Good morning. David, this one, I think, is for you. Just related to a pro forma capital structure, it looks like you'll have about CAD75 million of senior unsecured notes still on the balance sheet, assuming that the full CAD170 million par bid is not taken up.

What are your thoughts about that line item at 9-1/8 coupon, and would you consider refi-ing that in the near term, with, perhaps, some short-term callable debt?

We're currently assessing our options with that. Clearly, 9-1/8 is a little bit expensive for us, but we also need to keep in mind the premium we would have to pay on any redemptions. So, these are factors that we're thinking about as we look at options for the CAD75 million. So, we could do anything from just carry that through to maturity, or look to refinance it with either a new bond issue, or with some other debt instrument. But, again, it's all about how does that total cost play out for us.

Okay. So, it's more of a -- at this point, it's a cost/benefit analysis against the current coupon on the notes and --

And the premium, exactly.

Exactly. Okay. Thanks very much.

You're welcome.

Thank you. Our next question comes from the line of Chris Lalor with GMP. Please proceed with your question.

Hi, guys. I'm just trying to get a sense of what the quarter could have looked like, excluding the weather impact. Do you guys have a sense of how much work was scheduled to be done, but then was canceled due to weather?

Yes, I think an estimate would be about CAD15 million of revenue, and maybe CAD1 million or so of extra EBITDA. So, it would have been nearer CAD10 million in terms of the EBITDA for quarter.

Okay. Okay, that's good. And so, it looks like the next quarter could be roughly similar. So, are you looking for a recovery in the quarter after that, the December quarter, then? And do you think you can get the EBITDA margin up to kind of that target 10% range?

We're obviously bidding different work packages, and based on expected timing of awards, we think the work will occur between October and March, the last two quarters of our traditional financial year.

That's why we're saying we think this current quarter will be pretty flat with last. So, it's just the timing of work that's kind of dictating things.

Okay. And just one final thing. Did you disclose the under-recovery of equipment in the quarter? I'm not sure if I missed that.

Yes, it was around CAD7 million, compared with CAD15 million last year, and, obviously, we had a lot less utilization of equipment, so it was a good effort in price to get to CAD7 million.

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

Thank you. (Operator Instructions). Our next question comes from the line of Ben Cherniavsky with Raymond James. Please proceed with your question.

Good morning, guys.

Good morning, Ben.

Martin, could you maybe just clarify the outlook a little bit? I mean, I think you said, if I'm paraphrasing it right, you said that the projects were going to gather momentum, but we're also staring down a lot of project delays and uncertainty in oil sands spending. So, how are you feeling between those two sort of competing factors? Is this -- and what do you think -- what do you think needs to happen to get more of the gathering momentum scenario going, as opposed to the delays and do-nothing scenario?

That's a great question. We're bidding, we're pricing work. Whether the projects will actually go ahead or not is uncertain. Some of them will, some of them, perhaps, will be pushed to the right. So, it's always a judgment call in terms of trying to assess workload in coming quarters.

But based on what we're seeing, we think the timing is any work that's likely to go ahead will, as I mentioned, be in the October to March timeframe. We're looking at some reasonable dirt packages, some construction projects. So, that'll help us do better in that timeframe.

Then, as I mentioned, the pipeline situation with Keystone and the large pipeline, the East project yesterday certainly helps, I think. If Fort Hills or Joslyn or both go ahead, that would be a big shot in the arm for us, because two more mine sites when we're only on four or five right now would be a big benefit. So, we're hopeful that those projects will go ahead.

So, those would be two -- obviously, two important catalysts to monitor?

Yes, huge. Yes, huge. There'll be contract mining opportunities. There'll be construction opportunities. Just as we're seeing at Kearl. We started in the mining work a few months ago, and now we're looking at potential construction projects there. So, a couple more mine sites, that'd be great.

Great. And just as a follow up, the competitive landscape, how would you describe that right now, and the efficiencies and cost cuts you put into your business, how does that position you to be more competitive on bids, without getting into any unfavorable contract situations again?

We're certainly not going to get ourselves into unfavorable contract situations. It's still very competitive out there. There's too much capacity of equipment still. But these incremental mine sites, potentially, will help address that, as other contractors spread their equipment across more areas.

