MDU Resources Group, Inc.
Q2 2016 Earnings Call Transcript

Published: 3 Aug 2016

[Operator:]

Good morning. My name is Brent and I will be your conference facilitator. At this time, I would like to welcome everyone to the MDU Resources Group 2016 Second Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. This call will be available for replay beginning at 1

[Doran N. Schwartz:]

Thank you, Brent, and welcome to everyone to our second quarter earnings release conference call. The conference call is being broadcast live to the public over the Internet and slides will accompany our remarks. If you'd like to view the slides, please go to our website at www.mdu.com and follow the link to the conference call. Our earnings release is also available on our website. During the course of this presentation, we will make certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Although the company believes that its expectations and beliefs are based on reasonable assumptions, actual results may differ materially. For a discussion of factors that may cause actual results to differ, refer to Item 1A, Risk Factors, in our most recent Form 10-K and Form 10-Q. Our format today will include formal remarks by Dave Goodin, President and CEO of MDU Resources, followed by a Q&A session. Other members of our management team who will be available to answer questions during the Q&A session of the conference call today are

[David L. Goodin:]

Well, thank you, Doran, and good morning. We appreciate you joining us today to discuss our second quarter results. This was a significant quarter strategically for our company as we completed our exit from the Exploration and Production business and sold our interest in the Refining business. We are now a more streamlined company with a lower risk profile and less exposure to commodity prices, and we're focused on growing our two primary continuing business lines

[Operator:]

Thank you. Your first question comes from the line of Brent Thielman with D.A. Davidson. Please go ahead.

[Brent Edward Thielman:]

Hi. Good morning. Nice quarter.

[David L. Goodin:]

Hi. Thank you, Brent. Good to talk with you this morning.

[Brent Edward Thielman:]

Yeah. First question I guess would be on the construction materials, you had a really nice growth here in the quarter when a lot of your peers have been kind of blaming weather for causing delays in their respective businesses. Was this just not an issue this quarter? Or is it just a function of the underlying demand being that good?

[David L. Goodin:]

Brent, I'm going to have Dave Barney weigh in on that, because he can't wait to tell you how Knife River's doing.

[David C. Barney:]

Good morning, Brent.

[Brent Edward Thielman:]

Hey, Dave.

[David C. Barney:]

Yeah, we did – we were impacted by weather in our Central Texas operations, but the bigger impact was that Eastern Texas operations. But I don't know, we just have so much work there, it was a good year. We're ahead of last year. They have a strong DOT budget there. I believe we're going to continue to be strong in Texas for the coming years. So, it did have an impact, but not like I guess other companies did.

[Brent Edward Thielman:]

Got it. Okay. And then you're holding on to the revenue outlook there. Is it you're just trying to be conservative for any kind of quarterly nuances or are there any potential holes in work schedules here in the second half?

[David C. Barney:]

We'll always have our lows here and there in different regions, we are in 17 states. So we're going to have lows here and there but, overall, we're looking really strong and we haven't had any of the benefits yet, Brent, from the FAST Act, which passed earlier this year. So we're looking forward to that in 2017 and the bid schedule looks good. So I think we're set up for the coming years.

[Brent Edward Thielman:]

Well, that's great. One more if I could. Now that you guys have exited the E&P, Refinery businesses, how are you evaluating kind of M&A going forward versus kind of internal organic business development versus thinking about growing the dividend?

[David L. Goodin:]

Yeah. Great question, Brent. So as you know us, historically we've been an acquisitive company, it's really how Knife River and in particular the CSG were born and grown. Certainly the Utility has had acquisitions in the past and we've had probably some modest ones, certainly at the Pipeline & Midstream business. Very much as we think about our CapEx over the next five years and we've talked about that in past calls, it's very line of sight. We don't have baked in there unidentified M&A activity. It's very line of sight, so you might view that as organic primarily. That doesn't mean we're not interested in M&A activity. Again, there's a history there within our organization, but we also recognize our current financial situation and some of the write-downs that we've taken on the balance sheet. The balance sheet is important to us. It underpins the credit ratings, it underpins our access to capital that our construction businesses have access to they might not otherwise have. So, you kind of roll all of that together and then I think the last part of the question was how are we thinking about the dividend and how does that play into this? We think that's important. I commented a little bit in the script on that. Important way to return shareholder values; has for 78 straight years, uninterrupted, 25 increasing. And we view that as a very important part of returning shareholder value. So we put that all into play and again, I think you should take away from that historically acquisitive, primarily organic over these next five years with not a lot of fluff baked in of unidentified M&A.

[Brent Edward Thielman:]

Okay. Thanks, I'll turn it over.

