Mullen Group's (MLLGF) CEO Murray Mullen on Q1 2017 Results - Earnings Call Transcript

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Mullen Group Ltd (OTC:MLLGF) Q1 2017 Results Earnings Conference Call April 20, 2017 12:00 PM ET

Executives

Murray Mullen - Chairman, Chief Executive Officer and President

Stephen Clark - Chief Finance Officer

Joanna Scott - Corporate Secretary and VP of Corporate Services

Analysts

Walter Spracklin - RBC Capital Markets

Greg Coleman - National Bank Financial

David Tyerman - Cormark Securities

Jeff Fetterly - Peters and Company

Elias Foscolos - Industrial Alliance Securities

Operator

Good morning. My name is Amy and I'll be your conference operator today. At this time, I would like to welcome everyone to the Mullen Group Limited First Quarter 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 20, 2017 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, and welcome to our quarterly conference call. We will be discussing our currnet financial and operating performance for the first quarter, and this will be followed by an update on the near-term outlook as we see it.

Before I commence the review, I'll remind you that our presentation contains 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.

With us this morning I have two thirds of our Executive team. I have Stephen Clark our CFO and Joanna Scott, our Corporate Secretary and VP of Corporate Services. So this morning Stephen will review the first quarter financial and operating results of Mullen Group. After which, I'll provide an updated outlook and discuss my near-term expectations for both the oil and gas -- natural gas industry as well as the overall economy. Following which, I will close with a with Q&A session.

So before I turn it over to Stephen, I'd like to open with a few comments. And since this is our third conference call since December 15, 2016, there really is no such standard change in our plans for 2017 or for the two sectors of the economy that Mullen has focused on, which is the trucking logistics industry. And as we all know that's closely linked to overall economic activity, as well as the oil and natural gas industry in Western Canada, which is closely co-related to the price for both crude oil and natural gas.

I will, however, provide some commentary on our first quarter results before Stephen delves into the financial details. So generally speaking, Q1 '17 was in line with our expectations. But perhaps, I’ll admit, not with those that some of those who follow our Company. And the reason is most likely embedded in the fact that we have some difficult comparatives to overcome from Q1 '16, principally due to our transload logistics works associated with some major capital projects in Western Canada, as well as the very active pipeline construction activity in the early part of '16. In 2017, we did not have the benefit of these high margin businesses. What we did have, however, was improvement in many other aspects of our business, and I'll explain in more detail shortly.

Overall, there is a growing sense of optimism that both markets that we are serving that we serve, are recovering. Now, this is precisely what we expected and articulated for several months. To be clear, however, we also suggested that the real benefits of the recoveries probably wouldn’t materialized until the second half of 2017. The rationale for this view is all in the pricing. We need demand to continue to improve then we can start calling back some of the pricing power versus units of lost over the last couple of years.

I still remain of the view that the last half of '17 is when the supply demand structure comes into balance, allowing for pricing improvements. Until then, the markets remain very competitive. And as such, margins will remain under pressure. We have also highlighted that acquisitions will play an important role over the course of this market cycle. This is exactly what occurred in Q1 '17.

So in summary, the short-term remains challenging but conditions are improving; most notably, in terms of drilling activity. Acquisitions will be key to driving revenue growth; however, most new acquisitions will negatively impact our margins until we fix the issues associated with these acquisitions. But we will get it figured out as we always have done. Margins were below 2016, primarily due to the two reasons I mentioned earlier.

The first, I'll highlight again, is related to the completion of the previously approved major capital projects, like the Suncor Fort Hills oil sands plant. For example, in our TL segment, the Kleysen Group, our top performer in 2016, was down over $7.5 million in high margin EBITDA in the first quarter alone as compared to last year. Not because they changed, but rather because there were and continue to be no major oil sands projects following up from the last year.

The second reason is due to the timing of major project work. Q1 '16 was very active in terms of pipeline construction activity, providing our Oilfield Services segment business unit, Premay Pipeline Hauling group with several good margin pipeline hauling and screening projects. Whereas in Q1 '17, there were fewer projects and these were at lower margins. In fact, Premay Pipeline Hauling was down $3.9 million in high margin EBITDA year-over-year. So if we take the year-over-year declines from Kleysen Group and Premay Pipeline Hauling out of the margin equation, one can see that the majority of our business units actually not just held their own but they increased margin, and did a great job.

And the last point I want to make relates to oil and natural gas drilling. Entering 2017 we, like most anticipated recovery of sorts, certainly better than 2016. But in reality, drilling activity in Western Canada, particularly in the resource plays, was much stronger. And because we didn’t get the memo that activity would as robust as it was, we were not as prepared as we would have traditionally liked. And from this, I mean, from a people and pricing perspective.

Our business units did a great job managing the spot market work, but truthfully, we underpriced ourselves on several contracts. If the upward trend in drilling activity is maintained then this situation will correct itself later in 2017. So all-in-all, it was another solid quarter for the Mullen Group given the circumstances and the difficult comparatives we had to overcome.

Stephen, I am going to turn it over to you to provide some more of the details as it relates to the financials and our balance sheet. After which, I will provide an update on the 2017 outlook. So Stephen its 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 19, 2017 news release and our Q1 interim report, which consist of our MD&A and consolidated financial results, contains the details to fully explain our performance. I'll stand to both of my comments this morning on the elements within our results that warrant some further explanation.

