Mullen Group's (MLLGF) CEO Murray Mullen on Q2 2016 Results - Earnings Call Transcript

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Mullen Group Ltd. (OTC:MLLGF) Q2 2016 Earnings Conference Call July 21, 2016 12:30 PM ET

Executives

Murray Mullen - Chairman of the Board, CEO and President

Stephen Clark - Chief Financial Officer

Richard Maloney - Senior Vice President

Joanna Scott - Corporate Secretary & VP, Corporate Services

Kim Derbecke - Investor Relations

Analysts

Walter Spracklin - RBC

Scott Treadwell - TD Securities

Jon Morrison - CIBC World Markets

Jeff Fetterly - Peters and Company

Elias Foscolos - Industrial Alliance

Operator

Good morning. My name is Erika and I will be your conference operator today. At this time I would like to welcome everyone to the Mullen Group Limited Second Quarter 2016 Earnings Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] Please note that this call is being recorded today, Thursday, July 21, 2016 at 10 AM Mountain Time.

Thank you. Mr. Murray K. Mullen, Chairman, Chief Executive Officer and President, you may begin your conference.

Murray Mullen

Good morning folks and welcome to Mullen Group's quarterly conference call. We will discussing our financial and operating performance for the second quarter and this will be followed by an update on the near term outlook as we see it. Before I commence the review, I would remind you that our presentation does contain forward-looking statements that are based upon our current expectations and are clearly subject to a number of uncertainties and risks, and actual results may differ materially. Further information identifying these risks, uncertainties and assumptions can be found in the disclosure documents which are filed on SEDAR and at www.Mullen-Group.com.

So with me this morning I have Stephen Clark, our CFO; Richard Maloney our Senior VP; Joanna Scott, Corporate Secretary and VP of Corporate Services; and Kim Derbecker our conference coordinator.

So this morning Stephen is going to review the second quarter quarterly financial and operating results for the Mullen Group after which I will provide an outlook and discuss my near-term expectations for both sectors of our business model that is the oil and gas industry and of course the overall economy. And then, we will close with the Q&A session.

So before I turn it over to Stephen let me make just a few opening comments. So let’s take the quick look back on what we are seeing from macro perspective. Now firstly, I am of the view that really not much has changed over the last [indiscernible]. The oil and gas sector while showing some signs of life remains mired and deep down turn due low commodity prices and the upward economy is in nasty recession and the Canadian economy just models along, a little growth here and there but really nothing sustainable. In fact, if we look a little deeper, I am of the view that really there are two economies out there today and I will expand upon that shortly.

So our results today reflect the economic reality of the markets we operate in, it reflect our diversified business model and as well our focus on running the very best business we can. So, let me elaborate on what I think as I see the two economies and really they are distinctly different.

Let start with what we have, what I refer to as the public sector and as we know in the public sector there are many people employed by, relying upon and even deriving some level of business activity from various levels of government spent. To this sector of the economy really not much has changed and the reason is that the governments don’t have to balance the books. These things take care of themselves to “our prime minister”. They simply either raise taxes or they deposit finance which is they are experts at. So as such, this part of the economy has remained relatively stable and nothing has changed and that’s reflected in the economy that we see.

Now let’s talk about the reality sector of the economy. Anyone involved in, working for, or rely upon this, the private sector the things are a whole lot more complicated. In this sector, we are subject to market forces, competition, currency swing, changes in technology, government policies et cetera. In other words, the private sector does not live in a static stable world, we must balance the books and in this sector of the economy many companies are struggling. So let's take the oil and gas sectors an example. After many years of robust activity and good times when crude oil and natural gas prices were much higher than today, this sector is now undergoing a very difficult transition of adapting to a low commodity price environment, capital investment and long life infrastructure projects has been slashed, drilling activity is at multi-decade lows and demand for services are soft at best, pricing is driven to add to our near operating costs.

So what does this mean to anyone involved in the oil and gas sector? Clearly, job losses. For example here at Mullen Group over the last 18 months our employee count has down over 1500 people. In the oil and gas industry in Canada we're talking about over a hundred thousand job losses and personally I think this is understated, wage and salary adjustments that always makes for a popular boss but to be clear this is an absolute necessity given the markets that we are seeing.

Capital investment has been virtually declined to nil and these are just a few of the examples of the headline adjustments that the private sector in the oil and gas business must make an order to balance the books, painful to say the least. And it is for this sector of the economy that really we're seeing more difficult and troubling times. In fact proportion are now emerging that confirmed what we've been saying for quite some time now and that is that for example Alberta is in a very deep recession. Not because of declines in government sponsored activities, because the government of Alberta has actually increased employment, paid more to the public sector and spent more. Now of course to accomplish this Alberta has now raised taxes significantly and will run an annual budget deficit in excess of $10 billion. In fact, the Province of Alberta is sounding more and more like Ontario all the time.

So that tells us that if the Alberta economy is down 6% to 7% as has been reported and the public sector is actually been up a bit then the reality sector has been crushed. So within that backdrop, how we've done? What steps that we implemented here at the Mullen Group to deal with the market realities we have or quite simply, we have adapted. We balanced the books and we relied upon one of our core fundamental strengths and that's our diversified business model. These are the three fundamental reasons that enabled our organization to generate $247 million in consolidated revenue and more importantly to earn a very respectable adjusted operating income of $46.6 million, that's down only 1.9% from last year, not bad all things considered.

Stephen Clark will now provide some additional details on the second quarter performance and after which I'll close with some thoughts on the near term outlook, some of the initiatives that our organization is pursuing and of course will do the Q&A session. So Stephan, it’s all over to you.