[David L. Goodin:]

Okay. Thanks, Brent.

[Operator:]

Your next question comes from the line of Matt Tucker with KeyBanc Capital. Please go ahead.

[Matt Tucker:]

Good morning. Congrats on a nice quarter.

[David L. Goodin:]

Hey. Good morning, Matt. Thanks, appreciate visiting this morning.

[Matt Tucker:]

First question. Could you talk about overall, in the first half how the results have been tracking versus your internal expectations? Given you've left the guidance intact, should we assume that you're kind of just down the middle of the Fairway so far? And then within that, on a segment by segment basis, are there certain segments where the results and/or your expectations have been tracking positively or negatively versus your initial expectations?

[David L. Goodin:]

Yeah, that's – I'll try to catch part of that, Matt, because it's pretty broad based. So yes, we left the earnings guidance in place. And you think through the first half of the year, certainly Knife is off to a great start, and combined construction, a little over $40 million in earnings there. Some offsets to that, though

[Matt Tucker:]

Thanks, Dave. That was a broad question and your response was very helpful. I wanted to ask about the Construction Services margins trending a bit lower this year, although it's nice to finally see the strong backlog growth translate into revenue. But it looks like you've also brought down your expectations for the full-year margins, so I guess was there anything specific in the second quarter that weighed on margins? And at this point, is it fair to assume that given what's in the backlog, we shouldn't really expect you to be able to hit those kind of peak 7% to 8% type margins that you saw a few years ago?

[Jeffrey S. Thiede:]

Hey, Matt. This is Jeff. Our margin pressure is really driven from our outside business lines and our equipment business. We've got slower work releases out from our customers and our backlog really has picked up, our margin looks to be stable. It has increased slightly in our backlog. And then our smaller project work also where we don't record backlog, but it is higher margin, has also been a little bit slower. So we continue to work on execution and building backlog with selected projects. We have a number of significant projects that are not reported in backlog, but we are in pre-construction. So we're looking to execute and finish out the year stronger than the first half.

[Matt Tucker:]

Thanks, Jeff. And I guess a follow-up to that, for both Construction segments, your bookings were down a little bit year-over-year, backlog ticked down a bit sequential. Are you seeing any slowdown in terms of bidding activity or opportunities? It sounds like you're not. Or should we just chalk that up to kind of lumpiness?

[David L. Goodin:]

I'll maybe ask Dave Barney to catch on that first, and then follow on with Jeff.

[David C. Barney:]

Hey, Matt. You know, we're not concerned about our backlog. We just did quite a bit more work in the second quarter than we did last year, burned through more of our backlog, so we see the backlog out – our backlog's not a concern. You'll see it growing. Like I said, with the FAST Act coming up really into play into 2017 and beyond, we're not concerned with that. We'll be fine with our backlog.

[David L. Goodin:]

Jeff?

[Jeffrey S. Thiede:]

Yeah. This is Jeff. So our backlog is down from the previous quarter, but you have to go back to June 2009, since we've been in that $508 million range. So we like where we're positioned in our equipment business. We have seen slower transmission and equipment rental sales, also construction side of the transmission & distribution. So we've increased our capabilities with our equipment business and when the market improves, we'll be able to capture that revenue and margin, and improve the results.

[Matt Tucker:]

Great. Thanks, guys. And just last question from me, I believe your Utility customer growth expectations have changed from the last quarter. I believe you were saying 1.5% to 2.0% and you're now saying 1% to 2%, so if you could just comment on what's driving the change there, please?

[Nicole A. Kivisto:]

Yeah, Matt. This is Nicole. Essentially, what we did is took a look at our year-over-year data and when you look June-to-June, our customer growth rate across our brands ranges from 1.3% to 1.8%. So we did decide to move that range to 1% to 2% to accommodate year-over-year fluctuations. We still feel very comfortable that as you look ahead, we're going to grow within that 1% to 2% range. And when you do compare that to the national average, what we've been seeing, that's around 0.55%. And so we still feel very comfortable that our system is growing above the national average, but we did revise that down to accommodate year-over-year changes.

[Matt Tucker:]

Thanks, Nicole. I'll jump back in the queue.

[David L. Goodin:]

Okay. Thank you, Matt.

[Operator:]

Your next question comes from the line of Brent Thielman with D. A. Davidson. Please go ahead.

[Brent Edward Thielman:]

Thanks. Just a follow-up maybe more for Doran, but with a different company today, different risk profile, how are you thinking about kind of appropriate leverage ratio ranges going forward?

