North American Construction Group Ltd (NOA) 2017 Q2 法說會逐字稿

Good morning, ladies and gentleman, and welcome to the North American Energy Partners Earnings Call for the Second Quarter of 2017. (Operator Instructions) The media may monitor this call in a 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 Finance and Information Technology at North American Energy Partners Inc. Please go ahead, sir.

Thanks, Denise. Good morning, everyone, and thank you for joining us. Welcome to the North American Energy Partners 2017 Second 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 June 30, 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 second 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 Joe 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 will now turn the call over to Rob.

Thank you, David, and good morning, everyone. Let's now review our consolidated results for the second quarter ended June 30, 2017, compared to the quarter ended June 30, 2016. For the 3 months of this quarter, revenue was $47.6 million, up from $24.2 million in the same period last year. Last year's Fort McMurray wildfire and subsequent May 3 evacuation of the city and surrounding oil sands sites, negatively affected our activities in the prior year quarter. The wildfire shut down all of our operations in the Fort McMurray area and significantly delayed the ramp up of our summer mine support activities. Our current-year revenue was driven by overburden removal work at the Millennium mine site, and mine support services' work at the Millennium, Kearl, Mildred Lake and Aurora mine sites. Our activity in the quarter was negatively impacted by a customer's cancellation of a significant earthworks contract as a result of a plant fire. We were able to secure replacement work for the majority of the fleet committed to the canceled project but lost the early startup advantage as we had to relocate the equipment to other sites. Contributing to the slower spring quarter, was the ever-changing weather conditions during the period, which resulted in shift cancellations and continuous haul road repairs for our overburden removal work.

Complementing our results in the quarter was our continued mines activities at the Red Chris Copper mine located in Northern British Columbia, and mobilization activities for our new mine services contract at the Fording River coal mine located in Southeast British Columbia. For the current quarter gross loss was $1.2 million, down from $2.1 million gross profit in the same period last year. The gross loss in the quarter was the result of startup delays on new projects, driven by the aforementioned earthworks contract cancellation, coupled with lower productivity and haul road repairs and our overburden removal work as a result of the changing weather patterns that occurred during the quarter. Contributing to the gross loss was the effect of lower pricing negotiated by our customers on our long-term services agreements and equipment running repairs as we drew down on our maintenance backlog generated from a very strong first quarter winter works program in preparation for ramp up activities in the second half of this year.

Prior year results did not include a similar-sized draw down of maintenance backlog, typical for the spring breakup period, due to the operational shutdown caused by the 2016 Fort McMurray wildfires. For the 3 months ended June 30, 2017, depreciation was $8.1 million, up from $5.5 million in the same period last year, reflecting this quarter's continuous equipment activity compared to last year's interruption of activity due to the wildfires.

During the quarter, we recorded an operating loss of $6.6 million, an increase from $5.3 million operating loss for the same period last year. General and administrative expense, excluding stock-based compensation costs, was $4.9 million for the quarter, consistent with the $4.9 million for the same period last year. For the most recent quarter, we recorded a $6.2 million net loss, basic loss and diluted loss per share of $0.23 compared to a $4.9 million net loss and basic and diluted loss per share of $0.16 recorded for the same period last year. Interest expense was $1.8 million for the quarter, up from $1.6 million for the same period last year, primarily due to the interest from the issuance of convertible debentures at the end of the prior quarter, partially offset by the elimination of interest from our Series 1 debentures redeemed in prior periods. We recorded $2.2 million of deferred income tax benefit in the current period compared to $1.9 million deferred income tax benefit recorded in the prior year. The variance between the basic loss per share in the current period and the basic loss per share in the prior year period is partially affected by the reduction in the weighted average number of outstanding common shares, which was reduced to just over 27.2 million in the current period compared to approximately 30.2 million last year at this time. The reduction was driven by our recent NCIB activities and an increase in shares held as treasury shares. Of note, we ended the quarter with $34.6 million of cash on hand. As of June 30, 2017, we have purchased and subsequently canceled over 1.1 million common shares on the TSX under a previously announced NCIB.