Revenue was generally in line with prior year, but margin was challanged because of the lack of capital spend in the oil sand and for pipelines, and the addition of lower margin revenues streams by way of acquisition. Our consolidated results, our consolidated revenue rather, was approximately $285 million, an increase of approximately $13 million or up 4.9% as compared to 2016. This increase was attributable to $7 million increase in revenue for the Trucking/Logistics segment and $4.8 million increase in the Oilfield segment. This was the first year-over-year increase in first quarter revenue in three years and the highest level of revenue ever attained by our Trucking/Logistic segment of any first quarter.

Revenue was impacted by various factors that Murray articulated. On the positive side, we saw improved drilling activity in the Western Canadian Sedimentary Basin that resulted in increased demand for Oilfield Services and supported increased demand for trucking services in Western Canada. We saw the completion of the series of six acquisitions that began in the fall of 2016, including Kel Western involved during the current quarter. And we saw increased demand for pumps and water management services.

But these positive factors were offset by the completion of several major capital projects such as Fort Hills that resulted in lower demand for transload and trucking services. There continues to be competitive pricing environment for most of our services within our truckload division and for fluid transportation. And as Murray spoke about earlier, there is a decline in pipeline construction activity.

From a segment perspective, the Trucking/Logistics segment contributed approximately 63% of pre-consolidated revenue or approximately $181 million, again a new record. This increase of $7 million or 4% was primarily due to the incremental revenue related to our recent acquisitions, and the increase in demand for trade services in Western Canada along with $4.3 million increase in fuel surcharge revenue. These increases were somewhat offset by the completion of several major capital projects. In fact, on a same store basis, so to speak, Trucking/Logistics revenue was relatively flat. Murray spoke earlier about the negative impacts on Fort Hills had Kleysen, so I won’t belabor the point.

On the Oilfield Services segment, it contributed approximately 37% of our pre-consolidated revenue or approximately $105 million, which was an increase of approximately $5 million above 4.9% year-over-year. The increase in revenue can be attributed to improved drilling activity and an increase in demand for pump and pump related services. These increases were somewhat offset by the decline in demand for pipeline streaming services. Again, Murray detailed this impact in his openings remarks and further details on the Oilfield Services segment performance, and a breakdown of revenue changes by category can be found on page 26 of our Q1 MD&A.

Operating income before depreciation and amortization, or what is referred to as OIBDA within the MD&A was $41.7 million, an increase of $2.8 million or 7.2% over the same period in 2016. This increase was primarily due to the decrease in foreign exchange expense within the corporate office related to the strengthening of the Canadian dollar in relation to the U.S. dollar. 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 was $42.7 million, a decrease of $2.8 million or 6.2% as compared to $45.5 million in 2016. So Murray alluded to the impact Kleysen and Premay had on these numbers.

In terms of percentage of consolidated revenue, operating margin adjusted declined to 15% as compared to 16.7% in 2016, primarily due to the decline in margin in the Trucking/Logistics segment, as a result of the change in the revenue mix due to combination of acquisitions and the completion of several major capital projects.

Net income for the quarter was $14.5 million or $0.14 per share, a decrease of $6.9 million from the $21.4 million or $0.23 per share that we experienced in 2016. This decrease was mainly due to the $14.2 million negative variance in net unrealized foreign exchange. A more detailed break down of these factors affecting net income can be found on page 18 of our Q1 MD&A.

As for the balance sheet, it continues to be well capitalized. At the end of the quarter, we had working capital of approximately $245 million, which includes $242 million of cash and cash equivalents. And a current liability of $135 million related to our Series E and F notes, which mature on September 27th later this year. Our long-term debt stood at approximately $556 million, which includes $12 million of convertible debentures that mature in 2018. Our credit facility of $75 million continues to remain undrawn.

So Murray, with that, I'll pass the conference call back to you.

Murray Mullen

Thanks, Stephen. In terms of providing an update on the outlook for our business for the balance of 2017, I'll start with saying that really nothing has really changed since our December 15, 2016 call or our February 09, 2017 call. We remain of the view that, and let me start with the segment that will have the biggest year-over-year change, and that is drilling activity in Western Canada. But this is also not our largest segment any longer as we've diversified our organization substantially over the course of the last two years.

So there is growing evidence that the oil and natural gas sector of the economy is recovering from the depths of the spare in 2016. Commodity prices are now at levels that justify increased drilling programs in Western Canada, areas like Northwestern Alberta. As such, I expect the year-over-year comparisons and relating to drilling activity to be pretty impressive, just as they were depressing in the last two years. However, for drilling activity, the increase above Q1 2017 levels, I believe that we need to see either higher commodity prices or LNG investment decisions, not approvals but decisions. But I will be clear, business tied of drilling activity will be much stronger than 2016.

Now, in terms of major capital projects, the news is not so good. I just don’t see any rationale that would encourage investment in new major oil sands projects. This will definitely impact Alberta as part of our business, like our transload business. However, there will still be activity related to the oil sands, whether it would be to support day-to-day operations, repairs and maintenance, turnarounds et cetera.

We still expect new pipelines to be built, we just don’t know when these projects will start. But when they do, our Premay Pipeline group will be active. As such, this is more of a timing than a regulatory approval issue rather than no pipelines will be built. We feel recently confident about that.

