Mullen Group's (MLLGF) CEO Murray Mullen on Q1 2016 Results - Earnings Call Transcript

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Mullen Group Ltd. (OTC:MLLGF) Q1 2016 Earnings Conference Call April 21, 2016 12:00 PM ET

Executives

Murray Mullen - Chairman of the Board, CEO and President

Stephen Clark - Chief Financial Officer

Richard Maloney - Senior Vice President

Analysts

Walter Spracklin - RBC Capital Markets

Scott Treadwell - TD Securities

Milan Posarac - Scotiabank

Jon Morrison - CIBC World Markets

Operator

Good morning. My name is Mike and I will be your conference operator today. At this time I would like to welcome everyone to the Mullen Group Limited First 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, April 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

Thank you. Good morning and welcome to Mullen Group's quarterly conference call.

But before I commence the review, I would remind you that our presentation this morning contains some forward-looking statements that are based upon current expectations and are 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, Senior VP; Joanna Scott, Corporate Secretary and VP of Corporate Services; and Kim Derbecker will be the conference coordinator.

So this morning I am going to have Stephen Clark to provide a comprehensive review of the first quarter financial performance and operating results for the Mullen Group, after which I will provide an outlook and discuss my near-term expectations for both the oil and natural gas industry as well as the overall economy. And then, we will follow that with our traditional Q&A session.

So before I turn the call over to Stephen, I'd like to open with a few comments. Firstly, I have to – you will have to bear with me this morning, I got one of these spring calls, so – but yes, this is Murray still talking to you, even though it sounds like I'm in an oil drum.

So let me just say this – suffice to say, we've all seen better days if you're involved in the oil and gas business and specifically, if you're in the oil and gas service sector. It is in the midst of what I can only describe as akin to being in a depression, the likes most of us have not ever witnessed. So even during these times like this, even the very best are challenged.

So today, I'm not going to spend a lot of time on why our Oilfield Services segment results were down. Everyone knows why. Producers are not investing, they're not drilling. And in truth, they are not even -- they're barely spending, which quite simply implies that there is no demand for oilfield services at this time. And whatever demand there is, the pricing is simply awful.

Our competition is striving to survive. And the producers are more than just willing partners of what I've referred to in the past as a game of dumb and dumber. So instead of focusing on all the doom and gloom, let me share with you what I consider is the positives in the last quarter.

First, in spite of all the negatives, our oilfield service segment turned in a very respectable first quarter. Yes, revenue was down by some $58 million. But let's take a look at drilling activity in Western Canada. The average rig count was a mere 153 rigs working in the first quarter. That's down nearly 50% from last year.

What did we do? We adjusted quickly, we adjusted swiftly to the lack of business, we controlled the costs. We right- sized our employee count, thereby ensuring that we could generate at least some positive earnings in the quarter. In fact, we earned $18.5 million of EBITDA. But it was not easy and certainly I can tell you it was no fun. Unfortunately, we had to lay off many very very good people, something I'm not proud of, nor will you hear me talk about letting people go as an achievement. It was just something we had to do.

Second, our trucking logistics segment continued to perform and performed at a high level. And this is in spite of some very soft market conditions in Western Canada as a result of the economic slowdown with low end oil and natural gas prices and truthfully a rather unimpressive Canadian economy, and continues to bump along in the 1% range or thereabouts. So really there's not much really going on.

But within that context, our 12 trucking logistics business units did an outstanding job of managing costs and driving efficiencies wherever possible. Our revenue in this segment was down a modest 6 million, or 3.4%. And most of this was due to just lower fuel surcharge revenue as a result of lower fuel costs.

But the margin gains were impressive. And that is even with some currency headwinds that we experienced as a result of the strengthening Canadian dollar. Two business units deserve special mention. The Kleysen Group had another very strong quarter, taking full advantage of that new state-of-the-art transload facility we [ph] talk about up in Edmonton. They did a great job and kudos to our team up there. And the Gardewine team, they just continued to produce margin improvement. We started on this path over a year ago. The management team has brought in and they continue to look for ways to make sure that they can run their business at the highest possible level and I'm very very pleased to report that they had some margin improvement in the first quarter over last year.

So all in all, it was a great quarter turned in by trucking logistics segment. In fact, in terms of our operating income, it was a record.

So on this issue, in terms of being in the trucking, I want to remind our listener that this is exactly why Mullen has a diversified business strategy. I can't imagine where we would be without the trucking logistics segment. And as I said to you, we've learned these lessons early on in my -- in our family's history, is that the oil-patch can be great but there are times when it is just plain nasty and we're going through one of those times right now.

