North American Construction Group Ltd.
Q1 2009 Earnings Call Transcript
Published:
- Operator:
- Welcome to the North American Energy Partners conference call. (Operator Instructions) It is now my pleasure to introduce Kevin Rowand.
- Kevin Rowand:
- On this morning’s call we will discuss our first quarter financial results for the three months ended June 30 2008. All amounts are in Canadian dollars. Participating on the call are Rod Ruston President and Chief Executive Officer; Peter Dodd Chief Financial Officer; David Blackley Vice President of Finance, Miles Safranovich, Vice President of Operations; and Bernie Robert, Vice President of Business Development and Estimating. Before I turn the call over to Rod, I would like to remind everyone that statements made during our prepared remarks or in the Q-and-A portion of the call with reference to management’s expectations or our predictions of the future are forward-looking statements. All statements made today which are not statements of historical fact are considered to be forward-looking statements. The business prospects of North American Energy Partners are subject to a number of risks and uncertainties that may cause material differences in our future results. For more information on these risks, please refer to our March 31, 2008 Management’s Discussion and Analysis or Annual Information Form which are available on SEDAR and EDGAR. As we mentioned on our last call, management will not provide financial guidance After our prepared remarks, we look forward to taking your questions but we ask that you pose one question at a time in order to give everyone an opportunity to speak. At this time I will turn the call over to our CEO, Rod Ruston.
- Rodney Ruston:
- Thank you, Kevin and good morning ladies and gentlemen. I’m delighted to be speaking to you this morning. Before I start into the main gist of the words I want to say about the quarter I want to make you aware that subsequent to our filing of our NDNA yesterday an error was identified in the backlog disclosure. The total backlog was reported at $675 million and should have been reported as $932 million. The corrected backlog was for a unit cost contract in our heavy construction and mining segment. The backlogs reported that the pilling and pipeline segments were correct and the backlog reported for all other types of contract works were at. The correct backlog for unit price contracts is $855 million. We’re filing an amended NDNA and everything else in the NDNA was correct. Moving on, I’m pleased to announce that our fiscal 2009 year is off to a good start with strong first quarter performance and growth in both our top line and bottom line results. Peter is going to provide more of the financial detail in just a few moments, but I’ll start off with a few comments about the quarter. We continue to capitalize on the significant opportunities in the oil sands, in the pipe line industry and across Western Canada to deliver another strong quarter. Our first quarter is generally a slower quarter due to seasonality; however this year although we did have some weather impacts, we experienced high activity levels across the business. Our consolidated revenue for the first quarter of fiscal 2009 was up 55% to $259 million compared to the same period last year. This reflects continued growth in all three segments of our business. Our consolidated bottom-line results were even better with gross profit more than tripling to $48 million and gross margin climbing to 18.4% to 8.9% in the comparable quarter last year. This was despite camping some margin challenges in one of the oil sands projects that Miles will discuss shortly. The combination of higher revenue and stronger margins contribute to a 278% improvement in consolidated EBITDA which increased to $37 million. In addition, we achieved net income of $19 million or $0.53 per share. Overall, we are pleased with these results and the strong contribution from all three of our business segments. Heavy Construction and Mining segment which is our largest business increased revenue about 49% year-over-year, as we expanded our work Petro-Canada's oil fields, oil sands project and continued to increase services under the applied services agreement with Albian Sands Group. With the race in commissioning of Bucyrus shovel, it became fully operational during the first quarter. We ran production up on availability of the mining contract at Canadian Natural’s horizon project. We continue to provide construction services at Suncor’s Voyageur project and substantially completed our work on Suncor’s MNU project during the quarter. From filing the regional, we benefited from strong demand, achieving revenue growth of 20%. We made good progress on a filing contracted voyageur during the period and experienced continued strong growth in the commercial and industrial construction markets for Western Canada. Part of the margins however was affected by timing of receipt of outstanding change orders. We expect to recognize the revenue on this work in subsequent period when the change orders are processed. I’m pleased to report that our strong pipeline performance continued. Revenue was $27 million and segment profit was $9 million, a significant improvement from this provision last year. The gains reflect our continued work on the TMX Anchor Loop project and the settlement of a claim related to one of the pipeline projects that incurred a loss last year. We recognized $5.3 million in claims during the quarter. Overall we are very pleased with our first quarter of fiscal 2009 results and remain optimistic about our future opportunities. We are pursuing a diverse range of opportunities in all our key markets and particularly in the oil sands where the scale of projects continues to grow. I will now turn it over to our CFO Peter Dodd, to elaborate on the financial results.
