North American Construction Group Ltd (NOA) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to North American Energy Partners earnings call for the second quarter ended June 30, 2014. (Operator Instructions). 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 Incorporated. Please go ahead, sir.

Good morning, ladies and gentlemen, and thank you for joining us. Welcome to the North American Energy Partners second-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 expected results because of various risk factors, uncertainties and assumptions. For more information about these risks, uncertainties and assumptions please refer to our June 30, 2014 management 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 the second quarter ended June 30, 2014 as compared to the quarter ended June 30, 2013.

Revenue from continuing operations for the quarter was CAD116.2 million compared to CAD115 million in the same quarter last year. We commenced the ramp up of civil construction work at the Fort Hills mine, heavy civil and mechanical stabilized earth wall construction activity at the Horizon mine, and road building activity on the Alberta Transportation Highway 63 project. These activities replaced the heavy civil and mechanically stabilized earth wall construction performed last year on the Mildred Lake Mine relocation project.

Revenue was lower than the same period last year on the Horizon Mine overburden removal contract due to the client's decision to take over the procurement of equipment maintenance parts. Revenue was lower than anticipated at the Millennium mine with the suspension of work in June.

Gross profit from continuing operations was CAD9.3 million or 8% of revenue in the second quarter, up from CAD8.4 million or 7.3% of revenue for the same quarter last year. The improvement in both gross profit and margin were primarily driven by reduced operating lease expenses, the contribution from the ramp up of activity at the Fort Hills mine and the addition of non-overburden work at the Horizon mine coupled with improved margins on mine service activity.

The cost impacts of the June shutdown at the Millennium mine combined with accelerated depreciation recorded on assets held for sale and increased use of rental equipment to support the civil construction volumes eroded some of these gains. We recorded an operating loss from continuing operations of CAD2.2 million in the quarter compared to an operating loss of CAD2.3 million in the same quarter last year.

General and administrative expense excluding stock-based compensation was CAD7.9 million in the quarter down from CAD8.3 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 a net loss from continuing operations of CAD4.1 million in the quarter, an improvement from a net loss of CAD5.6 million in the same quarter last year. Basic and diluted loss per share was CAD0.12 compared to a basic and diluted loss of CAD0.16 per share in the same quarter last year.

In the quarter, total interest expense was CAD3 million down from CAD5.7 million in the same quarter last year. Our debt restructuring including the partial redemption of CAD150 million of our Series 1 debentures in the third quarter of last year and CAD10 million of redemption completed early in the second quarter of this year. This resulted in reduced interest expense on our Series 1 debentures of CAD1.5 million during the quarter from CAD3.5 million -- from CAD2.9 million in the corresponding period last year.

Looking at our capital structure at June 30, 2014, we had net debt of CAD118.6 million. As part of the ongoing review of our capital structure I'm pleased to announce that we successfully negotiated amendments to our credit agreement. These amendments will allow further flexibility in our financing needs as we plan for the future. We will change the senior leverage ratio to less than 2.5 times from less than 2 times. We will increase our ability to finance equipment purchases through capital leases by an additional CAD15 million increasing the limit to CAD90 million.

In addition, we have preapproval from our bank syndicates to redeem up to CAD20 million of our high cost unsecured debt. This will increase our flexibility to balance our mix of lower cost secured debt versus higher cost unsecured debt. We are comfortable with this debt profile and the planned debt repayments on capital leases that will be funded from future operating cash flow.

Turning now to capital, total capital additions for continuing operations for the period amounted to CAD6.6 million with CAD6.4 million being allocated to sustaining capital.

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

Thanks, David, and good morning, everyone. We continue on the path of operational improvements, but our path can be impacted by seasonal factors especially in this reporting period which historically is our slowest each year. Last quarter two the path was flooded for awhile. This time conditions remain very wet and muddy particularly in the last six weeks when we had 10 days of intermittent heavy rainfall.

Q2 is also when we transition from mostly earthworks with heavy equipment to labor intensive and lighter construction projects. That change in work mix which involves the mobilization of large amounts of people and equipment tends to build in momentum as the quarter unfolds. To put that point into perspective, this year we moved over 800 project personnel and around 150 pieces of equipment to our Fort Hills jobs which mainly entail the building of roads, de-piping and drainage systems.

The wet weather that occurred stalled our progress in getting these projects off to a fast start as the quarter went on. As you can probably imagine performing work in trenches is far from ideal in wet conditions.

Unfortunately we also experienced an employee fatality at the Millennium mine site in early June and work was suspended for the rest of the month and into July. Even now we are not back to pre-incident workload levels but hope to get there in the next few weeks. This was our second fatality in over 30 years of oil sands activity with heavy industrial equipment and came at a time when our overall safety performance has been trending really well. The tragic incident will always be at the forefront of our minds as we continue to strive to ensure that the rest of our workforce gets home safely at the end of each shift.