So third, one of the other positives we had -- and let me talk in terms of the balance sheet. We took the initiative to work with our long-term debt holders to give us credit for some very prudent steps that we took in the past in terms of holding cash on the balance sheet and the embedded value in our US dollar hitch. So on the February 11 conference call, I indicated that this would be a priority to us.

And I'm pleased to report that our noteholders agreed with our request and the logic that we've presented. The amendment in our notes gives us added leverage to ensure we remain within the debt covenants, which is 3.5 times trailing EBITDA during these unforeseen challenges due to the collapse in oil and gas prices. Nobody envisioned that we were going to have a market like this. But such as it is, you must deal with it. Stephen is going to provide further details in his presentation on the balance sheet issues and then on the notes.

Fourth, another positive, and it really is one of the encouraging signs that we're beginning to see. And it started to emerge in the last quarter and that was the movement in the price of crude oil. It is ironic that the last time we held a shareholder conference call, February 11, 2016, also happened to be the low spot price for crude oil at $26.19 US per barrel. And along with that low oil price was virtually the low in the Canadian Dollar at less than $0.69 US. So today the Canadian dollar is near $0.80 and the price of a barrel of crude oil is near $43, that’s nearly a gain of 60% from the February 11 lows.

Is this a trend? Look, I don't know for sure. But I can tell you it sure feels a whole lot better than two months ago. However let me be clear. The short term remains challenging simply because of the damage caused by the recent collapse in the crude oil. That began in earnest earlier this year is expansive. But at least it looks like there's some light at the end of the tunnel.

Now for some additional detail on the first quarter results, I will turn the call over to Stephen Clark after which I will close with some thoughts on what the near term outlook might be. Stephen, it’s all yours.

Stephen Clark

Thank you, Murray and good morning fellow shareholders. With respect to our financial and operating results for the first quarter, our April 20, 2016 news release and our Q1 interim report which contains our MD&A and consolidated financial results, contains the details that will fully explain our performance. In my presentation notwithstanding the proper accounting term of operating income before depreciation and amortization or OIBDA, for simplicity, I will refer to it as operating income for short. I will set to the bulk of my comments on the elements within our results that warrant further explanation.

So let's start with revenue. On a sequential basis, consolidated revenue for the first quarter uncharacteristically decreased by $16 million due to drilling activity declines in Western Canada that have been well articulated. Overall though on a year-over-year basis revenue decreased by 65.5 million, or approximately 20% to $271.7 million but margin adjusted for foreign exchange effects remained relatively stable at 16.7% as compared to 17% in 2015.

Now specifically from a segment perspective. Revenue in the oilfield services segment decreased by 58.4 million or 36.9% to 99.8 million as compared to 158.2 in 2015. All but our Premay Pipeline Group experienced declines. Despite this decrease, this segment generated respectable operating income margin of 18.5%, a testament to our cost control disciplines and highly variable cost structure which resulted in lower direct operating expenses as a percentage of revenue. However our sales and administrative expenses were up by 310 basis points, more than offsetting the gains made on our DOE expenses. Further details on the oilfield services segment performance and a breakdown of revenue declines by category can be found on page 24 of our Q1 MD&A.

Revenue in the trucking logistics segment decreased by a mere 6.2 million or 3.4% to 173.9 million as compared to 180.1 million in 2015. This was primarily due to the $3.8 million decline in fuel surcharge revenue but it generated operating income margin of 16.1%, an increase of 220 basis points. The slight decline of revenue but expansion of margin resulted in record first quarter operating income of $28 million, in part due to the exceptional performance by Kleysen and the operational improvements by Gardewine combined with additional operating income due to the acquisition of Courtesy.

Again in this segment, our direct operating expenses were down by 370 basis points but S&A expense on an absolute dollar basis, excluding foreign exchange, were up by about $0.5 million largely as a result of the Courtesy acquisition, yet rose by 150 basis points when including the negative foreign exchange variance of $1.3 million on the US denominated working capital within that segment. Further details on the trucking logistics performance can be found on Page 19 of our Q1 MD&A.

Operating income prior to foreign exchange gains or losses recognized within the corporate office or what is referred to as OIBDA -- adjusted within the MD&A decreased by $11.9 million or 20% to 45.5 million, or an operating margin, again as I stated earlier of 16.7% as compared to the $57.4 million of OIBDA or operating income or an operating margin of 17% in 2015. Operating income, including foreign exchange losses, decreased by $25.9 million or 40% to 38.9 million from 64.8 million in 2015. This really was due to the decrease of -- the $14 million decrease within the oilfield services segment, a $3 million increase in the trucking logistics segment as well as the $14 million negative variance on the foreign exchange recognized within the corporate office.