- Peter Dodd:
- Thank you Rod and good morning everyone. I will now review the financial results for the first quarter, fiscal 2009 as compared to the first quarter fiscal 2008. As mentioned in our release, we have restated net income for June 30 2007 and comparisons here are to those restated numbers. Starting with revenue, for the first quarter of fiscal 2009, consolidated revenue increased by 55% to $259 million with all business segments contributing to this growth. First quarter fiscal 2009 gross profit increased 220% to $47.6 million reflecting higher revenue and an increase in gross profit margin to 18.4% from 8.9% a year earlier. The significant margin improvement primarily reflects the return to profitability in the pipeline business and the recovery of $5.3 million in claim of revenue related to the pipeline losses in previous periods. The large improvement also reflects lower equipment costs due to higher activity levels and in turn relatively less repair and maintenance work completed during the first quarter of fiscal 2009. Operating income increased to $26.9 million from a loss of $0.4 million primarily reflecting the improvement in gross margin and the decrease of general and administrative expense to 7.4% of revenue from 8.7% of revenue during the same period last year. Consolidated EBITDA which we consider to be a key indicator of our operating performance improved to $36.7 million from $9.7 million a year ago. Similarly we achieved improved year-over-year performance in our net income and earnings per share. With net income increasing to $19.1 million from a loss of $8.6 million last year and basic earnings per share climbing to $0.53 from a loss of $0.24. I want to point out however that we do not view net income or EPS as particularly improved indicators of our performance and these numbers are affected by non-cash items such as unrealized gains and looses on foreign exchange and derivative financial instruments. After adjusting for those non-cash items, basic earnings per share for the first quarter of fiscal 2009 would have been $0.42 per share compared to a loss of $0.14 per share in the first quarter of fiscal 2008. Turning to capital spending, this totaled $59 million in first quarter; $55 million which was classified as growth capital investment and the remaining $4 million was sustaining capital investment. We complemented this with approximately $21 million in new equipment operating leases. Looking at liquidity, at the end of the first quarter of fiscal 2009, we get $51 million of cash; however, there was $44 million in accounts payable related to our first quarter capital spending. We had approximately $104 million of borrowing availability under our $125 million facility. That $104 million is after taking into account the $21 million of outstanding and un-drawn letters of credit to support performance guarantees on our customer contracts. That summarizes our first quarter results. I will now turn the call over to Miles Safranovich, our Vice President Operations to tell you about our divisional results.
- Miles Safranovich:
- Thank you Peter and good morning everyone. As previously stated we achieved growth in all three of our operating divisions during the first quarter. Starting with Heavy Construction and Mining, the very active quarter for this division; we carried on underground services installation at Suncor’s Voyageur project and completed our foundation underground work at Suncor’s MNU project. Site preparation work at Petro-Canada’s Fort Hills project continuous to ramp up. In addition, we increased we increased our supplies mining support services of both Albian and Syncrude and over at Canadian natural we moved into our fourth year of our 10 year over burdened removal contract. A high level of activity helped us through this first quarter of mining and heavy construction revenue by 49% to $189.4 million compared to the same period in fiscal 2008. Our gross profit meanwhile grew by 9.8% year-over-year reflecting the higher revenue partially offset by a lower gross margin on that revenue. Our first quarter gross margin for the segment was 11.3% compared to 15.4% last year; that was a result of production challenges related to overall conditions, in fact congestion on one of our projects. We are working with the client to improve coordination between the North American fleet and their fleets and improve the overall traffic ability and we’re also progressing through an analysis of our options through the contract. Our margins on all other projects in the segment remain strong. Our piling segment also had a busy first quarter with revenue up 19.7% to $42.5 million. We ramped up work on Suncor’s Voyager project and benefited from strong commercial and industrial construction projects in the west, particularly at Saskatchewan where we are achieving strong growth; however piling margins were lower at 20.4% due to a delay in the accrual of change orders. Once the documentation is finalized we’ll be able to recognize the associated revenue. Now turning to pipeline, this division continued to achieve very strong results in the first quarter as we made continued progress on the Kinder Morgan TMX Anchor Loop Project. The contract is approximately 80% complete as of the end of June. As anticipated, the main pipeline activity slowed during the spring breakup period but some work extends a little