North American Energy Partners' (NOA) CEO Martin Ferron on Q1 2018 Results - Earnings Call Transcript

North American Energy Partners Inc. (NYSE:NOA) Q1 2018 Earnings Conference Call May 2, 2018 9:00 AM ET

Executives

David Brunetta - Director of IR and Finance & IT

Joe Lambert - President & COO

Martin R. Ferron - Chairman & CEO

Robert J. Butler - VP, Finance

Analysts

Yuri Lynk - Canaccord Genuity

Maxim Sytchev - National Bank Financial

Ben Cherniavsky - Raymond James

Operator

Good morning, ladies and gentlemen. Welcome to the North American Construction Group Earnings Call for the quarter ended March 31, 2018. At this time all participants are in a listen-only mode. Following managements prepared remarks there will be an opportunity for analysts, shareholders, and bond holders to ask questions. The media may monitor this call in listen-only mode. They are free to quote any member of management, but they are asked not to quote remarks from any other participant without that participant's permission. I advise participants that this call is also being webcast concurrently on the company's website at nacg.ca. I will now turn the conference over to David Brunetta, Director of Finance, Investor Relations, IT and Treasury at North American Construction Group Limited. Please go ahead, sir.

David Brunetta

Thank you, Jacqueline. Good morning, everyone, and thank you for joining us. Welcome to the North American Construction Group's 2018 first quarter conference call. I would like to remind everyone that today's comments contain forward-looking information. Additionally, our actual results may differ materially from expected results because of various risk factors and assumptions. For more information about our results, please refer to our March 31, 2018, management's discussion and analysis, which is available on SEDAR and EDGAR.

On today's call, Rob Butler, Vice President of Finance, will begin by reviewing our first quarter results. Martin Ferron, Chairman and CEO, will then provide his comments on our outlook and strategy. Also with us on the call today are Joe Lambert, President and Chief Operating Officer; and Barry Palmer, Vice President of Operations. After management's prepared section, there will be a question-and-answer session.

I now turn the call over to Rob.

Robert J. Butler

Thank you, David and good morning everyone. Let's now review our consolidated results for the first quarter ended March 31, 2018, compared to the quarter ended March 31, 2017. Revenue this quarter was $114.7 million, up from $92.8 million in the same period last year. Revenue grew in the current period compared to last year as a result of growth in heavy civil construction work at both the Kearl Oil Sands mine and the Highland Valley copper mine located in Central British Columbia. The latter is part of the contribution from the recently awarded three year civil construction and mine-support contract.

We also realized current quarter growth and mine-support activities as a result of ongoing work at Fording River coal mine in Southeast British Columbia, which offset a slight decline in mine-support activities at the Kearl mine. Our current period winter works program included volumes similar to last year's strong program with reclamation work at the Mildred Lake mine site, in both overburden removal and tailings pond support activities at the Millennium mine site. We achieved these equivalent winter works volumes while also dedicating portion of our equipment fleet capacity to the incremental heavy civil construction of mine-support activities. This was made possible due to our 2017 investment in growth capital, which expanded our larger size equipment fleet capacity and the benefit realized from the effective execution of the earthworks program to the ever-changing weather conditions of the winter season.

Gross profit in the first quarter was $26.8 million or 23.4% gross profit margin, up from $23 million or 24.8% gross profit margin in the same period last year. The higher gross profit in the current period resulted from the aforementioned higher revenue. Slight decline in current period gross profit margin was driven by certain heavy civil construction and mine-support contracts that included lower-margin activities. For the quarter depreciation was $18.2 million or 15.9% of revenue, up from $14.6 million or 15.7% of revenue in the same period last year. The increase in the current period depreciation was primarily driven by increased equipment use as a result of the higher revenue activity. I'd like to note that the depreciation as a percentage of revenue is similar between the two periods.

Operating income for the quarter was $17.1 million, up from $14.4 million for the same period last year. General and administrative expense excluding stock-based compensation was $5.9 million for the quarter, down slightly from $6 million for the same period last year. Stock-based compensation expense decreased $0.2 million compared to the prior year. We recorded $1.7 million noncash provision for an anticipated loss this quarter on a sublease we negotiated at fair market rates of its remaining term for an underutilized tender to our office facility. While this effect will be eliminated all of $1.7 million of the future commitments to this facility over the next five years and nonetheless, negatively affected current year earning as we recorded the anticipated loss as an expense against operating income in the period.

