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Executives

Bob German – President and Chief Executive Officer

Scott Matson – Vice President Finance and Chief Financial Officer

Analysts

Dana Benner – AltaCorp Capital

Steve Kammermayer – Clarus Securities

Horizon North Logistics Inc. (OTC:HZNOF) Q2 2014 Earnings Conference Call July 30, 2014 11:00 AM ET

Operator

Good morning. My name is Curt and I will be your conference operator today. At this time, I would like to welcome everyone to the Horizon North Logistics, Inc., second quarter results conference call. (Operator Instructions) Thank you. Mr. Bob German, President and CEO, you may begin your conference.

Bob German

Okay, thank you everybody for joining us this morning. As usual, I will turn it over to Scott to cover some of the legalities and then I will get into the quarter stuff. So Scott?

Scott Matson

Before we begin, I just like to remind everyone this call may include certain statements or disclosures relating to Horizon that are based on the expectations of management as well as assumptions made by and information currently available to Horizon which may constitute forward-looking information under applicable securities laws. All such statements and disclosures, other than those of historical fact, which address activities, events, outcomes, results or developments that Horizon anticipates or expects may, or will occur in the future should be considered forward-looking information. We caution listeners that many factors could cause the performance or achievements of Horizon to be materially different from any future results, performance, or achievements that may be expressed or implied by such forward looking statements.

Bob German

Thanks, Scott. As all of you have seen, we released our less than stellar results for the quarter. What I want to do is talk about what happened in the quarter and certainly the drivers for activity et cetera and get out to what we see coming up ahead of us, what we see for the year and the things that we are doing to prepare for what we see coming going forward.

Year over year revenue is down 35% and EBITDA 53% while sequentially both revenue and EBITDA were down as well. So the best way to talk about this is providing an update on our different pieces of the business.

Now I will start with the camp and catering operations. Year over year our revenue was down about 7% while sequentially revenue was down about 27%. Year over year the primary cause for the decline was primarily in the Fort McMurray region where we had camps coming up. If you recall long term contracts midyear in 2013 and we did not see the sand utilization of those camps this year as we had in the first – in the second quarter of last year. And for instance, the base one is our Black Sand, so it was last year, it was 85% utilized whereas this year it’s only 65% utilized.

In addition, some of the beds that we were redeploying from those sites, were delayed on projects, we did mention one project, the 540 person camp which is a combination of both beds that we built new plus beds that we’re redeploying, we had expected that to be up and running substantially earlier, it is just now running actually this month, it’s up and running now that 540 person camp. So a number of factors there.

Sequentially it’s really the normal course, I mean it was – the winter work coming off in the second quarter from the first quarter with revenue down about 27% sequentially quarter over quarter.

Manufacturing, down substantially. As you recall, through 2013 we were working very hard on the big camp project that we’re just finishing up now. In the second quarter, our manufacturing that’s just primarily dedicated to internal work, building for the 400 person camp that will be up and running here on a long term contract, it will be up and running in September of this month. In addition, we’re just finishing up the large contract which is now 99.9% complete, we just have a few people on site just doing the finishing mope up on that. We were incurring some additional costs on that too, so that’s squeezed our margins as well on that front, the manufacturing front.

From a matting perspective, and it’s more appropriate that we talk about matting on a year over year basis. But overall revenue was up in the matting business, about 12% year over year in the second quarter which is traditionally a very busy quarter for us in that business.

Certainly in terms of rental activity and rental days, it’s up but pricing has come down, both on the rental side and on the sales side. It is a competitive business. We’re also seeing margins being squeezed a little bit by lumber prices that have increased recently on lumber coming out of US. So quarter to quarter our rental prices were about the same but year over year we did see some decline in that.

You will note that – turning to the balance sheet, our debt has picked up a bit. We have, as mentioned earlier, stashed some money on our projects that have been delayed, so half of those beds we built in late 2013 that project was delayed, so that we’re carrying that capital without the revenue stream which is just now starting. We have mentioned before that we have acquired land in BC market [indiscernible] for those opportunities and spending on the projects that I mentioned the 400-man camps that is being installed as we speak that will be up and running in September. So all of those things kind of ticked up our debt load. We are confident that it will come back down to more normal debt levels for the next six to nine months as those assets are deployed and utilized.