In essence, the rise in the Canadian dollar impacted our operating results two-fold. It negatively impacted our trucking logistics operations by $1.3 million and our corporate office by $14 million but reduced our long term debt, improved our net earnings by $16.4 million because the mark-to-market that occurs on our debt and our hedges.

As for the balance sheet, it continues to be well capitalized. At the end of the quarter, we had working capital of approximately $185 million, down about $2 million from December 31, 2015 and includes approximately $105 million of cash. Our cash position fell by $42.1 million, largely due to the repayment of our Series C notes. Excluding the repayment of the debt and the interest prepayment that occurred in March, our cash position was relatively neutral. In fact, it rose by 0.3 million.

Specifically though, during the quarter, we generated $34.5 million of net cash from operating activities. We paid dividends of 23.8 million. We repaid debt of $36.7 million which was the net effect of paying off our Series C notes and using a portion of our bank credit facility. And we paid $6 million interest. Other items such as purchases of PP&E and foreign exchange make up the rest. Further details on our capital liquidity can be found starting on page 27 of our Q1 MD&A.

As for specific changes in the capital structure in the quarter, on March 30 we repaid our Series C notes that were set to mature on June 30 of this year. This involved us -- that this involved us incurring an additional expense of approximately $0.8 million. In essence, this was a prepayment of the million dollars of interest that were scheduled for the second quarter with adjustments for a make-whole penalty and the benefit of currency swap held by our lenders. As a result, although we paid the debt 90 days early we were able to save just a little bit of expense in absolute dollar terms although it all hit during the first quarter.

In addition, we amended our private placement agreement to have the measurement of debt changed. The debt definition of consolidated total debt was replaced by consolidated total net debt. The amendment gives us credit for derivative financial instruments and our cash in excess of $50 million.

Our consolidated total net debt stood at $625.3 million at the end of the quarter, for total net debt to operating cash flow ratio of 3.04 to 1. Specific calculation methodology of total net debt can be found on page 42 of our MD&A. The result of this amendment is that we improved our ability to handle the risks and it will enable us to execute on good opportunities as they arrive during the current downturn. We funded part of the prepayment with new borrowings on our bank credit facility. Rather than comforting [ph] some of the US cash held on our balance sheet we chose to borrow $35 million at 2.84%, balancing the risk of currency volatility against the attractive interest rate. In essence, we concluded that it was more strategic to continue to match our US dollar debt with our US dollar cash.

And with that Murray, I will turn the conference back to you.

Murray Mullen

Thanks Steph for that. So in terms of the first quarter we put that now away. And we now look forward to what does the future look like. So during the last conference call I suggested -- and these are my words -- is that 2016 will be a year of positioning, and that the chaos and certainly in the energy space would probably start to end. That it was just simply a question of timing.

So clearly $40 plus oil feels better than $26 dollar oil. And I hope that the trend continues because until commodity prices recover and from this perspective, I mean both crude oil and natural gas, the producers will be cash strapped. Which really is just another way of saying they won’t be drilling, they won't be investing. And they probably won't be spending much. These are the basic fundamentals that drive demand for oilfield services.

The basic reality is that the near term fundamentals continue to look awful. This is bad news for our 15 business units and our oilfield service segment. It also presents a challenge for the operators in Saskatchewan economies. But if the news is bad for Mullen, the news is downright scary for our competitors. In fact, we've already started to see some bankruptcy. Next week, for example, at the Ritchie Bros auction in Edmonton they will be holding their very first five day sale. There's over 10,000 pieces of equipment that are on the market. I suspect that many of our competitors will not be around and participate when the industry recovers. Which by the way I do not believe will happen to any great extent until sometime in 2017. As such we must be prepared to endure a few more quarters of pain before we can confidently start for planning that the demand is once again improving.

Now there will be a new investment cycle. Perhaps not exactly like the last one, because demand continues to grow. Supply is now contracting. And the combination of these two important ingredients is key to balancing the markets. Until the new investment is renewed, we are thankful that Mullen [indiscernible] the challenge as the most severe downturn since the 1980's.

Our trucking logistics segment, it will continue to provide the necessary cash flow to enable Mullen to meet our basic obligations. We have some great business units and while I don’t see the Canadian economy growing in any substantial way, the expectations, even from the Bank of Canada governor recently, is that GDP in Canada will be somewhere around 1.7%. Now that's not specifically great. But when compared to the oil and gas sector, it is great.