For the quarter, we recorded $11.1 million net income with basic earnings per share of $0.44 and diluted earnings per share of $0.36 compared to $9.6 million net income in the prior year with basic earnings per share of $0.34 and diluted earnings per share of $0.31 recorded for the same period last year. A 15.6% net income improvement was achieved despite the aforementioned $1.7 million noncash loss provision recorded in the quarter, coupled with $0.5 million increase in interest expense in the current period, which was driven primarily by the issuance of the convertible debentures at the end of comparable period last year.

Recording of the sublease loss negatively affected basic and diluted earnings per share in the quarter by $0.07 and $0.06, respectively. The variance between basic income per share in the current period and basic income per share in the prior period, is also partially affected by the reduction in weighted average number, issued and outstanding common shares to just under 25.3 million as of March 31, 2018, compared to over 28 million shares as of March 31, 2017. Interest on capital lease obligations of $0.8 million in the quarter was comparable to the interest expense in the prior year despite a $9.1 million increase in our capital lease obligations.

For the quarter, we continue not-to-pay cash taxes booking in deferred income tax expense of $4.1 million. This compares us to a combined income tax expense of $3.5 million recorded in the period last year. Of note, adjusted EBITDA for the quarter was $39.1 million compared to $31.6 million for the prior year, an improvement of 23.7%. We ended the quarter with $12.1 million of cash on hand. Current period investing activities included net cash spending on property, plant and equipment of $17.4 million, which included $5.2 million use towards the construction of our new maintenance facility. We spent $2.3 million in the quarter to a purchase and subsequently cancel just over 344,000 common shares under a normal course issuer bid. And on April 11, 2018, our shareholders approved an amendment to the articles of our company, allowing us to change our name to North American Construction Group Limited effective on that date.

I'll now turn the call over to Martin.

Martin R. Ferron

Thank you, Rob and good morning to everyone. This is the third year in a row, and we've started off in quarter one with very strong results. Back in 2016, when we permit [ph] $26.3 million of adjusted EBITDA, I commented on the conference call in [indiscernible] that we did not recover of the board. And in 2017, when we reported $31.6 million of EBITDA, I described our performance is exceptional. So now in 2018 with $39.1 million of EBITDA, I'm running out of superlatives to describe the bidding and execution of our work by our operations team. I especially want to publicly recognize the outstanding leadership of our team by our President and Chief Operating Officer, Joseph Lambert, and our Vice President of Operations, Barry Palmer, who, as you know, are both on this call.

We look through the past to compare this result with other years in our 65-year history and found this to be our best quarter since Q1 2008, when we had three business divisions and revenues were over $300 million. I'm also very pleased that we produced $0.51 of basic earnings per share before the $1.7 million, one-off charge related to the sublease of our former head office in Edmonton. Since the lease is with the provincial government agency, we do not expect the loss to get any larger.

I would also like now to add some further color to our overall -- sorry, to our real estate overall picture as it provides a good example of how we have driven considerable cost out of our business. Back in 2012 we had a total of seven offices, two with associated maintenance shop facilities. All the leased -- pardon, all in annual cost of around $7 million. And we have long-term take-or-pay lease commitments of over $50 million. Since then as part of our business transformation process, we have offloaded five of those offices. And now we just have a combined office and shop facility in each of Fort McMurray and Edmonton.

Also by the end of the year, we will be moving out of our leased Edmonton facility into a likely mortgage purpose design and built office and shop complex that will serve our external maintenance growth foundations. We expect to eventually cover our property costs and make about $4 million of annual profits from this venture, based on very supportive feedback from potential customers. Therefore, we will produce a positive annual profit swing of around $11 million through the rationalization of our real estate needs and our entry into the third-party maintenance market. We will have also have gone from under all but $1.7 million of our once massive take-or-pay lease commitments. I'm obviously very satisfied with this much improved situation.