[Doran N. Schwartz:]

Yeah, that's a good question, Brent. Here's how I would think about it. As we think about our, for example debt-to-cap ratio, I would say that over time you could expect that to move up, in part because of how we're investing at the company. As we put more of the investment, as David mentioned, $272 million at the Utility this year out of about $370 million, that does have a higher debt-to-cap target, more of a regulated target, as allowed by regulators of around 50/50. And so by definition that will allow us to use a bit more debt to fund the growth that we see at the Utility. So I would see that as we move forward and more of our debt then would be at the regulated operations which is an indication that even with the ratio moving up, that's not necessarily an indication that the balance sheet is weaker. So I think as we invest going forward with the organic plan that Dave had talked about, we'll probably be able to utilize a little bit more debt on the balance sheet, primarily at the regulated operations. I will tell you that our balance sheet is very important to us. Discipline is important to us. We like our credit rating right now at BBB+ and the access to lower-cost, both long-term and short-term debt that we have the benefits from as a result of that, and so we remain committed to that as well, but that's how I see the balance sheet going forward.

[Brent Edward Thielman:]

Very helpful. Thank you.

[David L. Goodin:]

Thank you, Brent.

[Operator:]

Thank you. This marks the last call for questions. This call will be available for replay beginning at 1

[Matt Tucker:]

Thanks. Just a couple follow-ups from me. It looks like the CapEx plan this year for Pipeline & Midstream went up by $20 million. Could you discuss what drove that?

[Martin A. Fritz:]

Yeah. Hey, Matt. It's Martin. We have a Line Section 25 expansion project that we're going to be filing with FERC here. And so we're starting off on that. And that is what is driving it. That's going to be compression at basically three locations

[Matt Tucker:]

Thanks, Martin. And then last question, another kind of broader, open-ended question

[David L. Goodin:]

Well, certainly the exit of the E&P and Refining, there's a lot less exposure directly with commodity prices. I mention to folks, I look at WTI maybe three times a week and not three times a day as I used to. But when we think about – we'll still have exposure to just kind of the general economies that surround the E&P business. I mean again, North Dakota, the Bakken is in our backyard. We enjoyed some very nice customer growth, investment opportunity at the Utility. We moved organically Knife River into that market and enjoyed some strong workloads there. And so while we have some exposure there, I'll point out – as Dave mentioned, Knife's in 17 different states, so there's some exposure there. But at the same time, it is not all eggs in one basket. And so I think it's more economic risk, it's not direct price commodity risk. And then actually there's some things up in Dave's business, he goes through a lot of diesel every year running those big, heavy equipment around. We actually see some benefit with lower commodity prices and actually asphalt oil business can be favorable in certain kind of markets like that too. So, there's certainly some exposure, probably all companies have from an economic perspective, but it's a lot less direct affected from an income statement with commodities.

[Matt Tucker:]

Great. Thanks, Dave. Appreciate the color.

[David L. Goodin:]

Okay. Hey thanks, Matt.

[Operator:]

Your next question comes from the line of George Register with Register Financial. Please go ahead.

[George Robert Register:]

Good morning, Dave and Doran. Nice quarter.

[David L. Goodin:]

Hey. Good morning, George.

[George Robert Register:]

As you explained earlier, Dave, that you're a fairly diversified company, really much more than just a utility, so my question is, has there been any serious consideration to restructuring MDU? And has there been any steps taken to move in that direction? I appreciate the question.

[David L. Goodin:]

Yeah, thanks for the question, George. I would say this last quarter was pretty important strategically that we've done some of those things you just talked about. I mean the exit of the E&P and the Refining were very conscious decisions on our part. And we think strategically that makes us a much less volatile company and less exposed to commodity. And we really are centered on two platform business, that being Regulated Energy Delivery. That's through Nicole and Martin's business, along with Construction Materials & Service, Dave and Jeff's business. And so we think those are two great platforms. They can complement each other. And we think they're very core to MDU Resources.

[George Robert Register:]

Okay. Thank you.

[David L. Goodin:]

Yep. Thank you, George.

[Operator:]

Thank you. This marks the last call for questions. This call will be available for replay beginning at 1

[David L. Goodin:]

Thank you, Brent. Appreciate everybody again participating on our call here this morning. As noted earlier, our continuing operations delivered strong results for the second quarter of 2016. We're committed to continue building on this momentum by focusing on those factors that we can most directly influence, those being controlling costs, expanding margins, along with growing earnings. We appreciate you being on that call here today and we thank you for your continued interest in MDU Resources. Thank you and we'll turn it back to the operator. Brent?

[Operator:]

Thank you. This concludes today's MDU Resources Group conference call. Thank you for your participation. You may now disconnect.