In terms of the oilfield services segment, I do not expect any significant contribution until later in 2017. As such, the board accepted our recommendation that we reduce the monthly dividend to $0.03 per month. As I have consistently articulated that dividend must be proportionate to the cash flow we generate -- expect to generate. And since the oil and gas industry is in a depression, in what I believe is only temporary, the most logical improvement step to take is to reduce the dividend, protect the balance sheet and be business [ph] and to capitalize on the failures of our competitors. This will be our mantra for the next two quarters. Much better days lie ahead. And as conditions improve the board will once again revisit the dividend. And remember since 2005 we have distributed over $1 billion to shareholders.

So thank you for joining us today. I will now turn the call back to the operator and we’ll enter the Q&A session. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from Walter Spracklin from RBC.

Walter Spracklin

Thanks very much. Good morning everyone. So I'd like to kind of go big picture here, and Murray, I guess, you mentioned depression levels and declines that we would never have envisioned before. And I was wondering about lessons learned now that you've gone through, or are in the process of going through this business, or through this downturn as it relates to your businesses. And I'm wondering if now when you come out on the other end of this, do you make any changes in terms of how big you let OFS get relative to your total business and a lot of CEOs do, look at the more volatile businesses and say, okay we don't ever want this part of our business being more than X percent and as a result directing more in terms of acquisition dollars, over in the trucking logistics if we do see that return in your oilfield services business. Is that something – is that an approach that you're thinking about now as we hopefully come up through the trough here, if this is indeed the trough?

Murray Mullen

Well, that's an interesting concept, Walter, but the truth of the matter is what we do here with the senior executive team and we present to the board is we present our very best opportunities where we see the best place to put capital to work. If we think the best place to put capital work is in the trucking logistics segment, that's where we're going to put it to work. If we see the opportunities in the oilfield service we're going to put it to work there. So it really is predicated upon where is the best opportunities.

Now for the longest time, for way before 2014 we did not like the opportunities in the oilfield services side. So as such we didn't put a whole bunch of capital to work. We kept giving the money back to shareholders in terms of dividends. We are at the bottom of the oilfield services cycle now. We're going to come out of this cycle. It's going to be a new investment cycle and there will be new opportunities. And we will be looking at these and saying okay, is the oilfield the best place to invest, or is it in the overall economy where the annual growth rate is maybe 1% to 2%. So we look at all, it's got to be strategic whatever we do. But we're going to invest money where in the heck the best opportunity is around.

Walter Spracklin

I guess a corollary to that –

Murray Mullen

And I would suggest that it’s not that long away from when we would be putting more money to work back to in the oilfield services side. Once we get through this, this part of the cycle, I mean that's just unfortunate but that's simply because it was too much capital went into the oilfield service side and we've got to correct it. Then there will be not enough capital in the oilfield service side and then the investment cycle starts all over again.

Walter Spracklin

So does the investment cycle start all over on an equal basis similar to last time? I mean as you mentioned you have 15 separate business units all in kind of different types of operations, are there somewhere part of it is structural and it's just not going to come back up, and would you foresee exiting some of those businesses as a result of what you learned in this downturn?

Murray Mullen

I don't think we will exit the businesses. We will monitor those businesses to see what our cost structure should look like and when we put capital to work. But the oil patch is a very complex business. People like to think of the oil patch as just drilling activity. That's not the truth, that's not the case. It’s drilling activity, it’s service work and it's capital investment which is big long lead like projects. I think the part of the business that may be impacted longer than others is the long lead major projects. Are we going to build another oilsands class in the next little bit? I doubt it. It’s going to take a while, and there’s going to be a lot of things further way before more capital goes into the oilsands for example.

But in terms of the drilling activity and other stuff, we expect that that cycle is going to return and the capital go back into there, so we'll put capital to work where you see the opportunities through the next three to five years where they look best. So we’re not going to add anything. We’ve certainly downsized and right sized and then we just got to wait for the cycles to come back. And we've been pretty good at managing that and managing our cost along the way.

Walter Spracklin

On that down-sized, have you – I know you reluctantly had to shed workers here, would the same apply to equipment, have you effectively parked it or would there be a shedding opportunity as well on the equipment side in terms of –

Murray Mullen

No, we can’t shed. We shed equipment in 2014 and that’s what we articulated -- I don't think anybody was really paying attention at that time but we were selling off assets in 2014 when there was buyers, we sold – reminding now but it's in the over $30 dollars worth of assets. Not including the land, the land was a separate one. But we monetized somewhere $65 million, $70 million of things when there was buyers. And there's no buyers today, things are on sale. So everybody's selling, there’s 10,000 pieces, like -- so what we've done is we never really added too much capital in the last cycle. We lived within our means, whatever excess we got we just parked it, we wait but I'm not going to go and wear it out. We use a lot of sub contractors, a lot of owner operators which is why we've been able to maintain margin.

