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Good morning, ladies and gentlemen. Welcome to North American Energy Partners Earnings Call for the fourth quarter of 2017. [Operator Instructions] 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 and Information Technology at North American Energy Partners Inc. Please go ahead, sir.
Thanks, Casey. Good morning, everyone, and thank you for joining us. Welcome to the North American Energy Partners 2017 Fourth 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 December 31, 2017, 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 fourth 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.
Thank you, David, and good morning, everyone. Let's now review our consolidated results for the fourth quarter ended December 31, 2017, compared to the quarter ended December 31, 2016. For the fourth quarter, revenue was $82 million, up from $62.2 million in the same period last year. The increase in revenue is a result of an earlier ramp up of our expanded winter works program at the Mildred Lake and Millennium mines, coupled with the word of nearly works heavy civil construction project at the Kearl mine. Contributing to the stronger results from the quarter, was mine support services activity at the Fording River coal mine in Southeast British Columbia, started with 3-year mine support services contract at the Highland Valley copper mine in Central British Columbia and the ramp up of a site development project by our Dene North Site Services partnership at the Aurora mine. Our ability to take on these stronger volumes was aided by the expansion of our heavy haul fleet capacity with the investment in growth capital earlier in the year as we acquired certain used heavy equipment pieces from a competitor, exiting the large earthworks marketplace. And we further leveraged our prior year capital investment and equipment technology that expanded the haul capacity certain of our existing heavy haul trucks.This increased activity in the quarter more than offset a reduction compared to the previous year in heavy civil construction work at the Mildred Lake and Aurora mines, lower mine support volumes at the Kearl mine and the completion of a site development project at the Red Chris Copper mine in northern British Columbia. Gross profit in the fourth quarter was $12 million or 14.6% of revenue, up from a gross profit of $6.4 million or 10.3% of revenue during the same period last year. The higher gross profit in the current period was driven by the higher volume of activity in the quarter, coupled with improved productivity on our winter works program at the Mildered Lake and Millennium mines, with their earlier onset of winter conditions, compared to last year. Equipment costs as a percent of revenue were consistent between the 2 periods, despite the expansion of active project sites, which included a large heavy equipment fleet located at the Fording River coal mine, the mobilization of equipment fleet to the Highland Valley copper mine, and the mobilization of the equipment fleet from -- the demobilization, sorry of the equipment fleet from the Red Chris copper mine. For the fourth quarter, depreciation was $11.9 million or 14.4% of revenue, down from $12.7 million or 20.4% of revenue in the same period last year. The current period decrease in depreciation as a percent of revenue, starting to reflect the benefits we are realizing from our recent program of securing quality used equipment at discounted prices from sellers looking to exit the marketplace. While also leveraging our strong maintenance expertise programs to extend the expected lives of our current fleet. Operating income for the quarter was $4.5 million compared to an operating loss of $1.2 million during the same period last year. G&A expense excluding stock-based compensation expense was $5.7 million for the quarter, up slightly from $5 million in the same period last year, reflecting the timing of accruals during the current year for short-term incentive plan costs compared to the previous year.Stock-based compensation expense in the quarter decreased $1.1 million compared to the prior year, primarily as a result of the effect of the previous year's most significant upward movement in share price, and its effect on the carrying value of the liability classified award plans.For the quarter, net income was $2.5 million, basic income per share of $0.10 and diluted income per share of $0.09 compared to last quarter -- last year's quarter net loss of $0.5 million basic and diluted loss per share of $0.02 per share. Total interest expense was $2 million during the quarter, up from $1.1 million in the same period last year. The higher expense in the current period was primarily due to recording of $0.6 million in interest on our March 31, 2017, issued $40 million convertible debentures and the higher amount of amortized -- amortization of deferred financing costs.On note, this quarter helped us to return to full year profitability with annual net income of $5.3 million, basic income per share of $0.20 and diluted income per share of $0.18. During 2017, we used $15 million in cash to purchase and subsequently cancel more than $2.6 million common shares in the normal course, reducing our outstanding common share balance to approximately $25.5 million, net of 2.6 million shares classified as treasury shares. And finally, on February 13, 2018, the Board of Directors declared a quarterly dividend of CAD 0.02 for common share, payable to common share shareholders of record at the close of business on March 6, 2018. That summarizes our fourth quarter results. I will now turn the call over to Martin for his remarks.