On April 1, 2017, we entered into a partnership agreement with Dene Sky Site services, a private First Nations business based in Janvier, Alberta. The partnership is carrying on business under the name Dene North Site Services, and will operate primarily in Northern Alberta. We believe that this partnership will expand our services to both the oil sands and in situ markets and provide us with the ability to secure certain work that we may not otherwise have had the opportunity to bid or perform.

On June 6, 2017, we expanded our activity outside of the oil sands with the award of a contract to provide mine services at the Fording River coal mine in Southeast British Columbia. We expect to utilize the fleet of large-haul trucks, shovels and excavators to support our customer's coal mining operations, including extracting and hauling coal as well as removing associated waste materials.

Finally, on August 1, 2017, we entered into new credit facility agreement with a banking syndicate led by National Bank of Canada, replacing our current Sixth Amended and Restated Credit Agreement. The new facility provides borrowings of up to $140 million through a revolver facility with an ability to increase the maximum borrowings by an additional $25 million, subject to certain conditions. This is an increase from the $70 million revolver and $30 million term loan of our previous facility. The facility matures on August 1, 2020, with an option to extend on an annual basis. Credit facility also allows for a capital lease limit of $100 million, an increase from our $90 million under the previous facility, taking our senior debt liquidity potential to $240 million from our current senior debt liquidity on our existing facility, which was $190 million. Beyond the increase in senior debt liquidity, our new facility is not limited by our borrowing base, which limited our previous credit facility. In addition, the new pricing includes a 25 basis point reduction to our borrowing rate and a 5 basis point reduction to our standby fees at our current leverage ratio. We're very encouraged by the support demonstrated by our banking syndicate and with this new credit facility. We believe that this expanded and less-restrictive facility supports our strategic priorities and provides us with the ability to expand our liquidity in line with our growth.

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

Thank you, Rob, and good morning to everyone. I've been involved in the reporting of quarterly results for public companies for coming up to 20 years, and so I've experienced a few tough quarters along the way. I can honestly say, though, that none were tougher than Q2 last year on this reporting period in terms of operating adversity. As Rob mentioned, last year, we had to deal with the wildfires that swept through the Wood Buffalo area and closed most of our operations down for much of the quarter. In a strange way perhaps, that was straightforward to deal with, as we knew that we faced an extended period of downtime due to a natural disaster. Therefore, while making sure that all for our fuel-based stock was safe and help with payments from a disaster fund that we established, we shut down every other variable cost. In particular, we did not carry out any equipment repair and maintenance after a busy first quarter as we just did not know when the equipment would go back to work.

Q2 this year started out full of promise as we had won a significant overburden stripping contract that we could start in the period. We were aware that a plant fire had occurred late in Q1 at the work site but initial reports indicated that it was not severe in terms of potential impact. Therefore, we completed our mobilization to site and we were literally within hours of starting the job when we were informed by the customer that work should be suspended. Soon afterwards, the project was completely canceled, which was an operational body blow to us as we had turned down what similar work was available in a normally seasonally slow quarter. As the period progressed, we experienced a wetter than unusual June and this, together with extended impact from the plant fire, pushed some smaller quarter construction jobs into Q3. In this truly tough situation, it would have been very easy to just surrender to circumstances, but I was very proud of the way that we responded. We secured some incremental overburden stripping work at another site and then won the Fording River coal excavation project in stiff competitor opposition. We commenced mobilization for the significant job late in Q2 and expect to ramp up to full excavation rates early this month.

Successfully bidding this project further demonstrates the transferability of our cost structure and expertise to other resource plays. The job should add around $25 million of revenue to the second half of the year. It's important to know that we incurred around $5 million of expense in equipment and repair cost after an extremely busy Q1, getting ready for the Fording River job and other work that we expect to execute in Q3 and Q4, this being the normal way of things when it comes to the timing of equipment maintenance expenditure.

Back to the theme of revenue diversification, we were delighted to secure the Fording River coal-related project and have several other bids outstanding for nonoil-resource jobs, 2 of which we have been shortlisted for. Therefore, we are encouraged by our recent degree of success. In the medium-term, earthworks on infrastructure-related construction jobs will likely also play an appreciable role in our organic growth plans. And again, we are addressing several large bids to initiate that effort.

