North American Energy Partners' (NOA) CEO Martin Ferron on Q2 2014 Results - Earnings Call Transcript

Aug. 8.14 | About: North American (NOA)

North American Energy Partners Inc. (NYSE:NOA)

Q2 2014 Results Earnings Conference Call

August 07, 2014 09:00 AM ET

Executives

David Brunetta - Senior Financial Manager, IR

David Blackley - Chief Financial Officer

Martin Ferron - President and CEO

Analysts

Greg McLeish - GMP Securities

Luke Folta - Jefferies

Maxim Sytchev - Dundee Capital Markets

Operator

Good morning ladies and gentlemen. Welcome to North American Energy Partners’ Earning Call for the Second Quarter ended June 30, 2014. 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 Incorporated. Please go ahead, sir.

David Brunetta

Good morning ladies and gentlemen and thank you for joining us. Welcome to the North American Energy Partners’ second quarter conference call. I would like to remind everyone that today’s comments contain forward-looking information and our actual results may differ materially from expected results because of various risk factors uncertainties and assumptions.

For more information about these risks, uncertainties and assumptions please refer to our June 30, 2014, 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.

David Blackley

Thank you, David, and good morning everyone. I’m going to review consolidated results for the second quarter ended June 30, 2014, as compared to the quarter ended June, 30 2013.

Revenue from continuing operations for the quarter was $116.2 million compared to $115 million in the same quarter last year. We commence the ramp up of several construction work at the Fort Hills mine, heavy civil and mechanical stabilized earth wall construction activity at the Horizon mine and road building activity on the Alberta transportation Highway 63 project.

These activities replaced the heavy civil and mechanically stabilized earth wall construction performed last year on the Mildred Lake Mine Relocation project. Revenue was lower than the same period last year on the Horizon mine overburden removal contract due to the client’s decision to take over the procurement of equipment maintenance cost. Revenue was lower than anticipated at the Millennium mine with suspension of work in June.

Gross profit from continuing operations was $9.3 million or 8% of revenue in the second quarter up from $8.4 million or 7.3% of revenue for the same quarter last year.

The improvement in both gross profit and margin were primarily driven by reduced operating lease expenses, the contribution from the ramp up of activity at the Fort Hills mine and the addition of non-overburden work at the Horizon mine coupled with improved margins on mine service activity.

The cost impact of the June shutdown at the Millennium mine combined with accelerated depreciation recorded on assets held for sale and increased use of rental equipment to support that civil construction volume eroded some of these gains.

We recorded an operating loss from continuing operations of $2.2 million in the quarter compared to an operating loss of $2.3 million in the same quarter last year. General and administrative expense excluding stock-based compensation was $7.9 million in the quarter, down from $8.3 million in the same quarter last year.

This reduction in expense reflects the benefits from the simplification of our business and the associated restructuring activity initiated during the prior year. We recorded a net loss from continuing operations of $4.1 million in the quarter, an improvement from a net loss of $5.6 million in the same quarter last year. Basic and diluted loss per share was $0.12 compared to a basic and diluted loss of $0.16 per share in the same quarter last year.

In the quarter, total interest expense was $3 million, down from $5.7 million in the same quarter last year. Our debt restructuring including the partial redemption of $150 million of our series 1 debentures in the third quarter of last year and $10 million of redemption completed early in the second quarter of this year. This resulted in reduced interest expense on our series 1 debentures of $1.5 million down during the quarter from $3.9 million in the corresponding period last year.

Looking at our capital expenditure at June 30, 2014, we had net debt of $118.6 million. As part of the ongoing review of our capital structure, I'm pleased to announce that we successfully negotiated amendments to our credit agreement. These amendments will allow further flexibility in our financing needs as we planned for the future. We will change the senior leverage ratio to less than 2.5 times from less than 2 times. We will increase our ability to finance equipment purchases through capital leases by an additional $15 million, increasing the limit to $90 million.

In addition, we have pre-approval from our bank syndicates to redeem up to $20 million of a high cost unsecured debt. This will increase our flexibility to balance our mix of lower cost secured debt versus higher cost unsecured debt. We’re comfortable with this debt profile and the planned debt repayments on capital leases that will be funded from future operating cash flow.

