North American Construction Group Ltd. (NOA) Q3 2014 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen. Welcome to North American Energy Partners' earnings call for the quarter and year ended December 31, 2013. 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, Senior Financial Manager, Investor Relations of North American Energy Partners Inc. Please go ahead, sir.

Good morning ladies and gentlemen and thank you for joining us. On this morning's call, we will discuss our financial results for the quarter ended December 31, 2013. This quarter marked the end of our fiscal year, as we have transitioned to a December 31st calendar year-end reporting cycle. All amounts are in Canadian dollars. I would like to remind everyone that statements made during our prepared remarks or in the Q&A portion of the conference call with reference to management's expectations or our predictions of the future are forward-looking statements. All statements made today which are not statements of historical fact are considered to be forward-looking statements. Certain material factors or assumptions applied in drawing a conclusion or making a forecast or projection are reflected in the forward-looking information. The business prospects of North American Energy Partners are subject to a number of risks and uncertainties that may cause actual results to differ materially from a conclusion, forecast or projection in the forward-looking information. For more information about these risks, uncertainties and assumptions, please refer to our most December 31, 2013 Management Discussion and Analysis, which is available on SEDAR and EDGAR. On today's call, David Blackley, CFO will first review our results for the quarter and then he will hand the call over to Martin Ferron, President and CEO, for his remarks on our strategy and outlook. After prepared remarks, there will be a question-and-answer session. For your information, management will not provide financial guidance. I will now turn the call over to David.

Thank you, David, and good morning everyone. As David stated above, we have transitioned to a new reporting period and will now follow a calendar year cycle. Thus, I am going to review consolidated results for the quarter ended December 31, 2013, which is now our fourth quarter, as compared to the quarter ended December 31, 2012. Revenue from continuing operations for the period was C$108.9 million, compared to C$116.8 million in the same quarter last year. We experienced lower volumes of reclamation work and haul road construction at the Millennium mine in the quarter. This was partially offset by the startup of mine services volumes at the Kearl mine, and early site development activities at the Fort Hills mine. Gross profit from continuing operations was C$16.8 million or 15.4% of revenue in the quarter ended December 31, 2013, up from C$9.8 million or 8.4% of revenue for the same period last year. We experienced improved profitability in the quarter, due to the execution of change orders on two longer term projects, strong performance on our haul road project, and the benefit of equipment cost efficiencies. This improved margin more than offset the effect of lower volumes. We recorded operating income from continuing operation of C$5.6 million in the period, compared to an operating loss of C$1.7 million in the same period last year. General and administration expense excluding stock based compensation was C$8 million in the period, down from C$8.9 million in the same period last year. This reduction in expense, reflects the benefits of our business restructuring activity, partially offset by C$0.8 million of business restructuring charge recorded in the quarter. We recorded net income from continuing operations of C$5.5 million in the period, compared to a net loss of C$4.9 million in the same period last year. Basic and diluted income per share was C$0.15 compared to a basic and diluted loss of C$0.13 per share in the same period last year. Operating income from discontinued operations was C$0.4 million for the period, as compared to operating income of C$15.4 million for the same period last year. In the three months ended December 31, 2013, total interest expense was C$3.2 million, down from C$5.9 million in the previous year. This reduction reflects the benefits of the debt restructuring in 2013, which included the partial redemption of our Series-1 debentures, and the repayment of our term facility drawn under our previous credit agreement earlier this year. Looking at liquidity, as of December 31, 2013, we had approximately C$82 million of borrowing availability to support working capital and credit needs, and the cash position of C$13.7 million compared to a cash position of C$1.2 million at the beginning of 2013. Turning now to capital; total capital additions for continuing operations for the period amounted to C$11.8 million, with C$11.5 million being allocated to sustaining capital. We also realized C$1.5 million in proceeds from the sale of assets. During the quarter, we also signed a three year credit facility with our existing lender that will also lower the cost of our working capital lines going forward. That summarizes our fourth quarter results. I will now turn the call over to Martin for his remarks.

