North American Construction Group Ltd (NOA) 2017 Q1 法說會逐字稿

Good morning, ladies and gentleman. Welcome to North American Energy Partners Earnings Call for the quarter ended March 31, 2017. (Operator Instructions) 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 will advise participants that this call is also being webcast concurrently on the company's website at nagc.ca (sic) [nacg.ca].

I will now turn the conference over to David Brunetta, Director of Finance and Information Technology at North American Energy Partners Inc.. Please go ahead, sir.

Thank you, Carol, and good morning, everyone, and thank you for joining us. Welcome to the North American Energy Partners 2017 First Quarter Conference Call . I would like to remind everyone that today's comments contain forward-looking information. Additionally, our actual results may differ materially from expected results because of various risk factors, uncertainties and assumptions.

During this conference call, any reference by management to EBITDA indicates consolidated EBITDA as defined in our financial statements and earnings release. For more information about our results, please refer to our March 31, 2017 management's discussion and analysis, which is available on SEDAR and EDGAR.

On today's call, Rob Butler, VP of Finance, will begin by reviewing our first quarter results. Martin Ferron, President and CEO, will then provide his comments on our outlook and strategy. Also with us on the call today are Joel Lambert, Chief Operating Officer; and Barry Palmer, Vice President of Operations. After management's prepared section, there will be a question-and-answer session.

I'll now turn the call over to Rob.

Thank you, David, and good morning, everyone. Let's now review our consolidated results for the first quarter ended March 31, 2017, compared to the quarter ended March 31, 2016.

For the 3 months ended March 31, 2017, revenue was $92.8 million, an increase from $78.5 million over last year. Revenue was higher in the current period as a result of an expanded winter works program, driven by the award of reclamation work at the Mildred Lake mine site, which more than offset lower overburden removal and tailings pond support activity at the Millennium mine site. Our ongoing mine support activities at the Kearl mine site contributed to our revenue for both periods.

Gross profit in the quarter was $23 million for a 24.8% gross profit margin, an increase from $18.4 million or a 23.5% gross profit margin during last year's first quarter. The higher gross profit in the current period was driven primarily by a higher revenue, while the improved gross profit margin was achieved through continued improvements to operating performance despite lower pricing negotiated by our customers on our long-term service agreement.

Depreciation for the quarter was $14.6 million, up slightly from $14.3 million in the same period last year. Driving these similar depreciation costs, despite the higher volume of activity in the current quarter, was our ability to leverage our 2016 capital investment in equipment technology improvements, which increased our haul efficiency on certain of our larger trucks while improving our haul capacity on a fleet of medium-sized trucks.

We recorded operating income of $14.4 million in the quarter, an improvement from $10.7 million over the same period last year. General and administrative expense, excluding stock-based compensation, was $6 million for the quarter, down from $6.3 million for the same period last year, reflecting the benefits gained from cost-saving initiatives implemented over the past year.

Stock-based compensation expense increased $1.1 million compared to the prior year, primarily as a result of the effect of the higher share price on the carrying value of our liability-classified award plans.

During the first quarter, we recorded $9.6 million net income, basic earnings -- basic income per share of $0.34 and diluted income per share of $0.31 per share, compared to $6.4 million net income last year with basic income per share of $0.20 and diluted income per share of $0.19. The net income improvement in the current quarter was achieved despite the recording of $2.1 million in stock-based compensation expense in the current quarter, compared to $1 million in stock-based compensation expense recorded in the same period last year.

Interest expense was $1.4 million for the quarter down from $1.7 million for the same period last year, primarily due to the redemption of the Series 1 debentures in prior quarters, partially offset by the issuance of convertible debentures at the end of this current quarter.

We recorded $3.5 million of deferred income tax in the current period compared to $2.6 million of deferred income tax expense recorded in the prior year, driven by a higher income in the current period. The variance between the basic income share in the current period and basic income per share in the prior period is partially affected by almost 3.7 million share reduction in the weighted average number of issued and outstanding common shares as at March 31, 2017, compared to the prior year, driven by our normal course issuer bid activity and an increase in the number of shares held as treasury shares in our trust as a hedge against our long-term incentive plan.

The variance between the diluted income per share in the current period and the diluted income per share in the prior period is also affected by the increase in the treasury shares purchased and held in trust, stock options vested and exercisable and the weighted average effects of our newly issued convertible debentures.