Turning now to capital, total capital additions for continuing operations for the period amounted to $6.6 million with $6.4 million being allocated to sustaining capital.

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

Martin Ferron

Thanks David. And good morning everyone. Well, we continue on the path of operational improvement but our path can be impacted by seasonal factors especially in this reporting period which historically is our slowest each year. Last quarter two the path was flooded for a while; this time, conditions remain very wet and muddy, particularly in the last six weeks when we had 10 days of intermittent heavy rainfall.

Q2 is also when we transition from mostly earthworks with heavy equipment, the labor intensive and lighter construction projects. That change in work mix which involves the mobilization of large amounts of people and equipment tends to build the momentum as the quarter unfolds.

To put that point into perspective, this year we moved over 800 projectors now and around a 150 pieces of equipment to our Fort Hills jobs which mainly entail the building of roads, deep piping and drainage systems. The wet weather that occurred [stoled] our progress in getting these projects off to a fast start as the quarter went on. As you can probably imagine, performing work in trenches is far from ideal in wet conditions.

Unfortunately, we also experienced an employee fatality at the Millennium mine site in early June and work was suspended for the rest of the month and into July. Even now we are now back to per-instant work load levels, let's hope to get there in the next few weeks. This was our second fatality in over 30 years of science activity with heavy industrial equipment and came at a time when our overall safety performance has been trending very well.

The tragic incident will always be at the forefront of our minds as we continue to strive to ensure, but the rest of workforce gets home safely at the end of each shift.

We currently estimate the economic impact of the incident to be a loss of around $20 million of revenue and $3 million to $4 million of EBITDA evenly split between Q2 and Q3. Hopefully we have the time and the opportunities to make some of these shortfall back by the end of the year.

Despite the spring break up and accident impact, we still managed to produce around 15% more EBITDA for Q2 on a year-over-year basis. And for the first half of the year we are although 40% ahead of the same period last year. We will continue to make good headway, but I suggest that it’s best to judge our progress on a year-over-year rather than a sequential quarterly basis. Indeed the dark cloud of the last two weeks of caring and we’re very busy undertaking a semi-construction projects of Fort Hills and two of the other mine sites, while bidding for winter season work. We now expect more of the construction work to carry over to Q4 thereby making our workload smoother for the rest of the year.

On the non-oil sands mining front our work on the Highway 63 road building project is doing well. Given drier conditions and we’re pursuing follow-on deals. We also recently completed the pre-qualification exercise of a large SAGD hydroelectric project in BC and hopefully will be short listed for that as part of the contract to consortium.

We’re also presently bidding for a couple of SAGD-related infrastructure projects which are meaningful in size. In an eventful second quarter our largest shareholder announced that they wish to liquidate their holdings in North America. The disposal was conducted by our secondary offering which I believe proved to provide minimal disruption to the market. The secondary offering resulted in a little over 7 million shares entering the public float and increased free flow should improve the liquidity of our shares and will be a benefit to our much expanded number of shareholders.

On August of 4th, just last Monday, the borrower of our piling business announced interim results for the first half of 2014 and stated their profits lower than expected at the time of the acquisition due to a very material decline in investment in the Canadian resources market. Therefore they do not expect to pay any contingent consideration this year.

For this to be the case, the EBITDA earned by the business unit must have fallen from 45 million to under 30 million in the 12 million period which is a very precipitous fall by any measure. We are due to receive the official numbers in the next week or two and will obviously be taken a close look at them.

I would like to now turn the call back to David, the operator for Q&A session. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question is from Greg McLeish of GMP Securities. Please proceed with your question.

Greg McLeish - GMP Securities

Good morning guys. Just a quick question on Fort Hills. Just wanted to see what the impact of the mobilization of 800 people in the 150 pieces of equipment the delays potentially getting up to higher utilization due to wet weather. What do you think that could have been during the quarter?

Martin Ferron

Yes. I think it could easily delays around $10 million of revenue maybe cost us $1.5 million, $2 million of EBITDA.

Greg McLeish - GMP Securities

So, what I guess is going to happen now if more of that revenue will be pushed into Q4 or for the second half of the year?