We will put company equipment back to work when there's a recovery in the pricing formulas. Until then we just park it, we wait it out. But there's no send selling it now, I mean that part of it, everybody's doing that, so you can't maximize value now. So we just park it and we will wait.

Operator

The next question is from Scott Treadwell from TD Securities.

Scott Treadwell

Morning guys. Wanted to ask about trucking first. Nice improvement in the margins, I know you guys have referenced the work you've done at Gardewine and sort of deconflicting some market areas. I'm just wondering from a general level rather than sort of in response to the demand, how much margin improvement is left? Are those businesses now maybe some tinkering aside pretty much how you'd want them to run?

Murray Mullen

Kleysen is operating actually at peak capacity, we can -- we just made, between them and our corporate office we made some good strategic moves there with the transload center. So we are operating at peak capacity in terms of that business unit. The rest of our businesses, except Gardewine and/Courtesy have really done a good job of minimizing kind of the downturn so they did a great job of managing costs and right sizing. But I think Gardewine, Courtesy and [indiscernible] business, we still have some opportunities there. They're not going to be easy. But we’ve got a pretty good game plan there. And we're going to continue on that path to deploy technology and make good business decisions, look for synergies where we can and consolidation opportunities that we think can enhance the performance of those business units.

So Gardewine, we've made some good improvements. I'm going to watch -- I think those improvements are going to carry through to the rest of the year, so we will have the benefit of margin improvement throughout the whole year and that's my expectation. Really pleased with the initiatives that they've undertaken. And I said last year we would be working with that team to improve margin and guess what we've done it in one year. But we're not finished.

Scott Treadwell

One of your comments actually partially answered the question, I was actually in a reference to the amount of equipment auction. You talked about selling when there was buyers. Does that translate into buying when there are sellers in the upcoming auctions?

Murray Mullen

You know what, we're going to be looking at that. But I'll be honest with you we’re going to be – I think the buying cycle is a little early. So we'll be seeing where that equipment goes and – but no, it goes on sale percentage the dollar will be a buyer. So we've got lots of good assets and that’s the safety.

In terms of the company equipment, I am more -- I like to use our hybrid model of subcontractors and owner operators who have company truck [ph]. I think it's a little early on in the game to invest in company equipment. So I'm hoping a lot of that goes to subcontractors and owner operators and they get it cheap on the dollar, and they come to work for us, we will be the provider of – and they can come to work for us.

Scott Treadwell

Okay and a follow up on that, you’ve referenced a couple times the US dollars on hand, I mean obviously the conditions are just as bad there. Would it make any sense, as you look at either owner operators or company assets to look at deploying US dollars into US auctions, especially given how much the Canadian dollar strengthened here in the last couple months?

Murray Mullen

Nope. Not interested in US auctions, opportunities down there in terms of equipment, they've got. I just don't see that as being viable.

Scott Treadwell

Just not even to drive back across the border.

Murray Mullen

No, don’t see it. That’s my personal view. Now I do think that some of the US buyers are going to be up at this auction and maybe some foreign buyers. And if you want honestly, I hope that happens. I hope, all those 10,000 pieces of equipment leave the province because that's going to help us immensely. If all that equipment stays in the province, I'm still going to take advantage of it as the market improves because we're going to have more owner operators and more subs working for us.

Scott Treadwell

Okay. And last one for me just as -- now with the reduced dividend and having some room on the covenants and some I guess runway there. When you think about going forward acquisitions, managing the balance sheet and then increasing the dividend, I mean you’ve kind of referenced a number of times where it's going to make the most impact for shareholders. And I know you've also referenced in the past that acquisitions you tend to run into private equity guys a lot, has that changed to the point where -- and you've sort of referenced in the news release where the acquisitions are becoming not much more attractive, either the bid ask spread or the playing field of competitors is starting to thin out?

Murray Mullen

It’s very difficult – No, the bid ask hasn’t -- people still are living in La La land in terms of their ask. Our view has been for quite some time, it’s really not helpful for us to buy just one of the competitors. We’re in a dog fight right now for survival. And I need half of the competitors to die. So by us buying one is not going to help a whole bunch in the short term. So but there's going to be opportunities that arise over the next little bit. I think it's just a bit early. And there's no rush to be early, to be honest with you. So we're just going to run our business as best we can. Now what we're going to do in the future is exactly what we've done in the past. If we see opportunity to put capital work on behalf of shareholders, we're going to put it to work. If we don't, we're still going to make as much play as we can and the free cash goes back to shareholders. I would rather give it back to shareholders than us keep it here and do something stupid.

