North American Construction Group Ltd (NOA) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the North American Energy Partners earnings call for the first quarter ended March 31, 2014. (Operator Instructions) I advise participants that this call is also being webcast concurrently on the Company's website at www.nacg.ca.

I will now turn the conference over to David Brunetta, Senior Financial Manager, Investor Relations of North American Energy Partners, Incorporated. Please go ahead, sir.

Thanks Danielle. Good morning ladies and gentlemen and thank you for joining us. Welcome to North American Energy Partners first quarter conference call. I would like to remind everyone that today's comments contain forward-looking information and our actual results may differ materially from the expected results, because of various risk factors, uncertainties and assumptions. For more about the information on these risks and uncertainties and assumptions, please refer to our March 31, 2014 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 am going to review consolidated results for first quarter ended March 31, 2014 as compared to the quarter ended Mach 31, 2013.

Revenue from continuing operations for the period was CAD107.7 million, compared to CAD130.3 million in the same quarter last year. Increased mine services and heavy construction volumes at the Kearl, Fort Hills and Horizon mines were offset by declines in reclamation activity at the Base Plant and Millennium mine and overburdened removal activity at the Millennium mine compared to the same quarter last year.

Gross profit from continuing operations was CAD15.2 million, or 14.1% of revenue in the first quarter, up from CAD8.9 million, or 6.9% of revenue for the same quarter last year.

We experienced improved productivity on a mine services project in the oil sands, eroded the gains made in lowering equipment maintenance costs.

We recorded operating income from continuing operations of CAD3.0 million in the quarter, compared to an operating loss of CAD6.5 million in the same quarter last year. General and administrative expense, excluding stock based compensation, was CAD7.3 million in the quarter, down from CAD10.1 million in the same quarter last year.

This reduction in expense reflects the benefits from the simplification of our business and the associated restructuring activities initiated during the prior year.

We recorded net income from continuing operations of CAD0.1 million in the quarter, up from a net loss of CAD9.2 million in the same quarter last year. Basic and diluted income per share were CAD0 compared to a basic and diluted loss of CAD0.26 per share in the same quarter last year.

In the quarter, total interest expense was CAD2.8 million, down from CAD5.9 million in the same quarter last year. This reduction reflects the benefit of debt restructuring initiated in 2013, which included the partial redemption of our Series 1 Debentures and the repayment of our term facility drawn under our previous credit agreement earlier in 2013.

Interest expense on our Series 1 Debentures was CAD1.7 million in the quarter, compared to CAD3.8 million in the comparative quarter.

Looking at liquidity, as of March 31, 2014 we had approximately CAD82 million of borrowing availability to support working capital and letters of credit means and a cash position of CAD24.9 million compared to a cash position of CAD13.7 million at the beginning of 2014.

Turning now to capital, total capital additions for continuing operations for the period amounted to CAD5.6 million, with CAD4.9 million being allocated to sustaining capital.

Several events took place after the end of the March quarter. Firstly, we completed the redemption of CAD10 million of our Series 1 Debentures at a call price of 103.042 on April 8, 2014. With the completion of this redemption in April, we now have CAD65 million of debentures outstanding.

Secondly, on May 1st, Standard & Poor upgraded our corporate long-term debt rating to B, from the previous rating of B-. The improved credit rating will reduce the interest rate payable on borrowings under our credit agreement.

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

Thanks David and good morning everyone. I've followed a number of first quarter earnings releases over the last few weeks and a common theme has been commentary on the negative impact of the worst winter on record, the Polar Vortex, etc. All of that is fairly normal for us in Northern Alberta, so we just got on with producing another solid quarter of operational performance with our leaner cost structure.

In fact, as David mentioned, the worst effect of unusual weather on us was a warm spell in mid-February, which unfortunately followed a quiet (inaudible) for activity.

I noted in my press release quote, I was particularly pleased that we were able to generate over CAD14 million of cash flow from operations net of investment activities during the quarter, which we have used to pay off debt. The highlight of that effort was the retirement of another CAD10 million of expense of debentures. Also we used a portion of those funds to pay down almost CAD4 million of capital leases during the quarter. We therefore clearly demonstrated an ability to generate meaningful cash flow, even at low cycle revenue levels.

As forecast [last time], I believe that our revenues likely trough during the winter months and we hope to achieve steady top line improvement from here, driven by a modest uptick in trading activities since the start of the year.

Again, our leaner cost structure is proving to be a significant advantage for securing work in the three segments we are targeting; existing oil sands mines, new oil sands mines and non-ore sands mining work.

Taking each of these in turn, on the existing mine sites, bidding activity usually kicks off around this time for annual work. This year we encourage quite potential work levels linked to production growth efforts and we recently secured a nice contract to build an MSE wall at the Horizon Mine.

On a new mine site, Fort Hills, we have already won over CAD100 million of site development work for the current year and there is still very significant work still to be awarded for this year and next. This will lead to a very active summer construction season for us.

