North American Construction Group Ltd (NOA) 2015 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the North American Energy Partners earnings call for the second quarter ended June 30, 2015. 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 to 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, Director of Investor Relations at North American Energy Partners Inc. Please go ahead, sir.

Thank you, Linda. Good morning, ladies and gentlemen. 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 that our actual results may differ materially from expected results because of various risk factors, uncertainties and assumptions. For more information, these refer to our June 30, 2015 Management's Discussion and Analysis, which is available on SEDAR and EDGAR.

On today's call, Rob Butler, VP of Finance, 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 the prepared remarks, there will be a question-and-answer session.

I will now turn the call over to Rob.

Thank you, David. Good morning, everyone. Let's now review our consolidated results for the second quarter ended June 30, 2015 compared to the quarter ended June 30, 2014. Revenue for the quarter was CAD64.4 million, down from CAD116.2 million last year. The decrease in this quarter's revenue was primarily the result of the completion of mine development and mechanically stabilized well construction activities at the Fort Hills mine, and the suspension of mine development activities at the Joslyn mine.

The award of an overburdened removal project at the Steepbank mine, site development from a new project secured at the Kearl mine, and mine support work formed as part of our return to the Aurora mine, could not fully replace these previous projects. Also contributing to the lower revenue in the quarter was the assumption of reimbursable ownership and maintenance costs by the customer on the Horizon mine overburden removal contract, which was anticipated with the expiration of this long-term contract at the end of this June.

Gross profit for the current quarter was CAD4.6 million or 7.1% of revenue, down from a gross profit of CAD9.3 million or 8% of revenue earned last year. Normalizing gross profit to exclude the previously mentioned elimination of activity at the Joslyn mine, and the loss profit contribution from the previously mentioned reimbursable costs on the Horizon mine, we generated gross profit that was comparable to last year, and gross profit margin that was 2% stronger than last year.

This year's comparable results during spring break-up season benefited from lower project costs with the reduction in equipment rental costs and lower contractor costs. Operating loss for the current quarter was CAD0.8 million compared to an operating loss of CAD2.2 million last year. G&A expense, excluding stock-based compensation, was CAD5.1 million for the quarter, down from CAD7.9 million last year, which reflects the benefits gained from restructuring and cost savings initiatives implemented over the past nine months.

Stock-based compensation expense was down CAD2.1 million in the quarter compared to last year, driven primarily by our lower share price's effect on the related liability. We recorded a net loss of CAD4.1 million in the quarter, with a basic and diluted loss per share of CAD0.13. This is comparable to last year's net loss of CAD4.1 million with a basic and diluted income per share of CAD0.12 -- sorry, loss per share of CAD0.12.

Total interest expense was CAD2.6 million for the current quarter, down CAD3 million to last year. Interest on our higher-cost Series 1 debentures was CAD1.3 million in the quarter, which is down from the CAD1.5 million recorded last year, driven by the redemption of CAD16.3 million of Series 1 debentures last year.

Meanwhile, there was a slight increase in current-quarter interest on capital lease obligations, with the year-over-year increase in the balance of equipment finance through our equipment leases. Total income tax expense in the current period was higher as a result of the increase in the statutory tax rate, and the reversal of certain temporary timing differences in the current period. Of note, we ended the quarter with CAD40.7 million of cash on-hand. This is up CAD15 million from our Q1 balance.

As we announced on July 8 of this year, we entered into an amended credit facility with our existing banking syndicate. The credit facility provides borrowing of up to CAD100 million, contingent on the value of the borrowing base defined in the credit facility. The facility is composed of a CAD70 million-dollar revolver that will support borrowing and letters of credit, and a CAD30 million term loan to support the redemption of a large portion of our Series 1 debentures.

Credit facility will provide for an increased borrowing base determined by the value of receivables, inventory, unbilled revenue and equipment. Using this enhanced borrowing base, our maximum allowable draw on June 30 would have been almost CAD53 million greater than the allowable draw under our previous facility. The credit facility should give us 125 basis point improvement to pricing on borrowed funds, assuming that our total debt to trailing 12-month EBITDA remains below 2.25 to 1.