And as we give back to shareholders, you can't do anything too stupid. So that's what we did and I'm glad we did it to be honest with you. Because if we would have deployed all of that capital in the oilfield service side as an example to get short term EBITDA and get some road, we would have absolutely shrewd our company. Probably like nearly every other service company.

Operator

[Operator Instructions] The next question is from Milan Posarac from Scotiabank.

Milan Posarac

Hey guys, it’s Milan here just on the line for Turan Quettawala today. Just had a couple questions here, from the financial side here. Trucking demand, can you provide color really as to how much trucking to manage down in Alberta, maybe from a revenue perspective? I know you have the mixed businesses of course across the provinces. But any color you can provide specifically on the Alberta trucking market from a revenue perspective?

Murray Mullen

I think the anecdotal evidence coming out is that somehow the province of Alberta is not in decline. I don't know who adds up the numbers. But I can tell you that trucking demand which all you do with trucking to manage your service -- service the market is overall trucking demand in Alberta and in LTL are the businesses that got to be down 15% to 20%. So I am not seeing the Alberta economies down 15% to 20% but I guarantee you that oil patch is down by more than 20%. The rest of the economy is not growing, so everybody should do the math and say Alberta, when they finally come out with the statistics you are going to find out this is a pretty steep recession here in Alberta, Western Canada.

If you get outside of Alberta, it's not quite as bad as Saskatchewan. And then once you go East even more, there is no decline and the market is rolling and begrudgingly as I said but it's still reasonably -- we haven't seen the same. Declines and we haven't seen the same region’s pricing pressures. It's still pricing sensitive. But it's not the same kind of issues that we've got out here in Western Canada. So all in all, when I think that all into account, I say you know what, our business units did a heck of a job. Now I think we're nearing the low point, I think ’16 will be the low point. And I think investment dollars start coming back in ’17. My view right now is that ’17 might look more like ’15 than ’16. And I think once you get to ’18, I think it looks -- for sure it looks a lot more like ‘15 or maybe even more like ’14. So ’16 will be the down, and then we'll start to see recovery starting next year.

Milan Posarac

Can you also give us a sense of organically in the quarter on the trucking side, or maybe another way to look at it is just, do you have a number for the acquisition revenue contributions in Q1 on the trucking side?

Murray Mullen

Well, we only did one acquisition which is Courtesy.

Stephen Clark

Yes, Courtesy, I think we telegraphed that that was a $10 million revenue on an annualized basis, so the seasonal effects are really that significant in –

Murray Mullen

It’s quite marginal.

Stephen Clark

So call it, $2 million to $2.5 million during the first quarter. On an overall organic growth, I can tell you that we've had some growth in the east, we've had some growth because of Kleysen in the transload and then the resource sector in the Alberta economy continues to be challenged and the net effect is that ex the fuel, were down -- on same store sales were down about 5%.

Murray Mullen

And that's really Alberta overall. With the east not being down and Alberta being down substantially more, so but the east is a big part of our business now. You know what the regional LTL businesses, Gardewine and Courtesy, that's a big part of our business.

Considering all the evidence from sea fee from trans-borders, for ourselves is the market is soft. There is not a lot of demand growth. The only way to do it you've got to -- we've got to make things happen because the market's not making things happen for us. And from that perspective as I said to you, I'm more than pleased with how our business units performed in the first quarter. In fact, I am more than pleased with how they did last year. They just continued that performance in the first quarter of this year.

Milan Posarac

And then just one more final one. It's probably too early but any change or thoughts on the 2016 EBITDA guidance you gave before? I think it was 200 to 225 I believe million for the year?

Murray Mullen

Well, that was predicated upon when the price of oil was where it was in the first quarter. The price of oil got absolutely slaughtered, went down to $29. When that happened, it really put -- every one of our customers slashed their capital spends on their operating budgets which is really -- that's where we've been hurt is all on the oilfield side. So I don't know how long it's going to last for, I think the next quarter or two is going to be pretty awful. But we cut the dividend because we said, look, we're not going to do what we said in December. Because our customers cut their – they cut their budgets just directly in the first quarter that when we put the budget out we were counting on what they said they were going to do. But they've reduced it. So we will be down accordingly from there. Trucking logistics will continue to do okay but it's the oilfield side that's going to be down for sure.