Thanks David and good morning to everybody. We ended 2013 with the anticipation that the mine condition and competitive pressures in the oil sands mining segments, were likely to remain extremely challenging. In this situation we will continue to hunker down and focus on operational improvements, especially in the areas of safety, cost, customer satisfaction and risk exposure. Reflecting on this now, I am extremely pleased and proud of our performance in the market conditions that turned out much worse than we expected. With the backdrop of a 21% fall in revenues, we increased EBITDA from continuing operations by 55%, gradually improving as the year went on. Our results in the December ending quarter really showcased the success of our business turnaround efforts, with EBITDA margins far exceeding our projected 10% exit rate even after some charges related to reorganization, and the change of the financial year-end. [Indiscernible] rolled out some other shareholder-friendly initiatives that we completed in 2013. Firstly, we repurchased 1.8 million of our shares, roughly 5% of those outstanding in December, through a normal course issuer bid, which took only eight weeks to complete. Shareholder's equity on the balance sheet was improved by 45% to 192 million at year end. Net debt was reduced from C$336 million to C$105 million, thereby producing annual interest cost savings of around C$18 million. C$35 million of free cash flow was produced from the better profitability and capital discipline, and we fully implemented a complete strategic realignment focused on a much simplified and easier to understand [coal] [ph] business. Now we did announce last night, another shareholder [friendly] [ph] initiative, which I will comment on at the end. As you’ll soon read in my shareholder letter, I believe that we are near the end of the beginning of our business enhancement efforts. While we have always relentlessly pursued cost savings, our main emphasis going forward will be improving our top line revenues and free cash flow. We expect to achieve the revenue growth from, firstly, increased activity on existing mine sites, as the owners grow production in order to reduce operating costs per barrel. Renewed confidence in pipeline and rail takeaway capacity for produced oil, together with the depreciation of the Canadian dollar, should help drive this trend. [Indiscernible] incremental work on new mines, with the green light for the Fort Hills mine being a very welcome recent development we are already bidding and winning material work scopes for this exciting and fresh opportunity. Then lastly, revenue will come from additional and alternative asset utilization from SAGD projects, support, road building and other resource plays such as coal, hydro electricity and LNG. In the 1st of January, we secured our first road building job in quite a while, and we plan to build upon that success. We have the fleet and resource capacity to produce around C$650 million of revenue, and aim to achieve that over the next two to three years, without much growth capital, or increases in our indirect costs. Ideally, we would like to see about C$100 million of revenue diversification outside the oil sands mines, [inaudible] level of business. As we enter 2014, I expect that our revenues will drop over the winter months. But based on a recent real uptick in bidding activity, together with some nice job wins, I am reasonably optimistic that the market will treat us better this year. We have already replaced our non-recurring project work from 2013, and look to continue building our [workbook] [ph] from the foundation of our lean cost structure. While we do not give performance guidance, I'd like to comment that we expect around 65% of our EBITDA to be produced in the middle two quarters of the year, based on the timing of job, job startups that we see. So lastly, I am very pleased to conclude my prepared remarks here. We are talking about yesterday's announcement, that the board has approved the implementation of a new dividend policy. According the policy, we will pay an annual aggregate dividend of C$0.08 per common share, payable on a quarterly basis. I believe this distribution level, a portion of our cash flow to shareholders fits well with our long term strategy to maximize shareholder value, and also help us to broaden our shareholder base. With that said, I'd like to take the opportunity to turn the call back to LeTonya for the Q&A session please.

Thank you. (Operator Instructions). Our first question comes from Maxim Sytchev with Dundee Capital Markets. Please proceed with your question.

Good morning gentlemen.

Good morning Max.

Just a quick question, in relation to the EBITDA margin this quarter, obviously very impressive at 13.8, and I think originally, you telegraphed may be 10% exit rate by year end. I guess, couple of questions there, first of all, in relation to sustainability, if there were any unusuals that you are not going to see over the coming couple of quarters, and just, again if you may be can comment -- directionally speaking, in terms of how you think the EBITDA margin dynamic is going to play out in 2014?