I'd note, on February 1, 2017, we renewed a 5-year master services agreement on a sole-sourced negotiated basis for the major oil sands operator for the performance of reclamation, overburden removal, mine support services and civil construction activities. On March 15, 2017, we closed an offering for 5.5% convertible unsecured subordinated debenture due March 31, 2024, for gross proceeds of $40 million. We ended the quarter with net debt of $93.4 million, which included $44 million of cash on hand and the addition of the $40 million convertible debentures.

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

Thanks, Rob, and good morning to everyone. At this time last year, we announced an excellent result of $25.9 million of EBITDA to Q1, which possibly took many observers by surprise. That outstanding performance may have been viewed by some as a one-off, even a fluke outcome. Well, the even better results for Q1 '17, hopefully demonstrate that we can consistently produce exceptional numbers given the right volume and mix of work opportunities.

As highlighted in the earnings release, the results were achieved despite pricing being around 10% lower than in the same quarter last year. So we continue to improve our operational execution, on the basis of cost leadership, on methodology innovations, in a marketplace that is in clear recovery mode. A particular note is that we managed to produce over $25 million of operating cash flow in the quarter, even after building more than $5 million of working capital.

Also the time of the cost falling earnings call last year, we were just beginning to deal with the implications of terrible wildfire that was to sweep through the Wood Buffalo area. This natural disaster severely disrupted our operations for Q2 and Q3 of 2016, such that we only added EBITDA of $1.7 million in Q2, and $9 million in Q3. We then went on to produce $13.5 million of EBITDA in Q4, to lead to a total of $50.1 million of EBITDA for 2016.

While this year we're again going through the impact of wildfire, this time, a plant fire at one of our busiest worksites. This situation has lead to the cancellation of an overburden stripping contract worth around $45 million in revenue, which we were all set to kick off in Q2.

Now while this is an extremely frustrating situation, we believe that we can still achieve better than our original EBITDA expectations for 2017, as laid out last November. At that time, we forecast 15% growth in EBITDA over 2016 levels. Since then oil prices have stabilized at around USD 50 a barrel, and our customers have reduced cash operating cost to around USD 17 a barrel, largely driven by the huge economies of production scale available on the oil sands mines. The drive for maximum production growth has brought about improved opportunities for us, like the reclamation project that really helped our Q1 performance.

The overburden stripping contract was going to be a second sequential such opportunity, and the key point here is that there will be many more of these type of opportunities to come, especially if oil prices increase even a little bit.

We are also seeing a much-improved opportunities for work outside the oil sands, which were not available last year. We have several bids in place, for copper and met coal-related and coal projects expect award news in the coming weeks for potential work to start in late Q2.

All in all, the marketplace for our services is much better than last year, and the fire situation is not as severe. So we expect to handily outperform EBITDA levels for Q2 and Q3 compared to 2016, while already being ahead by over $4 million at the Q1.

Other highlights of an eventful first quarter, were in the formation of the Dene North joint venture, principally to address the sands and in-situ support services market, which we think has really good growth prospects.

Secondly, the initiation of the provision of equipment maintenance support to third parties. We plan to ramp up this slowly and carefully into a significant aspect of our business.

Thirdly, an issue of $40 million of convertible debentures to provide further growth capital. We deployed several million dollars of this to improve the mix and cost basis of our equipment fleets by buying further assets at distressed prices from a competitor exiting the heavy equipment space.

Well, that's pretty much it for now as I prefer to let our Q1 numbers do most of the talking. I'll just mention that during April, we pretty much completed the buyback of the 820,000 shares under our extended NCIB. And we've been to looking to buy another 840,000 shares starting in June. So finish the 820,000, look for us to buy maybe another 840,000 in June.

With that, so I'll hand the call back over to Carol, the operator, for the Q&A segment. Thank you.

(Operator Instructions) Our first question this morning comes from Yuri Lynk from Canaccord.

Martin, what is the bigger picture? What do you make of the consolidation amongst your oil sands clients that we've seen over the last couple of months? Particularly interested to hear your thoughts on the Jackpine in Muskeg River, mine sites where you haven't been active in a number of years. So just wondering if change in ownership could maybe alter that situation in your favor?

Yes, I think overall it will be a good thing for us. I think it's always much better to work with somebody who's committed to what they're doing. I think the previous owner was just kind of producing at basic levels whereas I think the new owner will go in there and improve that situation and drive the economies of scale that we're seeing at other mines. And then we do a lot of work for that new owner. So given the fact that we're doing nothing for the previous owner, I think the situation should, at the minimum, get better for us.