Overall, we mastered the adversary of Q2. We believe that we can still meet our growth targets for the full year. On the last call in early May, I asserted that our combined EBITDA for the Q2 and Q3 this year will be higher than achieved in the same 6 months last year and I still expect that to be the case. Also, very significantly, our EBITDA of the second half of this year will come from 3 oil sands mines, a copper mine, together with a coal mine. Around 25% of that EBITDA should come from the 2 non-oil field related projects.

Rob also covered the details of another really exciting recent development that is the negotiation of a new bank credit facility. From my perspective, I just wanted to add that 3 banks competed very aggressively to lead the syndicate and the deal was well oversubscribed. Each bank involved stated that they admired the way we run our business in an extremely cyclical operating environment and each wanted to be part of our growth plans.

Going forward, we have no borrowing base, and much improved liquidity, which we will continue to mind very carefully. I cannot resist, though, the temptation of pointing out that our total available liquidity is now higher than our market capitalization.

That point leads me to close with an update on our latest NCIB program. As of market close yesterday, we have just over 400,000 shares left to buy before the program close on August 7. Reasonable-sized block trades have been in short supply in recent weeks and so we've been just mopping up our proportion of the daily volume. If we complete this current buy, we will have bought and canceled around 8.5 million shares in total since we started our buys in late 2013. In addition, the trustee of our long-term incentive hedging plan has bought about 2.7 million shares which are held in treasury. All the while, we have maintain a very strong balance sheet despite fires, floods and an enduring major cyclical downturn in our core business. I remain very bullish on our future, and I've taken my personal stake in the company to over 5% in recent weeks.

With that, I'll hand the call back to Denise for any questions. Thank you.

(Operator Instructions) Your first questions comes from Maxim Sytchev with National Bank.

Martin, I was wondering if you don't mind please updating us, how we should be thinking about CapEx in the back half of this year because I believe you're guiding on a net basis? And I'm just trying to see if you're also assuming some asset divestitures in the back half? Or you feel kind of happy with your footprint right now?

Yes, the only divestitures will be end-of-life assets sent to auction in the normal course of business. In terms of total CapEx, I'd be using $35 million of sustaining and $15 million of growth, another $15 million coming from the convertible offering that we made earlier this year.

Okay. And then, the $15 million growth, is that in relation to non-oil sands work? Is that where that is being deployed?

Yes, as it turns out several of the assets that we bought with that $15 million are on the Fording job. So yes, it's definitely linked to the growth that we see in non-oil sands activity.

And then, just Fort Hills is going to be ramping up later this year, we assume that you're going to get work, obviously, on that site. Will you have to buy incremental gear for that project? Or do you have all the yellow iron at hand right now for 2018?

Yes, we believe that we have the assets to address that opportunity. We're, obviously, very busy with heavy assets in Q1. I would expect activity at Fort Hills to be outside that busy season. So hopefully, we have the tools to address that incremental demand.

Okay. And then, Martin, maybe any updates in terms of how you think about potentially deploying some of the growth capital. I mean, I know that you've signed a JV with the First Nations firm. Is there anything else that's piquing your interest right now in this -- it feels like buyers market still?

Yes, I'd like to start off by saying that I'm very happy with the progress that we're making on our organic growth plan. The diversification outside the oil sands is going extremely well. We've got our JV, as you mentioned, to address in situ projects. We're bidding infrastructure projects. So all of this will bring a lot of growth without much incremental capital. So while that's going on, I'm content to just screen opportunities on the acquisition side. But, obviously, the recent downturn in stock prices, our own in particular, again, gives us a very low multiple, I think around 2.9 for 2018, the way I calculate it. So we're in a position again that some of our capital will likely go to another buyback. We'll go assess that next week when the present one finishes, and we'll just keep buying until we get the appreciation for what we're doing.

(Operator Instructions) Your next question come from Ben Cherniavsky with Raymond James.

I'm just trying to clarify -- I hope you can just clarify some of the language in the -- in your MD&A in your discussion here, just around the drawdown of maintenance backlog. Is that you're basically doing maintenance work in the quarter that incurred costs in preparation for work in the back half of the year?

Yes, running repairs of expense, right?