Sure thing, Max. So we did have a little bit of a pickup in the quarter from selling two claims. But that's kind of normal course stuff, we are always dealing with change orders and claims. Contrary to that though, we did have some reorganization costs, as David mentioned, C$0.8 million. We carried the cost of the change of year-end, which was about C$400,000. So you know, taking into account all the puts and takes, it didn't really have a net benefit for us. I put it down to just good operational cost control. This December quarter will be my second one, I kind of learned from the first one, and what we saw last year, the same as this, was that basically the mine shut down for a couple of weeks, and so it turns [indiscernible] quarter. So we were better prepared for that and we managed to shed our costs off, and just did a much better job of managing that situation this year. So you know, going forward, I expect us to continue to really focus on that cost structure. We did do another reorganization in November, cut our G&A even further. So during the year, you are going to see the full benefit of G&A cuts to be made, full benefit of other initiatives we undertook. But the real thing that's going to drive the ethanol margins going forward now, is revenue, as I mentioned, and I am very pleased that when I came back in January, we have seen a real uptick in bidding, and I have been expecting that to take place, and just great to see it happen. So we have already started the [inaudible] work, and while we don't want to be sounding too rosy here, I am very encouraged by that situation. So that's kind of it.

Okay, that's excellent. Just one quick follow-up, in relationship to dividend, obviously very welcome development I think from a shareholder base. In terms of -- how should we think about capital allocation down the road, in terms of paying down the debt, internal opportunities and so forth; because right now, it looks like you have enough equipment to really benefit from operational leverage. Can you just maybe provide a bit of color, in terms of how you think about [FCS] [ph] redistribution down the road?

As I said in my remarks, I am not expecting us to invest much with growth capital. As you say, we have got a fleet that can do much more work, get us to that C$650 million or thereabouts number over the next couple of years maybe. So you know, our capital will go to maintenance sustaining efforts. It will go to paying down debt. So obviously with dividend now, more share buybacks at certain points [aren’t] [ph] out of the question either. So we will just look at our situation, we are going to free cash flow. Hopefully, we are going to get contingent payments from Kella [ph]. So as our cash comes in, we will look at the best way to allocate it, and I think we have shown that we have been very shareholder friendly and hope to continue on that basis.

Okay. Excellent. Thank you very much.

Our next question comes from Ben Cherniavsky with Raymond James. Please proceed with your question.

Good morning guys.

Good morning.

Martin, just around your strategy of diversification in the past, you have talked about other avenues for growth, outside of mining, outside of oil sands but also diversify within oil sands, like pursing some of the SAGD opportunities. Have you made any progress with the strategic pursuit of those kind of opportunities, and would it be, in any way, material for the next year or two?

Potentially, we bid a very large site, the support contract last year for example, was around C$90 million, C$100 million. Fortunately, it got pushed to the right. So we are hoping that's going to come back this year. We have got another couple of SAGD support [bids in house] [ph] that we are looking at. I mentioned in my remarks, that we won our first road building job, just a small one, C$16 million, but it’s all grading, it’s all earth work. So it will be a great job for us to start up that business again. There are other bigger projects to bid, so we will be doing that. We are looking at the LNG, we have got again, some big packages in-house there; and coal mining too, there is a couple of potential coal mining support prospects that we are looking at. So some of it will be longer term, but certainly, the road building will help 2014, and you know, I hope that we win a SAGD project too as well. So as the year goes on, we can update you on it.

Can you elaborate on the LNG opportunities you are identifying?

Joe Lambert is online. Maybe you can just help me out with that Joe, is that okay?

Yeah, there is – it’s in the East Coast industrial areas, around Kitimat, and a lot of the facilities have -- the major dirt works projects that create the initial access into the areas, and the civil works for the plant site. So there is three or four major facilities there, that are in kind of preliminary stages of bidding, where we have done initial requests for information and some, we expect to see our fees. Most of them are longer term towards the end of 2015, as far as when they'd actually break ground.