(Inaudible) the alternate lines, we have started building our twinning section of Highway 63 and we're in the prequalification process of participation in the SAGD hydroelectric project in B.C. Also we are targeting a couple of meaningful SAGD related projects for later in the year.

All in all, we're off to a very good start in our quest for revenue enhancement in 2014 and hope to land the right mix and finding of work to improve upon our recent EBITDA margin run rate.

On the last call, I also commented that I expected 65% of our EBITDA this year to be earned in the middle two quarters, as I expected a robust construction season. I still stand by that statement, but realize that I may be doing a poor job of not providing guidance after our policy. With Q1 now in the record books, it may be interpolated that our annual EBITDA could exceed CAD65 million, even without financial improvement in Q2 to Q4 performance. However, I hate to rain on that parade, but I must parade the point that heavy rain in the spring breakup could impact our performance in the current Q2. Although I did not complain about the cold winter conditions in Q1, you will hear about the effects of rain in Q2, if they approach being as bad as last year.

In closing, I cannot resist remarking that I'm very pleased that our credit rating agency recently raised our corporate credit rating to B, after lately recognizing the clear business improvement efforts that the stock market has been giving us credit for for the last 18 months. This upward rating is just going to provide a welcomed reduction in our cost of credit facility debt, should we need it.

For those remaining debenture holders out there who noted that our recovery rating was (inaudible), please take comfortable in the CAD10 million payment we made from just Q1 cash flow that I described earlier.

With that said, I'd like to take the opportunity to turn the call back to Danielle for the Q&A session. Thank you.

(Operator Instructions) Greg McLeish, GMP Securities.

Great quarter. Just a quick question on margin here. Historically, Martin, you had been guiding into the 10% EBITDA margin. The last two quarters you've done 13.2 and 14.1. Is your margin improvement a combination of your leaner cost structure and starting to get increased use of larger equipment?

Yes, any improvement will be. Obviously, it's great to be doing the margin levels we are at the current level of business, just CAD107 million of revenue in the quarter. I mentioned that the mix and (inaudible) of work are important. There will be pick up for the summer season. Here it's more civil construction work that tends to be labor intensive and uses more equipment. The margin on that are not the best but they're still reasonable. So I think the trick to even better margins is getting, as you say, our heavy equipment up and running again. We certainly have (inaudible) opportunities to help do other things.

And you've highlighted some of the near-term bidding opportunities, so if we were to take a look out maybe over the next 1.5 years, do you think that there's enough bidding opportunities to tighten up the market to improve overall pricing?

Yes. We've got the new Fort Hills mine, so that's going to take capacity from the existing mines. It's a mine that wasn't around last year; that's great. Activity levels are going to be high for a while there I think . And I mentioned that [Site C], the prequalification for that is underway. That project goes ahead, it should take (inaudible).

Then we're hearing good things about a couple of LNG projects that might take off next year or the year after. And that should take a (inaudible) too. So if you look across the oil sands plus other resource plays, I think the overcapacity should get sorted out here over the next year or so.

When you prefaced your comment, about 65% of your EBITDA coming in the middle two quarters, you sort of tempered that, but are you just tempering that from the standpoint of weather impact too, or are you sort of seeing the weather impact already?

Well you know, it's normal in the second quarter here to be having spring breakup down turning. I mean, it's normal for us. April is usually a quiet month as we transition from winter to summer work. So we're anticipating a big ramp up end of May, June, into July. So if, for example, we got the rainfall that we did last year, that would impact us. That's all I'm saying is that I still think we can do the 65%, but it's more likely to be in Q3 than in Q2.

Luke Folta, Jeffries.

I guess first question, just on revenues, you kind of suggested you already booked everything. You replaced what you burned in 2013 at that rate and it seems like you've got some nice growth on the Fort Hill side. You're starting from a hole, because first quarter was down year-over-year. Should we be expecting revenues to be higher year-over-year now, starting in Q2, for the remainder of the year and can you give us any sense of how much of the 100 million of Fort Hill awards you've got that we could think about as a 2014 event?

The way I'd think about that is that we obviously had some construction work last year, so I think net net we've got about 50 million more this year than last. So I would add that 50 to Q2 and Q3, is the way I'd look at it.

Then on the road project you've got, any sense of scale and timing there that you can predict?

It's only a small project; only one set [CAD16] million but it's the first project that (inaudible) done in a while, so it's good practice for other opportunities we see out there.

There's been some change in the stock option practice. Can you just talk about it? Is the first quarter going to be sort of more loaded than the rest of the quarters and should we expect something similar in terms of the rate of expense throughout the course of the year?

I think the way I would look at it is assume that the rate of expense will be varied. Some of that, obviously the biggest variable in that will be the movements in the share price. If our share price continues to improve like it's doing, then clearly that expense will continue to increase.