What's the maintenance backlog, though? Is that -- you're just taking the kind of -- all the work that you have determined that you needed to do?

Yes, you have to think that Q1, we're just flatout busy with the large assets, right? So there is no time to address any repairs that you'd like to do to address future work. You can continue doing the existing work, but you want to get the equipment ready for the future. So we build a backlog of things in Q1 that we normally do in Q2. And I think the point we were making on the call was that you didn't see that last year because it wasn't a normal year.

And does that largely explain, I suppose, that along with the setup cost of the contract that was then canceled, but does that explain how you had lower EBITDA margin from substantially higher revenue this period?

Yes, absolutely. We had that incremental running repair cost, plus we were getting ready to mobilize and do work that will occur in Q3 and Q4. Just losing that stripping contract, as I said, it was a very tough thing to happen right at the start of the quarter and we incurred some costs recovering from that.

And I guess, you spoke to a little bit in your commentary about how the rest of the year is going to stack up with EBITDA and such, but -- I mean, the numbers in this period were substantially lower than I had expected. And just in terms of the sequence of events when you had press released the contract that you'd won for $45 million in January, and then in April, when you said it had been canceled, the indication was that the market had improved so much since the beginning of the year that you could make up for the lost contract. Did the second quarter turn out -- when you issued that press release, it was the beginning of second quarter, so did it turn out along the lines of what you expected, such that you could still make up that EBITDA? Or was this, in anyway, more difficult with weather and other variables that you now think that the make up is going to be more difficult even despite some of the contracts you've won since then?

Yes, I'd say that our language has been very consistent. We talk about the whole year, it's very difficult to manage just 90 days when you get jobs canceled and you get more rain than perhaps normal and you're mobilizing for new work. So our commentary has been all about the whole year. And despite everything that Q2 threw at us, which was a lot more than we expected in early Q2, we still think and believe that we're going meet our growth targets, which I think is pretty amazing. So that's kind of the consistent message we're trying to deliver.

And how did -- what's changed even since the beginning of the second quarter to give you that kind of confidence? Because clearly, well it seems like this was a more difficult quarter than you'd even anticipated at the start of the quarter, as you say. So other things must have improved sequentially to give you more confidence you can make up for the lost ground you didn't anticipate.

Yes. So at the start of the second quarter, pretty much after 2 weeks we knew that this job had been canceled, but we did not know how serious the fire event at the work site was. It seemed to escalate in terms of impact as the quarter went on. So some of the work that we expected to start in late Q2 got pushed into Q3, so that was a change. On the positive side, we didn't expect to win the Fording River job because it didn't come up until middle of Q2. It was literally bid and awarded within a couple of weeks. So there were kind of puts and takes and that's the nature of contracting. As I say, when you judge in 90 days, things can go a little wrong and that's what happened, but it was a really tough quarter operationally.

Your next question come from Maxim Sytchev from Nation Bank (sic) [National Bank].

Just a couple of very quick follow-ups. I think in your discussion around kind of assumptions around outlook, it feels that the canceled project, it's -- potentially it's going to be coming back next year. Is that an accurate understanding? Or this was something very specific that maybe is not going to be coming back?

I think work of a similar nature, maybe, at other sites will occur next year. This specific work has gone away. So as our customers are really ramping up production, they're creating more overburden to strip and more reclamation, they're doing more tailings to manage. So we'll see work like the reclamation project we did in Q1, unlike this overburden stripping contract that was canceled at other sites, likely.

Okay. And then, actually, talking about clients, now that some of the assets in the oil sands have been reshuffled, what are you hearing from them in terms of how they view the supply chain on the services side? What is kind of the latest color on that front?

I think it's too early to say, Max. The buyers, they're just still getting their arms around the assets that they've acquired. I'm sure they'll plan things quickly and share those plans with us. We are expecting incremental opportunity on the assets with Canadian Natural Resources. I know they reported this morning, I kind of went through their release quickly, wasn't much detail there. But I expect them to have some reclamation to do this winter on those new assets, and that is incremental work or opportunity for us.

There are no further questions queued up at this time. I turn the call back over to the presenters.

Okay, that's it for today. I appreciate everybody joining, and look forward to speaking to you next time. Thank you.

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