Okay. Any specific discussions with the customer yet on bringing you on the sites or it's still too early?

No, they haven't closed the deal yet. I think they are focusing on taking on the employees that they need from the previous owner and just getting their hands on the asset. So they're in planning mode and I'm sure we'll help them with that.

Okay. And then just a second one from me. It sounds like the contract that was canceled is not coming back, which seems a bit counterintuitive to me. I mean, is that the case? Or is it -- is that -- you're likely to see that work come back at another time, you would assume that, that work needs to get done at some point?

This exact piece of work that will not come back because what happened is our customers have fleets of equipment, large trucks and shovels that they normally use for oil mining, so during the complete shutdown of the mine, they're looking for things to do with those assets. So they're likely, I think almost certain, to do that piece of work that was slated for us. But the point I was making in my prepared remarks is that the piece of work came from this drive for a maximum production. It was extra work, and I think we'll see many of these type of opportunities going forward. When, I'm not certain, but given that we've seen 2 in the last 6 months, the reclamation project and this August overburden stripping opportunity. I think we'll see such opportunities at other mines also. So it is frustrating that we've lost this 1 piece of work, but I think others will follow in the future.

Our next question comes from Ben Cherniavsky from Raymond James.

What is your fleet utilization rate like right now? Both in the larger and the smaller segment?

So up until the end of the first quarter, the utilization of the heavy fleet was pretty much 100%. Obviously, it has been break up and that falls to maybe 20%. So on the light side, no work in the first quarter because it's earth moving rather than the construction season. We expect those assets to go to work as Q2 unfolds. Certainly, it'll be a lot busier in Q3. A little early to say exactly how busy because we're still waiting on some awards, but we're expecting better utilization of the light fleet this year than we achieved last year. And then in Q4, the heavy equipment utilization will increase again on a seasonal basis. So it's the usual pattern with, I think, more work for the light fleet this year than last.

I'm thinking more on a seasonally adjusted basis or a year-over-year, just trying to get a sense of your capacity. What kind of operating leverage is left by utilizing idle fleet? And whether if you might have to spend money on to capture future -- any future revenue opportunities?

Yes, we've got very large operating leverage to any sort of return to a normal construction market. In Q3, 2014, which was the last time we saw normal construction activity, I believe that we posted about $26 million of EBITDA. So given the staff we've add to this year, with EarthWorks, coming into a normal seasonally slow Q2, which will be a lot better than last year because of the absence of a wildfire. I don't think that we'll do anything like the 25 in Q3, but certainly I think we'll improve on last year's numbers. And same for Q4, I think it'll be a little better. I can't give you exact utilization numbers on individual parts of the fleets because we don't track it, to be honest, Ben, but hopefully, I've given you some color there.

Okay. Well, I guess maybe just trying to get a sense of the other capital needs. I understand you don't track your utilization rate to a specific number but you must have a sense of what kind of idle capacity you have left before you'd have to go and increase your CapEx?

Well, to achieve our target, we're talking about $30 million of maintenance capital, and we intend to deploy about $12.5 million of growth capital. The $12.5 million won't kick in, in terms of return on a full basis this year but it will certainly help next year. So to achieve the target, those are the capital numbers.

And then -- so maybe I'll ask in a different way. How would you -- because clearly the markets have recovered, people are feeling better, you guys have just stated that, but how does this compare to where -- I mean, if you -- I think you said Q2 versus Q3 of '14 might have been the last sort of good normalized quarter before the downturn, how would you describe the market today versus then?

Well, it's somewhat in between. Last year, there was no construction activity, whatsoever, because of the wildfire. Plus the market for after services outside the oil sands was pretty much nonexistent. We won our copper mine in B.C. We hope to stay on that 1 copper mine this year, and we're also hopeful of picking up a couple of further contracts outside the oil sands. Inside the old sands, we're expecting, based on bidding activity, the construction effort to be great over the last year. So pending awards its hard to put a number on that but certainly better than last year is the color I can give you.

Yes. Well, if everyone acknowledges last year was the bottom, I guess just trying to get a sense of how far off the bottom we are, and how much more we got to get to recover. That's quantitatively or qualitatively, I don't know? How do we...

I would say we're about 25% between the bottom and the good numbers of Q3, 2014.

So we're about 25% off the bottom? Or 25% away from the top?

The first one.