further into April than expected due to favorable weather, while the clients decided to complete the jobs perfection before spring breakup. The project resumed once mal conditions improved in early June. We’re now working in the Bail Mount area on the BC side of the quarter and we are on track to complete this project on schedule this October. First quarter pipeline revenue increased to $27.1 million compared to last year. The bottom line gain was even more significant with segment profits increasing to $8.9 million from a loss of $1.2 million a year ago and margin growing to 32% from a negative margin of 22.9%. Our results include the recovery of the $5.2 million in our claims revenue, so overall an excellent quarter for all three divisions. Turning now to our equipment inventories; we acquired 21 medium to large sized trucks as well as various articulated trucks, dozers and executers during the first quarter of fiscal 2008. Our ability to acquire heavy equipment has not been an issue at any point this year but we are seeing increased lead times as the tire shortages for certain type of trucks begin to ease; this increases the demand for equipment in those sizes. We are closely monitoring and managing our tire situation and we believe that the combination of our current inventory and access to additional suppliers is sufficient to support our operating needs for the next nine months. Looking forward to the balance of the year, we anticipate continued growth in our business. In addition to our existing mining and type services contracts with customers like Canadian Naturals Suncor, Syncrude and Albian, we anticipate increasing demand from Central Canada’s and the Fort Hills project to continue. Outside of the oil sands we continue to provide constructability assistance to a number of professionals clients. In our Piling division robust conditions at the commercial and public construction markets and the oil sands related investment continue to provide new opportunities. For example a number of upgraded facilities are being planned for the Edmonton area and we have significant experience with this type of large scale project. Turning to pipeline; the outlook for this segment reflects inherently variable nature of our pipeline work. In the near term we expect a slowdown once the TMX project concludes in October; however a number of new pipeline projects are being considered for Western Canada to relieve the limited capacity and accommodate growing oil sands production. The TMX project represented just the first of these. We believe our success to date on the large and demanding TMX project positions us to compete successfully for some of the new projects coming to tender. In addition the remains of the regular need for smaller pipeline projects for which we would be an active bidder and we are pursuing a number of these leads. Overall, the outlook for our three business segments remains positive and we continue to focus on strong business execution as we move forward. With that, I’ll now turn the call back to Rod to discuss the key financial trends in our outlook.
- Rodney Ruston:
- Thank you Miles. Subject to continued demand we expect a continuing accumulation of strong revenue performance in the Heavy Construction and Mining segments. Margins in this segment will recover in the next couple of quarters and we work through the productivity issues on that one mining project. Piling will also benefit from strong market conditions, but given the current landscape of projects we expect Heavy Construction and Mining will lead the way. Margins in the piling segment vary depending on the type of piles and the contract structure and associated risk. Currently we have a high proportion of cost reimbursable contracts with driven pile installations which dictate lower but still healthy margins. We expect this to be the case for the next couple of quarters. As mentioned by Miles, Pipeline results are project based and we expect to see revenue from this segment decline once we complete the TMX project. TMX will take us into late September, early October. We have identified some potential opportunities for the winter period, but these projects have not yet been tended. We will also continue to focus on managing our equipment costs through internal initiatives such as condition wise monitoring software and prevent any maintenance. We will also continue to reduce maintenance cost by determining optimal replacement times for our equipment. We do expect that the higher activity in the first quarter will result in the sharing of the maintenance and repairs more equally out of the first and second quarters rather than having the concentration in the first quarter. Subject to continued demand we intent to finance the 2009 equipment purchases of $150 million to $200 million through a combination of operating cash flow and operating leases and to maintain an owned lease rented balance to provide us with the flexibility to respond to our customers needs and also provides us with a sound risk profile while maximizing the utilization of our own fleet. Turning to G&A as a percentage of revenue we still expect our fiscal 2009 G&A to be similar to the levels we were at in fiscal 2008. Overall our outlook is positive, we remain very excited about where the business is heading. With that I’ll turn the call back to the operator, thank you; operator.