We're bidding reasonable prices, and, obviously, our cost-cutting initiatives help us make better margins if we get the work. So, we're kind of holding the line in terms of where we're pricing things. And we're getting our fair share of any work that's out there.

That's great. Thanks. And congratulations on achieving your targets in your first year.

Thanks very much. Appreciate that.

Thank you. (Operator Instructions). Our next question comes from the line of Bert Powell with BMO Capital Markets. Please proceed with your question.

Yes, thanks. Sorry, Martin, I'm a little late getting on the call here, but I just wanted to look at the just balance of this year. You said CAD15 million is kind of what flipped between this quarter and next, this quarter also looking impacted by weather. I assume that work has to get done. Is it an equal amount that gets pushed from Q3 to Q4, like another CAD15 million? Do you stack another CAD30 on top of it for Q4?

No, I think, unfortunately, on a mining site, the work doesn't carry forward. It does for piling. I know that's discontinued operations now, but the piling backlog that was lost in June and early July will certainly take place in the coming quarters, which will help the earn-out situation, which is good.

But for mining, some of the CAD15 million, but not all of it. It just gets pushed to the right.

Okay, so there's no opportunity to run at a higher utilization rate to play catch-up on it.

Not in this quarter, no.

I think, Bert, the other thing to keep in mind is that July was very similar to June in terms of weather, and that's going to be one of the challenges that we face here. And, of course, when you're looking at December, weather can be a little bit risky for the latter part of December.

So, there's been a lot of moving parts for you guys, and I'd echo Ben in the sense that it's been a lot quickly. If you look at your fleet today in the context of what you're seeing, do you feel you've got the fleet at the right place, or is there further room to take some capital out of the business on that side?

No, we do have some more disposals planned, but it's more end-of-life equipment.

Okay. So, nothing that would --

Yes.

Nothing that would cause you to think that the opportunity is any different than what you would have been thinking about three and four months ago?

No. No.

Sorry, Bert. The other thing that we're thinking about, clearly, when we look at our equipment, we may have surplus equipment today, but given the price of used equipment, we're not going to give it away. I mean, if we could get a fair dollar for it, we might think about selling some more, but not if you're going to get 50 or 40 cents on the dollar. We're not going to give it away.

Okay. That's great. Thanks.

Thank you. Our next question comes from the line of A.J. Strasser with Cooper Creek Partners. Please proceed with your question.

Hey, gentlemen. Thanks a lot for taking my question. Good morning to you.

Good morning, A.J.

Martin, first off, congratulations on just steering this ship in the right direction. And now that you've been with the Company maybe for about a year and even in the most challenging environment you're putting up sort of upper-single-digit EBITDA margins, and I'm not asking for guidance, but can you just maybe steer us either qualitative or quantitatively, if you have an idea, when things start picking up in, hopefully, two, three quarters from now, what do you think is -- with the Company having done peak margins of -- I'm looking at your presentation now -- back in -- of 19% or so.

What seems achievable, if we ever get kind of a pickup in the revenue here, from your perspective?

Well, we -- let me look back at what was achieved in the peak years. Revenue was CAD650 million, CAD700 million with the fleet that we have today. So, I'd like to think that with an increased number of mine sites, more work, we could get to that sort of number again at some point in the future.

Obviously, we've got a much better cost structure now to go along with that revenue potential. So, all I would say is that I would be hopeful that we could do better in the future than we did in the past in terms of that EBITDA margin.

Just to be clear, even with the right-sizing of the fleet, you believe that CAD600 to CAD700 million of revenue is still achievable?

Yes.

That's great. I mean, and in terms of margin, can you give us any type of -- I mean, you're putting up upper single digits now. You're still 1,000 basis points below peak. Where do you kind of think a normal margin might be for you, once revenue starts to normalize, in your opinion?

Well, I've said that I'm hopeful of exiting the year at 10% EBITDA margin. We're creeping up towards that number, and that's still our target. With any help from the market in terms of demand and incremental revenue next year, I'd expect that to go up. And we'll be targeting that 19% you mentioned at some point in future.

All right. Well, thanks for taking my question, and great job, again.

Thanks. A.J.

Thank you. Mr. Ferron, there are no further questions at this time. I'd like to turn the floor back over to you for closing comments.

Well, thanks for calling in today. We look forward to speaking to you next time. Thanks.

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