In terms of the overall economy, the general thesis of modest growth prevailings. I believe the supply/demand fundamentals in Trucking/Logistics is nearing a balanced situation. As such, pricing levels should start normalizing later in 2017. In addition, the profits of Alberta is now not an economic drag and we are seeing better indicators that demand will be increasing, particularly as it relates to the restocking and the retooling for the energy sector, which is under invested and drawn down inventories of the course of last two years.

And lastly, we still have that strong balance sheet to continue our strategy of growth through acquisitions. And as we’ve highlighted before, we did two acquisitions in the first quarter, and still believe that we’re going to continue on that path for this year.

Now, taking all of the above into consideration, I am the view that both segments of the economy Mullen serves is improving, which is why we remain optimistic and why we’ve increased the 2017 capital budget by $25 million. You will recall that in December '16 we announced as part of our 2017 business plan and capital budget that we were allocating $25 million in CapEx. And I quote, virtually all of which will be deployed in our Trucking/Logistic segment. I also indicated that if our Oilfield Services customers and the markets were pointing toward some growth and we could get some pricing leverage that we would consider increasing the CapEx for 2017 after Q1 2017. Well, obviously, we see positive indicators to justify today’s announcement.

So thank you for joining us today, and I'll turn the call back to the operator for the Q&A session.

Question-and-Answer Session

Operator

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

Walter Spracklin

My first question is on acquisitions, because as you noted the margin differential from what you're acquiring to what you run at can oftentimes be a fairly significant gap. And you alluded to, I guess, two reasons for that; one, being the run at higher cost; and the other, they may have mispriced business. How much of each would you put into the other bucket? In other words, how much of it has been priced, how much of it is cost? And as a result, and I have a follow-up on that, is depending on how you answer, how quickly can you fix one over the other?

Murray Mullen

I think let's just take one step back; number one is that most people are selling their business are selling it because they have got no ability to change their business under running into some type of struggle; or number two is, they hit some point in their life cycle where they are going to monetize their business. Those ones the latter ones that they don’t come up that often, they come up once in a while and those are what we would call as are -- is the quality best-in-class on company.

Most of them out there are running sy or near variable costs, maybe in low margin business. So why would we do those? Well, the only reason we do them is just that we take them and we layer them into our existing business units. So we just take all of the business they’re doing. And unfortunately, there is a lot of job losses and you just keep the business that you want and that ends up being how you get your margin improvement.

It probably takes six months maybe nine months to be able to go in and identify exactly what -- who you’re going to keep and all those kind of things. But generally, all we’re keeping is just the sales and the driver force and the rest is all layered into our shared services group. But that ends up being the margin improvement, because we can't change the pricing in the overall market with these small acquisitions. You're just taking and taking up costs [multiple speakers].

Walter Spracklin

I guess that was my next question, if they have business that they underprice to achieve and that is hurting their margin, is bringing in your operation enough to fix that margin or do you have to reprice it higher? And if you do, do you put yourself at risk of losing some of the revenue that you've purchased?

Murray Mullen

Yes, you’ll lose some of the revenue, because we’ll de-market some of the business that they’re doing because it doesn’t make any sense. But that’s what they do when they’re smaller company, they are kind to forced to take the hands or dealt with. And we’ll just rightsize their business and keep the good parts of it and then we get rid of a lot of the cost. So at the end, we may be don’t get as much business but the business we do get and the business they do have, it’s the stuff we want to keep.

Walter Spracklin

And could you comment on Gardewine in that regard…

Murray Mullen

Gardewine was a standalone business that wasn’t layered into anything, so that was simply just part of a much bigger strategy, that’s the standalone business. And then all you do is you go in and work with the management team to implement our quality programs and our measurement programs and our leadership programs, and those kind of things. And then empower the people to how to run the business more effectively. And so that’s a total different strategy and acquisition than the ones of the tuck-in once that we’ve been talking about. These are the companies -- the industry is full of small to medium size carriers that are struggling. But they do have some good business, and that’s that part we keep and layer into our existing one that as business units, we just layered in…

Walter Spracklin

And are you still focused on tuck-ins then, or could you start spreading your footprint a little bit into a Gardewine types of -- cut a new acquisitions in new markets?

Murray Mullen

We would always do another Gardewine. I mean we’ve got very good reputation after 27 years in the public market of how we do this and we drive value, and we protect culture and then enhance culture. But they only come up like once in a while and when they do, we position ourselves to be somebody that they’d want to sell their company to. And we did a good job of Gardewine and then on that issue, talking about Gardewine. They continue to find ways to improve their business and are most impressed with what they’re working on.

Walter Spracklin

Switching over to Oilfield Services, you mentioned not getting the memo. Is there anything that obviously it was a surprise level of drilling activity. If looking back at what happened, is it sustainable at current oil prices, was it a blip, because obviously you guys live and breath at every day and you were caught by surprise. So is the reasons why you were caught by surprise, just simply because it was temporary? Or, and I guess where I'm going is, where is the next level of activity going to come from, do it wait for oil prices to come up or could we have another -- didn’t get the memo type situation for 2018 or into back half 2017 into 2018?

Murray Mullen

I don’t think we’ll -- I think they don’t get the memo situation was like every -- most people were caught off guard as to have busy it was going to be, most analysts, most industry players, most participants. And that’s why I say nobody sent the memo out. Within that context, a number of our customers, either they didn’t plan or they were quiet about what their plans were and they wanted to protect pricing. So it's a big game of poker that you play is to nobody tells you what's really in their hand, so we're left to kind of guess what activity levels were going to be like.

