North American Construction Group Ltd (NOA) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the North American Energy Partners Earnings Call for the Quarter Ended September 30, 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, Investor Relations, IT and Treasury at North American Energy Partners Inc. Please go ahead, sir.

Good morning, everyone. And thank you, Krista, and thank you, everyone for joining us. Welcome to the North American Energy Partners 2017 Third Quarter Conference Call. I would like to remind everyone that today's comments contain forward-looking information. Additionally, our results may differ materially from expected results because of various risk factors and assumptions. For more information about our results, please refer to our September 30, 2017, management's discussion and analysis which is available on SEDAR and EDGAR.

On today's call, Rob Butler, Vice President of Finance will begin by reviewing our third quarter results. Martin Ferron, Chairman and CEO, will then provide his comments on our outlook and strategy. Also with us on the call today are Joe Lambert, President and COO; 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 third quarter ended September 30, 2017, compared to the quarter ended September 30, 2016. For the third -- for this third quarter, revenue was $70 million, up from $48.2 million in the same period last year. Current year revenue was driven by overburden removal activities at the Millennium mine site, and mine support services that the Millennium, Kearl, Mildred Lake and Aurora mine sites. In addition, this quarter saw the award and start-up of a site development project at the Mildred Lake mine, led by our Dene North Site Services partnership. Complementing these activities in the quarter was our new mine support services contract at the Fording River coal mine located in southeast BC, and the wind down of our mine support activities at the Red Chris Copper mine located in northern BC.

Last year's wildfire and subsequent May 3, 2016, evacuation of Fort McMurray negatively affected our activities in the prior year quarter. The wildfire which had shutdown all of our operations in the Fort McMurray area during the second quarter of last year significantly delayed the ramp up of our summer mine support activities.

Gross profit was $5.8 million or an 8.2% gross profit margin, up from $5.4 million gross profit or $11.1 million gross profit margin in the same period last year. Gross profit margin was lower in the current quarter as a result of lower pricing negotiated by our customers on our long-term service agreements, and certain of our mine support activities that required a large proportion of the lower margin subcontract and mobilization activities. In comparison to the previous year, we also saw a return to a normalized level of summer equipment maintenance activities in the current year, as our equipment and maintenance personnel were available to complete our equipment servicing. The completion of planned maintenance activities in the prior year was curtailed by the impact of Fort McMurray wildfire and subsequent operational shutdown, coupled with a slow start-up of customer activities through the balance of the summer.

For the quarter, depreciation was $10.3 million or 14.6% of revenue, up from $8.3 million or 17.2% of revenue in the same period last year. The current period depreciations was a return to a more normalized level of depreciation as a percent of revenue, driven primarily by equipment activity compared to the prior period, which included a disproportionate amount of fixed charge depreciation as a percent of the lower revenue. In addition, the current period decrease in depreciation as a percent of revenue is starting to reflect the benefits we're realizing from our recent program of securing quality used equipment at discounted prices from sellers looking to exit the market place, while also leveraging our strong maintenance expertise and programs to extend the expected lives of our current fleet.

During the quarter, we recorded operating income of $1 million or a 1.4% operating income margin, an increase from $0.3 million operating loss for the same period last year. General and administrative expense, excluding stock-based compensation cost, was $4.6 million for the quarter, lower than the $5 million for the same period last year. Stock-based compensation expense decreased by $0.6 million compared to the prior year, primarily as a result of the effect of lower share price on the carrying value of the liability classified award plans.

For the most recent quarter, we have recorded $0.6 million net loss, basic and diluted loss per share of $0.02, compared to $1.4 million net loss with basic and diluted loss per share of $0.05 recorded in the same period last year. Interest expense was $1.8 million for the quarter, up from the $1.4 million in the same period last year, primarily due to the issuance of convertible debentures at the end of the first quarter this year, partially offset by redemptions of the Series 1 debentures in prior periods.

The variance between basic loss per share in the current period and the basic loss per share in the prior period is partially affected by the reduction in the weighted average number of issued and outstanding common shares dropping to 26 -- just over 26 million for the 3 months ended September 30, 2017, compared to just over 29 million shares for the 3 months ended September 30, 2016.

Of note, on August 1, 2017, we entered into a new credit facility agreement with a banking syndicate led by National Bank of Canada. The new facility provides borrowings of up to $140 million, and unlike our previous credit facility, borrowings from our new facility are not limited by our borrowing base. On August 7, 2017, we completed a previously announced normal course issuer bid, canceling a total of almost 1.5 million common voting shares under that program during 2017 at the weighted average price of $6.26 per share. And as of September 30, 2017, we purchased and subsequently canceled just over [1.] million shares to the facilities of the TSX and the New York Stock Exchange at a weighted average price of $4.98 per share under a normal course issuer bid announced on October 14, 2017.