Stephen Clark

Thank you Murray and good morning to all shareholders. With respect to our financial and operating results for the second quarter, our July 28, 2016 news release and our Q2 interim report which consists of our MD&A and consolidated financial results, contains the details that will fully explain our performance. I will center the bulk of my comments this morning on the elements within our results that warrant further explanation. I will start on the revenue front.

Our consolidated revenue was $247 million, a decrease of approximately $38 million or 13.3% as compared to 2015. This decrease in revenue was directly attributable to the oilfield services segment. From a segment perspective, the truck and logistics segment contributed 68% of pre-consolidated revenue approximately $169 million. This decrease of $4.8 million or 2.8% was primarily due to lower fuel surcharge and a reduction in demand for transportation services within Alberta. These decreases were somewhat offset by revenue generated by Kleysen Group relating to an increase in demand for transload services as well as incremental revenue related to the acquisition of courtesy.

Excluding the decline in fuel surcharge revenues, same store sales declined by about 2.5% reflecting the softness in the Alberta economy. The oilfield services segment contributed 32% of our pre-consolidated revenue or approximately $80 million which was a decrease of approximately $32 million or 28.5% year-over-year decrease for that segment.

It was tough all around, low commodity prices have reduced capital investment in drilling activity within the western Canadian sedimentary basin which has negatively impacted almost all our service lines within the oilfield services segment with the exception of a pre-made pipeline. Further details on the oilfield services segment performance and a breakdown of revenue declines by category can be found on page 24 of Q2 MD&A.

Operating income before depreciation and amortization or what is referred as OIBDA within the MD&A was $46 million, a decrease of $0.4 million or 0.9% over the same period last year.

As a percentage of consolidated revenue, OIBDA increased to 18.6% as compared to 16.3% 2015 primarily due to the increase in margin experience by both segments to the decreased DOE and a favorable revenue mix including the proportional shift to company assets which currently as a gross margin of approximately 35% as compared to contractor revenue where gross margins are approximately 27%.

Operating income prior to foreign exchange gains or losses recognized within the corporate office or what is referred to it OIBDA adjusted within the MD&A was $46.6 million, a decrease of $0.9 million or 1.9% as compared to $47.5 million in 2015. This more clearly reflects smaller groups operations are results from an operating perspective. This decrease was due to the combination of a $2.4 million decrease in the oilfield services segment, a $1.5 million increase in the truck and logistics segment as well as a half a million positive variance in foreign exchange recognized within the corporate office.

Most analysts were expecting margins to contract in the second quarter and traditionally it does but these are not traditional times on a sequential basis OIBDA adjusted margins expanded by 220 basis points. This is more reflective of how brutal lead difficult first quarter was rather than how buoyant second quarter was. Year-over-year excluding the impact of foreign exchange OIBDA adjusted margin was 18.9% as compared to 16.7% in 2015. This year-over-year margin improvement is a testament to our diverse business model, the hard working commitment to managing cost by all of our employees and quite frankly some higher margin business generated by Premay Pipeline into to a lesser degree Kleysen Group.

It should be noted that margin expanded in both segments but specialized project works such as Premay and Kleysen, although at times lucrative, they are also fleeting and they're [flat] in a slow quarter is more pronounced.

Looking at some other performance indicators, net cash from operating activities in the second quarter was approximately $49 million, a decrease of approximately $14 million from last year. This decrease is mainly attributable to a $15.4 million decrease in changes in non-cash working capital items from operating activities and the slight reduction in OIBDA. These factors were somewhat offset by a $2.9 million reduction in income taxes paid on a year-over-year basis.

Net income for the quarter was $13.7 million or $0.14 a share, an increase of $12.8 million from the $900,000 or $0.01 per share that we experienced in 2015. This increase was mainly attributable to a $6.9 million positive variance in net unrealized foreign exchange and $4.7 million decrease in income tax expense and to a lesser degree, the $900,000 decrease in finance cost.

Touching briefly to our results for the six month period: consolidated revenue was approximately $519 million, a decrease of approximately $103 million or 16.6%. OIBDA adjusted for the FX of the U.S. cash held by our corporate office was $92.1 million, a year-over-year decrease of $12.8 million or 12.2% compared to $104.9 million generated in the first six months of 2015.

Moving now to the balance sheet, it continues to be well capitalized during the quarter. Mullen Group closed a bought deal offering and a non-brokered private placement and issued a total of approximately 12 million common shares at a price of [13.30] per common share for net proceeds of 153.2 million. As a result at the end of the quarter we had working capital of approximately $350 million which included approximately $236 million of cash. Our total net debt is calculated in accordance with our amended noteholders agreement stood at $452.3 million for net to cash flow ratio of 2.2 to 1, 1.6 to 1 if you use a traditional definition of net debt.

Our $75 million credit facility continues to remain undrawn, this line along with our $236 million of cash gives us significant to our power however I will remind everyone, it is our intention to repay our notes that would mature in 2017.

So with that Murray, I will pass the conference back to you.

Murray Mullen

Thanks Steph. As we said above we are pretty pleased with the quarter given everything that the noise was going all around us but all you can do is just use your business sense and deploy your strategy and just work hard at which as the Stephen said we are very pleased that everybody joined with some that.

So my final comments as I start to look to the future now give some perspective to everybody okay what's going to be next? I have this innate desire to give everybody the all clear signal and that spoke to our shareholders and employees alike, however it appears to me that the storm clouds remain well entrenched and saying this on the view that we are seeing some early signs of a recovery at least in terms of drilling activity here in western Canada but drilling activity is a function of commodity price and as we all know predicting tomorrow’s price is pretty much akin to gambling.