Thanks, Rob. Good morning to everyone. Back in the fourth quarter of 2016, we unveiled a plan to grow both revenues and EBITDA by a compound 15% per year for 2017, 2018 and 2019. Recall at the end, we were still deep into a terrible cyclical downturn in our core oil sands market sector, and the timing of the recovery was uncertain. While despite the downturn continuing through 2017, after a false uptick in oil prices during the first part of the year, we managed to grow revenue and EBITDA by 37% and 24%, respectively, above the levels reached in 2016.I'm delighted by these achievements and congratulate my superb team of employees who pulled that off in tough circumstances.Other notable accomplishments for the past year were: firstly, the preservation of a very strong safety management performance even with much higher activity, involving many new and inexperienced personnel. Our total recordable injury rate was well under 0.5% again, which signifies the top-decile outcome in the construction industry. I strongly contend that the outstanding safety execution is the foundation for overall operational excellence, and we will always strive for further improvements.Second, return to net profitability was one of the very few oil service companies to achieve this. Going forward, linked to the growth plan, we expect the profitability to move meaningfully higher.Next our successful diversification onto a significant coal mine as well as a new copper mine for a minimum 3-year term. During the fourth quarter, almost 20% of our revenues were derived from outside the oil sands. Next the formation of the Dene North partnership with a very strong indigenous partner. And finally, the initiation of the provision of heavy-equipment maintenance and rebuild services for our customers, which I will cover in more detail later.Okay. So moving on now to cover future prospects. We are starting 2018 flat-out busy. I repeat flat-out busy. This very positive situation has been largely driven by our customers scrambling to maximize production on the oil sands mines, a trend I've been talking about now since the downturn started over 3 years ago. We're also extremely busy, addressing bids for both the earthworks and heavy construction, with customers keen to secure capacity much earlier this year. For the first time since 2014, we are tendering for significant civil construction scopes, which is symptomatic of this key market segments swinging back to full life. All in all, by the end of the first quarter, we could be well on our way to meeting our growth targets for the year. A genuine recovery in oil sands work appears to be taking shape quickly, and we continue to pursue profitable diversity in other markets.This great outlook is completely unaffected by a recent announcement by our key customer about the introduction of the 150 autonomous mining trucks over the next 6 years. Our reaction to this news is as follows: Firstly, we welcome any initiative that makes overall oil sands operations safer and more cost effective. Secondly, we believe that the autonomous trucks will be replacement vehicles rather than incremental units, and we'll represent around 30% of the customers' total oil mining fleet.Our customers have always handled the mining of oil themselves and this activity is best suited to automation due to the consistency of the material, and the predictability of the whole roots. Lastly, we have been supporting the mine operators for over 3 decades with smaller, cheaper and more flexible trucks, performing important activities, the least suited to automation. If we continue to excel, we expect to retain our key role on the mine size for many more years. Next I'm pleased to confirm that our Board of Directors recently approved the $28 million investment in a purpose-built heavy equipment maintenance and consolidated office facility for Edmonton. Maintenance has become one of our real main core competencies and customers are trending towards rebuilding existing equipment, rather than buying new. Therefore, the investment is intended to address a part of this large and growing market. Our plan is to be fully up and running in these premises by very early 2019, and we expect cash payback on the investment in about 5 years from then.Also of note is that $10 million of the investment was incurred late in Q4 2017. This move further improves our long-term outlook, which is easily the most positive since I came to calendar almost 6 years ago. I am encouraged that we continue to execute our work really well. The only headwind that we face is the prevailing extremely negative investor sentiment towards the oil industry, in general, and the oil sands in particular. Based on our honest estimates for 2018 and 2019, our stock is currently trading at enterprise value to EBITDA multiples of 4 and 3.5, respectively. Surely, these numbers are way too low given our strong growth profile and diversity, a rhetorical question. Based on my long tenure in the oil industry, I've experienced peers have deeply negative sentiment several times before, and I am well aware that it can be very challenging and time consuming to turn the tide the other way. In my shareholder letter this year, which should be filed later today in our annual report, I focus on this matter, and I encourage you all to read it if you get the opportunity.Well, that concludes my prepared remarks, except I'm pleased to announce that we will be seeking shareholder approval at the annual meeting to change our names to the North American construction group, to better describe what we do and where we do it. The whole of North America is now our market, and we continue to broaden our construction related services. Hopefully, this rebranding will also help you overcome the negative sentiment towards us and place more emphasis on our growth and diversity. Well, that ends the prepared remarks. And I now would like to hand the call back to Casey, the operator, for the questions segment. Thank you.
