North American Construction Group Ltd (NOA) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the North American Energy Partners earnings call for the quarter and year ended December 31, 2013. (Operator Instructions). I advise participants that this call is also being webcast concurrently at the Company's website at www.nacg.ca. I will turn the conference over to David Brunetta, Senior Financial Manager, Investor Relations of North American Energy Partners, Incorporated. Please go ahead, sir.

Good morning, ladies and gentlemen, and thank you for joining us. On this morning's call, we will discuss our financial results for the quarter ended December 31, 2013. This quarter marks the end of our fiscal year, as we have transitioned to a December 31 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 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 are reflected in the forward-looking information.

The business prospect 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 December 31, 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'll 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. As David stated [about], we have transitioned to a new reporting period, and will now follow a calendar-year cycle. Thus, I am going to review consolidated results for quarter ended December 31, 2013, which is now our fourth quarter, as compared to the quarter ended December 31, 2012.

Revenue from continuing operations for the period was CAD108.9 million, compared to CAD116.8 million in the same quarter last year. We experienced lower volumes of reclamation work, and haul road construction at the Millennium mine in the quarter. This is partially offset by the start up of mine services volume as the coal mine and early site development activities at the Fort Hills mine.

Gross profit from continuing operations was CAD16.8 million, or 15.4% of revenue in the quarter ended December 31, 2013, up from CAD9.8 million, or 8.4% of revenue for the same period last year. We experienced improved profitability in the quarter due to the execution of change orders on two longer-term projects, strong performance on a haul road project and the benefit of equipment cost efficiencies. This improved margin more than offset the effects of lower volumes.

We recorded operating income from continuing operations of CAD5.6 million in the period, compared to operating loss of CAD1.7 million in the same period last year. General and administration expense, excluding stock based compensation, was CAD8 million in the period, down from CAD8.9 million in the same period last year. This reduction and expense reflects the benefits of our business restructuring activities, partially offset by CAD0.8 million of business restructuring charge recorded in the quarter.

The recorded net income from continuing operations of CAD5.5 million in the period, compared to a net loss of CAD4.9 million in the same period last year. Basic and diluted income per share was CAD0.15, compared to a basic and diluted loss of CAD0.13 per share in the same period last year. Operating income from discontinued operations was CAD0.4 million for the period as compared to operating income of CAD15.4 million for the same period last year.

In the three months ended December 31, 2013, (Inaudible) interest expense [put] CAD3.2 million down from CAD5.9 million in the previous year. This reduction reflects the benefits of the debt restructuring in 2013, which included the partial redemption of our Series One debentures, and the repayment of our Term Facilities drawn under our previous credit agreement earlier this year.

Looking at liquidity as of December 31, 2013, we had approximately CAD82 million of borrowing availability to support working capital and (Inaudible) credit needs, and the cash position of CAD13.7 million, compared to a cash position of CAD1.2 million at the beginning of 2013.

Turning now to capital, total capital [additions with] continuing operations for the period amounted to CAD11.8 million with CAD11.5 million being allocated to sustaining capital. We also realized CAD1.5 million in proceeds from the sale of assets. During the quarter, we also signed a three-year credit facility with our existing lender that will also lower the cost of our working capital line going forward.

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

Thanks, David, and good morning to everybody. We entered 2013 with the anticipation that the mine conditions and competitive pressures in the (Inaudible) mining segments could likely to remain extremely challenging. In this situation, we would continue to hunker down and focus on operational improvements, especially in the areas of safety, cost, customer satisfaction and risk exposure.

Reflecting on this now, I'm extremely pleased and proud of our performance in market conditions that turned out much worse than we expected. With the backdrop of a [21%] fall in revenues, we increased EBITDA from continuing operations by 55%, gradually improving as the year went on. Our results in the December ending quarter really showcase the success of our business turn around efforts, with EBITDA margins far exceeding our projected 10% exit rate. Even after some charges (Inaudible) to reorganization and the change of (Inaudible) year end.

Please indulge me now while I roll out shareholder-friendly initiatives that we completed in 2013. First, we repurchased 1.8 million of our shares, roughly 5% of those outstanding in December [for our normal course issue] of bid, which took eight weeks to compete. Share[load] equity on the balance sheet was improved by 45% to CAD192 million at year end. Net debt was reduced from CAD336 million to CAD105 million, thereby producing annual interest cost savings of around CAD18 million.

CAD35 million of free cash flow was produced from the data profitability and capitol discipline, and we fully implemented a complete strategic realignment focused on a much-simplified and easier to understand core business. We did (Inaudible) another shareholder-friendly initiative, which I'll comment on at the end. As you'll soon read in my shareholder letter, I believe that we are at the near the end of the beginning of our business enhancement efforts.

While we will always relentlessly pursue cost savings, our main emphasis going forward will be improving our top line revenues and free cash flow. We expect to achieve the revenue growth from [firstly] increased activity on existing mine sights, as the owners grow production in order to reduce operating costs per barrel.