Overall, however I remain of the view the next few quarters will be challenging and here's my rationale. So to just talk a little bit, let's talk about the positive oil and gas prices while higher than earlier this year, they simply are not at levels that we view justify any significant drilling activity. Off the lows of the first quarter yes but in the second quarter but any meaningful, we just don't see it, that's our view and we'll stick with that until we see something more evidence.

Number two, we're seeing the last of the big investment dollars dedicated to development of the major oilsands projects, they are nearing completion and furthermore we have to ask ourselves when new capital will be available for future oilsands projects. Now I just don't see it, I don't know, I will really admit that but in this low commodity price environment I just don't see it. And let's remember that these are massive capital projects. There are huge employers of skilled labor, engineers and the like and if new projects do not perceived then we must ask what projects will replace oilsands development. Now I know the governments have promised to invest heavily in social infrastructure projects but I haven't seen much yet nor have I really seen anything to replace the capital that's been deployed oilsands.

Number three: L&G development. Well that appears to be they are on hold or dead on the water. I'm not sure which one it is but I just do not see any significant capital being committed to this sector at this time. Now this negatively impacts capital project development pipeline expansion and of course drilling activity in northeast British Columbia in northwest and Alberta.

And lastly, our view is the Canadian economy has stalled out. So what is unclear is why is it stalled? Has the consumer slowed spending? Or has the slowdown in the oil and gas industry now negatively impacted other parts of Canada? What I do know is that slowing demand always weeds to pricing pressure which ultimately means continue job retrenchment. A company can only use so much on the productivity scale, before taking the unpleasant task of reducing overall wages benefits and employment levels. So is it any wonder that the middle class feels pressured?

With these headlines and headwinds all converging at the same time, I can only assume that the challenging conditions will remain until something changes. But what I just outline is all the stuff that everybody already knows. So short term pain is inevitable the economy, the oil and gas industry and companies are in this very painful adjusting period. And if your company is well positioned and by this mean a good balance sheet and actually this is the time to be opportunistic which is exactly what our strategy will be here at Mullen Group. So we have two market segments and we operate in. We have the oil and gas industry and we have the trucking logistic sector the Canadian economy and our strategy will be as follows.

We're going to continue to pursue quality larger opportunities that will diversify our organization even further. And secondly we're going to look to consolidate smaller tuck-in acquisitions that will actually enhance the competitive position of our existing 27 business units.

So in summary, the short term will remain challenging but eventually we know markets recover. So for example we believe, hope or whatever wants to call it that commodity prices will eventually improve, that's going to renew demand and will renew opportunity. Now given this view, then this is our view is the time to position for the future, for the next business cycle. Only a few will be positioned to capitalize in today's uncertain times but to position for the next business cycle we need to start planning today. So one [indiscernible] so the last course of the last number of years everyone knows we have not invested heavily in the oil and gas industry. Even though many thought the industry was right for growth opportunity we saw totally different choosing to distribute cash that we generated to our investors and that [at least back] to 2005. So over the course of last 10 years we have distributed over $1 billion which is obviously at the expensive growth. But our view was that if we didn't see real opportunity why not operate the best business we could and give the rest back to the shareholder.

Our second strategy was to diversify away from the oil and gas sector. And now we did that by investing in what we call the bread and butter sector of the economy, the trucking logistic sector. And more specifically the regional LTL business primarily because we saw far too much money entering oil and gas sector along with the opportunity consolidated the regional LTL business. So thus far these two added strategy has worked to our advantage. And I can point to result of this year as evidence. We have mitigated the downside risk associated with the sick [indiscernible] of the oil and gas sector. We have invested in the stable part of the economy, the regional LTL business which by the way is heavily weighted to the consumer and we have implemented our disciplined business approach to our new acquisitions. So when I look back I am pretty pleased of what we have accomplished. Mitigated the downside and improved margins. But tomorrow's markets they are going to be different and we are now focused on positioning Mullen for the next market moves. So for example we will continue to invest in the regional LTL network on two fronts.

We are going to look for productivity improvements in our existing carriers and we are going to look for market expansion across Canada. We will always be on the outlook for great quality companies that fit into our self managed business model and lastly we are starting to look at regaining market share in the oil and gas service sector after deliberately giving our business to undisciplined competitors over the course of last 18 months. My view has changed for three reasons. Firstly, by downsizing quickly we could right size our business units to get a cost structure that would work in today's ultra-competitive environment. I think we are just about there now. Secondly, today I think our competitors are in trouble. They do not have a diversified business model. Their balance sheet stretched and they have chased bad business to the point that they must be getting more down.

And thirdly, sometime over the course of the next 12-18 months I see demands for oilfield services improving. As such given this back drop I think this is the time for Mullen to start positioning for sometime later in 2017. We will be more aggressive in the market and we will start to regain some loss market share. Now there is a quick proto here. These initiatives will mean that our margins will decline in the short term but as you can see from what we have just produced, we will get them back. It's just a matter of time. Our financial position and strong balance sheet will be put to work over the course of the next new quarters but I will tell you this we will never get trapped in the signing bad long term deals with oil companies simply to get their business today. We leave that to our dumb competitors. So thank you for joining us today. And I will now turn the call back to the operator for Q&A session.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And your first question comes from the line of Walter Spracklin from RBC. Your line is open.

Walter Spracklin

Hi, there can you hear me now Murray?

Murray Mullen

Yes, I can Walter. Good morning.

Walter Spracklin

Okay. Good morning to you. Last year yes, so I did as you mentioned a few changes so let's start with the acquisition -- your strategy there, I heard you let's start with trucking, I heard you say across Canada so clearly now are you looking at diversification not only by going in a trucking but taking trucking now and looking at all regions of Canada outside of western Canada is that right?