- Operator:
- (Operator Instructions) and we have a question from Matt Duncan - Stephens Inc.; please go ahead.
- Matt Duncan:
- The first question I’ve got Rod is on the Petro Canada Fort Hills project, it looks like that project is probably ramping pretty fast. I mean can you talk about sort of where the quarterly revenue levels are and are we still in the process of ramping up that project at this point?
- Rodney Ruston:
- That project is still ramping up.
- Matt Duncan:
- Okay, so it should continue to ramp throughout the year then?
- Rodney Ruston:
- Miles do you have the timing on that?
- Miles Safranovich:
- Yes it will continue to ramp throughout the year yes.
- Matt Duncan:
- Okay, thank you and if then if we look at the project where you guys had some higher cost, I guess it looks like it was hall road conditions and a crowded job site. Is that something that will be fixed by the second quarter here so that you will expect margins for that segment to go back up and maybe could you address what segment margin would have been for heavy construction and mining if that job had been in a normal margin?
- Rodney Ruston:
- Matt I’ll answer that, we don’t have that number, but as I had mentioned before, working with the client to improve the hall road conditions, to deal with the conjunction and they have their others fleets on date and that projects about 30% complete, that’s once shovel and small fleet of truck, with some of them more complex and congested than we originally anticipated. So that’s about all I can say about what we’re doing on that one right now.
- Matt Duncan:
- So then it sounds like it’s probably not completely fixed yet and it might have some impact on margin to get in the second quarter but things are going to get fixed at some point anyway?
- Rodney Ruston:
- Yes, I mean in alignment with GAAP we recruit for the cost of rush going forward and I believe we’d accounted for the worst case scenario at this point.
- Matt Duncan:
- Okay, so you’ve already accrued for all that, I got you; and was that hall road condition, did that have anything to do with the spring breakup and things just being overly muddy or is it just not big enough to handle all the traffic?
- Rodney Ruston:
- A combination of both.
- Matt Duncan:
- Okay Rod staying with the Heavy Construction and Mining segment on the last call you said revenues there would grow 25% or 30% this year and you guys obviously did much better than that in the first quarter up around 49%. Can we read anything into that; would you expect to see this higher level of growth to continue going forward?
- Rodney Ruston:
- No I wouldn’t think so. I think there’ll be a bit of the balancing of that.
- Matt Duncan:
- Okay but still keeping in mind that the winter is going to be higher, just maybe the September quarter revenues there will be closer first rather than up?
- Rodney Ruston:
- Yes that’s right. Suddenly the same balances will occur through the year we believe, but the amount over our expectations there in the subsequent quarters might be the same, so we think things will climb up a bit. Some of the stuff in the first quarter was a bit of other additional work or just literally additional work that we hadn’t been paying for and I think the other quarters will just continue as normal quarters.
- Matt Duncan:
- Okay and then Rod if we look at your backlog or pipeline it sounds like you guys had not put anything in the backlog yet for the winter pipeline season?
- Rodney Ruston:
- That’s correct; the sundering process with the pipeline work would be just starting now.
- Matt Duncan:
- Okay, then the $59 million of backlog that you had in pipeline, that’s all TMX anchor loop to be finished by sometime in October?
- Rodney Ruston:
- That’s correct.
- Matt Duncan:
- Okay that’s helpful, I appreciate; so where would you think then that the contracts will be awarded for the winter pipelining or when would you expect to hear something on those.
- Rodney Ruston:
- It comes out in the September, October sort of period, so that we can prepare for the winter and then away you go.
- Matt Duncan:
- So probably by the next conference call you’re going to know what you’re working on over the winter in pipeline then.
- Rodney Ruston:
- Yes certainly, I think by the next conference call we’ll some idea of what we’ve got, but remember also Matt of what we said before that the cost of not pipelining is not expensive and a lot of the equipment that we use in that pipeline division will -- if we get a job in another division, particularly the industrial division a lot of the equipment will go over in the back of it, so it does share that a little bit. We do sequentially potential opportunity out there in the pipeline business as well.