Walter Spracklin

But you've got a 2017 back half forecast, so is that been a function of what customers have reflected into you and you’re banking on? Or is there something else that is giving you that kind of confidence about back half of 2017?

Murray Mullen

I think that's what I'm saying, is that the memo is out now. You can't -- it's going to be busier; commodity prices have recovered; balance sheets have strengthened; cash flows are up. So there is a reasonable chance that activity levels were going to be much higher, I don’t know if exactly the same proportion as the first quarter,but if that, it very well it could be because we have some pretty easy comps to come over in terms of drilling activity in 2016. So I fully expect that some of the pricing will start improving as we make a commitment to our customers, we’ll do this and activity improves.

Now, can we -- are we going to beat -- is there going to be more rigs working than in Q1 of 2017 in another quarter in '17? I wouldn’t make that call. I think there will be more drilling than on a competitive basis each quarter. But I don’t know if we’re going to beat Q1 of '17 that was 350 rigs. I think or somewhere around there is where we peaked out, that's a pretty active market at 350. Now remember in another time frame,the old days, it could be up to 600 rigs maybe 700 rigs.

So 350 is a substantial improvement from 150 last year, but certainly not anywhere near what it was in the past. Now, are we going to get above 350 this year, I don’t think so; next year, I would say it's dependent upon commodity prices, which is both crude oil and natural gas. But also to me, yes takeaway capacity and you need somewhere to put this natural gas. And LNG is an important part of this discussion in my view. So we think it's going to be a better industry, but we're looking -- we're not going all-in yet until we know that LNG programs -- LNG projects really start coming off the drawing board and get final investments decision. I think 2017, it’s a pretty critical year for LNG in Canada. And I'm hopeful, I'm optimistic, but I don’t know, nobody has given me the memo.

Operator

[Operator Instructions] Your next question today comes from the line of Greg Coleman of National Bank Financial. Your line is open.

Greg Coleman

Just wanted to start on the Oilfield Services side. I understand that we had some projects that were rolling-off, may occur in for tough year-over-year comps in Q1. I'm wondering Murray or Stephen, can you give us some context as to when those year-over-year comps become materially easier to sum out? We know that your revenue from all of this fell about $20 million sequentially from Q1 to Q2 last year. Is that the conclusion of those projects, or was it was really isolated to just Q1 of '16? Or did you also have some of these bulky projects in Q2 and beyond? And do we need a back out down to normalize or at that revenue level in '16?

Stephen Clark

We still had a lot of pipeline activity in Q2 of '16, so now if that balance between how much of your loss from pipelines and how much if you gain from drilling activity. It appears at least early innings here, a break up that it’s a bit more busier than last year. But again, it's going to be a tough comp, and also on the Trucking/Logistic side, because that Suncor project went through until august of 2016.

Murray Mullen

I think to summarize, I think the real Q2 has still got the comparative to overcome in Q2, but the overall markets are strengthening. So that will buffer that but that is going to be difficult for us to grow until we get through those comparatives, because we’re losing really good business and really high margin. So we’re waiting for whether new projects come on. And LNG, to me, is the new project work, but it hasn’t really glimpsed yet.

Greg Coleman

So if we -- just to summarize and put it back to make sure I understand. If the markets up drilling activity say 40% or 50% year-over-year in Q3 that might be a good indicator of what your Q3 activity might be like. But say if it is again similarly 40% or 50% in Q2, you’re not likely to be up for 40% or 50% year-over-year, because [multiple speakers].

Murray Mullen

That’s right, because we got those comparatives coming off of that project. So that’s one of the things about our diversified business model. The good news is we have these last year, these two really good enablers and the rest of our business was really struggling. And this year we’ve got the rest of our businesses that are improving, but we’ve got these two major headwinds on a relative comparative basis. But that’s the nature of our business model. And last year it helped our business and helped our numbers and this year it hurt us for a little bit. But these things come and go. Of the 30 businesses we’ve got, we’ve got some businesses that are these project related and their high margin, and they make us great returns on capital. And then they go away for a little bit and they come back again. And so, it makes it sometime awkward, but clearly that work that we did with our Kleysen Group was a major one. I’ve talked about it in every conference call we’ve had that they did us a great job last year. But we caution that major project work is the biggest fundamental change that we see in the energy space.

Oil prices, natural gas prices have recovered nicely, and that’s going to go -- drilling activity is the first to improve. But we’ve not seen significant capital allocated to major capital projects yet. When that happens then I will say the oil and gas recovery is well entrenched. Until the major long lead projects are committed to, it’s still fragile and the money will go to drilling activity, just as easy it could be turned off. But it's the long big capital projects that would really tell us that the future looks brighter. So we’re waiting -- I think we’re still need to see a little bit more happen before that occurs.

Greg Coleman

And keeping along that theme, just trying to get a feel for the normalized level in this environment. Murray, coming back to some comments you made about Q1 and rig count being 350 on average. And absence breaking through that 350 average or absence LNG, is it fair to characterize Q1’s OFS revenue as a lightly hard watermark for the year, or is that a bad characterization? I'm just trying to understand your comments in the context of this year with probably a lack of major projects coming through. Is that 105 we saw on Q1, unlikely to be eclipsed over the course of the year unless we see that rig count again eclipse Q1?