Murray Mullen

Well for our regional LTL business we think we are going to be able to leverage that. We will continue to link our opportunity in the regional LTL business across Canada. Probably not so much on the truck load side we have a pretty good investment in Kriska Transportation Group back East that they are pretty good at that but on the regional LTL network we think that building on a strong regional LTL network across the country probably makes good sense.

Walter Spracklin

Okay and then –

Murray Mullen

And we look for those opportunities.

Walter Spracklin

Right. Diversification is it also mean going outside of trucking and OFS altogether?

Murray Mullen

No, we will stay within the trucking logistic space but trucking logistic is a big business. So we are not just having trucks on the road, it's warehousing, it's anything to do with the logistic part of the business that's something we have a pretty good core competency in that we understand it and we can see some good leverage because we think that's all part of the supply chain, the value supply chain.

Walter Spracklin

Okay. And the other change I guess you were kind of shying away from, well not shying away, it's kind of letting your competitors fall apart around you rather than go after and acquire them did I detect there now that you are seeing maybe more comfort if we can call that around the late 2017 recovery that picking up some of them would be not would possibly be carried now is that, did I read that right?

Murray Mullen

Sure, then perhaps in the oil and gas sector we will see the recovery. So we would look at any acquisition that we get at the right price that would enhance our 27 business units that we have got. We have got a ton of invested capital and ton of intellectual capital in these business units. They are very, very well managed as you could see by the results that we have generated. So we will do what we can to help back fill their business models in the markets where there really is no internal growth, no any growth. So acquisitions tuck-ins that's why I call the tuck-ins, you just use your existing infrastructure and you just layer off cost from your – from the companies you are acquiring and trying to get margin that way.

Walter Spracklin

Kind of makes sense and then going on to your competitors now and you mentioned market share losses so in the early days if I understand how you have done in early days of a down turn you are willing to see business and actually lose share those competitors then fall away and you kind of naturally gain share and then ultimately expand share in the recovery if I am reading correctly what you have stated in the past. Where are we in this now? Are we -- have competitors started to fall away now? Have any kind of put of shutters and walked away now or we still waiting for the worst to really have an impact on your – on the liability of your competitors?

Murray Mullen

Well, so specifically we will talk about the oil and gas sector right now because that's been the deepest slump for the – for a period of time. That really started all the early signs in late ‘14 but really didn't start taking place till ‘15. Our view was as price started to come down and the markets coming down, I don't want to protect market share in a declining price environment. That didn't seem to be to make much sense plus I didn't see where our cost structure was aligned properly and all you have done is just kept topline growth and you wouldn't have generated down thing. So we didn't want to chase market share in declining markets. Our view is that the markets are going to stabilize in the oil and gas sector sometime over the next period of time, it could be 12 months, it could be 18 months, I don't know for sure. I can't predict commodity prices but our view is it's going to so this is the time to start getting market share because as the demand picks up then pricing will pick up. So it's just the inverse relationship to what I saw happening starting in ‘15 but by the time we get through ‘16 that will be two pretty tough years and based upon the pricing we see in the marketplace today there is just no way that we can see some of our competitors that are going to make it in fact we have seen some shut the doors, not enough but as some shut the doors and some consolidation happens and then when demand improves that's a pretty good combination. It gives at least a chance and so we are going to look at – we are going to look at it from a different strategic perspective over the next sort of a…

Walter Spracklin

So the last question here you indicated that with that strategy will come declining margins and -- indicated yes your margins were quite surprise on the positive here but from what I am hearing from [indiscernible] is that we should probably model for those to come back down is there any order of magnitude you can kind of hint toward here? Is there any prior period floors that you wouldn't go down to or is there any indications where you can get from how deep that margin decline you are talking about?

Murray Mullen

I can't quantify I think it's going to be – if we are going to implement this new strategy which I think is by the way it's the right one and sometimes you have to pay a little bit of price to make something up in the future, I think that's what the risk for our shareholders, I think our shareholders are buying it. We know how to make money but in the short term if you are going to go out after market share you have to give up something. And we are now looking at regaining market share hiring people because we are stable, we have got – people were comfortable that we are going to be able to pay the bills, they are not so comfortable some of our competitors. So we think we will be able to rebuild the teams and but the market is the market today. But as demand improves and the things I talk about I think the pricing will improve sometime in ‘17 but I got – you got to start getting market share now if you wait till 17, you are going to miss an opportunity in my view. So we will give up a little bit in the short term but I think it's just a few quarters.

Walter Spracklin

Okay. That makes lot of sense. Again it's – I got to say it's encouraging as well to hear you talk about the strategy shift. That's all my questions. Thanks very much.

Murray Mullen

Thank you.

Operator

Your next question comes from the line of Scott Treadwell from TD Securities. Your line is open.

Scott Treadwell

Thanks. Morning guys. I wanted to dive in on some details actually. I was looking through the segmented information. And I just on the oilfield services sides specifically on at [Arnhem] the company Arnhem was down nearly 40% company revenue down less than 30, that looks like a meaningful gap, I mean you guys have never been one to cannibalize equipment, so I mean the obvious conclusion is something else is playing there. Can you just give me some color was there just more internal Arnhem done or was there something else that drove that sort of meaningful drop compared to revenue?

Murray Mullen

Scott, I can't point to anything [indiscernible] there was no direct or anything that we gave. I would say to you Scott I think it's fair to say that in our quest, our business unit did a good job but you can only squeeze Arnhem for a short period of time. Parts are not down in value but I think it's fair to say we do not have as many people deployed at our jobs as we once did. And I can't point to anything.