Okay great. Well done on the quarter, and nice to see the dividend too. Thanks guys.

Thanks very much.

Our next question comes from Chris Lalor with GMP Securities. Please proceed with your question.

Hi guys. Just another question on outlook. Seems to me in your commentary that there has been a bit of an improvement over last quarter. You guys have targeted -- your target of 10%, you guys exceeded that quite a bit, and you guys are looking for increasing EBITDA margin to about 12% in the next year or two. So just wondering, have your targets increased following this quarter, or how do you expect your outlook has changed versus last quarter?

Clearly, producing this EBITDA margin in the last quarter there was great. The benefits of simplification have really helped us here, more than I expected actually, and that's great. I think, we are going to be cautious as usual, and say that 12% is kind of a good number for 2014, and hopefully we can do better than that though, especially if we get more utilization, more revenue than has been predicted, based on present bidding activity. So eventually, as that asset utilization really improves, and we get more revenue, but I think clearly 12% will be a low number. We will get to 15 and higher than that eventually.

Okay great. And just may be further on that, it is good to see the uptick in bidding activity. I was just wondering if you could elaborate on where you are seeing it? Is it across the border, some areas more so than others?

Obviously, the Fort Hills opportunity, the new mine there is providing a lot of bidding, it is coming out in five years, and we have already picked up three of those. We don't report press release, when it’s below $C$50 million. So the three wins we have are below that threshold, but still building a nice proper work there. We have got our foot in the door, we are on the site, and hopefully use that situation to get a lot more work. We did a much larger [indiscernible] last week, and I am hopeful, we will see what happens. But we are beginning work on existing mines. As I mentioned two, the Horizon mine, we picked up some project work. I mentioned SAGD, we got a couple of bids in-house. So across the board, we are seeing opportunities to put in bids, and we have had our fair share of success here, more than our fair share I think, because we have got probably the leanest cost structure out there [indiscernible].

Great. Thanks guys.

(Operator Instructions). Our next question comes from Luke Folta with Jefferies. Please proceed with your question.

Good morning. Thanks for taking my question. Firstly, when we start to think about the opportunities outside the traditional business that you are, in the oil sands, we talked about mining and some of the other areas. You will see a margin benefit, as the utilization on the fleet rises. But can you talk to the contribution margins on that business? Should we be thinking of them as similar to what you earn in your core business currently, better or worse?

Yeah, similar is a good way of looking at it. Obviously, if we are seeing an opportunity to squeeze a bit more price out, we will do it. But based on the road building job we just god, its similar to what we are earning on the mines. So if we can bid about level, it is great.

Okay. And the movement of those areas, does that involve adding any additional equipment, or is it purely the current fleet?

It is the current fleet. As I mentioned in my remarks, I'd like to get, maybe C$100 million at the end of a two year period, with this diversification effort. So that's kind of what we are targeting.

Okay. You spoke before on the general condition in the industry still pretty competitive, given the excess equipment that's available. Can you just talk to the broader trend? Are we seeing any sort of rationalization amongst the competition, and I guess, do you think we have reached the bottom in terms of overall industry utilization rates?

I certainly hope so. I think our revenues are going to trough here over the winter months, and the competitor's revenue should do also. They are obviously going to benefit from the uptick and bidding also. So hopefully as a group, we are going to do better. While our advantage is in the -- we are ahead of the game, in terms of what we have done on costs, I think. So that will hopefully help us more.

Okay. And one last one if I could. The two settlement, the claims that were settled in the quarter. Anyway you can quantify what the impact of that was?

It was around C$1.5 million. As I mentioned, we had other issues that kind of countered that. So I don't want to give people impression, that this was all about claims or change orders. But that's the number.

Understood. Thank you very much.

At this time, I would like to turn the call back over to management for closing comments.

Thanks LeTonya. Yes, so that's it for today. I think we've had a good year. Hopefully 2014 will turn out to be better. Certainly, looking forward to it, and we will speak to you next time. Thank you.

Thank you. And this does conclude the North American Energy Partners conference call, and have a great day.