North American Construction Group Ltd (NOA) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the North American Energy Partners earnings call for the three months ended September 30, 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 call any member of management, but they are asked not quote remarks from any of the participants 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 December 30, 2013. This represents the second quarter of our transition reporting year as we move to a December 31 calendar year-end reporting cycle. I'll remind everyone that all amounts are in Canadian dollars.

I'd also like to remind everyone that statements made during our prepared remarks are 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 and drawing conclusions 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 protection in the forward-looking information. For more information about these risks, uncertainties, assumptions, please refer to our most recent Management's Discussion and Analysis as well as our June 30, 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 our prepared remarks, there will be a question-and-answer session. For your information, management will not provide financial guidance. I will now turn over the call to David.

Thank you, David, and good morning, everyone. I'm going to review consolidated results for the second quarter ended September 30, 2013, as compared to the second quarter ended September 30, 2012. Revenue from continuing operations for the period was CAD116 million, compared to CAD124 million in the second quarter of last year. Operational rain-out dates, which reduced volumes at the end of the first quarter, extended into July, leading to further lost volume and unfavorable site conditions at the start of the quarter.

Mine services volume at the Kearl mine offset the prior-year activity from the above-ground steel construction project at the Mt. Milligan copper/gold mine in Northern British Columbia, while overburdened removal volumes at the Horizon mine remained similar.

Gross margin from continuing operations was 10% in the second quarter, compared to 6.7% for the same period last year. The profit and margin improvements were primarily a result of reduced operating lease costs. The maintenance cost production initiatives that we started partway through last year, together with a reduction in the use of [wrinkle] equipment, helped to mitigate the cost of increased maintenance activity that resulted from the poor ground conditions during the period.

We recorded operating income from continuing operations of CAD0.6 million in the second quarter, compared to an operating loss of CAD0.7 million in the same quarter last year.

General and administration expenses, excluding stock-based compensation, were CAD7.3 million during the three months ended September 30, 2013, up from CAD6.3 million in the same period last year. General and administration expense were CAD0.6 million lower, excluding the benefit of CAD1.6 million from the prior-year, arising from the adjustments to short-term compensation.

Operating income from discontinued operations was $96.5 million for the second quarter ended September 30, 2013, as compared to operating income of $14 million for the second quarter ended September 30, 2012. Results from discontinued operations reflect activity through to July 12, 2013 from the divested Piling business along with the full-period activity from a single Piling project not included in the sale. We recorded a gain of CAD97.3 million from the divestiture of the Piling business.

Turning to the balance sheet, we have realized the benefits of the net proceeds of CAD218 million received from the sale of Piling, which we applied to our continuing efforts toward de-leveraging. First, we completely repaid the CAD16.3 million outstanding on our Term A facility. Next, we completed the repayment of CAD150 million of our 9.125% Series 1 debentures, of which CAD142 [was at] the coal price of CAD104.56. The debenture retirement is expected to reduce our annual interest costs by approximately CAD13.7 million.

In total, we have achieved an impressive reduction of CAD258.1 million in debt since March 31, 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. Also adding to our cost (inaudible) focused, we are pleased with the newly amended three-year credit facility agreement that we signed with our existing syndicate in October. A new credit facility amendment will reduce our cost of borrowing by providing us with a 1.5% reduced interest rate. An increased focus on the asset value on the balance sheet, combined with less restricted financial covenants, will improve our borrowing flexibility. I believe the newly amended agreement demonstrates the continued support of our banking syndicate in North America Energy Partners.

Turning now to capital, total capital additions from continuing operations for the second quarter amounted to CAD10.9 million, including CAD9.9 million of sustaining capital and CAD1 million of gross capital additions. We also realized CAD2.3 million in proceeds from the sale of assets.

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

Thanks, David, and good morning. Well, we certainly had a busy and eventful few months with many highlights. It was great to deploy the cash proceeds from the sale of our Piling assets to significantly lower our debt. Facilitate the negotiation of a new credit facility. As David mentioned, the new credit line meaningfully reduces the cost of our working capital needs going forward. As quoted in the press release, I'm particularly delighted that despite the many distractions including a complete office move, we again improved our operating performance in a continuing difficult market for our services.

Gross margins reached 10%, and EBITDA margins would've exceeded our year-end target of 10% if not for a big uptick in stock-based compensation expense due to the otherwise not unwelcome rise in our stock price.

As (inaudible) annual edited (inaudible) list, David and I recently spent time meeting investors in New York, Toronto, Montreal, and Edmonton using the presentation posted on our website. Most of the questions we received concerns slide 5 and 6, which cover further debt reduction, potential future financial performance. So don't worry if you have not got the slides in front of you, as I will share my thoughts and appropriate details with everyone here.