Stephen Clark

It was pretty broad based, Scott I would say that yes very correct the cost of replacement parts placed largely in U.S. dollar and -- so there is inflation there but we just really managed that heck of costs this quarter knowing that it was brutally tough for the revenue was squeezed.

Scott Treadwell

Okay, so in terms of health of equipment all that stuff there is really been no change from sort of previous quarters.

Murray Mullen

The only change is that on a sequential basis quarter one of ‘15 we had lot more equipment working that we typically would repair in April, May we didn't have that same usage in the first quarter of this year. So therefore the catch up in second quarter wasn't as large.

Scott Treadwell

Okay. Okay. That makes sense. Second one from me I just wanted to check on the debt, you talked about the preference for paying back the 2017 notes within that, within the two tranches of ‘17 is there a preference if you have got a macro view on the currency, do you wait or is it just you will do in both or sort of you have no preference at this point?

Stephen Clark

I think really it's one where we are almost perfectly hedged on our U.S. dollar so it's $75 million in cash we have about an $85 million note that comes during September ‘17, so we will watch it, monitor it but there is natural hedge there that will just watch. I don't think there is any really preference, yes we will for sure we will pay off the – we are sitting with U.S. cash equal to both what the U.S. debt is so we will just pick the time as to when we are going to pay that down but our intention is to just pay off that U.S. note and then the other one is the Canadian now I think it's only $20 million, it’s the minimus, so but we are we feel pretty we think that our strategy of making sure that we were hedged either with the derivative or with cash on the balance sheet was probably a pretty prudent move and so we will just pay it off either we will wait till the day it's paid off or we will look at the market conditions and see that if we can pay it off early.

Scott Treadwell

Okay. Turning sort of to the outlook, first I wanted to touch just on form of McMurray if you have seen things kind of recover from kind of consumer volume point of view from where they were pre-fire or potentially they have improved or they haven't fully recovered yet?

Murray Mullen

I don't think Fort McMurray is fully recovered. We are on top of this with our business units but I just don't see Fort McMurray going back to where it was. Unfortunate situation people lost a lot but then unfortunately there was no loss of life so for some reason I guess that's just great planning but I think from an economic perspective I just don't see Fort McMurray getting back to having [indiscernible] one’s head the fires were devastating. People I think reached 1500 homes or something like that in – 2000 homes lost in the community generally speaking those people probably are just going to pull up and leave and I see job the main economic activity in Fort McMurray is declining particularly as these projects wind down. Unless there is a new project which it's not on the bell on the books. There is no engineers working in the big engineering houses, so one can only assume that Fort McMurray is not going to be as robust as it has been in the past, it won’t look the same.

Scott Treadwell

Okay and to sort of follow-on to that with the new transload facility in Edmonton, how would you feel kind of competitively placed in the event of modest or full rebuilding in Fort McMurray maybe taking some of that oilsands volume and activity and replacing it to some degree, you feel pretty well positioned just from a logistic perspective?

Murray Mullen

Yes, from the logistic I think we balanced this pretty good so we are going to transition that transload center into a major pipe yard so we have a significant lease that we have had with our Withers group that expires early in ‘17 so the timing is absolutely matched perfectly and I think we are just going to use that transload now as a major pipe yard and transload for rail for pipe. And so we will put good use to that and then we will see and then but we will go back to the transload yard again, if we see new big projects coming in, but in the meantime we are going to put pipe there. We are going to store it and we are going to run the best pipe transload yard and Northern Alberta through that facility.

Scott Treadwell

Okay. I wanted to turn to M&A. You talked about through a larger more strategic acquisitions versus smaller at and tuck-in, at this point you talked about maybe a little bit more confidence in a turnaround in the oil-patch. Does that translate into a willingness to deploy larger amounts of capital in M&A in the oil-patch or is it fair to say that those larger deals are likely in trucking and logistics?

Murray Mullen

Yes, those larger deals are most likely in trucking logistics but we are always interested in really well managed good companies for strong market positions. But we don't chase those come up and but I think they will probably be the big ones will probably be more in the trucking logistic space. In the oil-patch space we think we have got lots of assets and we will just rebuild by adding to our teams now and regaining market share that way and the old fashion way instead of M&A just through rebuilding the business. Lot of M&A in the oil-patch is going to be very difficult because a lot of those assets are redundant so we will be careful on that side.

Scott Treadwell

Okay --

Murray Mullen

But we will do little tuck-ins, don't get me wrong. We would enhance our business units and give us a stronger market position. We will look at those things but not -- I don't think a big we won’t be looking for a big homer in the oil-patch because it's so cyclical. The trucking logistics side 20 years from now I know regional LTL is going to go on. The oil-patch I have no idea.

Scott Treadwell

Okay. Last one from me just to follow-on Walter stuff and you might answered this and if so I apologize. The new strategy you have talked about in the past sort of turning down work that didn't meet your returning criteria is that new strategy now just simply engaging on that work that's a lower pricing or is it, do you use the godfather analogy really going to the mattresses and even dropping prices further where it makes sense to?

Murray Mullen

Yes, I think that's a good way to look at it. So strategically I didn't think that our cost structure was at a position to chase declining markets back then. So I said give it up. Then we right sized our organize and get our cost structures down. Well, now I feel a lot more comfortable that we can go back after that business even if that price is not where I wanted today I would be highly surprised that it's not a little higher next year. So the margins will improve because we have got our structure, cost structure in line. And I wouldn't mind chasing business and chasing customers when I think they are going to get busier. When I think they are getting slower, why chase it. So we just changed our view point on that. And yes we will have to be more competitive because you are not going to get a freebie in this market. But I am positioning for next year. That's correct. And that's why I am cautious, I am just saying it, I think now is the time to leave a little bit on the table in terms of margin so that we can have higher margin but more business in 17, more than if we just stuck with our current strategies. So we are going to be more aggressive.