Renewed confidence in pipeline and rail takeaway capacity for produced oil, together with the depreciation of the Canadian dollar should help drive this trend. Secondly, incremental work on new mines, with the green light for the Fort Hills mine being a very welcome recent development. We are already bidding and winning (Inaudible) for this exciting, fresh opportunity.

Lastly, revenue will come from additional and alternative asset utilization from [Site B] project support, road building, and other resource (Inaudible), such as coal, hydroelectricity and (Inaudible). In the first half of January, we secured our first road building job in quite awhile, and we plan to build upon that success. We have the freedom, resource, capacity to produce around CAD650 million in revenue, and aim to achieve that over the next two to three years without much growth capital or increase in our indirect costs. Ideally, we would like to see about CAD100 million in revenue diversification outside (Inaudible) mines at that level of business.

As we end the 2014, I expect that our revenues will (Inaudible) in the winter months, but based on a recent real uptick in (Inaudible) activity together with some nice job wins, I'm reasonably optimistic that the market will treat us better this year. We've already replaced our non-recurring project work from 2013, and look to continue building a work (Inaudible) from the foundation of our lean cost structure. Although we do not give performance guidance, I would like to comment that we expect around 65% of our EBITDA to be produced in the middle two quarters of the year based, on the timing of job -- job startups that we see.

So lastly, I'm very pleased to conclude my prepared remarks here. We're talking about yesterday's announcement that the board has approved implementation of a new dividend policy. According to the policy, we'll pay an annual aggregate dividend of CAD0.08 per common share, payable on a quarterly basis. I believe this -- this distribution of a portion of our cash flow to shareholders fits well with our long-term strategy to maximize shareholder value, and also help us to broaden our shareholder base.

With that said, I would like to take the opportunity to turn the call back to back to La Tonya for the Q&A session, please.

(Operator Instructions). Our first questions comes from Maxim Sytchev with Dundee Capital Markets. Please proceed with your question.

Good morning, gentlemen.

(Multiple Speakers) Good morning.

Just a quick question in relation to the EBITDA margin this quarter (Inaudible) very impressive at 13.8%, and I think originally you telegraphed maybe a 10% exit -- exit rate by year end. I guess a couple of questions there. First of all in relation to the sustainability, if there were any unusuals that you're not going to see over the coming couple of quarters, and just again, if you maybe could comment, directionally speaking, of how you think the EBITDA margin dynamic is going to play out in 2014.

Yes, sure thing, Max. We did have a little bit of a pick up in the quarter from settling two claims. Well that's kind of normal course stuff, we're always dealing with change orders and claims. (Inaudible) we did have some reorganization costs, as David mentioned, CAD0.8 million. We carried the cost of the change of year end, which was about CAD400,000. So you know, taking that into account all the puts and takes, it didn't really have a net benefit for us. I put it down to just good operational cost control.

You know, this December quarter was my second one, I learned from the first one, and what we saw last year the same as this was that basically the mine shut down for a couple of weeks, so it turns into a ten-week quarter, and so we were better prepared for that, and we managed to shut our costs off and just did a much better job of managing that situation this year. Going forward, I expect us to continue to really focus on that cost structure. We did do another reorganization in the November, cut our G&A even further. So during the year, you're going to see further benefit of G&A cuts to be made, the full benefit of other initiatives we undertook, but the real thing that's going to drive the (Inaudible) margins going forward now is revenue, as I mentioned, and you know, I'm very pleased that when I came back in January we have seen a real uptick in bidding, and I've been expecting that to take place, and it's great to see it happen. We already started to win work, and while we're going to be sounding too rosy here, I'm very encouraged by our situation, so that it.

(Inaudible). One quick follow up in relation to the dividends. Obviously a very welcome development, I think, from the shareholder base. In terms of how should we think about capitol allocations down the road in terms of paying down the debt, internal opportunities and so forth. Because right now, it looks like you have enough equipment to really benefit from operational leverage. Can you just maybe provide a bit of comment in terms of how you think about [SES] redistribution down the road.

Yes, as I said in my remarks, I'm not expecting us to invest much in growth capital. As you say, we can do much more work, get us CAD650 million or thereabouts number over the next couple of years, maybe. (Inaudible) go to maintenance sustaining efforts, it will go to paying down debt, (Inaudible) dividend now, you know, more share (Inaudible), we'll just look at our situation, we (Inaudible) a free cash flow, hopefully we're going to get contingent payments from Keller, so as our cash comes in, we'll look at the best way to allocate it, and I think we've shown that we have been very shareholder-friendly, and hope to continue on that basis.

Okay, thank you very much.

Our next question comes from Ben Cherniavsky with Raymond James. Please proceed with your question.

Good morning, guys.

(Multiple Speakers) Good morning.

Martin, just around your strategy of diversification in the past, you have talked about other avenues for growth outside of mining, outside of oil sands, but also diversified within oil sands, like pursuing some of the SAGD opportunities. Have you made any progress with a strategic pursuit of those kind of opportunities, and would it be in any way material for the next year or two?