Connected to entering into this new facility, on July 8, we announced the decision to redeem CAD37.5 million of our Series 1 debentures, financed by CAD30 million for the lower-cost term loan, and the remainder financed through available cash. We expect to realize a CAD2.3 million savings on our annual interest expense with this transaction.

Finally, on August 5, we announced that we intend to purchase, and subsequently cancel in the normal course in Canada, through the facilities of the TSX, up to [532,500] of our common shares -- our voting common shares, which represents 2.3% of the public float as defined in the TSX Company manual. Previously, under a US share purchase program, we purchased and subsequently canceled an aggregate of almost 1.8 million shares, which, when combined with the planned purchase on the TSX, would represent approximately 6.8% of the issued and outstanding voting common shares as of July 31.

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

Thanks Rob, and good morning. Well, we've come through the first half of the year with just about the same amount of EBITDA as we made in the corresponding period last year. Not many, if any, oil service companies will be able to state the same claim. We achieved it despite the profound impact of the deep cyclical downturn that grips our industry, and the coincidental end of the bulk of the long-term overburden removal contract at the Horizon mine.

Overall revenues were down by 33% year-over-year and yet we improved EBITDA margins from 11% to 15%. Unfortunately, the second quarter commenced with an early start to spring break-up, and so our Winter Earthworks program was curtailed, leading to an extremely slow April, where we only made about 20% of the quarterly revenue and a rare monthly EBITDA loss.

Therefore, we have to play catch-up for May and June at a time when we were negotiating pricing concessions with our customers and facing a continued pause in our spending in relation to construction work. Activity levels related to recurring mine services remain reasonable. And in fact, we managed to improve our penetration on a couple of the mine sites. That is still the case, but customers have reined in spending on construction work, especially where there is an element of discretion in relation to volume and timing.

Such spending pauses at the outset of cyclical downturns are not unusual in my experience. And in spite of these circumstances, we still managed to meet our EBITDA objectives for the quarter.

The more recent second retreat in oil prices after a seemingly encouraging rebound has caused the customer spending pause to continue such that we now must temper our outlook for the second half of the year. This is explained in more detail in our press release and filings.

For Q3, we will get by fine with a reasonable level of recurring mine services work, the construction project we won at Kearl late last year, and several smaller construction jobs we have secured more recently. Our fortunes in Q4 will depend, as always, on how quickly winter sets in, as again the cold season runs of Earthworks look normal at this stage.

On balance, although much downturn certainly remains, we hope to produce approximately the same level of EBITDA for Q3 and Q4 as we did in Q1 and Q2 but with a more even spread. We regard this as a balanced assessment of the situation with equal regard to a potential upside and downside.

In terms of our quest for revenue diversification, we are busily working away at our bid for the sightseeing main several works as part of a strong team now led by the impressive Ferrovial. Our team now appears to have a very solid mix of local know-how and megaproject experience on an international stage.

We also hope to participate in a bidding team for the next section of the Congreen Road to be built, and we are already assisting main contractors with preengineering and feasibility studies related to a couple of potential LNG projects in British Columbia.

Next, I would like to comment on the amended credit agreement that Rob Butler detailed. At first glance, it may seem that we just got some temporary covenant relief from our existing bank syndicate. However, I would like to stress that we negotiated the amendment from a position of real strength rather than weakness.

We have three lead banks in a competitive process to obtain the best terms at a time when many other oil industry-related companies are having to go cap in hand to their lenders to retain part of their previous facilities on much worse terms. I note that one of our competitors for site C is effectively being managed month-to-month by their lenders.

In contrast, we will soon -- as of August 14 -- have a much lower overall cost of debt and a tremendous financial flexibility, as the borrowing base now takes reasonable account of the value of our PP&E. Next week, once we have partially redeemed the 9 1/8 debentures and paid interest, we will have around CAD30 million of cash left, an undrawn CAD70 million revolver, and scope under the credit agreement to take on around another CAD20 million of capital leases.

It should be clear, then, that we have a financial flexibility level that is far in excess of our current market capitalization of less than CAD80 million. Therefore, while we will always manage our business carefully within the constraints of our revised debt covenants, we have decided to extend our present normal course issuer bid to the TSX in order to buy back another 500 shares-plus.