Scott Treadwell

Okay and within that do you have I mean would you have a preference to try and use the sub-contractors and owner operators versus company assets or is that –

Murray Mullen

Yes, with us it's a combination of company assets or owner operators, lots of owner operators in the market and they have got the truck and they work hard and they are very good at what they do, they will be an integral part of our strategy and of course subcontractors also, so we deploy all three of those modes in our business models.

Scott Treadwell

Okay. Perfect. I have got all the answers I need guys, thanks very much for the color.

Murray Mullen

Thanks Scott. Take care.

Operator

[Operator Instructions] Your next question comes from the line of Jon Morrison from CIBC World Markets. Your line is open.

Jon Morrison

Morning all.

Murray Mullen

Morning.

Jon Morrison

Morning. Is it fair to assume that your comments around getting more aggressive on pricing and market share within the oilfield services side, it’s very much a forward looking statement and you really haven't employed any of that to date in 2016?

Murray Mullen

That's correct. Yes there is nothing to employ in the second quarter with no demands. So but and we will start to implement that over the course of the next few quarters. Is it all going to happen in the next 30 days, 60 days, no. But I am starting to I am telegraphing is that look we are going to get more aggressive on market share but when you get more aggressive I got to give up something. And because a lot of the business we see out there doesn't generate margin. That's why we maintain our margin because we didn't chase down business. But I sense that dumb business won’t be quite as dumb next year.

Jon Morrison

On the labor cost reduction side that you guys have achieved within the oilfield services side, is that largely a reduction in the hourly rates that you are paying to guys or you try to eliminate overtime are in series of other things to try to take new businesses best you can in the context of the current environment?

Murray Mullen

It's both of those things. I would say virtually across the board that unfortunately I would say field wages are down by about 20% and that's what we have targeted but if you layer on top of that, what I think is the most inefficient way of getting of operating your businesses with overtime because you don't get paid more money to go do a job because you pay the employee overtime. So, additional overtime cost up to $20 an hour and but you don't get $20 an hour more from the customers. So, you actually loose margins by going to work more.

Jon Morrison

It's fair to assume though that you not expect?

Murray Mullen

We have been very tight on overtime, absolutely.

Jon Morrison

Okay. It's fair to assume though that you are not expecting hourly rates to decline from here, considering your view of the market?

Murray Mullen

No, I think the hourly rates are I think we've got them where they need to be. Now, some of the things that we are seeing from some of our competitors, would tell me that either they are asking people to go to work for below minimum wage or they are getting their butts kicked. So, but no I think we got the cost structure in where it needs to be and within that will be aggressive pursuing with customers that along that line. But if some stupid comes up, Jon we are not chasing that. Like we've seen some oil companies are getting cute, where they want you to sign a three year contract just to get business today. Well, I go like not, so and some of our competitors have taken that, so we're seeing panic happening right now. That tells me we are near the bottom. So, I am starting to think about '17.

Jon Morrison

Okay. Stephen, just a follow-on on Scott's question around the R&M side, it's fair to assume that maybe timing played a role in some of the deflation that we saw in the quarter and there is no reason to believe that the cash cost of operating your equipment is structurally changed full cycle?

Murray Mullen

That's correct.

Jon Morrison

Okay. In the release you talked about the visibility that remains for pre-May in the coming quarters, if you look out beyond that I realized that you are obviously not going to have contracted work in pipeline approvals are near impossible to forecast. But are you bidding on any small opportunities like you guys are ahead of the trailing call it 18 months or line of sight's fairly low at this point?

Murray Mullen

Line of sight is it's all over the map. If some of the projects come through, they are massive projects. So, it will be there could be little timing difference there but there is still a lot of line replacement going on. There is little 20 corners that have to be done here, there is this, there is that. So, I think there will be some activity, I don't know it will be quite as robust, there was a couple good approaches. Let me just wait for the next ones to come. So, are they going to come? We don't know for sure. Jon I don't think anybody knows for sure.

But there is a lot of pipe in the ground and it wears out. And they have to be very careful as you just saw with the M bridge, that if you are not keeping that pipe up and you have a problem, you are going to get slapped. So, they are pretty aggressive on replacing where it needs to be replaced.

Jon Morrison

Within the trucking logistic side can you give any color on whether you have materially increased your outsourcing of work to other operators in the last three to six months and attempt to lower their overall cost to your customer?

Murray Mullen

No, no we haven't done that.

Jon Morrison

Okay.

Murray Mullen

No, it's we maintain the same roughly the same balance. The only things that's happened is when you buy Gardewine, they are heavier related to company equipment because they are regional LTL business.

Jon Morrison

Stephen, I realize you might not have these figures handy and I am just kind of looking for a ballpark but if you think about the last four acquisitions you guys have done in the trucking logistic side, do you have any sense of how much margin have inflated relative to that what they would have been and do you officially believe here it in inflation point where it's hard to push them further beyond what you've achieved?

Stephen Clark

Well, I think Murray can speak to this but Gardewine is most horrible. I mean courtesy surrounding Jay's margin is expanding really by virtue of Gardewine exiting this to catch one market. But we telegraph to the market when we bought Gardewine and they needed about $225 million revenue including some portion that was taking place in to schedule and then they did 10% margin. We've expanded that margin now to the point where they are not quite mid teens but they have improved substantially in the last year. And most notably because they are sitting as this casual business but also the courtesy helped a little bit because we got further density in Ontario and Winnipeg and working on the synergies there.