As of the end of September, we had CAD75 million of debentures left on the balance sheet along with CAD46 million of capital leases. The latter number will decline in the ordinary course of our business to around CAD50 million by the end of 2015, as shown on page 27 of the MD&A. The debenture number will then be addressed with any contingent proceeds received from the sale of the Piling business and free cash flow from operations. We expect interest payments to be down to around CAD10 million next year and net sustaining CapEx to be about CAD30 million. Therefore, as we do not expect to pay any cash back for a couple of years yet, we will generate free cash flow if EBITDA exceeds CAD40 million. On that point, I'll note that analysts have our EBITDA for next year at around CAD55 million.

That then segues into the question of financial performance. And, as mentioned before, we still have the equipment assets and resources to produce around CAD700 of revenue if market conditions improve compared with the present run rate of about CAD450 million.

As we are a very asset-intensive business, we would expect our EBITDA margin to increase markedly with steady utilization, especially given the improvements we have made to our cost structure over the last 18 months. We anticipate a gradual increase in our revenue generation over the medium-term, driven by enhanced activity on some mine sites as our existing mine sites with our customers seek to ramp up production; incremental activity on new mine sites; and finally additional utilization on work opportunities outside of our core oil sands market sector.

I look forward to the future with cautious optimism, as we continue to face slow and competitive demand conditions for our heavy construction and mining services. However, I believe the longer-term outlook for the oil sands mining appears to be strengthening. Berkshire Hathaway's investment in Suncorp, TransCanada's synergy pipeline plants, and the go-ahead decision for the multibillion-dollar Fort Hills mine all support this belief that the demand headwinds that we've been facing for the last couple of years might finally begin to calm down.

I especially welcome the positive site development decision for the Fort Hills mine project last week, and I believe that we are well placed to benefit from that sanctioning decision. The new 180,000 mile per day mine site with a CAD13.5 billion price tag and a 50-year life presents us with a nice opportunity. I look forward to continuing positive relationships with the operator of this exciting new venture.

For the near-term, however, we expect the challenging operating environment to continue over the winter months, and we are still bidding for seasonal work. Overall activity levels in this period may reflect this challenging environment, but we continue to address costs that will hopefully offset any further work scheduled for (inaudible).

I cannot close without out mentioning the normal course issuer bids that we launched in late October to substantially purchase up to 1.8 million of our common shares to cancellation. This represents 5% of our common shares outstanding and will be funded by working capital monetizations from the sales of the Piling and pipeline-related assets.

In particular, we recently settled the claims associated with the pipeline project, and since the well-chronicled difficulties on such projects detracted from [Shell Devonnie], there seems to be a certain amount of justice in using claims proceeds to help restore it. With that said, I'd like to take the opportunity to put the call back to Christine for the Q&A session. Thank you.

(Operator Instructions) Greg McLeish, GMP Securities.

Just a couple of questions here. I was just trying to figure out how much revenue you think you lost in July due to ongoing wet weather conditions?

That would've been about CAD5 million to CAD10 million, Greg.

And have weather conditions normalized now to maybe see that uptick?

Certainly there's no wet weather conditions right now. We're in the seasonal cold weather hopefully.

Okay. And just a question for David. On the interest expense line, it was CAD6.9 million in Q2. I'm just trying to figure out how much additional interest was paid as a result of the redemption of the debentures and if there is a way to normalize that. Or is that a normalized number there? Because there would've been some penalties there, wouldn't there?

The penalties, Greg, where the premium we paid for the 4% on CAD143 million, so I think that number worked out to about (inaudible).

Perfect. I'll get back in the queue and have a few more, thanks.

(Operator Instructions) Pat Uotila, Sterne, Agee.

Now that you guys have done a nice job with kind of your capital structure and some cost reductions, can you -- you've divested some of your faster-growing businesses. Can you give us more detail on what opportunities are out there going forward? Like even maybe on Fort Hills? A timeline on bidding or something like that? Margin activities going forward on new bids, and maybe a little bit of info on what's going on outside the oil sands for growth opportunities.

Yes, in my commentary, Pat, I mentioned that hopefully our revenues are going to start to improve through (inaudible) spent on existing mines, incremental spending on new mines, and then opportunities outside the oil sands. So I'll address your question in those three segments.

So existing mines. We're seeing customers starting to plan really ramp up production in order to reduce operating costs. I was at the horizon mine recently, and they've got big plans to take production from about 110,000 barrels per day to 500,000 barrels over the next few years. And you know that could represent a lot more work for us just in terms of (inaudible) for example. So, I see other customers potentially wanting to do that, as operating costs is a key consideration for them. So in the medium-term, I see that as a driver. So obviously new mine sites, there aren't many existing ones, so any new ones are very welcome.

We obviously have got the Kearl project last year, and we're seeing a gradual ramp-up on that as far as activity levels are concerned. And then you mentioned Fort Hills. So Suncorp said in their announcement that they had already started to spend, and we've been talking to them about pieces of work. I think in the short term, and that's next year, we might see some construction activity. And then we'll be bidding for a contact [mine in] probably in the next few months. That's kind of the way we see that.