We currently estimate the economic impact of the incident to be a loss of around CAD20 million of revenue and CAD3 million to CAD4 million of EBITDA evenly split between Q2 and this Q3. Hopefully we have the time and the opportunities to make some of this shortfall back by the end of the year.

Despite the spring break up and accident impacts, we still managed to produce around 15% more EBITDA for Q2 on a year-over-year basis and for the first half of the year, we are over 40% ahead of the same period last year. We will continue to make good headway but I suggest that it is best to judge our progress on a year-over-year rather than a sequential quarterly basis.

Indeed the dark clouds of the last two weeks are clearing and we are very busy undertaking the summer construction project at Fort Hills and two of the other mine sites while bidding for winter season work. We now expect more of the construction work to carry over to Q4 thereby making our workload smoother for the rest of the year.

On the non-oil sands mining front, our work on the Highway 63 road-building project is going well given drier conditions and we are pursuing follow-on jobs. We also recently completed a pre-qualification exercise for the large Site C hydro project in BC and hopefully we will be shortlisted for that as part of a contracted consortium. We are also presently bidding for a couple of SAGD related infrastructure projects which are meaningful in size.

In an eventful second quarter, our largest shareholder announced that they wish to liquidate their holdings in North American. The disposal was conducted via a secondary offering which I believe proved to provide minimal disruption to the market. The secondary offering resulted in a little over 7 million shares entering the public float. The increased free float should improve the liquidity of our shares and will be a benefit to our much expanded number of shareholders.

On August 4, just last Monday, the buyer of our piling business announced interim results for the first half of 2014 and stated the profits were lower than expected at the time of the acquisition due to a very material decline in investments in the Canadian resources markets. Therefore, they do not expect to pay any contingent consideration this year. For this to be the case, the EBITDA earned by the business unit must have fallen from CAD45 million to under CAD30 million in a 12-month period which is a very precipitous fall by any measure. We are due to receive the official numbers in the next week or two and we will obviously be taking a close look at them.

I would like to now turn the call back to David, the operator, for the Q&A session. Thank you.

(Operator Instructions). Greg McLeish, GMP Securities.

Good morning, guys. Just a quick question on Fort Hills. I just wanted to see what the impact of the mobilization of 800 people and the 150 pieces of equipment and the delays potentially in getting up to higher utilization due to wet weather, what do you think that could have been during the quarter?

Yes, I think it could have easily have delayed around CAD10 million of revenue, maybe close to CAD1.5 million, CAD2 million of EBITDA.

What I guess is going to happen now is more of that revenue will be pushed into Q4 or through the second half of the year?

We are going to do a lot of this Fort Hills work in Q3 but given the slower start due to the weather I expect some of it to go into October. That is the way we think it is going to happen right now.

Great. Just one more question. Can you just maybe discuss or elaborate on some of the SAGD opportunities that you have and potential timing?

Yes, we have been looking at meaningful SAGD scopes and we did a large one last year at Dover, which unfortunately was postponed. Hopefully it will happen at a certain point. But this year we have been chasing another couple of opportunities. Both are kind of fairly extensive access roads so that is the type of work that involves extensive earthmoving and other things that we do. So we think that hopefully we can be competitive on that type of work and we will be bidding them hopefully in the next few weeks. A Q4 start for one of them perhaps.

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

(Operator Instructions). Luke Folta, Jefferies.

Good morning, guys. I guess first question, this was kind of touched upon on some of the earlier comments but this quarter had a lot of noise in terms of weather and the Millennium mine closure and all that. If I kind of add back some of the comments you made about a couple of million dollars for the mobilization on Fort Hills and the weather impact and a couple of million dollars for the Millennium mine which is kind of implied for this quarter, I think it takes EBITDA to a low 12% sort of range which is still down a couple of hundred basis points from your first quarter. And I understand mix issues there but still nice on a year-over-year basis.

I guess with all of these moving parts, how do you think we should think about go forward margin levels to the extent we don't get further disruption from some of these discrete items?

Did you see yourself building upon the improvement that you got here in the first half or is there something else in there in terms of mix that would impact it negatively?

Mix is the most important factor. During the winter as we have said, we tend to use our heavy equipment, it is not very labor intensive. That is we where we earn our best EBITDA margin. That can be anything from 12 to 20 on occasion. In the summer time, the light construction projects are very labor intensive generally and involve the light run of our equipment fleet and there the margins can be 10 to 12 to 13 to 14 so it is our type of mix that is going to occur on a seasonal basis and pretty much any year. So on an annual basis, we are hoping to trend up towards 15% but if we get to 12, 13 this year that will be a nice improvement.