So, the drag on the margins that we pretty much telegraph that through 15 through the MD&A and I don’t have those numbers on hand but they were somewhere around 200 basis points, all things considered. And that's really front end weighted. That was really for the first half of the year. We are now with Gardewine somewhere around as I say sort of mid-teens versus the 10% margin. And they are the biggest player by far, the biggest waiting.

Jon Morrison

Perfect. Last one just from me. I know you guys have always said that you don't want to buy tired equipment but when you see certain competitors like an ATK, you'll go under, do you ultimately get interested in going to auctions to pick up fairly new equipment and tying it into your broader fleet or ultimately you are not looking at picking up assets but more on the business side at this stage?

Stephen Clark

We will pick up good assets Jon that would help our business being more competitive or get cost down for sure. Capital, there is lots of assets available out there and I think it's fair to say we are starting to and oil fronts get a little more constructive about what will late '17 and because once you get in '17 then you probably got a new business cycle and the competitors have been worn down or there has been a lot of capital investment for a number of years and all those kind of things. I would say we might be in a more stable operating environment for little bit once we get through this current one we are in.

Jon Morrison

Appreciate the color. Good quarter guys.

Stephen Clark

Thank you, very much.

Operator

And your next question comes from the line of Jeff Fetterly from Peters and Company. Your line is open.

Jeff Fetterly

Good morning, everyone.

Murray Mullen

Good morning, Jeff.

Jeff Fetterly

First question on the OFS side. The 500 basis points or so improvement in your operating ratio either relative to Q2 last year or the first quarter, how much of that do you think is revenue mix related versus the cost reduction measures?

Stephen Clark

I think it's tough to really quantify, some of it was margin premium pipelines was busy. That was clearly a win but that's the strength of our business model. We only have one or two businesses that are doing very well. But I think on the cost side if we had not been aggressed on cost, some of our other business units they really didn't have any demand like drilling, we could have been killed. So, I think from the cost side, we probably get what we saved and we didn't have losses that I am most impressed with.

And we were, we just said well look there is no sense repairing equipment till we know what's going back to work. In a typical market you are going to do that in the second quarter you get ready but this year we kind of we just said what's there is no rationale. So, I don't know I think probably most would be tied to the good business that we had with some of our specialized business of which we made is good, is the most important but the other is we just control the cost within that big losses.

I think that's the biggest improvement. I think it's fair to say also the majority of the 1500 employees that we've logged, they weren't all on this quarter. We had more employees terminate last year and there is always cost to terminating employees. And we didn't have quite as much of that but overall it's kind of the mix. It's the two of them. Good quarter by the premier group and by some of our other specialized and they watch margin. We didn't have a lot of revenue but we really watch cost and make sure we didn't have losses.

Jeff Fetterly

Safe to say, weighted to the cost reduction side versus the revenue mix side?

Stephen Clark

Yes. Yes, if you hadn't been aggressive on cost, you could have really lost money in the second quarter because it was really no revenue in some of our businesses. So, lots of people with the job sharing, lots of people with time off, unfortunately all that kind of stuff. So, make no mistake when you want anybody talks about cost savings really they are talking about job losses or the expense of people. So, we don't take any pride in it. We are fulfilled by it. We are just stating the fact we had to do it.

Jeff Fetterly

The comment in the release that you also mentioned earlier in the call around further cost reduction measures, I assume on the OFS side what other measures are you looking at to your point just now in terms of headcount but I guess how much more do you think you can take out of the business from a cost standpoint?

Murray Mullen

Not too much on the OpEx side, I think maybe when I was referring there and maybe didn't come out clear enough is that if the overall Canadian economy starts to slow down then we will probably have to start the headcount reduction on the trucking logistic side that we haven't had to. We are watching that carefully to see is like the softness in the Canadian economy which is driven a little bit by what's happening in the US and those kind of things, is that going to be just a short term blip or is that more systemic. I can't answer that question but we will monitor it very carefully and adjust accordingly, which we know what to do.

Jeff Fetterly

The comments really are above market share and the OFS side is there a specific sub segments or businesses or regioned where you think there is or if there opportunities are as important to try to push your market share higher?

Murray Mullen

Well, it will be anything to do with drilling activity because drilling activity as commodity prices which have a more drilling and then and also we have been at a number of business that are tied specifically to drilling activity, some of that is going to be fluid on, some of it's moving up drilling rigs, some of its drilling mud, some of its pipe storage and hauling. So, just are the business we have got but we have given up revenue, make no bonds of other, we let our competitors take it.

But we are not will let any more go because we think the market is going to turn as I articulated. That's our expectation which is why we are telegraphing that that's our new strategy and hopefully our view of the future is correct as it has been in the past but there is no guarantees but that's our view.

Jeff Fetterly

Just a clarification.

Murray Mullen

We are going to use our strong balance sheet, we are not just going to sit here and say oh wow we have got good strong cash balance sheet. We are going to start put some, we are now going to now when our competitors are a little weaker, we are going to put, we are going to find out who really can last now. That's our strategy.

Jeff Fetterly

Just a clarification, the two pronged M&A strategy you referenced in your remarks, the tuck-in component of that, is that more of an OFS focused or would that also touch on the trucking logistics component?

Murray Mullen

All 27 business units. We will do whatever we can to enhance those strong companies that we have got. We have got great management teams, great cost controls technology, we just need more pucks on the net and so tuck-ins are an integral part of what we are looking at.