[Operator Instructions] And your first question comes from Ben Cherniavsky with Raymond James.
Just have a few questions, actually. The -- first of all, it was great to see the revenue accelerate the way it did, but I was a bit puzzled that the EBITDA margins compressed on a 30% increase on the top line. I mean the business has always been about utilization and operating leverage and yes, that didn't seem to take place this quarter. What -- can you help me understand what the factors were there?
Yes, part of the reason, Ben, was something we discussed last time around and that was, the work continued on the coal mine, which we took at lower margin because we needed to fill in for a job that was canceled. So I think, that contributed to that situation. Anything else, Rob, that comes to the mind?
There's the ramp up at Highland Valley.
Yes, there's the mobilization at Highland Valley. We never take as much margin on the startup of the job, right, especially a term contract like that. So those 2 factors are main ones, Ben.
And when does the coal mining contract runoff? Like where does that become less of an impact?
We think probably April time, it will wind down.
And your -- does that mean last revenue? Or we will replace that at higher margins?
The second one, I think, right now.
So can you help us just to understand? Because your margins tend to be quite hard to predict quarter-to-quarter, especially, but even, like, on an annual basis. What's the directional target for this year?
It will depend on mix. We're hoping that we get more construction work, which is more labor-intensive this year. And the EBITDA margin on that is lower than earthworks. So I think depending on that mix, we can be 22, 25-ish for the year.
We should see a pickup in the second quarter, Ben, compared to last year where we really struggled because we had to react to the cancellation of the contract, plus...
Yes. I remember that, yes.
So our trend of seasonality should continue with an improvement in Q2.
Okay. And then on CapEx, can you talk about what we can expect there? I think you made a mention of growth CapEx. I wasn't sure if that was a net total CapEx or just for growth. But the number that you would anticipate this year in the CapEx number, all in?
So in terms of maintenance capital, we'll be about $35 million. So what we talked about in the press release and the prepared remarks was a one-off investment in the new maintenance and office facility for 28.
Yes. And so that will be how much additional?
28, on top of the 35.
Sorry 28, on top of the 35, yes. Okay. So that's -- so clearly, you're reinvesting in the business, and you've got the growth to justify it. But in the last 3 or 4 years, Martin, you'd really been focused on returning cash to shareholders, deleveraging the business. We saw that the dividend get implemented some pretty aggressive and well-timed buybacks. What are the -- how would you sort of sort the capital allocation priorities going forward in each of those buckets if you looked at growth CapEx versus dividends, buyback, debt reduction? And for that matter, any potential M&A that you see?
Yes, just to comment on there. We actually invested about $20 million in secondhand equipment during the downturn, which is really paying off right now. So we allocated capital to buy extra trucks, the piece of equipment that are all worth now at good pricing. So I think, that was a reasonable capital allocation move in the downturn, also. So we're just investing $28 million in the new facility for a maintenance in office, and that's going to hopefully contribute really well. We continue to look at M&A, but when you're trading yourself at a multiple in the 3s, it's kind of hard to do an accretive deal. To be honest with you, we're so pleased with our organic opportunities that we're quite consent to stay on that track with the growth that we foresee. If the stock price continues to be in the doldrums, I would expect us to maybe even do another buyback this year, and just keep going until things turnaround.