So we think that we're in a position to get our fair share of that work. We've got a good relationship with customers and we're hopeful. So that leaves opportunities outside of the oil sands. We're looking for extra utilization for our equipment, and we're really in the business development stage of that because it's obviously expensive to move our heavy equipment. So we've been looking at road projects, we've been looking at other resource plays, we've been looking at Hydro projects. Even the LNG has stuff that's part of the West Coast. So since we're in business development and looking for opportunities, they see that as kind of a year to two -- two years out type improvement initiative. I hope that gives you some color.

Great. Thanks, guys.

Greg McLeish, JMP Securities.

You mentioned that you've received money from the claims on the Piling division. Was that received in the second quarter, or has that been received subsequent to the second quarter, and what was the total amount?

Are you asking about the claims in the Piling or the pipeline?

Sorry, the pipeline division.

Yes, so the money was received for one of the claims on the pipeline side (inaudible).

Okay, and do you know what the amount was?

It was around about CAD9 million, something like that.

Great. And then just, you mentioned, Martin, on existing mindset horizon is going to be moving production up aggressively. Does that mean they're going through to Phase II?

No, I think Phase II is up to 250,000 barrels and after that, Phase III is up to 500,000 barrels. So it will be Phase II and III, and obviously that ramp up, as I mentioned, hopefully will involve more of our type of services.

Great. And just one final question on G&A. In the MD&A there, you said that your restructuring costs last year resulted in savings of approximately CAD6 million. And I think to normalize your number now, you take a look at the March 2013 number and then take CAD6 million off of it, and that normalizes it? Or are you seeing additional savings as well?

That would be a baseline, but we are obviously, as Martin said, always looking at our cost. And if we can find further savings, we'll look to do that.

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

Jeremy Lucas, Scotia Bank.

Good morning, just with respect to that CAD75 million remaining on the senior unsecured notes. You mentioned you would be looking to use some of the contingent proceeds for from Piling business sale and perhaps free cash flow to pay them down over time -- or to call them over time. Are you precluded from using your revolver to pay down the notes? And if not, is that something you would consider as well?

We're not precluded from doing it, but we've set up our credit facility to support our working capital, and I don't think it would make a lot of sense for us to go and take a portion of our revolver to pay down it now. Again, it's such a small amount that [when] it's over, we may look to do that or we may look to fund it through some other mechanism.

Understood. Okay, thanks very much.

Ben Cherniavsky, Raymond James.

Just maybe ask you if you could talk a little bit about the change in the operating environment in the oil sands as some of these projects go ahead. Clearly, these guys are now more focused on cost, but -- and obviously you've done a good job bringing your cost down as well. But how does that change the way you approach bidding and working on the sites? And then how does it change your margin potential as the projects ramp compared to, say, the last cycle?

Yes, that's a really interesting question. You know, in the short term, as you keep mentioning, the competitive pressure is very strong at a time when customers are reining in their expenditures. So the two things together make for a very difficult operating environment. So we've managed to lower our cost significantly. So we can price work lower and still make the same margin as we did previously. And it's taking lower prices to [when work] right now. There's still overcapacity, too many competitors. So I'm hoping that over the medium-term things will shake out there.

Now, in terms of some consolidation and some equipment leaving the market. But after that, I'm hopeful that demand will pick up for the reasons that I've gone into and some of the overcapacity will be absorbed, pricing will improve, and our EBITDA margins will get back to where they once were, the peak of the last cycle or [propensity] of [data], given we've got a better cost structure.

And now that your balance sheet is in better shape, would you consider trying to [effect] some of that consolidation buying from your -- buying some of the competitors?

We are certainly looking at things like that. I think it's a little early. There's more pain to be felt for a little while yet. If I ask around the competitors, I think we're getting stronger while some of them are getting weaker. I think, you know, (inaudible) group, we're going to address in the short term is our credit rating. David and I are going to meet with the rating agencies and try and get a better rating on our credit and, therefore, have a potentially lower cost of debt. (inaudible) working capital, but it will be nice to get a better rating in order to potentially reduce the cost of other debt going forward.

And finally if I may, how are you finding the expenses from your customers just with respect to maybe, call it, your brands in the market or confidence they may have, or the lack of confidence they may have had in the past, just given the events that you faced under distress. Is that -- are you spending some time going back and telling the market North American is back to business, so to speak?

You know, as well as spending time with investors, I've spend a lot of time with customers lately. I've always found it pleasing that customers always like the work North American does. That was one of the big attractions for me to come to the Company because, you know, I heard that and I experienced it firsthand when I arrived. That hasn't changed. In fact, it's got better. Our safety record is second to none right now. I don't think we had a single incident last month, for example. So customers recognize that. They appreciate the fact that we are doing things to our cost structure which will ultimately help them. So given the financial position stronger, I think there customers welcome what we've been doing.

Thanks Martin, I always appreciate your candid answers.

Thank you.

(Operator Instructions) 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, thank you, Christine. And thanks, everybody, for joining us today. We look forward to answer you next time around.

Thank you. And this concludes the North American Energy Partners conference call. Have a wonderful day.