Jeff Fetterly

Okay, last item. From in terms of Fort McMurray, if the view is that Fort McMurray is not going to rebound either post the fires or from a major projects down point. How does that change your approach or view towards either that you watering business the heavy-hall of somebody other infrastructure related things you have in that region?

Murray Mullen

Well, the heavy haul, we have been reluctant on really it's kind of like rig moving. Heavy-haul we have been very reluctant for putting capital in that business over the last five years, simply because we saw lot of other people get really smart. So, we have been very careful. And then secondly on the dewatering side that is really just an ongoing business. They still got the ponds, they are still going to manage them. I don't think the service work is going to go away. It's the build out phase that's going to go away.

Jeff Fetterly

Safe to say though that scales back incremental capital that you would put into any of those businesses?

Murray Mullen

Yes. That's fair.

Jeff Fetterly

Okay. Thank you guys. Congratulations for the quarter.

Murray Mullen

Thank you.

Stephen Clark

Thank you, very much. Thanks, Jeff.

Operator

And your next question comes from the line of Elias Foscolos from Industrial Alliance. Your line is open.

Elias Foscolos

Good morning.

Murray Mullen

How are you this morning?

Elias Foscolos

Fine, thanks. Questions regarding cost but I want to focus on the G&A side, we saw a relatively large sequential drop in quarterly G&A and I am thinking of the cash component. Is that going to be and there was lot of comment on margin but focusing on that, assuming the things pick up or at least flat line, will that be sticky on the way up or is there more of a variable cost structure there than in the past?

Murray Mullen

No, I would say that it's going to be somewhat sticky with there are a lot of headcount reductions in them. We are still not as productive on the F&A side as a percentage of revenue that's the reflection; it's a big higher. But in an absolute dollar terms it's been reduced as we have reduced headcounts and mostly the European services side. And we are just trying to be more efficient in implement technology well types slower. So, we are looking at both segments how we could use technology better and we will be able to keep that stickiness for certain for a while but at some certain point in '17 or '18 when a true recovery happens, you will start seeing the absolute dollar start to trend upwards.

Elias Foscolos

Okay. Thanks very much for that color. Next question is going to sound tie in I guess to Murray's macro view is we are going to see an implementation of a carbon tax in Alberta. Any idea on how that might hit the business units? Will that be a flow through, are you looking at stuff that might mitigate it such as using CNG or propane or might just I'll then [indiscernible] see out on that question?

Murray Mullen

Yes. I don't think, Sam?

Richard Maloney

I think there is an alternative energy source that really makes economic sense. I know to the purists and the bureaucrats whatever you want to call them that that should -- it looks good on paper but in the practical term we just we tested it, it just doesn't make any sense. So, I don't see any way we can adjust our business to do that and we've always looked at how do we make sure we get maximum fuel consumption.

Many of our businesses are in what we call SmartWay program, Richard, and then we benchmark how many miles we get, what's our IO times. Like we are doing all of these things, it's not as if business out there hasn't been trying to reduce cost throughout time. We have all had to do that. So, I think principally the carbon tax is just a tax grab because that's why it's called the tax. And it's going to have to be a flow through, just as they could easily just put it as a fuel tax. It doesn't matter. And we that would have just been a flow through. So, I can't, I'm not, and know one thing, we're not eating the cost.

Murray Mullen

Yes, it's not happening.

Elias Foscolos

Yes. Certainly on the --

Murray Mullen

Yes, it's not happening.

Stephen Clark

Yes. Certainly on the truck and logistics side you would have a few surcharges based on what’s the wholesale cost of fuel plus the taxes that's applied to. So, we have this experienced when carbon tax went up in British Columbia and it was largely put on to the consumer. It's a very regressive tax when you think about it. And we could track long and hard about how much truckers actually pay per metric ton of carbon and it's significantly higher than the carbon tax. I can tell you that.

Elias Foscolos

Okay.

Murray Mullen

So, it's like in summary, I don't see any easy transition that we can make from a technology perspective that would mitigate that, so therefore it either we're going to eat that tax or we are going to pass it on. And we are pretty good at managing margin, so somebody is payer and I don't think it's going to be us.

Elias Foscolos

Okay, thanks. I was just looking to see if we would have some potential unexpected surprise to confirm it. So, that's it from me. Thanks.

Murray Mullen

We don’t. I can tell you Elias, like we don't have enough detail right now, they know for sure. So, I am kind of giving you kind of an overall macro view of how I view it but once we get the details and once we hear from the federal feds or what they are going to do but at the end of the day, taxes have gone up and it looks like the taxes are going up on carbon and taxes are going up on beer and they are going up on taxes -- on carbon, sorry about that. Just seems like taxes are going up.

Stephen Clark

To put in perspective the carbon tax is going to quite somewhere over $0.045 per liter of diesel. We seen that increase in the cost of diesel just because oil is taking a run here in the quarter. So, we see it all the time, this just happens to be we know that there is going to be a rise January first in Alberta, but I can't tell you what the prices are going to be and we always adjust to the price.

Elias Foscolos

Right, okay. Well, thank you very much for the color. That will be it for me.

Murray Mullen

Thank you very much. I appreciate it.

Operator

There are no further questions at this time. I will turn the call back over to Mr. Mullen for closing remarks.

Murray Mullen

Well, thank you very much, folks. We appreciate you taking the time with us today. And we look forward to chat with you in the following week. Hope we have better news coming in September in terms of commodity price and our future outlook. And until then, we are just going to watch the cost as best we can. Thank you very much.

Operator

And this concludes today's conference call. You may now disconnect.

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