On the margin in the quarter, there were some project closeouts. Can you just give us some sense of what the impact there was and to the extent you can give us any color on what you think the warm weather had in terms of the drag on the margin, that would be helpful?

I'd just like to say that projects close out, clients change orders, are a fact of life for us. Every quarter there's puts and takes. The positives and the negatives here net net is kind of 1 million bucks.

Just looking at the CapEx table, it looks like total CapEx [additions to assets] was about 5.6 million; there's an offset in there on the cash flow statement for changes in nonworking capital. I'm not clear on what that is exactly.

That's just the timing of when we actually pay the vendor for the equipment, so that would be the accounts payable.

Maxim Sytchev, Dundee Capital Markets.

Just wanted to clarify something you said in your prepared remarks. The contract for the MSG wall on the Horizon Mine, has that been booked already or did you start doing work on this? Any color on that project, please?

It's just a recent award that was awarded to us in the last couple of weeks. So it's great to be on that for the next two.

Historically, you've press released anything above 50 million sort of contribution , so we should assume that this is smaller but still material enough, right?

50, yes, I said smaller than 50, yes. All the awards we have, the Fort Hills 100 million is in about 7 packages, which we haven't had a single award above 50 to trigger an individual press release yet.

Can you please comment in terms of how quickly those 7 packages on Fort Hills will actually translate into revenues? Is this a two-year type project or is the timeframe a bit more compressed?

Yes, it's definitely more compressed. This is all kind of summer season construction work, with most of it finished by the end of Q3, maybe it will spill over a bit into Q4. But it's definitely this season's work.

Can you please comment in relation to the additional packages that could be coming from that site? Is it sort of in line with the 100 million work that you won already or is it still larger packages coming in?

It's a mix of smaller packages plus this one large package for heavy civil work. The build of the main haul road and the starter [gate]. About a two-year job that is around CAD150 million. That involves heavy equipment, so it's one where we've seen (inaudible) and we'll see a very competitive situation, but we should hear about that in the next week or two.

Obviously, we haven't seen any new data points from [Teller], but what's your comfort level in a relationship (inaudible) announcement that we expect for the year; any incremental color relative to what you have disclosed in the prior conference call?

No. I said right from the start here that our expectation is to get something and I'm still saying that today. They're going into spring breakup too, same as us and we've seen in years by that [rack] can have an impact on their business, so I think it's too early to say. But we're expecting something.

Just briefly, obviously, you've done just a tremendous turnaround of the business over the last 18 months and right now, as you look out forward to addressing additional organic growth opportunities, is there something from an M&A perspective that might be of interest or are you starting to potentially consider some M&A? Any color in relation to that would be much appreciated.

Yes, sure thing. I'm always interested in looking at M&A and I'm often looking at it, but I don't see anything on the near-term horizon. I think we've got a fair way to go yet in terms of organic improvement. I'm very pleased by the operations (inaudible) by the opportunities that I see. And I'd like us just to hold on different projects, different work scopes to what we have and get relatively stronger in relation to potential M&A targets. So that would be the game plan for the next while here.

(Operator Instructions) Ben Cherniavsky, Raymond James.

Well done, good to see that. Most of my questions have been asked. I'm wondering if you're in any position at all to comment on the (inaudible) note on the piling business? I think the first milestone would be September, is that correct?

Yes, that's correct. It's a payment due; it will be made by the end of September. I just said that we've maintained all along that we're expecting something and we're looking at this last quarter here, because it involved the spring breakup, as you know, that can impact activity. So we just think we'll get something. I know you did a nice piece of work on it in terms of looking at financial statements, etc. That was encouraging, but we'll see how it pans out here.

But the best way to monitor it, is just look at how their financials are reporting I suppose.

Sure.

You don't have any special (inaudible) on that than we do, it's just--.

Well (inaudible) they're putting in a new enterprise system, so you know that can slow things down a little bit in terms of reporting and obviously they're running the business slightly differently than we did, so we just decided a while ago just to wait and see how things pan out and we'll start looking at it at the end of the period.

The Horizon contract, I believe expires in 2015, correct?

Yes.

Are you starting negotiations or planning for how you deal with that contract yet, once it's expires? What's your thought process on that?

We've certainly entered a dialog with the customer. It's actually end of June next year that the contract expires, the first term. And we're talking to the customer about what happens next. If you look at the mine, they saw very aggressive production targets going from about 108,000 barrels a day presently to 250,000 barrels in phase one and more than that in phase two.

So sensibly, they're going to need a lot more of the type of service we've been rendering. So we're hopeful of doing something with them either on a kind of extension basis or we'll see. I think we've got over a year to get things right and I'm sure we'll be on the mine beyond June next year.

Ladies and gentlemen, at this time I'd like to turn the floor back over to Martin Ferron for closing comments.

Thanks everybody for calling in. Look forward to us speaking with you next time. Thanks.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.