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

Thank you, Rob, and good morning to everyone. It is now just about 3 years since the start of the cyclical downturn in the oil industry. And over that timeframe, we have restored annual EBITDA to near pre-downturn levels. Reduced total debt by over $20 million or 15%. Reduced quarterly interest payments by over $1.3 million or 43%. And lastly, reduced shares outstanding, net of treasury shares, by over 9.6 million shares or 27.5%. I hope that you will agree that this is a pretty stellar performance in the brutal operating circumstances that have prevailed in the period.

In comparison, several of our peer companies had to pursue very diluted equity offerings or taking on expense of debt or even gone bankrupt during this period. I'm very proud of this performance and excited about the growth outlook we have to target 15% compound annual increases in revenue and EBITDA for the period 2017 to 2019. We are on track to achieve the 2017 numbers despite the negative impact of a severe plant fire of one of our normally busiest oil sands work sites.

We've covered the background to our excitement in the reformatted outlook section of the (inaudible) and MD&A, but as this is well worth repeating, I will go through it again here, perhaps adding some more color along the way. So the growth will be achieved by building production related recurring services volumes in our core oil sands market together with the addition of value creating services like third-party equipment maintenance.

It is important to note that the oil sands region is our core market, very much of a choice rather than a necessity. You may have seen that our largest customer posted some very impressive quarterly results last week, clearly demonstrating that robust cash flows can be achieved from the operating mines even in a high 40s to low 50s oil price. That said, revenue diversification will also be a growth driver as we expand our market coverage to include other resource plays e.g. coal, copper, gold, diamonds, et cetera. And infrastructure related projects that involve major earthworks.

Our company is achieving the growth is and boosted by the following updates: firstly, the successful renewal of all of our oil sands service agreements, such that we're not faced with a contract expiration until late 2020; secondly, our customers continuing to use economies of scale in production to dramatically lower oil sands operating costs per barrel. On this theme, we were recently awarded two large earthworks jobs for the winter season with volumes expected to be roughly 10% higher than last year. The combined value of the work could exceed $90 million, and should benefit late fourth quarter, and potentially, all of the first quarter of 2018.

Next, the new Fort Hills oil sands mine is very much on schedule for production start-up at the end of 2017. This mine is anticipated to provide a direct benefit in terms of incremental demand for our services, and an indirect benefit from the overall tightening of heavy equipment supply. This being especially the case, with both of our main competitors selling assets to international markets in the last few months.

Next, we have a pretty good line of sight to meaningful heavy construction activity for the summer season of 2018. After what would be a near 4 year hiatus, due to the deep cyclical downturn in the oil industry. Now at this time, last year, we were seeing some green shoots of construction activity, but if that tuned into a little bit of a false tone as oil prices drop back, and construction activity was curtailed going into the third quarter. Next, continuation of earthworks in the Fording River coal mine deep into the fourth quarter and the award of extra such work for the first quarter of 2018 as we build a strong relationship with an important new customer.

Next, the award of a minimum 3 year site support contracts of the Highland Valley copper mine.

Revenue will start in the fourth quarter, is anticipated to be modest at first, but it is expected to increase over the work duration. Next, we're being shortlisted for a significant term contract at a gold mine and a diamonds mine. The former project could commence in early 2018 and the latter in mid-2019, if secured.

Next, we've had further success of pre-qualifying to bid for major infrastructure projects. This quarter we were chosen 3 from 7 as part of a strong international consortium to bid for a significant gravel road building job in the Northwest Territories. And finally, we've made excellent progress with leveraging our core equipment maintenance competence into work for third parties. We already have 2 jobs for customers in our Edmonton maintenance facility, and we believe that this initiative could have a discernible impact on our 2018 results. Eventually, this external maintenance business could provide more than $20 million in annual revenue for us.

I'm really looking forward to the next few years and pursue that this growth plan with the excellent core group of employees we have at North American.

That brings me to some concluding remarks on the press release we put out yesterday covering changes to our board and management structures. Firstly, perhaps due to my advancing years, I'm often asked by investors about my plans. On that note, I'm very pleased to assume the role of Chairman of the Board in addition to that of CEO. This should provide reassurance for that plan to lead the board and remain as a major shareholder long after my eventual retirement from executive management. Secondly, I'm delighted that we have someone of that caliber of Joe Lambert, to assume the role of president as well as that of COO. Joe has worked tirelessly and creatively on our operational excellence and revenue diversification initiatives and so thoroughly deserves this recognition.

Well, that ends the prepared remarks. And now -- I would now like to hand the call back to Krista, the operator, for the questions segment.

(Operator Instructions) And your first question comes from the line of Yuri Lynk with Canaccord Genuity.