But do you have the -- you think you have the financial flexibility and being conservative and prudent with the balance sheet [indiscernible] to do all that?
Yes, we've got $90 million, 9-0, of senior debt right now. So we are planning a liquidity. We have no issues with covenants. So to buy another -- we have 1 million shares under the existing buyback to go, so we'll finish that off in the next few months, I'm sure. And then, coming August, we'll see where we are and do another one if the current situation still prevails.
Okay. Just on the maintenance facility then, when will that be ready?
We hope to be in it by the end of the year, right. So obviously, you'll take a little bit of time to get going in terms of the follow maintenance services. So it will be ramping up that during the course of the next year, but we hope to get to $20 million to $30 million over the next 2, 3 years.
Any -- can you give any color on who the customers are? You mentioned 2 new customers you got there already. Or what industries, what their size is, anything that might help us understand who you are pursuing with this investment in terms of third party business?
So it'll range from our oil sands customers to other contract as you rent equipments. A coal miner is just going to send us some equipment. So the word is spreading that we're offering this service now, and I think customers are very keen to try it out. And we're extremely pleased with the take-up on it.
Ann their competitors in that would be -- who would you be taking business from? The companies who are doing this themselves or sending it to Finning or other dealers?
Yes, it's mainly the OEM. Yes. We'd be taking it from.
[Operator Instructions] Your next question comes from Yuri Lynk with Canaccord Genuity.
Just wanted to circle back, Martin, on the CapEx. You did mention at the outset that you sound like the fleet is fully utilized. I think you're renting more equipment than what would be typical. Is there a need to spend beyond the $35 million maintenance to perhaps expand the fleet further? Or do you have sufficient slack to handle 15% more EBITDA this year?
Yes. We're looking at that, Yuri. And obviously, it's early in the year still. And our workload is coming together. So we'd like to use rentals to kind of peak shave, if you like. But we think this upsurge in demand is for real this time. So it might make some sense to invest in some of new equipments. Fortunately, we did invest in some good used of the equipment during the downturn, as I mentioned earlier, and that's helped us out pretty well. We do have the equipment coming back from the coal mine, as I mentioned in April, so that will help us address higher margin in oil sands work. But $35 million is our starting number, we'll look to adjust that according to how the year pans out.
Okay. How much of that depend on, I guess, your outlook? I mean, we're early in the year right now. What does the year look like depending on how successful you are on the construction jobs that are being tendered at present? Is there -- can that result in a wide swing in potential outcomes for the year? Because you said it was pretty robust, I'm just trying to get a feel of what that might look like.
Yes, Q3 for the construction season could benefit from this upswing in civil opportunities. You may recall back in 2014, the third quarter, our EBITDA from memory was about $22 million, $23 million. So we haven't been able to achieve that since because construction work fell off. So it could be that we can get back to near that sort of number with, as Rob mentioned, a better Q2 also, because hopefully, we won't get a contract cancel on this at the last minute. So yes, where we are now, it's all about March, right. Q1 is all about the weather in March. When does the warmer weather come. If we get past March, and we're in good shape then on the next call, I think, we will be able to give you a lot more color on the full year.
Okay. And just to square away something you mentioned in response to one of Ben's questions. I thought your EBITDA margin goal for the year, I thought you said 22% to 25%. I mean, given that this construction work is structurally lower margin, how do I square that with a seeming increase in EBITDA margin for the year?
Well, I think we'll see a little bit of price empower on earthworks, plus on the construction activity too. But there really is, right now a shortage of resources, equipments. So I think, we can achieve a little bit pricing escalation, plus we have some ideas on execution too.
Okay. And last one if I can just fit it in. Working capital, you've seen $21 million investment in the back half of the year. What does that look like? Do we see that online or is that reflective of the growth in the business? Just trying to get a feel for when...