Stephen Clark

And I would think the guidance on the trucking logistics would largely hold but would be on the lower end because the Alberta economy has just taken a step down, greater than what we anticipated. But it will largely hold.

Murray Mullen

We can’t do the same amount of business when they come out, the rig count goes down to 136 or something like that, they're still working. Yeah. So yeah you're not going to be anywhere near that 200, 220 range. It’s all going to be on the oilfield service side that we're down. And that's all because the capital spending drilling and investment is down in the oil patch. And I think, as I said, I think that’s maybe just for the balance of this year and I start to see the -- I mean look, we've got $43 oil now, if we were to stay with $43 oil, and hasn’t gone through all this drama going down to 26, I doubt if we had to change our outlook, see, because $43, while it’s not great, people get by with that and they're still doing things, but you don't do anything at $26. So they just went cold turkey. But the fair mechanism appears to be well entrenched, as I said the price of oil is up nearly 60%, 65% since the lows of February. But the damage is done for the next couple quarters. That's a guarantee.

Operator

Your next question is from Jon Morrison from CIBC World Markets.

Jon Morrison

Morning all. Murray, you talked about small integration and optimization opportunities still remain in Gardewine and Courtesy in the coming quarters. Would you expect the maturity of that to be masked by pricing your volume headwinds from a margin perspective through the rest of your business, or do you actually believe that you could still improve margins based on things you could do in those two platforms?

Murray Mullen

No, I think it's going to -- we're going to see margin improvement out to east for the reasons that you just said, one is the acquisition, we're still working on some legacy based cost structures that Gardewine had, that are not going to be part of ours. And we're having productivity improvements and we are deploying capital, we're doing all the right things. But the rest of the business is being hit somewhat. So that's going to be -- will be a negative. So all in all the end of the year I think we will still be okay but we'll have some wins and some losses. And the losses are all going to be in the west.

But you've got to remember, a lot of our business, we know how to manage the spread. And so we strive for margin. We don't strive for volume. I'm not going to chase volume at the expense of margin, that doesn't make any sense to me. So we manage the spread. And as I see even in the first quarter – if the first quarter was awful for trucking in Western Canada but we still did pretty good. So we have owner operators, we know how to use the subs. And I don't put company equipment to work and just go out there just to go to work. So we'll continue to manage the spread as best we can. But be very realistic, Jon. I mean the next couple of quarters are going to be pretty tough. I think we're in the – at the bottom of the cycle. But we're not out of the ninth inning here, we're just only one out. We've still got to get two more out which is two more quarters.

Jon Morrison

So based on your previous comments for getting how bad it's going to be, the short answer is that we shouldn't see a precipitous decline in margins and in line with what you guys have done over the last three or four quarters, you'll give up revenue for margin at this point.

Murray Mullen

I will give up margin. The one that -- we have that has done an exceptional job, beyond has been our Kleysen Group, they’ve been just a superstar performer. And they will be for the next bit. But we've got to replace some transload business, we're going to be moving a business over there, some pipe business over later this year and starting next year, so we might have a little bit of softness for a little bit but we'll get that back I'm pretty sure. But Kleysen has been just a great performer and those kind of things so. But by the end of the year I start to see some margin improvement in the rest of our businesses.

Jon Morrison

And then just to put a clarification from an earlier question. Are you able to share what Alberta or Alberta and Saskatchewan exposure would be in the trucking logistics side versus outside of those provinces or would you prefer not to share that number?

Stephen Clark

I don't know if we have a hard number, just the way that our model sort of works everything kind of gets muddled together. But overall I think Murray’s earlier guess, that Alberta volumes are down 15% to 20% is largely accurate.

Murray Mullen

So, Jon, some of our trucking sites is based out of Alberta but they do trucking all over Canada and the United States. So even though we're based in Alberta, we’re all over the country, right? So the part of the business that is really down that I referenced is really specifically our LTL business which is really just the Alberta economy.

Jon Morrison

And what I was really just trying to get at was, if you go back to the core driver of who is ultimately paying the bills is 30%, or 40% or 50% of it coming from those two provinces or something less material than that?

Murray Mullen

I think that's fair. Yes, that's a reasonable assumption.

Jon Morrison

Just back to your earlier comment about your organic business being down ballpark net of acquisitions by about 5%. Is the majority of that all volume based or a mix of volume and pricing at this point?

Murray Mullen

That will be all volume. We manage the spread because we use so many subs and owner operators. So that’s just a matter on the pricing because we just manage the spread with an owner operator and sub. And most of our trucking outside of our LTL business is all owner operator and subs. Very few companies for us.