Okay. And then your comments in the press release about having replaced all the revenue that had stepped down from the prior year I think you said that last quarter, that implies that we should be looking for flat revenues year on year with the potential for some potential improvement above that if you were to win some of the current projects that you were looking at. Am I understanding that right?

Yes, we are still bidding for work. We are only in August and there is plenty of potential opportunity out there so hopefully we can add to our book here for the end of Q3 and Q4 for sure.

But in the case where you don't win anything else for the remainder of the year, you are still expecting to at least do last year's revenues based on what you have got in the book currently?

Yes, that sounds right but we are going to win some more work.

Right, right. Okay. And then I guess I am just curious this maintenance equipment maintenance takeover that the clients decided to bring some of that work in-house, is that something that was kind of in your prior expectation for the quarter or was that something that sort of happened since the last update and you see that as a trend that might continue elsewhere?

Well, it was a decision the customer made. I think it is a sensible one for them to buy their own parts. Essentially we were just buying those parts and charging them a markup so a sensible cost reduction exercise on their part to do it themselves. So no surprise. It was a nice extra bit of revenue and profit for us for awhile but these things tend to come to an end. So I am not surprised. We have managed to replace that revenue with project work at slightly higher margin on the site so [that is our base] for contracting.

Great. Thank you very much.

Maxim Sytchev, Dundee Capital Markets.

Good morning. I was wondering if you don't mind please elaborating a little bit in relation to the future of capital allocation decisions. Obviously right now with the correct balance sheet you have dramatically more flexibility. But if you don't mind maybe prioritizing in terms of whether it is M&A, dividends, potential buybacks, what is the potential being considered?

It could be all of the above. What I will say is this, we are very comfortable with around CAD120 million of debt so that is kind of where we are right now. We are focused for the time being on the mix of that debt. I think it is great that David has managed to negotiate a higher senior leverage ratio. It gives us more flexibility in terms of taking on senior debt. So right now there is pretty good deals out there for capital leases.

So it is good for us to be able to replace expensive debenture debt potentially of 908 with capital leases around the 5% mark. So as we need to replace equipment, you will see those capital leases probably creep up in the mix. So over the next couple of years, you are going to see our cost of debt come down. We are going to retire debentures and the interest savings will allow us to pay a higher dividend perhaps. That is an option.

We're looking at the share price right now and depending on what happens today, we have bought back shares in the past, that is still an option for us.

So I think the answer, it will depend on the circumstances. If we see a compelling M&A opportunity obviously we will look at it hard. If not, we will use any free cash in a sensible way buying back shares or rewarding our shareholders.

Okay. That makes a lot of sense. Actually in relation to M&A, can you maybe sort of talk about the parameters in terms of what could make a decent M&A opportunity whether it is size margins, ROEs, what are the internal triggers that you are looking at?

We have done a lot of hard work in the Company simplifying our business model. We are focused on a core business so any M&A opportunities should not add complexity because I think we have shown in the past that that is not good for the Company.

So I would like to add more of the same top synergies, expand market share if possible, maybe take us into slightly different geographic areas which is more buoyant than the oil sands. So I am scouring potential opportunities, always on the lookout for things so we will see. I am in no rush though. I think sensible decisions have to be made and any acquisition has to be a good fit and be accretive.

And then actually your commentary in relation to the oil sands activity and so forth and in conjunction with what is sort of telegraph going back three months ago sort of everything was as expected based on their outlook right now that slowed. But what are you seeing in the marketplace right now in terms of bidding activity for work that would help you obviously rebuild the backlog in 2015 and onwards?

We came into the year with Fort Hills bidding activity being extremely high as they kicked off activity. We are expecting to see some more packages come out for later this year and certainly for next year. We hopefully are going to be as busy there next year as this.

Then as I mentioned, the activity on the other sites is going to be flat to up I hope once we get past the issue of Millennium, I am expecting a normal year, the same at the Base Plant mine. Kearl should improve in activity. So I am hoping things will gradually improve plus we are bidding -- Site C is an exciting opportunity. I'm very, very hopeful that we prequalify for that and we must have a fighting chance of getting the work. So that type of opportunity wasn't there before.

Our SAGD is becoming perhaps a meaningful part of our business so I am encouraged. It is still a tough market, don't get me wrong, at least in the oil sands but there are other opportunities which we hope to take.

When will you know when you have prequalified for the sites, if you don't mind me asking?

I think we are going to know in the next week to 10 days, Max, that type of timeframe.

Okay, so soon. And then last maybe more sort of minutia but when will you guys be out of the blackout period, what is the rule?

Monday.

Monday, okay, excellent. That is it for me. Thank you very much.

Gentlemen, there are no more questions at this time.

Thanks for your interest and we will speak to you next time around.

Thank you. This concludes the North American Energy Partners conference call.