It's definitely a seasonal growth. You would have seen the same thing last year, it was ramped up for winter works, and given the customer turns, we start to see that unwind roundabout March, April time period. So you start to see the cash coming in, in Q2 for the windup of the winter works program.
Your next question comes from Maxim Sytchev with National Bank.
Martin, just to circle back on the pricing power, can you quantify this or this is still sort of early days?
Yes, I think it's a little early, but maybe, I'll just make this point. I think there was a bit of misconception out there, but just because we got MSAs that last long time, pricing is locked in. That's certainly not the case, because distinct projects, pieces of work get bid separately. So we take price according to market conditions that prevail when we're pricing it, right. So I think we maybe get the opportunity to take some more price this year on certain scopes. The coal mining project that we talked on at low margin last year, will fall off in April, and hopefully, we will replace that with better margin work. So all that coming together, will lead to the margin estimate I gave.
Okay. Now that's very impressive. Do you mind maybe, also, going through some of the opportunities outside of oil sands that you're bidding right now, just if you can talk about the potential funnel for 2018, how that's unfolding?
Yes, you -- so taking them by category, other resources, unfortunately, yes, we talked about a gold mine opportunity last time and the customer has not got financing for it yet. So that one will probably slide in time. But we've got another gold mine in the same area that we're looking at addressing, and we're looking at other coal opportunities, plus copper. So there are several opportunities that are related to other resources. On infrastructure, we mentioned in our filings that we prequalified to bid for a major gravel road construction contract in the northwestern territories. So we're bidding that right now, and hopefully, we can have some success as part of the pretty strong consortium there. The Fargo-Moorhead flood mitigation project will eventually revive, I hope. It's in a hold pattern right now, as they sort out some design issues, but hopefully, that will get back on track, and we'll be bidding that. And we continue to look for other infrastructure projects that's involved significant earthworks. And then obviously, in terms of the expansion of our services, the investment in the new shop and office facility is meant to really take that a major step further.
Right. And initially on that point, we have to hire incremental labor to be able to do this work? Or is that right now just mostly on CapEx how we should be thinking about this opportunity?
Yes, we will have opportunities for -- to add incremental people for the shop, for sure. But here in Edmonton, it's easier to get people than it is in Fort Mac. So we think we can find those people, and attract them to work for us in a great new facility, and we look forward to that.
Yes, now for sure. And then, one of the things that you mentioned, I just wanted to get the number right. The 20% of revenue generation outside of the oil sand, is that for Q4 or for the entirety of 2017?
Q4.
Q4, okay. And last question for me, in terms of the construction season, how that's shaping out, can you qualify, is that -- how much of that is catch-up versus what is sort of true incremental demand, which is coming back to the oil sands market right now?
So, it's a combination of both. This time last year, we were looking forward to a pickup in construction, but due to the plant fire, it's one of our main sites. Some of those projects got pushed to the right again. So they have revived now. Another base mine we're seeing good opportunity, and the new Fort Hills mine is bringing opportunity. You might recall, we did a major drainage system project in 2014. There is a similar opportunity to bid such a project this year. So it's a combination of both.
Your next question comes from Devin Schilling with PI Financial.
Just taking a look at your guys, this G&A line, we seen 3 conservative quarters here with year-over-year declines. Have we hit bottom here or how do you guys see this going into both 2018 and 2019?
Yes, Devin, it's Rob here. Our G&A is kind of hitting predictable trend now. So Q4 is always a little higher just with our [ autumn fees ] and things like that. But the numbers you're seeing last year will trend this year. At some point, we'll hit a threshold where we'll have to grow our G&A a little bit, but a lot of it is a fixed cost to us.
Your next question comes from Ben Cherniavsky with Raymond James.
My follow up has been asked, thank you.
And you have no further questions in queue at this time. I will turn the call back over to Martin Ferron with closing remarks.
Well, thanks for joining us today. And we look forward to talking to you again in the near future. Thanks.
Thank you. And this concludes the North American Energy Partners conference call. You may now disconnect.