Jon Morrison

In the release you talked about continued resiliency in the exposures you guys have on the hauling of large diameter pipeline in the quarter. And that kind of goes in line with what we've seen in the last few quarters. Does that visibility extend into the next few quarters in 2016 or has it fallen off at this point?

Murray Mullen

It hasn't fallen off yet. But in the absence of -- I would expect later this year or next year will -- unless there's some movement on some other big projects, it will probably fall off later this year and into ‘17. There's lots of activity and lots of bidding going on but I think we [need] permits. So it's coming. I think it's coming, Jon, to answer that. But the pipeline business big projects, so it’s body becomes and then it's go softer a little bit and then it comes back.

Generally speaking there's going to be pipeline activity because they still have to replace lines and repair lines and do those kind of things. But there are some major major projects that we're waiting to see whether the government approvals -- lot of people are waiting for that stuff. And then of course that goes into another cycle but we've had a very good run with the pipeline side for a bit. But it's a project based business, so later this year I think it falls off and then we've got to wait for the next projects to come back.

Jon Morrison

Just to follow on your earlier comments about the bid ask spread on acquisitions really not changing for the last three or six months. Is that true across the entire platform or are you seeing some decline in what guys would be expecting in some of the harder hit areas in Western Canada?

Murray Mullen

Well, most of the ones that want to sell in Western Canada which is nearly everybody. You're really only talking about what's the asset value of a company. Because there is no EBITDA. There is no earnings to value on and so you take a look at that. A lot of the companies that we take a look at I don't like their assets. So we will always look and say okay, what’s your competitive advantage. The trend advantage is not you have trucks or trailers, you’ve got equipment. Anybody can get that stuff. What's the competitive advantage and realistically we're pretty picky. There's a few areas we really like. We don't publish those things. But as I said to you, Jon, we're not interested in buying a guy that's got a bunch of old trucks and trailers. I'm not interested at all. They're going to get here, this market is too tough.

Jon Morrison

Last one just from me, it's fair to assume then that for you to do any sort of an acquisition in the oilfield services segment, it would just have to be such compelling financial returns that otherwise you just pick up a business down the road. Because we sold it.

Murray Mullen

Yes, that's exactly right. I think the best opportunity for us in the next bid is we outweigh our competitors. They're not going to make it. And then we start gaining market share the old fashioned way. I want to grow internally. I want to grow organically. I want to set up -- hire new people and give them the capital and I want to get market share like I said the old fashioned way, we want to earn it. I don't want to buy it.

Jon Morrison

Sorry, last one for me. Is it fair to assume that all of the investments you guys have will remain -- likely remain part of the company go forward over the next 12 to 18 months and you’re not looking at divesting any of your non-controlling interest?

Murray Mullen

Jon, I think that’s fair. Yes, we all sell at the bottom. We've honestly believed, Jon, that the market's going to come back. So we'll just wait it out. And we'll take a look at all those things and we’ll make an appropriate decision at the time. And some of them may not last. Some of them may get bought out, if happens I guess we will have to sell or we’ll have to make another decision.

End of Q&A

Operator

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

Murray Mullen

Well, thank you very much folks. Have been a very difficult time for a lot of people in the oil and gas sector, and been difficult on the Mullen Group. It’s been difficult – but it's difficult -- difficult to cut dividends and do those kind of things. One has to put into perspective that for us to be down this much of revenue there's a real human side to this story. Our total head count might be down by some -- I think 650 people year over year. But that masks the fact that we added people through some other acquisitions. The facts are we've got about 1400 people in our oil and gas service sector. That's just people and families and communities. And so when you're down in revenue the story behind the scenes is it was just people that lost their jobs. We’re hopeful that over the next bit of the cycle comes back and we can start to be an employer again rather than letting people go.

So I think that's a real tragedy that is lost in a number sometimes. And as I said it's been a challenge for us. But nothing compares to the challenge of those poor families that had to go through. So that we’re going to just hunker down, we're going to get through the next couple quarters. As I said our job is to not get too cute right now. A very difficult decision to cut the dividend but it’s absolutely the right thing to do, and in the next cycle coming back we will either deploy capital to grow the business or once again we'll give the money back to shareholders and say, you know what, you go bigger over where the next great opportunities are. We only look for great opportunities. So thank you very much. And we look forward to talking in July and reporting on the second quarter which – it’s going to be difficult time for the oil patch the next two quarters. So as I said one out at the bottom of the ninth. We’ve got to get through two more. Thank you very much.

Operator

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

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