You mentioned in the prepared remarks that you're realizing the benefit of sourcing lower price used equipment. And I got two questions on that. I mean, I thought the big flush out of equipment in Alberta kind of happened 2 years ago. So I'm surprised prices are still that low in that you are -- sounds like you're really realizing the benefit now so maybe you can clarify that? And secondly, you have obviously provided a very encouraging outlook. So curious why your competitors would be selling off equipment at this point?

It's also not so sure right now, Yuri. I think we've picked up some really nice equipment at around $0.50 on the dollar towards the tail end of last year and into the first quarter this year. I think with the rising oil price, as you say prices for used equipment have got higher cents. But we took the opportunity at that time frame to pick up equipment from our competitor who just wanted to get out of the space and we made that decision. And we managed to persuade them to sell our equipment at a pretty reasonable price in our opinion. So on the outlook, I can't recall exactly what the second part of question was? Do you mind repeating that for me?

Just curious if you can provide any color as to why others might be -- some of your competitors, you mentioned have sold equipment, I mean, that seems strange in the context of the very positive outlook you've provided.

Yes, so as I mentioned, one competitor decided to sell through us. But at the tail end of last year, they just decided to get over the heavy end of the market. They are in the construction end, but not in the heavy anymore. So that was just a modest strategy for them. And then we have seen a couple of our earthworks competitors lately, sent the few trucks to different international markets. I guess P&L procedures taken in terms of achieving data pricing for that equipment, I would imagine.

Okay. That's helpful. Just my follow up would be, just on -- you seem to have some pretty good visibility into next year on the revenue side given better line of sight on some summer construction activity. The earthworks, the $90 million job you mentioned. Fort Hill's starting up, all of that. Is it more likely than not that revenue next year exceeds that 15% target? Or maybe you should remind us of some of the offsets that might dampen revenue next year compared to this year?

Well, firstly, I really hope we don't have a -- another fire next year because that's really impacted last year and this. So in the absence of such an event, the second quarter and the third quarter should be better. I mentioned in the prepared remarks that we're seeing some meaningful construction activity. Just to add some color there. We haven't built a mechanically stabilized environment, an MSE wall since 2014. But we hope to be bidding to build a couple of them next year. So that eyes are real sign that meaningful construction activity is coming back. Our customers, as I mentioned, are using the economies of scale to still reduce operating cost further. It's been pretty impressive what they have done. So the volumes of work that we've been asked to undertake are increasing incrementally. Equipment supply is tightening. So all these factors could lead to a pretty decent year in the oil sands plus we're making good progress on our revenue diversification efforts. So I'm very pleased with the way things are shaping up for next year, and that to actually 2019.

And your next question comes from the line of Ben Cherniavsky with Raymond James.

Congratulations to both of you for your -- the management change announcements.

Thank you very much.

My question -- my first question is just on the land -- on the change in the landscape, and in particular with recent transaction with Aecon. Does that -- and you do make mention of it in your MD&A, just kind of loosely, but is there anything you can elaborate on there with respect to how that might change the competitive dynamics, if at all?

I think it's a little early to say, Yuri. It's a very recent announcement, but interesting situation for sure. I think the initial reaction was the acquire would make the competitor stronger. I certainly think that's the case for P3 projects, and maybe international bidding. But I'm not sure, it will change that posture towards oil sands mining, for example. So we'll just have to wait and see if that's a correct assessment of situation, but that's my expectation at the moment.

Okay. Maybe just me, but I find that one of the -- that the -- on a quarterly basis at least, your margins are very difficult to forecast. And just in some cases like when you talked about your gross profit impact by lower pricing negotiated by customers and a few other items like that. How much visibilty do you have on those kind of changes to your margin? And without begging for guidance, is there some kind of way you can help us a little more just to reduce the volatility in the forecasting, because the margins were just have landed all over the map for me in the last little while.

Yes, I can see that point. And we've been scrambling to pick up work in the second and third quarter. I'll give you an example. You'll recall that we had a nice overburden contract cancel on us at the last minute. That was a very decent margin. So we scrambled to pick up some work on the Fording River coal mine. That was a very competitive situation. So we took the work at a lower margin. So that was a great move in terms of getting incremental work for us. But I would say that if we just kept the overburden removal contract, we'd find about $15 million of revenue for that in this quarter, at a nice margin. With the Fording River job, we had about $12 million of revenue or a slightly less margin, maybe a couple of points less, right? So it's just a matter of what's going on in the market. I think with a stronger demand for our services and the lack of fires, you'll see more stability in terms of the margins that we've produced. So I see the reduction in margin in this quarter as being a one-off impact of taking a job that helped us get through the year.