Murray Mullen

I think that it’s -- I don’t know it’ll eclipse Q1 because very rarely it is one eclipsed Q1 in the Oilfield Services side. Typically, the rig count is the highest in Q1. However, I wouldn’t be surprised to see us have a another couple of quarters that are going to be awfully close to that as we finish -- as we get in the later part of year. And the reason I say that is the drilling techniques have changed so much and these are pad drilling and all weather roads and those kind of things. So I wouldn’t be surprised to see Q3 and Q4 being closer to Q1, that’s my best guess at this time, I think drilling activity be reasonably strong.

And if that happens then you can see we can have some numbers like Q1 along with some strengthening pricing, which is the thing is that we need just a little bit more demand. And we're going to get the pricing that was, because we're getting nice pricing on the spot market now. It’s more of a contract work that it’s still has to be normalized. And you keep the drilling activity the way it’s going to go in Q3 and Q4, you’re going to have labor shortage. And that’s going to be constructive to help us get our contract prices up.

Greg Coleman

Murray, when do you think the contract legacy pricings kind of roll off, I mean if we had good spot market and contracts are obviously set in the past…

Murray Mullen

Nobody has got really any leverage in Q2 because there is no activity going on in Q2. So it will be Q3-Q4, which really sets up for Q1 of '18 which is when I think you'll start to see the real benefit of the capital we’re deploying, the decisions we’ve made on the cost cutting and positioning. I think it's really Q1 of '18 where we’ll be a lot -- we'll really see all the benefits. So I’ve made the comments in the past and last year at this time I made a comment, that I said 2016 will be a year of positioning for our organization. And it was positioning in terms of balance sheet and right structuring and rightsizing and cost cutting and those kind of things, and just making sure you survive.

This year, I don’t say that. This year I would say it's more of your transition year and the recovery is happening, but it's not a street line up. There has been a lot of damage done to our business. I think in our Q1 revenues in 2010, we're just starting the recovery at the financial crisis we're about $177 million or $175 million in our Oilfield Services side, in Q1 of 2010. This year, we're just over $100 million, so the damage to the industry has been pretty significant. So we’re recovering, but we still got a long ways to go in my view.

Greg Coleman

And just switching gears over to the transportation logistic side, and I won't dominate the time here, just kind of one of the question. I want to better understand the split between things that, on the margin side, the split between what is under your control and is part of your process of integration and what's more due to the competitive landscape, which is obviously outside of your control. If we had normalized the quarter for having all of the the lower margin companies brought in and up to what I'll call Mullen's back. What would have it looked like or what could it look like, from a margin perspective? And then what is would still be outside of your control, which is just obviously impact of the competitive environment?

Murray Mullen

I don’t have exactly that number here. But I would say to you that for the most part, our Trucking/Logistics side would have been very similar traditional margins. The biggest thing that changed on the Trucking/Logistic side was the loss of the transload business. That as I said, was $7.5 million of EBITDA, high margin business of the Kleysen Group. If you take that out of the equitation last year and you normalize out, I think our Trucking/Logistic side was basically flat year-over-year. Was it not Stephen?

Stephen Clark

Yes…

Murray Mullen

I'm generalizing, but it's not a significant change. So overall, outside of that that smaller acquisitions we did, would have maybe made a small little percentage change. But the overall market and our overall, the same-store sales -- the margin was about the same, even in a competitive pricing environment because we had such good cost control. It was really the loss of the $7.5 million of that EBITDA from Kleysen Group that really distorts the Trucking/Logistic side, particularly.

Greg Coleman

And when do that $7.5 million roll-off, was that eaerlier…

Murray Mullen

That's just a year-over-year delta change between the Kleysen Group, and it all had to do with those -- that big transload job.

Greg Coleman

But the big transload job that was in August completion last year. Right?

Murray Mullen

Well, that's just in Q1.

Greg Coleman

Okay, got it.

Murray Mullen

That's just a Q1 delta change in our Kleysen Group year-over-year, $7.5 million of EBITDA and very high margin business.

Operator

Your next question today comes from the line of David Tyerman of Cormark Securities. Your line is open.

David Tyerman

I just want to follow-up on that question, so in Q2 of last year, was the run rate from the Kleysen transload roughly the same another $7.5 million?

Stephen Clark

Little bit less, but it was probably $6 million.

David Tyerman

And so we should thinking those sort of terms when we're thinking of the margins for our Trucking/Logistics in Q2, and that was [indiscernible] Q3 that was quite small, I assume?

Murray Mullen

By the time you get to Q3 and Q4, all of that relative comparison will be all normalized and you would get back to our traditional Trucking/Logistics margins, which is in the 15 point range, I think, Stephen, give or take. And that's more than our historical range, and we have that there. So we're still within the historical band of what the margin is. And if we get the pricing leverage as I think in the Trucking/Logistic side, we’ll be able to improve that margin later this year in our core business, ex the Kleysen Group. It’s only the Kleysen Group that’s really going to give us an issue on the Trucking/Logistic side this year.

David Tyerman

So if I just do the math on that number, would have taken the Q1 '16 like if it wasn’t there, and Q1 '16 margin to 12% roughly what you did in Q1 '17, as you said. So that doesn’t sound like 15%, and Q2 wouldn’t be 15% either. So is the level lower and just confusing me a bit further in the second half last year actually you had pretty good margins and Q3 was actually well over 15% and in Q4 '15. So I am trying to get an idea of what is the normalized level here of Trucking/Logistics?