Overall I am quite confident in our operating capabilities and we have proven track record of being able to deliver for our customers, and I am quite confident in the power of our integrated business model in that when we are bidding on a project. We are working hard at driving out our business development and marketing initiatives both on the manufacturing front to broaden out the demand for those services to more permanent modular structures that is very applicable to that kind of work and we are talking with a number of parties now who are very interested in doing that with this.

We are positioning ourselves for future opportunities certainly with respect to LNG opportunities. As I mentioned, we have acquired lands and are working on acquiring more lands, and that’s progressing as well. Our large presence in the BC market, this card that we’re going to play pretty hard, we have a workforce of over 600 people in the BC market and that’s going to play very well into that proposition.

As you know, we are giving more specific guidance going forward for the next couple of quarters, with EBITDA expected to be in the 30% to 35% range for the third quarter and 35 to 40 – in that million dollar range, and Q4, in the $35 million to $40 million range.

Our manufacturing right now is 85% booked for the last six months of the year, which is significantly higher when compared to Q2 that we talked about briefly. Our camps and catering occupancy levels will be going up on our existing assets and deploying the new projects that are underway in the latter half of the year. And our rig camp business is going quite strong right now. They are lot better than it was this time last year and our book for business for winter work is building up sooner than what we had anticipated. So that looks to be going quite strong.

The matting business will have a strong quarter in Q3 which will – as is typical taper off in Q4. Q4 will probably be similar to what Q2 is – as was – has been.

So with that, that’s a quick synopsis of what we see coming up. Bidding activity is still strong. We submitted bids this week for an 800 person camp, this week – sorry late last week, for an 800 person camp for a long term contract and know that the pipeline of opportunities as we expect a few thousand more beds in terms of bids coming online pipeline here in the near future. So that still remains strong.

So with that, I will open it up for questions. Curt?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Dana Benner from AltaCorp Capital.

Dana Benner – AltaCorp Capital

I wanted to start with the realized pricing in the quarter in your camps business, off meaningfully from – certainly from Q1, not so much on a year-over-year basis, if we look further back in time, there wasn’t as much seasonality in the pricing in your large camps base and there seems to be more now. And I realize – or if it’s just a change in the way pricing has done down et cetera but can you give us some more color on general pricing trends for beds in your space?

Bob German

Generally, I mean it’s getting a bit more competitive particularly in the Oil Sands market and certain regions. Some of what you are seeing, you will know, Dana, in terms of contract structures where I almost mentioned again, it’s delivery of contracts when – if utilization comes off for a period of time, it’s just reflecting in the rents – rent per day, so price per day comes down, but generally in certain regions of the Oil Sands market we are seeing more competition.

Dana Benner – AltaCorp Capital

And how would you assess the relative strength of the factors, in terms of determining pricing is – is it largely the fact that there is more competition that has led to the pricing that we now see or is it the just change in – or is it mostly just the change in structure of the contracts?

Bob German

Well, I’d say mostly it’s the change in structure of the contracts, because it’s just certain assets that we see competition.

Dana Benner – AltaCorp Capital

Secondly, just on the camp sales side, Q2 was as weaker quarter as you’ve seen in a long time, I think three or four years. And I guess probably I am and the others are wondering is this the truth trough point for manufactured orders or could we see orders – are we in a really bumpy period right now where sure things could bound back in the second half but we could be back at this level again in Q1 or Q2 of next year?

Bob German

We need – we are working to expand that market, so we are pretty confident that we are going to have some kind of different stuff projects come into the pipeline here as we move to the south that will lead into next year [indiscernible] I was talking about that activity. Certainly getting some investment decisions on the LNG projects is going to be a factor in that.

Dana Benner – AltaCorp Capital

So do you think it’s obviously – you’re saying that there isn’t something that – something else is going on structurally whether it’s more manufacturing capacity and orientation toward rental versus sales, or you don’t see any other trends that would explain?