- Matt Duncan:
- Okay, last couple of things and I’ll get back in queue; first if I look at your equipment cost I guess you guys said that because you were a little more active in the quarter in your respect and may be you didn’t quite get all of your permitted maintenance done, so the cost in terms of dollars spent in September may look pretty similar to June; would you then expect it to be down from that level in the December and March quarters; kind of sticking with the late one last year?
- Rodney Ruston:
- Yes; basically we expect it to be a bit of a balancing act because exactly what you said, you heard it correctly. When you did a bit more utilization in that first quarter which is normally our heavy maintenance quarter we have to balance things out a bit and so it will spread out here in the second quarter.
- Matt Duncan:
- Okay and then last thing in terms of Capex; I think on the last call you guys said your Capex expectation for the year was $150 million to $200 million; you spent about $59 million this quarter; is it still $150 million to $200 million or is that changed at all?
- Peter Dodd:
- That’s just our expectation. That subject to what we see in demand and what our views going forward are and the opportunities but in that also, the $150 million to $200 million includes leasing as well as cash.
- Operator:
- And our next question comes from the Jacob Bout - CIBC World Markets please go ahead.
- Jacob Bout:
- Just going back to the margin for the heavy construction in the mining division; if you were to strip out some of the congestion problem that you have there, what are you viewing now as kind of a normalized gross margin for the division? I mean should we be using something similar to what we saw in fiscal 2006.
- Rodney Ruston:
- Right, Jacob you’re cutting in and out.
- Jacob Bout:
- Well what I’m really getting at here is what is the normalized margins that we should be looking at with the mining is and the same division is what we saw in fiscal 2008 with the run rate that we should be looking at striping out any type of congestion issues?
- Rodney Ruston:
- Yes the sort of results we got in the 2008 year would be indicative of the further margin we can get in this segment. We are seeing a little bit of increased competition in the segment, not a lot but certainly a little bit more competition pressure.
- Jacob Bout:
- And your market share would be declining a lot or expanding in the off sense?
- Rodney Ruston:
- No, I don’t think the market share is declining but the growth of the oil sands is expanding rapidly as you know and whenever there is a big project like the ones that are up there you tend to get people from the outside wanting to get in. It hasn’t been a big impact on us, but we are seeing a little bit of additional pressure. Similarly in the piling area there is a little bit of additional competitive pressure there too.
- Jacob Bout:
- Okay and then just switching to tires, you’re saying that that situation has started to ease a little bit; any improvements in margins as a result of that?
- Rodney Ruston:
- Again, Jacob in which area?
- Jacob Bout:
- The tires.
- Rodney Ruston:
- Yes the tire, the issue is starting to come up a little bit. It’s mainly in the smaller size of trucks that are 100 ton, 150 ton trucks, the 240 and the 300 ton trucks too have some buyer pressure on them; supply pressure is should say, tire pressure is a bit funny way to say. That way we’ve got secure supply that we did to service our improvement for probably the next nine to cover this year. The number of very expensive tires that we’ve had to buy has significantly reduced.
- Jacob Bout:
- So how should we be looking at this as far as cost savings, either in the dollar amount or on a margin basis?
- Rodney Ruston:
- There won’t be a real big cost saving because you will remain with the week charge to tire premium to our customers and as we get less of the very expensive tires, basically what happens is the tire premium comes off, so what we said before was we were recovering sort of in the order of about 75% of the over cost of the tires, so as the tire costs comes down and normalizes, the only savings we’ll make will be on that 24%, 25% that we weren’t recovering on.
- Jacob Bout:
- Okay and just a last question here; can you comment on some of the work that you’re doing in Baffinland Iron and also on some of the work in the airstrip in the oil sands?
- Rodney Ruston:
- Okay Bernie would you like to respond to that?
- Bernard Robert:
- Sure Rod. Yes Jacob, Baffinland has formed a contract of group that they’re a EPCM contractor AMEC and we’re a member of that group, so we get invited to and attend meetings on a monthly basis with that group and right now we are going through the constructability at that site. I think right now Baffinland is looking for a strategic partner, but their progressing fairly well with their constructability and still expect to go forward.
- Operator:
- And our next question comes from Bert Powell - BMO Capital Markets, please go ahead.
- Bert Powell:
- Thanks. Miles on the contract where you had some site issues, what’s the nature of that contract; is that a cost or fixed price, just give us a sense in terms of what sort of remedies you might have in terms of recovering some of that loss margin?