Murray Mullen

I would say, 15% is more of a normalized level. I think what's not appreciative is that Q1 for Ttrucking/Logistics, it’s a soft quarter traditionally. You look at most truckers out there and then the margin builds as the year goes out and then the fourth quarter or late third quarters, the month that you get your best margins are September, October, November with the Christmas build. And then come January for the consumer, they get out of the equation and so your margin goes quite down significantly. And then so always in the first quarter, you’re always going to see a bit of margin push. So for second quarter third quarter, we’ll average out to 15% over the course of the year. And it builds slowly over the year was our best as I said being third and fourth quarters.

David Tyerman

Right, okay…

Murray Mullen

The only thing we’ll lose in the second quarter this year is just that margin from the Kleysen Group. The rest of the business is starting to, as just as indicated in the Q1, starting to be constructively much better. And so we’ll know more obviously in the next little bit, but it’s -- we're seeing enough evidence to say that I would expect revenue to start coming back a little bit and margin by Q3 will be just fine I think by Q3.

David Tyerman

So just to clarify, it sounds like you think you’re positioned to do something like 15% for Trucking/Logistics for the year?

Murray Mullen

I think that’s the traditional norm that’s right in the middle of the bandwidth, so what we’ve traditionally done, that’s correct.

Operator

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

Jeff Fetterly

On the CapEx, the incremental $25 million into OFS, what type of things were you going to be investing in?

Murray Mullen

Jeff, I missed that…

Jeff Fetterly

The incremental $25 million that you’ve allocated for the OFS capital spends here. What sort of things are going to be allocated or is that going to be allocated to us?

Murray Mullen

We don’t have anything specific right now. My early indications are we just acquired Envolve in the month of March, definitely on our horizon is building out another plant this year. And we’re just in the middle of, we just received approval on the new well. So we’re in early planning stages to build out another plant there. And we’ll do all the final work on it, and have a meeting here very shortly with that team. But that will definitely be a business that gets capital from our group here. We got a great management team there, we’ve got couple of another good locations that we’ve chosen out, and we’ve got a good design program. And so – and that’s where activity is really focused on in terms of drilling, as you know, which is in -- the Montney region is very, very active.

And when you’re doing long laterals and you're doing big fracs, you just don’t produce big gas and nice conde, you produce a lot of produced water that has to be disposed off. So think of the disposal, well disposal business, is just the warehousing business. And as you know, a lot of our business is tied to warehousing, whether it’s type, whether it’s drilling month, whether it’s transload, whether it’s LTL, whatever it is a big warehousing component and we're just going to warehouse produce water. And once you warehouse then you can start to manage the supply chain more efficiently. So we're going to take a lot of lessons learned and apply that into the business, and the acquisition involved is pretty key.

Other areas, we've told our other business units. We think there is going to be a lot more fluid haul and because I said when these big fracs require a lot of fluid. So we are open for business and we’ve told our business units, we're going to talk to the Board and we’re going to articulate to shareholders and tell them we get ready. It's going to be busier getting into ‘18. So if you think about the capital now really whatever we start planning for, you have to start -- you start putting that capital work in '18, not in '17. This is going to take a while to get things ordered and stuff like that. I'll give you one anecdotal piece of evidence.

Just to get trailers is the order book is increased by 50% now for trailers on a year-over-year basis. So there’s ample evidence to suggest that you'll have to get into queue to start getting your equipment now. And it's just going to have to -- it's going to be a life time. So we're going to start preparing already for '18, right now. It could be trucks, trailers, pumps and well disposal wise, as early indication that’s kind where I see it going.

Jeff Fetterly

In terms of existing capacity within Oilfield Services, you guys obviously have idle units and business units underperforming, right now. How do you think about the sustaining CapEx, the reactivation cost and the threshold in terms of getting equipment back to work, especially on the [multiple speakers]…

Murray Mullen

We've said that we think that we -- and we said this in our December '16 call. We said the sustainable CapEx for our existing Oilfield Services business is about $25 million a year, that’s in a normal market. We should be allocating $25 million of capital into our Oilfield unit. Now, when you have a normal market, you also have higher EBITDA because the last little bit is not in a normal market. But a normal sustainable CapEx for the oil and gas service side, as we’ve now got it, is about $25 million. That’s not to build out a new plant, that’s not to buy those kind of things, that would be on top of that. But our traditional business it would be about $25 million on an annual basis.

Jeff Fetterly

You guys in the MD&A specifically talked about not participating in some business units given aggressive pricing, specifically on the fluid hauling side. What's the view for that component coming out of break up? Is that related to the contract, the repricing of the contract 4Q referenced earlier, or do you think that’s another dynamic?

Murray Mullen

Well, I think Jeff that’s a good point you brought out. Number one is we’ve said we're not going to chase unprofitable business. There was a number of oil and gas companies that try to catch service companies, some of them were bragged about it that they lock their suppliers into three year pricing, that go well. I don’t need to tell you what I think how of those suppliers that did that, but that's what you think is a good business decision. But this Company wasn’t going to sign on to those. So we let the dummies have all the dumb business. We don’t really care.