Bob German

No, I don’t see any trends -- rental versus sales, I don’t see that. We’re still bidding on both. Some of the contracts that we do for the longer term contracts, the ones that we bid recently are substantially longer term full service contracts, they do that five or offs-season [ph], so that kicked in after three, four, five years. So sometimes you get competition on that as well.

Dana Benner – AltaCorp Capital

Just one final question and I will turn it back. So you’ve issued guidance in the second half of this year, based on indicated range. If I am a PM right now and I’ve gone through a quarter like this, what would give me the confidence that you’ve got enough clarity on business levels that you could put out numbers like that.

Bob German

We are quite confident those numbers both from contracted revenue stream, manufacturing basis is booked and it’s all – the third party stuff is booked, so the revenue stream is there, we’re quite confident that, that part of our revenue streams in the second half were contracted.

Operator

(Operator Instructions) Your next question comes from the line of Steve Kammermayer from Clarus Securities.

Steve Kammermayer – Clarus Securities

I am just wondering if you’d be able to quantify maybe that the impact of the increased cost you just saw in the quarter for the completion of that Oil Sands camp as well as the impact from the delayed camp versus what you guys had expected?

Bob German

Yeah, the increased cost probably in the $2 million to $3 million range, on the cleaning of that project, Scott is doing some quick math, on our 540 person camp, that’s delayed for a quarter.

Steve Kammermayer – Clarus Securities

Maybe we can just come back to that.

Bob German

Yeah, we will come back to that.

Steve Kammermayer – Clarus Securities

Sure, just on – just maybe back to your Q3 guidance, obviously it is -- the range comes in more than double what you saw in Q2. Just wondering if the beds are in place, I guess the ones that we’re transitioning, are they placed now or are they yet to be in place? And just wondering are you assuming additional beds coming online and getting into place for Q3 or could that be pushed out as well, just trying to figure out what might be more –

Bob German

We are just -- we’re just talking – beds have been redeployed, the contract is in place.

Steve Kammermayer – Clarus Securities

I am sorry.

Bob German

They are in place and contracted.

Steve Kammermayer – Clarus Securities

In place and contracted. Okay. That’s all I had.

Operator

(Operator Instructions) Your next question comes from the line of Greg Colman from National Bank Financial.

Greg Colman – National Bank Financial

Yeah, just a couple of quick ones here. Again as Steve was saying, I am just taking a little bit into the guidance. I just want some clarity, Bob, you mentioned I think in your prepared remarks that manufacturing is 85% booked through, through the second half. Is that 85% booked, what’s driving your guidance, or does it need to get higher than that, do you need to win additional bookings in order to reach the guidance that you’ve provided to street?

Bob German

No, that’s based on 85%.

Greg Colman – National Bank Financial

And just for a full clarity, in the interest of if we wanted to stretch, if you did want it to stretch and you received additional, you have a bit more capacity there, so there would be – that would be upside in addition to the guidance but based on existing contracts you’ve got, you’re looking at 30 to 35, and 35 to 40?

Bob German

That’s correct, yes.

Greg Colman – National Bank Financial

Great. Secondly, I just wanted to talk a little bit about, was [deepening] pipeline, we are looking at here, what I am trying to reconcile is you’ve been commenting about a robust pipelines, talking about some bids that are going out there, lot of opportunities. But concurrent with that, we are seeing a dropping utilization and pricing gets a little bit more competitive. Is that what we should be assuming then for the pipeline – the pipeline bids out there that they’re likely going to be priced at more competitive pricing, payback periods a little bit longer, economics are little bit more less robust than they have been in the past.

Bob German

I think that’s probably a fair comment, yes.

Operator

As we have no further questions at this time, I will turn the call back over to you, Mr. German.

Bob German

Okay. Thanks everybody. As usual, Scott and I will be available for any further questions that you may have, and we will talk to you again in a few months. Thank you.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: Horizon North Logistics' (HZNOF) CEO Bob German on Q2 2014 Results - Earnings Call Transcript

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