This will bring our total share purchases for cancellation or treasury to over 5.3 million. That is 15% of shares outstanding in less than two years. The treasury shares will be used to hedge our long-term incentive program so as to benefit investors once the cyclical downturn runs its course.

Another highlight of Q2 for me was the successful negotiation of a new five-year agreement based on a 6% permanent wage rollback with our main labor union. This provides an important labor stability as we navigate these uncertain times.

Now having spent much of my earlier career in the offshore oil and gas segment, I am not unused to seeing stock prices trading at a steep discount to book value per share in severe cyclical downturns. I note that presently some offshore drilling company stocks are trading at about 30% of book value per share. This is understandable to me, as they own and operate very specialized assets that can only drill for oil in an offshore area. The second resale value is therefore very limited to those assets.

We, on the other hand, are presently trading at around 40% of book value per share, which I find much harder to understand, given that our equipment can be used to the extraction of many resources and construction projects worldwide. In relation to negotiating our amended credit facility, we had an exhaustive appraisal done of the fair market value and orderly liquidation value of our fleet. With the former coming in comfortably in excess of book value, and a lot are coming in at over 90% of book value supported by, in part, the weakness of the Canadian dollar and the strength of activity levels in some construction segments in the USA.

For listeners perhaps unfamiliar with valuation terminology, the orderly liquidation value is based on a forced liquidation of the entire fleet in a period of 90 to 120 days at auction. Clearly we are not in a position to concern ourselves about that. We are certainly, though, in a deep downturn in the overall oil industry. And so it was great last week to hear our customers talking about the very long-term nature of the oil sands on their earnings calls. The commentary about how well the Fort Hills project is going and the expected 52-year production life was particularly encouraging.

I would like to end these prepared remarks by stating that I am a veteran of seven -- seven -- previous deep cyclical downturns. Each of the previous ones had two main things in common. Firstly, they were very painful for a while. But secondly, they all came to an end. This one has a potential to be as painful as any before, maybe even more so. But that will just set up a stronger rebound.

So with that, I would like to hand the call back over to Linda for the questions, please. Thank you, Linda.

(Operator Instructions) Greg McLeish, GMP Securities.

I have to say you guys are operating exceptionally well in an extremely difficult environment. Just had a couple questions. You guys have generated a lot of cash in the first half of the year. How should we be thinking -- and your data has come down -- how should we be thinking of cash generation in the second half of the year, and debt -- and sort of debt position at year-end?

Hi, Greg. It's Martin. Good morning and thanks for your comments on execution. We appreciate that. Yes, in terms of cash, obviously, we've got the payment from CNRL at the end of the contract, which helped our first-half performance. But it's also not unusual at the start of a downturn to monetize working capital.

So you've seen some of that happening so far as well. And that trend will continue for a while. So I see our cash position remaining strong. Capital allocation is always something we are looking at every day. So, rely on us to make the right calls in terms of lowering debt and doing other good things with our cash.

Great. And just on your G&A levels, I mean, they were -- G&A has come down substantially. How should we be thinking of maybe quarterly G&A moving forward for the balance of the year?

Hi, Greg, it's Rob. The numbers you're seeing in the Q2, probably a good run rate to go with, around the CAD5 million, CAD5.5 million number. It may peak up a little bit at year-end just with our annual audit fees that go through there.

Perfect. And just one more question. You guys have been incredibly successful cutting costs and becoming more efficient. Is there -- are there further things you can do in this environment? Or are you sort of -- what else can be done here? Or is this sort of it?

No, it's definitely not it. It's a never-ending journey on costs. We've been doing it for a few years already, and still the things we can do. We have an office in Fort McMurray which we are hoping to sublease. That will save us CAD1 million a year. And there are some other real estate that we are looking at to save some cost on. And there are other things. So we are going to continue to cut costs as we can here.

Great. I will get back in the queue. Thanks, guys.

Thanks, Greg.

Ben Cherniavsky, Raymond James.

I would echo Greg's remarks. Tough market out there, but you guys are hanging in there. Well done. The -- with the balance -- with respect to the balance sheet and the potential for ongoing free cash flow and deleveraging, I would applaud you on your share repurchase. That seems to be a good use of capital at this stage. Is there anything else you would contemplate strategically as your leverage position gets stronger and stronger, and considering what asset values look like out there in the market right now?