Martin Ferron

We're going to do a lot of this Fort Hills moving Q3 but given the slower start due to the weather I expect some of it to go into October. That’s the way we think it's going to happen right now.

Greg McLeish - GMP Securities

Great. And just one more question. Could you just maybe discuss or elaborate on some of the SAGD opportunities that you have in potential timing?

Martin Ferron

Yes. We've been looking at meaningful SAGD scopes and we did a lot on last year (inaudible) which unfortunately was postponed hopefully it will happened at a certain point. But this year we've been chasing another couple of opportunities. Both kind of selling expensive excess growth so not the type of work that involves expensive worth moving and other things that we do. So we think that hopefully we can be competitive one that type of work and will be bidding them hopefully in the next few weeks, Q4 start for one of them process.

Greg McLeish - GMP Securities

Great. I'll get back in the queue. Thanks guys.

Operator

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

Luke Folta - Jefferies

Good morning, guys.

Martin Ferron

Good morning.

David Blackley

Good morning.

Luke Folta - Jefferies

I guess first question, this is kind of touched upon on some of the earlier comments. But this quarter had a lot of noise in terms of weather and the Millennium mine closure and all that. If I kind of add back some of the comments you made a couple of million bucks for the mobilization on Fort Hills and the weather impact and a couple of million bucks for the Millennium mine which is kind of [five] this quarter. I think it takes EBITDA to low 12% sort of range which is still down a couple of basis points from your first quarter and there’s been some mix issues there, but still nice on a year-over-year basis. I guess with all these moving parts, how you think, we should think about kind of go forward margin levels if to the extent we don’t get further disruption from some of these kind of discrete items? Do you see you building upon what you the improvement that you have got here in the first half or is there something else in there in terms of mix that would impact that negatively?

Martin Ferron

Mix is the most important factor. During the winter as we have said, we kind of use our heavy equipment and it’s not very labor intensive. That’s where we earn our best EBITDA margin. That can be anything from 12 to 20 on occasion. In the summer time, the light construction projects are very labor intensive generally and involve the lighter end of our equipment fleet. And there the margins can be 10 to 12 to 13 to 14. So, it’s a type of mix that is going to occur on a seasonal basis and pretty much any year. So, on an annual basis, we are hoping to trend up towards 15%; but if we get the 12%, 13% this year, that will be a nice improvement.

Luke Folta - Jefferies

Okay. And then your comments in the press release about having replaced all the revenue that had stepped down from the prior year, I think you said that last quarter, that implies that we should looking for flat revenues year-on-year with the potential for some potential improvement above that if you were to win some of the current projects that you are looking at? Am I understanding that right?

Martin Ferron

Yes, we are still bidding for work, right, we are only in August and there is plenty of potential opportunity out there. So, hopefully we can add to our book here for the end of Q3 and Q4 for sure.

Luke Folta - Jefferies

Okay. But in the case where you don’t win anything else for the remainder of the year, you can still -- you are still expecting to at least do last year’s revenues based on what you got in the book currently?

Martin Ferron

Yes, that sounds right. But we are going to win some more work.

Luke Folta - Jefferies

Right. Okay. And then I guess, I’m just curious this maintenance, equipment maintenance takeover that the client decided to kind of bring some that work in-house. Is that something that was kind of in your prior expectation for the quarter or was that something that sort of happened since the last update and you see that as a trend that might continue elsewhere?

Martin Ferron

It was a decision that customer made, I think it's a sensible one for them to buy their own parts. Essentially we were just buying those parts and charging the markup. So a sensible cost reduction exercise on that part is to do with sales, right. So, no surprise; it was a nice extra bit of revenue and profit of for us for a while but these things tend to come to an end. So, I’m not surprise. We have managed to replace that revenue with project work at slightly higher margin on the site.

So, that's the nature of contracting.

Luke Folta - Jefferies

Okay, great. Thank you very much.

Operator

Our next question is from Maxim Sytchev from Dundee Capital Markets. Please proceed with your question.

Maxim Sytchev - Dundee Capital Markets

Hi, good morning.

Martin Ferron

Hi Max.