Returning to the topic of earnings per share, it should be noted that the fully diluted number for this quarter conservatively assumes full conversion of the convertible debt into shares. While the number for the corresponding quarter last year only takes into account a portion of them, therefore, year-over-year comparisons of diluted EPS was skewed due to the proper application of accounting rules.

Finally to our very strong start to the year, this clearly gives us added confidence in at least meeting our financial growth targets for the full period. This is especially the case given that we have sufficient work in hand to readily outperform the quarter two numbers from last year. That work includes a $35 million overburden striping contract that we negotiated with the customer and kicked off in mid-April. This work will last most of the balance of the year. Beyond quarter two, we remain encouraged with an outlook that includes robust oil sands demand for both securing earthworks jobs and summer season construction work. We also continue to pursue work outside the oil sands on work related to the extraction of other natural resources and infrastructure projects. We would expect more news on this continuing diversification effort as the year progresses.

Overall we remain on the path of growing revenue and EBITDA by at least 50% in each of 2018 and 2019, while reducing offload of outstanding shares by 10% each year, if we choose to, without meaningfully increasing debt. After that we have a clear line of sight to around $1 of earnings per share, maybe as early as 2020. It is also noteworthy that the consensus EBITDA number for 2018 is 14% above the amount we achieved in 2014, not be in the year before a deep cyclical downturn in the oil business. Most other service companies are struggling to get back to anywhere near pre-downturn EBITDA levels.

On the topic of share buybacks, we bought an additional 482,000 shares so far in quarter two, and have about 455,000 shares left to purchase under the current NCIB. Well, that concludes my short and hopefully sweet prepared remarks, as I prefer to let our impressive numbers to do the talking on this occasion. So I'd like to pass the call back now to Jacqueline, the operator, for the questions section. Thank you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Your first question comes from Yuri Lynk from Canaccord Genuity. Your line is open.

Yuri Lynk

Hey, good morning guys.

Martin R. Ferron

Good morning Yuri.

Yuri Lynk

Nice quarter. Martin, can you talk about how are the last three months played out relative to your expectations. I mean, it sounds like better than expected, but just if you could kind of frame that up for us and maybe the areas that drove your performance?

Martin R. Ferron

I'm glad to say that things turned out pretty much as I expected. My outlook last time around was pretty robust, right, I said we were flat out busy. So we've turned that work into good profitability. Execution was really, really good both in terms of financial outcomes, safety outcomes, customer satisfaction. So I'm just delighted with the way our operations team is working. So it's really good to watch right now.

Yuri Lynk

Okay. Fort Hills according to the project owners is going to reach full production earlier than planned. Are you seeing any impact on heavy equipment supply dynamics as that project ramps up quicker than, I guess, most of us had thought?

Martin R. Ferron

Yes. Even if it wasn't ramping up as quickly, it's still going to take heavy equipment from other mines, right? So generally it is tightening up supply, which is obviously good for us. I think customers are scrambling for certain types of work to get equipment. And so we're still pretty busy and Fort Hills is on for that dynamics.

Yuri Lynk

Okay, I will turn it over and get back in the queue. Thanks guys.

Martin R. Ferron

Thanks Yuri.

Operator

[Operator Instructions]. Your next question comes from Maxim Sytchev from National Bank Finance. Your line is open.

Maxim Sytchev

Hi, good morning.

Martin R. Ferron

Good morning Max.

Maxim Sytchev

And Martin, maybe building on the previous question in terms of tightening capacity what can you tell us about pricing in the general renewal sense, what's happening there?

Martin R. Ferron

Well, we'd expect pricing to improve, it hasn’t really kicked in just yet. But maybe for next year's or next winters earthworks program we'd expect to see it then. We haven't finished bidding summer construction work by any means yet either. So as we get the opportunity, we'll certainly be looking at our pricing and trying to get to the models that I predicted last time around.

Maxim Sytchev

Okay, that's helpful. And then in terms of Q2 over the last couple of years, I mean obviously, a lot of weather/fire afflicted results, but how should we think about it in terms of -- is there a normalized year that you can maybe refer us to, so that we can get a better sense of a run rate on revenue and EBITDA for the upcoming quarter?