So we anticipated it was going to be busier, so we gave our business and did not lock-in because we were trying to be trapped into signing dumb contracts. And we just gave up the business in the short-term and we’ll wait for you to business to come back or the dummies to go broke one of the two. But that's exactly what happened, Jeff. Now, you can take a look at our -- the step I think in our Oilfield -- in our production services side where we gave up, our margin actually went up quite nicely because we gave up that business, it’s in our production services side. It was up like about 2 basis points if I'm not mistaking.

Stephen Clark

Close to 400 basis…

Murray Mullen

So 400 basis points in there, our revenue was down, Jeff, but our margin was up like 4%. But there is no way we were going to get trapped into signing a long-turn contract as we see costs going up and pricing going up. So those did sign, well good on you, that's your business plan but it's certainly not ours. And that’s how we address -- that's how we’re addressing that market situation. And as the year goes on, I would be very, very surprised if pricing doesn’t firm.

Jeff Fetterly

The year-over-year increase in OFS margins, that's probably mix then?

Murray Mullen

Yes.

Jeff Fetterly

On the Trucking/Logistic side, couple of a cost items. You referenced an increase in purchase transportation. Is any of that related to move it online?

Murray Mullen

No. The move it online is our R&D program, we’re trying to make sure that that we get rate. How we’re going to participate in this new world of enhanced mobility and marketplaces. So we have some de minimis cost in terms of that but no revenue, but really we’ll see how that plays itself out. But now that you brought that up, we have some good initiatives going on there. We've already seen how it's getting into that is really focusing our attention on how we can use our sub-contractors more efficiently by having some access to some apps and some mobility and stuff like that.

So thus far, we've made some good headway but not enough to change the numbers for Mullen yet. That's we're working on that in the background and trying to see if we can get it right, but that's a very competitive market just like everything else. We just have to make sure we execute better than anybody else, and those kind of things. But it's just challenging as, Jeff, to how we think of business because the more that the Amazon's and the others of the world start doing online merchandizing, it really impacts the store front operator and we have to make sure that we use some of those lessons learned and how we could be competitive in our Trucking/Logistic side. So, I think it will help us but not enough to change the numbers for this year.

The biggest thing that’s going to change, the biggest acquisition that we've done that's going to change our numbers and give us where as growth profile is the disposal business with Envolve. That's a high margin business, good returns on capital employed. It's under right area and it's a growth that come for us that we're going to have at least one maybe two more clients within a year. And that's focused in the highest density drilling area in the Montney and Grande Prairie and that will give us more influence in the drilling related side of our business in the Oilfield Services. Because as you know, our business has changed so dramatically with Trucking/Logistics now making up nearly two thirds of our total business platform.

So if the Trucking/Logistic side is basically, which is tied to the general economy and it kind of is modest to slow growth. And once you assume that our Trucking/Logistic side ex the acquisitions, we would also be modest to slow growth because they are tied together. And now that represents roughly 65%of our business Trucking/Logistic -- and the Oilfield Services is a much smaller part of the business. So we wanted to have more leverage on the Oilfield Services side coming out of this and we saw Envolve was being the very best way for capital work and very excited about that opportunity, and we’re going to leverage it.

Jeff Fetterly

Last question, from a cost standpoint in T&L your fuel cost going up. Should we expect that they’ll be a fuel surcharge element that starts to play-in in the second half of the year that help offset that?

Murray Mullen

Two things on that, Jeff. In the Trucking/Logistic side, you’re exactly right on the fuel surcharge side. Most Trucking/Logistic business is got fuel surcharge component to it. In the Oilfield Service side, there really is no fuel surcharge. So your pricing is always lagging your increased cost and that’s exactly one of the reasons why we said there is no way we’re going lock-in the long term pricing within oil and gas company and fix the price, because you can't control the input cost like fuel. So we think the market is changed so that’s -- but there is always a lag between when fuel goes up, either for a fuel surcharge or a change in a rate. It just takes a little bit of time and I would say that lag is anywhere from three to six months.

Operator

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

Elias Foscolos

Couple of questions for you, first one focus is on Envolve. There was a press release of that transaction on the 31st. I was wondering, did the transaction close or was there an effective date for earlier in Q1? And was there a revenue contribution from that acquisition in the quarter and not looking on magnitude, but just the timing perspective.

Stephen Clark

The transaction was back dated to effectively where we got the benefit of the revenue and EBITDA from March 1st onward, so there is one month. And we would have put that -- you would have seen about $800,000 of revenue for the one month. And that was in the MD&A, I don’t know what page.

Elias Foscolos

Okay, I did miss that, I’ll admit that…

Stephen Clark

So when we closed the deal to went on, I think on the 17th or I think it was March [multiple speakers]. So we closed it on that day, but it was effective as of March 1st and as a result of that, there is during the month of March, Envolve did $800,000 of revenue that was included in our Q1 results.

Elias Foscolos

Now focusing a bit on that and the mix in the Oilfield Services, I did see a sequential increase in EBITDA margin or gross margin also. And can I make the assumption that that came from higher margin Canadian dewatering and the addition of Envolve to a degree, or would you -- or am I incorrect in assuming that those two were key drivers?

Murray Mullen

No, Envolve was de minimis because its such a small number, right…

Stephen Clark

We only had one month of revenue, it would have been much more significant if we would have had the full benefit of the whole quarters of revenue, and may be dewatering. On a sequential basis, I mean Canadian dewatering really was more or less flat. It's really what we call drilling related, so that’s Formula Powell, that's Pe Ben, that's Withers that really pushed the margins up, as you would expect, that was the most growth that we saw. Aand they rightsize their business and so well in '16 that would – in '17 when we had that up lift of activity they were able to really perform quite exceptionally well, and they’re really the cause on sequential basis.