Yes. Well, obviously, Ben -- and again, thanks for your comment -- M&A is something we are looking at. We like to diversify our revenue, sure. I've done a lot of deals in my time, and I haven't done one in a couple of years. So I'm actively looking for things and I'm being as patient as I can.

But I think our balance sheet, as it gets better, will allow us to maybe use it to fund some decent acquisitions in this tough period. I think other companies are perhaps doing less well than ourselves and we will have some opportunities. But I think it's a question of being patient here and just being opportunistic, too. So we will try and do that.

How would you put the right kind of context around your capabilities right now? Like what would be the size of an acquisition that you think you could reasonably digest within your comfort zone of liquidity and financial capacity right now?

I'm not sure I would want to talk about numbers in that regard, but we would be looking, I think, at companies that had some asset intensity that we could use an expanded balance sheet to acquire. I mentioned on the call that our credit facility now gives us due consideration for our PP&E; whereas before, it never really did.

So I think I would like use that attribute to maybe generate the cash through an expanded balance sheet to do an acquisition of another asset intensive company. But to put numbers on it, I think, would be premature at this stage. I'm just saying that while equity isn't clearly in the consideration for acquisitions, then cash and debt is.

Yes. And when you guys did your orderly liquidation value, I mean, I guess it is implicit in the number you've come up with. But pricing on used equipment for your kind of assets has been pretty good, I take it. Is that partly a function of exchange rates and the kind of fleet that you have? Or -- and how does that break down between, say, your large and your smaller equipment? What would be the current valuation profiles of the two different sorts of machine profiles?

Yes, you are right. It was not asked when we did the assessment. It was an esteemed third-party, you know, how they firstly assess the fair market value. Unfortunately, there are some good comps. There have been some resales of assets similar to the ones we own, so that gave them a good confidence on fair market value and therefore make the assessment of orderly liquidation value from that. Again, as there has been some robust auctions lately, so there are some good pieces of information out there to make the assessment.

And you're right. I mentioned it in my prepared remarks, the weakness of the Canadian dollar certainly helps. It supports the situation. The fact that we've got a nice balance of construction equipment and mining gear also helps, because there are some construction segments, especially in the US, are pretty robust right now. So there are kind of US buyers looking to take advantage of that situation and it supports our values.

But what about your larger fleet? That must be more distressed right now in terms of valuations?

No --

Not just more specialized for mining?

No. Again, we bought that stuff in US dollars, the main spending where it was 2008, 2009. And we find that the assessments support the valuation that we have on our books.

Okay. I guess I mean, sort of an obvious question, I suppose I'll ask it anyway, though. When we see the results from the recent oil field services company -- or sorry, the oil producers, I should say -- I mean, in some respects, they've been doing reasonably well or they are holding up the numbers themselves, considering the macro environment and the price of oil, I suppose it has been coming in with some resilience in certain cases.

Is that -- I mean, that must be a reflection of the kinds of pressure they are putting on the supply chain with companies like you in terms of concessions and price costs. I mean the services sector seems to be bearing the brunt of this downturn, it appears to me.

Well, that is the natural order of things in our industry and with no change this time around. All I can say is that we participated in that and we produced the margins that we have. So, we are trying right now to help our customers lower their costs by doing things differently. And I think we are having some success in that area. So we are trying to be part of the solution and I believe that our customers really value that.

One of them said to me the other day, we moan less than our competition. (laughter) So, I don't know if that's good or bad, but I took it as a compliment. So we are just trying to be part of the solution. That is what I am saying here.

And with lower costs, it's easier to do that.

Yes, I think we have an advantage. We've been lowering costs now for a while. Perhaps we got ahead of the game in terms of the competition. And we have a cost structure which -- we are doing okay in this terrible environment.

Great, that is helpful. Thanks very much.

Okay. Mr. Ferron, no additional questions have come into queue. I will turn it back over to you for closing comments.

Thanks, Linda. Well, thanks, everyone, for participating today, as we realize that you had a choice of calls to join. We look forward to engaging with you again in November. Thank you.