- Miles Safranovich:
- I’ll talk about the remedies that we have. I mean we work with the client to find better hall road access for our equipment, look at better halls for our equipment and also look at anything that that client should have been providing to us, their obligations and where they’re not, I mentioned before we go through the contract and request change orders.
- Bert Powell:
- So is there an amount that you feel you will be able to kind of recover form either change orders or claims from this?
- Miles Safranovich:
- I cannot comment on that right now. We are working with the client everyday to come up with the best solution to the problem and when we get there I will be able to finalize it with them down the road, but no idea at this point in time.
- Bert Powell:
- Okay and just looking at your amount of revenue in the quarter under master services agreement, I’m not sure exactly what the number is from the year ago, but it looks like it’s up fairly significantly, is that simply just the anomaly around the seasonal pattern gist on this. How are you seeing a step function up in terms of the types of services that your now providing for your clients under the master services agreement and that’s expected to kind of stay at this level or would you expect that things to kind of convert on that a little bit.
- Rodney Ruston:
- I would consider that to be a rent.
- Bert Powell:
- Okay and Peter just on the pipeline in the quarter, the $5.2 million recovery, that’s run through both the revenue and the operating income; it’s pure margin or it just comes in on the operating profit line?
- Peter Dodd:
- No, it goes through revenue and it flows right through the net income.
- Bert Powell:
- Right, but it is booked into the revenue?
- Peter Dodd:
- Yes.
- Bert Powell:
- Okay and just a last question. The payable is up quite significantly; is there anything that you would highlight there?
- Peter Dodd:
- We said in the release that quite an amount of a number of our equipment purchases were paid for in the subsequent quarter.
- Bert Powell:
- Okay so it’s all related to the CapEx part of the equation.
- Peter Dodd:
- Yes, so the cash was up and the net pay was up.
- Operator:
- And our next question comes from Ben Cherniavsky - Raymond James; please go ahead.
- Ben Cherniavsky:
- Most of my questions have been answered, but can you maybe just talk a little bit about the or can you elaborate a little bit on the comments you made about equipment supply getting tighter or are you saying that because tires are becoming more exhaustible people are actually now ordering equipment faster and have you not seen any loosing of equipment or are you speaking just about the mining equipment primarily because the reports are that in some of the mid and smaller size equipment supplies that are up a little bit?
- Rodney Ruston:
- Yes we’re talking mainly about mining equipment and predominantly of their trucks which are the things that guide our business to a large extent and so what you had during the worst of the tire shortage was you could buy a truck almost anytime because they weren’t ordering them; because you’d buy the truck, but you couldn’t get tires for it. As tires have become more available people have said “now that I’ve got tires I can buy the trucks” and that has been a bit of an exchange in the delivery times of the smaller trucks. The demand for 300 and 400 tone trucks remind very high around the world and certainly the demand for 400 tone trucks because of the very big purchases that various companies are doing of those trucks has extended out quite substantially. We have as we said before extremely good relationships with Kath and team and through that we believe we get a very big treatment by those organizations to make sure we get the equipment that we requirement on time. We haven’t had any situation where things stopped for lack of a particular equipment thing delivered on time.
- Ben Cherniavsky:
- So what is the lead time now roughly for one of the heaviest trucks, the 300 tone, 400 tone trucks?
- Rodney Ruston:
- A 400 tone truck for example if you ordered it today you probably wouldn’t get it until very like 2010 or early 2011.
- Operator:
- And our next question comes from Chas Baker - Cisco Systems; please go ahead.
- Chas Baker:
- A quick clarification on the Heavy Construction and Mining margins; I mean I understand that you said that you expect that to tick back up throughout the balance of the year but if you look in your margins in the back half of last year and I can appreciate there is some seasonality, they were pretty spectacular. I guess what I’m trying to figure out here is; number one, is this that GAAP between 18% of margin that your posting in the third and the fourth quarter and the 11% margin your posting in the first quarter. How much can you characterize seasonality versus this one specific contract and then the second part of that as we go forward are you thinking that you have kind of more of an immediate snap back in the margins, not may be to that 18% level but I guess how gradual is the up tick as we think about that for the rest of the year?