Yes, potentially. We've bid a very large SAGD complex last year, for example, and it was around CAD90 million to CAD100 million. Unfortunately, it got pushed to the right, so we're hoping that it is going to come back this year. We have got another couple of SAGD support bids in-house that we're looking at. I mentioned in my remarks that we won our first [road] building job. It's only a small one, CAD16 million, but it's all grading, it's all earth work, so it will be a great job for us to start up that business again. There are other bigger projects (Inaudible), so we'll be doing that. We're looking at the LNG, we've got again [bid packages] in-house there, and coal mining, too. There are a couple of potential coal mining support prospects that we're looking at. So some of it will be longer term, but certainly the road building will help 2014, and I hope that we win a (Inaudible) project or two as well. As the year goes on, we can update you on that.

Can you elaborate on the LNG opportunities that you're identifying?

Joe Lambert's on the line, maybe you can help me out with that, Joe, is that okay?

Yes, there's some of the east coast industrial areas around [Kitimat] and that a lot of the facilities have the major dirt works projects to create initial access into the areas, and the civil works for the plant site, so there is three or four major facilities there that are preliminary stages of bidding, where we've done initial request for informations, and some we expect to see RFPs, most of them are longer term towards the end of 2015 as far as when we break ground.

Okay, great. Well done on the quarter, and nice to see the dividend (Inaudible). Thanks.

Thank you, very much.

Our next question comes from Chris Lalor with GMP Securities. Please proceed with your question.

Just another question on outlook. It seems in your commentary there has been a bit of improvement over the last quarter. You guys have targeted -- your target of 10%, (Inaudible), and you guys are looking for increasing EBITDA margin to 12% in the next year or two. I was just wondering has -- has your targets increase (Inaudible) in this quarter, or how do you expect your outlook changed versus last quarter.

Yes, you know, clearly producing (Inaudible) the margin in the last quarter there was great. The benefits of simplification have really helped us here. More than I expected, actually, and that's great. But I think we've got to be cautious, as usual, and say that 12% is a good number for 2014. Hopefully we can do better than that, especially if we get more utilization and more revenue than has been predicted based on present (Inaudible) activity. Eventually, is that utilization that really improves, and we get more revenue, then I think clearly 12% will be a low number. We'll get to 15% and higher than that eventually.

Okay, great. Just maybe further on that, it is good to see the uptick in bidding activity is, I was just wondering if you could elaborate on where you're seeing it. Is it across the board, or some areas more so than others?

Obviously the Fort Hills opportunity, the new mine there is providing a lot of bidding. It's coming out in packages and we've already picked up three of those. We don't report or press release wins below CAD50 million, so the three wins we have are below that threshold, but still we're building a nice (Inaudible) of work there, and we've got our foot in the door, we're on the site, and hopefully use that situation to get a lot more work. We bid a much larger (Inaudible) last week, and we're hopeful, we'll see what happens. We're bidding, on existing mines, as I mentioned, too, the Horizon mine, we picked up project work. I mentioned [Site B], we have a couple of bids in-house. Across the board we're seeing opportunities to put in bids, and we have our fair share of success here, more than our fair share I think, because we've got (Inaudible) of cost structure (Inaudible), so that's great.

Great, thanks.

(Operator Instructions). Our next questions comes from Luke Folta with Jefferies. Please begin with your question.

Good morning, thanks for taking my question. Firstly, when we start to think about the opportunities outside the traditional business (Inaudible) oil sands, you talked about mining and some of the other areas. I mean, you'll see a margin benefit as the utilization of fleet rises, can you talk to the contribution margins on that business? Should we be thinking of them as similar to what you [earn] in your core business currently, better or worse?

Similar is a good way of looking at it. Obviously, if we see an opportunity to squeeze a bit more (Inaudible), we'll do it. But -- I -- based on the road building job we just got, it's similar to what we're (Inaudible) on the mines. So if we can get about level, that's great.

Okay, and the move into those areas, does that involve adding any additional equipment, or is it truly the current fleet?

The current fleet, as I mentioned in my remarks, I would like to get maybe CAD100 million at the end of a two-year period with this diversification effort. So that's what we're targeting.

Okay, and then just, you spoke before on the general condition of the industry and spoke pretty competitive, given the excess equipment that's available. Can you talk to the broader trend -- are we seeing any rationalization amongst the competition, and do you think we've reached the bottom in terms of overall industry utilization [rates]?

I certainly hope so. I think our revenues are going to (Inaudible) in the winter months, and our competitor's revenue should do also. They're obviously going to benefit from the uptick in bidding, also. Hopefully, as a group, we're going to do better. I think where our advantage is is in we're ahead of the game in terms of what we've done on cost, I think. That will hopefully help us more.

One last one if I could. The two settlements -- the claims that were settled in the quarter, is there any way you can quantify what the impact was of that was?

Yes, it will run [CAD1.5 million] but as I mentioned, we had other issues that countered that, so we don't want to give people the impression that this is all about claims or change orders, but that's the number.

Understood. Thank you very much.

At this time, I would like to turn the call back over to management for closing comments.

Well thanks, La Tonya, yes, that's it for today. I think we've had a good year. Hopefully 2014 will turn out to be better. We're certainly looking forward to it, and we'll speak to you next time. Thank you.

Thank you, and this does conclude the North American Energy Partners conference call. Have a great day.