Martin R. Ferron

Yes, I think, I'll be thinking in terms of 2015 Q2 then.

Maxim Sytchev

Okay. And last question, just in terms of the dollar in EPS in 2020, I mean, that sounds like a very tantalizing numbers. I was wondering if you don't mind sharing your assumptions in terms of how you're going to be getting there, is it more driven by further revenue acceleration margin, just any data point you can share with us, please?

Martin R. Ferron

All of the above, we just made $0.51 in one quarter, right? It's pretty outstanding. Obviously, as our best quarter of the year, now we're going into a slower period, but we don't except normal at North American, but we're trying to change things. And we're looking for work outside of the oil sands in Q2, just as we did last year to improve our results and contribute to EPS. And now we are going to do better than last year, that's pretty clear. For the rest of the year, construction is coming back, the land outside the oil sands is encouraging. Our external maintenance venture is getting off to a really, really good start. So all these things together are going to give us a nice diversified dollar of EPS by about 2020.

Maxim Sytchev

Okay, well very impressive numbers. Thanks a lot Martin.

Martin R. Ferron

Thanks very much Max.

Operator

[Operator Instructions]. Your next question comes from Ben Cherniavsky from Raymond James. Your line is open.

Ben Cherniavsky

Hi Martin.

Martin R. Ferron

Good morning Ben.

Ben Cherniavsky

Just on the diversification efforts, what was the revenue in the quarter that was outside of McMurray region?

Martin R. Ferron

I don't have the number in hand, but it wasn't as much as Q4, because we basically demobilize in Fording River. You got that Rob?

Robert J. Butler

Yes, it's about $15 million.

Martin R. Ferron

Okay, it is $15 million then Ben.

Ben Cherniavsky

Okay, great. And are you happy with the efforts so far to grow that and secure work in more conventional construction markets?

Martin R. Ferron

Yes. We still got certain things to do, and the progress is a little lumpy because we rely on projects. But we're trying to focus on term contracts like the Highland Valley copper mine, because that allows us to deploy a fleet of equipment for a considerable period. Projects that last a couple months perhaps aren’t as tantalizing as that, but we're certainly looking at everything.

Ben Cherniavsky

And the weather was bit of a challenge for most of that period, does that impact your results now?

Martin R. Ferron

No, on balance I would have to say no. We did have a week to 10 days of very warm weather in mid-March. And then the month finished up very cold so and into April. So on balance, I would say that the weather was fair to us during the quarter.

Ben Cherniavsky

Okay, that's all I have got. Thanks very much.

Martin R. Ferron

Thanks Ben.

Operator

Your next question comes from Yuri Lynk from Canaccord Genuity. Your line is open.

Yuri Lynk

Martin, when might we hear about the road-building contract in the Northwest territories, when do you expect that to be awarded?

Martin R. Ferron

Yes, I think Q4, likely. The bid goes in kind of late in Q3. So I think, it's going to be fairly quick turnaround in terms of awards, there's only three bidders. So hopefully, we'll hear by the end of the year.

Yuri Lynk

And if successful, what would be the plan of attack there in terms of allocating iron to that job given that you are pretty flat out it sounds at the present.

Joe Lambert

Hey Yuri, it's Joe. This is a partnership, so we're evaluating our fleet as far as our contributions. It'll be in the best interest of the partnership. So that's building them to our bid assessment and our tender process.

Yuri Lynk

Okay. Any other infrastructure jobs of note in the bid pipeline?

Martin R. Ferron

Yes, we had the long-standing forward more ahead opportunity is being hiatus for little while, but hopefully, it's going to come back to the floor shortly. That's a fantastic opportunity for us that we hope to participate in.

Yuri Lynk

Okay, that's it. Thanks.

Martin R. Ferron

Thanks Yuri.

Operator

There are no further questions at this time. I'll turn the call back over to Martin, and we'll wrap up the call. Thank you.

Martin R. Ferron

Well yes, thanks for joining us today. We're obviously very excited about our start of the year, and hopefully, we'll have more good news as the year progresses. So thanks again, everyone. Speak to you next time.

Operator

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