The first one. Yes, okay. Okay, that's helpful. And I know, in the past, you guys have spent a lot of time -- while in your numbers clearly reflect your cost improvements. I know we've been through the maintenance yard and understand what you've done there. I've seen some of the changes you've made, obviously, in management and office spaces, et cetera. But can you help us -- can you shed any more light on some examples or even just anecdotes of where you guys have improved your cost structure, been more competitive? What exactly have you done? Reducing costs is a bit of motherhood statement, and obviously, you guys have achieved that. I'm just trying to get more granular on some of the actions you've taken. How sustainable that is?

Cost has been a big driver for us for several years now. But lately, last year, and this we've introduced some methodology and included innovations that have really helped us become a lot more productive on certain aspects of our work, especially in the earthmoving space. So effectively, we're getting a lot more out of smaller assets than perhaps our competition is. I don't really want to go into too much more detail on that because, as you say, I'd like to sustain this advantage as long as possible. So we've been pretty smart in getting the best out of our assets in terms of productivity on unit rate work, and that largely drove our progress in Q1.

So a lot of processes and proper bidding processes and operating processes, things like that?

Well, also equipment modifications. We're carrying more with smaller pieces of equipment.

Our next question comes from Maxim Sytchev from National Bank Financial.

Martin, just wanted to follow-up on the copper opportunity. So the comment that you're making of waiting something from an incremental press release, is that in relation to the B.C. mine? Or is it outside of Canada?

No, so the Red Chris Copper mine, that we're on last year, we've got a letter of intent to carry on this year, so that's a given. We're expecting an award on an additional copper mine in B.C. We're on a pretty small shortlist for that work, and we expect to hear in the next 2 or 3 weeks. We are also bidding other work. Met coal has really taken off lately so that could be an opportunity for us. So overall, the markets for our services outside the oil sands is a lot more robust than it was at this point last year.

Yes, that's right. And then in terms of-- on the infrastructure side, Martin, any updates on that front in terms of you developing your partnership relationships and so forth? Anything you can share with us?

All I'll say there is that we continue to look for specific types of infrastructure project that involve larger earthworks scopes. They're not going to come along frequently. We're bidding the Fargo-Moorhead project, as you know. The timeline for that has gone back 4 months, but the number of bidders has dropped by 1 to 3 from 4. So that's helpful. So we're looking to form other partnerships, and we're in discussions with several other potential groups. We're just waiting for the right sort of opportunity to come along to address.

Okay, that's helpful. And then just a quick question on your cash flow statement. When I look at disposal of front-end equipment to the tune of $9.5 million, I'm just wondering what type of assets did you get rid of? Was it end of life type things? Or just some excess equipment?

It was on to disposables. Max, those are kind of, say, lease-back financial transactions.

All right. Okay, okay, that's helpful. And then lastly, I had a question in terms of deploying some of your growth capital. Any update there in terms of maybe the expectation of sellers? Or how should we think about your capital deployment strategy right now?

Yes, we're still looking at a lot of opportunities. They're certainly plenty of distress still in the marketplace. As I mentioned, we probably spent over $10 million buying heavy equipment from 1 competitor that's leaving the space, very good prices, plus financing from them. So a great deal for us. I think we'll see other search opportunities as the year progresses here. I think we're still being very careful and conservative and just waiting for the right sort of deal to come along. But it's great to have the dry powder in order to address those.

(Operator Instructions) Our next question comes from [Glenn Parmet] from [Promise Holdings].

Martin, I was wondering how much larger are you than your nearest competitor?

In the U.S. moving space, we've got one competitor that's comparable in terms of fleet size. But they focus just on earthmoving, they don't do any construction work. The other competitor is a larger, Canadian industrial conglomerate that have a mining segment, so they're more diversified. Again, they're fleet, on the heavy end, is probably similar to ours, and they do have some construction equipment. So all in all I think we've got 2 competitors that are similar in capability, but probably do a little less work than us on the earthmoving side.

Okay. And then the banks, I'm guessing are pretty stringent with giving out capital to people on a project. Do they just give like some distressed computation number, where you -- they already knew -- all those companies already know who to call to buy equipment at $0.20, $0.30 on $1, whatever?

Yes, we can track, certainly public companies' situations and we keep our eyes open for private situations. So between the 2, there are several opportunities that we're tracking. As you say, I think the banks are still going to be aggressive in terms of margin net for credit facilities.

We have no questions left in queue at this time. I'd now like to turn the call back over to Mr. Ferron for closing remarks.

Well, thanks to everybody for joining us today, and we look forward to speaking to you again in early August. Thanks.

Thank you. This concludes the North American Energy Partners Conference Call. You may now disconnect.