Okay. So for the fourth quarter in 2018, are there any specific moving parts you can see at the moment? Obviously, you know that things come up like fires or canceled contracts or new opportunities. That's stuff you can't predict right now, but the way you're looking at the landscape today, what -- whether -- how should we think about your margins for the next little while?

I think, overall, similar to what we've achieved this year. If we get a lot more construction activity next year, then the margin on that tends to be lower because it's less capital-intensive. And I know we haven't done a meaningful construction job for almost 4 years. So you haven't seen an impact. But you'll recall that, that side of job attracts margins around 15% of EBITDA on an EBITDA basis. So if you see that coming into the mix, then that could lower the overall margin, but revenues will be much higher. So it all depends on how strong the construction market comes back next year.

Okay. That's helpful. And then you have mentioned a specific note before. Some of those kinds of construction projects you're pursuing like the one in Fargo with the flood mitigation project. Is that -- you just kind of sit on your bid there and wait for it to happen? Or is there any further development that you can -- that can help you -- help us understand how much or, if at all, it's become sort of a more realistic project that led to the equation?

The project is kind of, on hold for the time being. As the 2 states involved kind of wrangle over final details. So we expect the project to eventually go ahead. So if -- but in the meantime we are kind of on standby. Hopefully, there'll be some news in December about a new time frame. So that's a little disappointing, but unfortunately most infrastructure projects these days are subject to some delays. So in the meantime, as I mentioned on the call, we're bidding other opportunities. And we continue to be shortlisted. And I was a member of very strong teams. So that's encouraging. We have been asked by major players to conduct earthworks on significant projects. And I think it's a matter of the time, and so it's when, not if, we'll get one of these jobs in my opinion. We will pick one up and it'll make a meaningful difference to our financials.

(Operator Instructions) Your next question comes from the line of Maxim Sytchev with National Bank Financial.

I had a question in terms of accounts receivable. Seems to be there was quite a bit of build in Q3. I'm just wondering how we should be thinking about that line item in Q4 and beyond?

Max, it's Rob. The Q3 accounts receivable buildup was tightened really to a ramp up of revenues during the overburden work. As you would have seen in Q2, our volumes were down and so we collected some of the money or all the money, out of our Q1 volumes. And so it's just a seasonality of the revenue that's driving the movement in the receivables. So the ramp up for receivables is the ramp-up revenue. And then Q4, you'll see a further ramp-up of receivables. Similar to what happened last year in Q4 and in Q1. So it would be the same sort of trend, Q4, Q1 as you saw last year.

Okay. That's helpful. And Martin, a question for you just in terms of -- I think for the first time you quantified the opportunity on the maintenance side for your clients. Two questions there. Any guidance in terms of how we should be thinking about margins there? And also your capacity to perform this work, I mean are there any incremental investments or is it is just drilling by hiring incremental people, if needed some. Maybe any commentary there?

Yes, I wouldn't want to comment on the margins, yet, Max. Because the initiative is in its infancy. But eventually, I think we can build it into a reasonable size piece of our business. For the time being, we're doing that work with the addition of people at our Atchison or Edmonton shop. And we're all looking at potentially building a larger facility that would accommodate all our office people as well as having a bigger shop. Now concentrating our resources in one place would be attractive and would save cost just on a real estate basis. So the addition of this revenue stream would make the investment even more attractive. So we're kind of kicking that around, and we'll be discussing it at our board meeting towards the end of November here. So don't be surprised if you see an incremental investment in that area.

Okay. And then on capacity, Martin. I mean, is this even sort of further scalable from the $20 million that you telegraphed?

Yes, I think so. I don't want to kind of name names or anything, but we follow the leaders in this space. And they talk about it being $1 billion a year business. So just take a little piece of that, little chunk and build a point, I think is very doable.

Okay, that makes sense. And then did you mind quantifying the materiality of the Northwest Territories project, if it were to head?

Yes, I would expect it to be around $150 million all up, maybe $200 million. We haven't got the final bid documents yet. So we don't know exactly. But a reasonable size project with our share maybe 30% to 40% of that.

Okay. That's helpful. And maybe lastly, again given a relatively positive commentary in terms of equipment supply normalizing and then things like that, are we sort of at the tail end of pricing compressions from clients? How should we think about this on a going forward basis?

Yes, I think so. And we mentioned that when we negotiated our MSAs towards the end of last year, and put them all in place, the pricing was down. But you have to kind of remember that for any significant piece of work, the customer tends to reprice that anyway. So we have the opportunity depending on capacity in what our competitors are doing to ramp up prices pretty quickly on specific pieces of work. So just because of the basic price on MSA is maybe a little lower than it was previously, doesn't mean to say that we can't take price opportunistically on a certain piece of work going forward.

And there are no further questions at this time. I'll turn the call back over to Mr. Ferron.

Well, thanks everybody for joining us today. And we 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 your lines.