Maxim Sytchev - Dundee Capital Markets

Actually Martin, I was wondering if you don't mind please elaborating a little bit in relation to sort of the future capital allocation decisions. I mean obviously right now with the corrected balance sheet, you have dramatically more flexibility, but if you don't mind maybe prioritizing in terms of whether it's M&A, dividends, potential buybacks, what's potential being considered?

Martin Ferron

Yes, it could be all of the above. What I’d say is this. We’re very comfortable with around a $120 million of debt. So that’s kind of where we are right now. We’re focused for the time being on the mix of that debt. I think it’s great that there is line to negotiate a higher senior leverage ratio give us more flexibility in terms of taking on senior debt. So, right now, there is pretty good deals out there for capital leases. So, it’s good for us to be able to replace expensive debenture debt potentially of 908 with capital leases around the 5% mark. So, as we need to replace equipment, you will see those capital leases probably creep up in the mix. So over the next couple of years, you’re going to see our cost of debt come down, we’re going to retire debentures. And the interest saving will allow us to pay a higher dividend perhaps that’s an option. Looking at the share price right now and depending on what’s happen today, we’ve bought back shares in the past that’s still an option for us.

So I think the answer Maxim is it will depend on circumstances. If we see a compelling M&A opportunity, we’ll obviously look at it hard; if not, we’ll use any free cash in a sensible way buying back shares or rewarding our shareholders.

Maxim Sytchev - Dundee Capital Markets

All right. Okay. That makes sense. And actually in relation to M&A, can you maybe sort of talk about the parameters in terms of what would make sort of a decent M&A opportunity whether it’s size margins, ROEs like what are the internal targets that you’re looking at?

Martin Ferron

Well, we’ve done a lot of hard work in the company simplifying our business model, right. And we’re focused on the core business. So, any M&A opportunity should not add complexity because I think we’ve shown in the past that that’s not good for the company. So, I’d like to add more the same, top synergies, expand market share if possible, maybe take us into slightly different geographic areas which is more buoyant than the oil sand. So, I am scoring potential opportunities, always on the lookout for things. So, we’ll see, I mean no rush so, I think sensible decisions are to be made and any acquisition has to be a good fit and be accretive.

Maxim Sytchev - Dundee Capital Markets

And then actually your commentary in relationship to simply oil sands activity and so forth. And in conjunction with what sort of telegraphed going back three months ago, sort of everything was as expected based on their outlook right now that slowed, but what are seeing in the marketplace right now in terms of bidding activity for work that will help you obviously rebuild the backlog into 2015 and the onwards?

Martin Ferron

Well, we came into the year Fort Hills did an activity being extremely high as a takeoff activity. We're expecting to see some more packages come out for later this year and certainly for next year. So, we’re hopefully going to be as busy there next year as this. Then as I mentioned that the activity on the other side is going to be flat to up by both, once we get passed the issue at Millennium, I am expecting a normal year, same at the Base Plant mine. The accrual should improve in activity.

So I'm hoping things will gradually improve plus we're bidding exciting sees and exciting opportunity I'm very, very hopeful that we prequalify for that and I must’ve applied in chance of getting the work. So that's type of opportunity wasn't there before SAGD is to coming props a meaningful part of our business. So I am encouraged still a tough market don’t get me wrong, right and the all science but there other opportunities which we hope you take.

Maxim Sytchev - Dundee Capital Markets

Okay. When will you know when you prequalify for the sight see if you don’t mind me asking?

Martin Ferron

I think we are going to in the next week to 10 days max that type of timeframe.

Maxim Sytchev - Dundee Capital Markets

Okay, so soon. And then last with maybe more sort of you should but. One will you guys be out of black out period, what is the rule?

Martin Ferron

Monday.

Maxim Sytchev - Dundee Capital Markets

Monday, okay. Okay, excellent, that's it for me. Thank you very much.

Martin Ferron

Thank you.

Operator

Gentlemen, there are no more questions at this time.

Martin Ferron

Well, thanks for your interest and we'll speak to you next time around. All the best.

Operator

Thank you. And this concludes the North American Energy Partners conference call.

Martin Ferron

Thanks David.

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