Murray Mullen

Our focus was normal for those business was tied directly to drilling activity, and that’s because there was such an increase and drilling activity. And we priced reasonably okay, but we missed a couple of opportunities. But that’s the primarily reason for that, which it’s correlated very nicely to the increase in drilling activity. So that’s what gives us some room for optimism that the last half of the year looks pretty good; we’ve right-sized our cost structure; really happy with that size; little bit of more growth coming in the last half; and we're starting to get the margin that we need to see; and that correlates with the $25 million of CapEx increase. As said, until we see the margin, no CapEx going into the oil patch but it’s at levels now where I think it’s going to be enough where we can start allocating capital to make sure businesses can operate as efficiently as possible again.

Elias Foscolos

And one last question, now focusing on G&A cost and focusing on a sequential basis, which is Q1 '17 over Q4 '16. I noticed every category seem to move up such as in terms of cost, such as bonus, just sort of straight G&A costs. Was it a bunch of minor things or did you see questions -- or did you see any wage pricing pressure on the G&A side? Was there cost related to Envolve and some other acquisitions that may be in there, and move it online. And was there any kind of change to the bonus plan that might be a permanent fixture? I know a bunch of related things in there, but I'm trying to get some detail on what cause that moment?

Stephen Clark

It’s on quite a few things alive, so on the G&A side, so first of all there was some restructuring cost in that for some of our new acquisitions like Kel West and ECR and such. And certainly some cost for legal, but they aren’t significant. And again, we never really speak to severance cost because again in grand scheme of things, they aren’t significant. The proprietor certainly is up because Oilfield Service focus are up. There is no change in the fundamental plans per se. But there always is in February a true up that occurs where we typically add back profit share. But this year, there wasn’t a large an add-back as there was in 2016.

So profit share is one of those variable costs that really go with by way of how well our business units are doing. But when you look at absolute dollar amounts for wages, there is little bit of severance in there but not much. And again on the G&A side, there is a little bit of legal in there, but again if it adds up to 200,000, I'd be surprised. I think the biggest changes…

Murray Mullen

Yes, we have some new acquisitions so that's layered on and we haven’t -- that's some of that will be redundant then that will be sweared away overtime. And the second thing I think Stephen hit on is that when we pay out step the profit share in February, you have to pay up CPP and pay the maximum amount for the full-year off of that, so that normalizes throughout the year. so you wouldn’t see that in Q4 because we would already prepaid for those people that got proprietor, so it's a little bit of anomaly there.

But overall SG&A was not up substantially, didn’t see huge wage pressure seen or anything like that. So it's just -- there is nothing out of this abnormal from our perspective on a year-over-year quarter basis. But I do understand what you’re saying on a sequential basis, because our costs are little bit higher in Q1 than Q4 due to that profit share.

Operator

Your next question comes from David Tyerman from Cormark Securities. Your line is open.

David Tyerman

I had just a quick follow-ups, the LTL growth was pretty strong in the quarter, 10% or $9 million or $10 million. It looks like you’re taking some market share and the better growth in the economy. Do you see that continuing for some time to come?

Murray Mullen

Do I see its continuing?

David Tyerman

Yes. Like, do you think you can add $9 million to $10 million extra out of the LTL per quarter for the next two or three quarters?

Murray Mullen

That's a reasonable assumption, because I think the economy is strengthening a bit. If you have $10 million in the first quarter, there is no reason why that won't continue on or accelerate throughout the rest of the year, because Q1 is always the most difficult quarter you've got in the LTL business. The Alberta economy, as we've said, is definitely strengthening because of the additional spend by the oil and gas business which has really helped our LTL business in Alberta. And our Gardewine business and our Jay’s business to a lesser degree in Saskatchewan have gained market share. And so yes I think that's a very reasonable assumption to make.

We lost a little bit of margin in the Trucking/Logistic -- we don’t give -- we don’t say every little bad thing that went wrong. But in our Gardewine Group, we didn’t see the same margin improvement as what we've seen in previous quarters because there was just some really nasty weather in Manitoba that virtually shutdown business for a number of days this winter that we did not have last year. But overall, I'm very pleased with the productivity improvements that that company has made. I think it will show up in the last half of this year.

David Tyerman

And then just kind of on the same line, $10 million benefit from acquisitions for Trucking/Logistics in the quarter. I assume that that will continue through the remainder of this year until you annualize?

Murray Mullen

Yes, it’s absolutely whether it would be $10 million, it could be $100 million, it could be a zero, but because we never know when we’ll get the acquisitions done. But clearly, the trend is for acquisitions is well entrenched couple of general themes that are going on; number one is if capital gains are going up, taxes that is what has been answered about is that a number of owners of good businesses are thinking about taking advantage of the lower capital gains now. And that might spur them to make a decision quicker rather than later. Some companies are running into very challenging market conditions. We’re always careful. We got to make sure those ones can layer in to our existing businesses. But we have lots of acquisitions we look at, but we look at lots and we do a few.

Operator

There are no further questions, at this time. Mr. Mullen, I turn the call back over to you.

Murray Mullen

Well, thank you very much folks for taking us of that, added some color for everybody. And we will say thanks for joining us and we’ll talk to you in July of this year. Take care.

Operator

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

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