- Rodney Ruston:
- The way that GAAP requires us to report the details is that we looked forward at the end of the contract and said given what we know at the present time and having a view of the future what their expectations are in the worst case scenario, what’s going to happen, so we are pretty much taken into account as far as we are aware everything that’s going to impact on that one contract, but what you’ll see in that contract looking forward, it should pretty much have a zero impact on margins in the future. So it could return back to a Heavy Construction and Mining margin with this back up prices of 16% to 18% fairly quickly.
- Chas Baker:
- Okay very helpful and then I apologize if I missed this, but are you expecting to still kind of hear a timing of a decision on curls, that’s still kind of late summer?
- Rodney Ruston:
- Chas interestingly Curl, their delaying their decision to early next year. It was in the global mile just for the board to approve going ahead. If you like some of the decline in mile was reported I bet a week ago that they’ve decided to putt off the decision until probably first quarter next year.
- Operator:
- And the next question come from Daniel McDonald - Peters & Co., please go ahead.
- Daniel McDonald:
- Looking at the piling segment here, can you quantify the magnitude that the change orders had on the margins. Would they have been back to the typical sort of high 20 that you historically had with those change orders you couldn’t recognize?
- Peter Dodd:
- Probably more the mid 20s.
- Daniel McDonald:
- Do you have any ideas of the time when you may feel or recognize those revenues?
- Peter Dodd:
- I would expect that we’ll have them resolved in the next quarter. The nature of the project is that some of them are very large projects and the type of trial of getting a change order through sometimes can be delayed.
- Daniel McDonald:
- Okay and then looking at the Mining segment were there any impact on margins caused by delay or any ability to fully pass through rise in fuel costs here in the quarter?
- Peter Dodd:
- No.
- Daniel McDonald:
- Okay, and then where you sort of pushed some RNM of everything that’s here into the next couple of quarters; do you think that’ll have any impact in your ability to I guess to generate the higher revenues you normally get here?
- Rodney Ruston:
- Yes, interesting questions. It’s all a matter of balance and that one other thing I’m a very, very strong believer in is that you do not run your equipment and completely bypass that maintenance for the purpose of executing and getting ready or proceeding with your operations; you must have your maintenance. Now I can tell you that we will do the maintenance that was planned on the equipment; that we had planned to do maintenance in the first quarter and we will do that maintenance. What basically will happen though is because it was created over a longer period of time, there’s additional work that we would hallow or do. We will typically place the equipment down and the longest period will allow us access to rental equipment and as far as we possibly can if we got something down and we need to use it we’ll replace it with a piece of rental equipment until we do the maintenance.
- Daniel McDonald:
- So you don’t expect that to mature in the back of your ability to do it.
- Rodney Ruston:
- Yes.
- Daniel McDonald:
- Okay and can you just provide a bit of color maybe on the nature of the increased competition you’re seeing up in the oil sands?
- Rodney Ruston:
- Yes what your saying is that in business of this type, the people that we were dealing with were not competitive in the past and also bought new equipment and some of them are bringing equipment in from outside the oil sands. It’s nothing to date that, well is either of additional competition; it’s just you can see that it’s there and then you got to expect it in this sort of a thing. I was down in Los Vegas about two months ago or something and they’re doing a major construction in the middle of Los Vegas and someone told me that that constructions for a new city standard which was about $8 billion of a single construction project and that it was the biggest single construction going on in the United States at the present time. Now I don’t know whether that’s true or not, it was just word of mouth that was told. If you consider that and you look in the oil sands of Alberta in an area that’s probably pretty close to the same footprint as the greatest city of Los Vegas, we’ve got four or five projects all in the high teens and early 20s in billions of dollars going on, that people notice that and the good thing about North America is we’ve been there a long time, we’ve got immense experience out there and we’ve got very, very good customer relationships and avenues into getting the business, but there’s lot of work and people know it and they’re going to have a go at it.
- Operator:
- And the next question comes from [Catherine Sebusky] please go ahead.
- [Catherine Sebusky]:
- I was wondering if you could just provide equipment hours for the various type of [Inaudible]?
- Rodney Ruston:
- Sorry Cathy, you want equipment hours for the various…?
- [Catherine Sebusky]:
- Exactly.
- Rodney Ruston:
- Okay, we used to put out equipment hours, but we don’t do that anymore.
- [Catherine Sebusky]:
- Okay and have you guys experienced any further pressure on labor costs?
- Rodney Ruston:
- Not on that labor cost because the contracts in the constructing industry were all pretty much modernized last year, so labor costs now are running relatively steadily. The cost is not a real issue the way we see it; availability is a bit of an issue but we’re working on a number of opportunities to secure additional labor and those opportunities are working very well. As we’re idle to mine time or build up particularly in the heavy duty mechanic area, we’re doing a lot of the build up there and satisfy the demand that we have.
- Operator:
- And the next question comes from Matt Duncan - Stephens Inc..
- Matt Duncan:
- Hey guys just a couple of follow ups; first on just Rod kind of big picture for a minute. Oil is falling from $145 to right around $117 today and as I understand it that really should have no impact on your business, yet it appears to have had some impact on our stock pricing. Are you guys seeing any change in demand at all from your customers and kind of what is their long term view on oil prices?
- Rodney Ruston:
- You are correct in your first statement; the way we are not oil price sensitive. I think the market sometimes thinks that we are. We are oil price sensitive at the point where a customer makes a decision to undergo and to commence a construction project in the very oil sand area, that once they’ve made that decision and keeping in mind that a 100,000 barrel a day oil chains up in the order of $5 billion to $6 billion of expenditure and these customers are going to get $3 billion through a project like that, which means the oil prices have dropped from $145 to $110 a day and we’re going to stock. They’re going to continue the construction on that project and with the chemical intensity of the projects up there, once they get that project constructed and the last thing they get to do is that when oil prices have dropped and we are going to turn the project off, they got to run that project as hard as they possibly can. So the only real exposure to oil price is when the customer is in the planning stage and that customer is then saying “will I or will I not go ahead with the initial start up of this project.”
- Matt Duncan:
- And Rod what is your understanding of kind of what the oil price today that your customers look at and say oil is going to be 60 or 65 a barrel before it’s profitable enough for us to go; do you have a kind of any feel for what that number is today?
- Rodney Ruston:
- I have probably the same feel that you have. Customers don’t tell us what that position is, here is says and in your window and everything else says that it’s something around 60 to 65 dollars a barrel where the decision is made, so they cash price even if it’s significantly lower than that.
- Matt Duncan:
- Okay yes that was our understanding too, I just wanted to make sure I was right and the last thing, I just want to follow up on Corel. We had heard hardly in July that Corel had been awarded to someone and I understand that the imperial board is delaying the decision about going ahead with that project, but can you comment on whether or not the Corel project that you had been on, is that bid been awarded to anyone as far as you know?
- Rodney Ruston:
- You’re correcting the fact that the Coral board has decided to delay their decision as to whether to go ahead. There is a multiple contract that they’re going to be awarded in the construction of the Corel project and our understanding is that the initial one has gone out and the decision to go ahead will be made by the board next year.
- Matt Duncan:
- So there is still plenty of opportunity for you at that project that made the decision to go then?
- Rodney Ruston:
- Yes there is certainly opportunity for us. There’ll be quite a number of contracts that would be delayed for various reasons across the quarter.
- Operator:
- And there are no further questions at this time; please continue.
- Rodney Ruston:
- If there are no further questions we’ll say to everybody thanks very much for joining us on the conference. Once again I’ll sum up to say we have put another good quarter together and this is the four good quarters in a row and we certainly see the business as being very robust, very strong and still maintain a very competitive position in the oil sands with opportunities also outside the oil sands. Happy to talk to you all, thank you very much and we’ll sort of continue on and continue with the business. Thank you.
Other North American Construction Group Ltd. earnings call transcripts:
- Q1 (2024) NOA earnings call transcript
- Q4 (2023) NOA earnings call transcript
- Q3 (2023) NOA earnings call transcript
- Q2 (2023) NOA earnings call transcript
- Q1 (2023) NOA earnings call transcript
- Q4 (2022) NOA earnings call transcript
- Q3 (2022) NOA earnings call transcript
- Q2 (2022) NOA earnings call transcript
- Q1 (2022) NOA earnings call transcript
- Q4 (2021) NOA earnings call transcript