North American Construction Group Ltd.
Q2 2013 Earnings Call Transcript

Published: 1 Nov 2012

[Operator:]

Good morning, ladies and gentlemen. Welcome to North American Energy Partners’ Fiscal 2013 Second Quarter Earnings Call. At this time, all participants are in listen-only mode. Following management’s prepared remarks, there will be an opportunity for analysts, shareholders and bondholders 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 webcasted currently on the company’s website at nacg.ca. I will now turn the conference over to Mr. Kevin Rowand, Director, Strategic Planning and Investor Relations of North American Energy Partners. Please go ahead, sir.

[Kevin Rowand:]

Good morning, ladies and gentlemen, and thank you for joining us. On this morning’s call we will discuss our financial results for the three months ended September 30, 2012, which represents the second quarter of our 2013 fiscal year. All amounts are in Canadian dollars. I would like to remind everyone that statements made during our prepared remarks or in the Q&A portion of the conference 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 facts are considered to be forward-looking statements. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. The business prospects of North American Energy Partners are subject to a number of risks and uncertainties that may cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information. For more information about these risks, uncertainties and assumptions please refer to our September 30, 2012 Management’s Discussion and Analysis, which is available on SEDAR and EDGAR. As previously mentioned, management will not provide financial guidance. On today’s call Dave Blackley, CFO will first review our financial results for the quarter and then hand over to Martin Ferron, President and CEO for his remarks on our strategy and outlook. As previously mentioned, management will not provide financial guidance. I will turn the call over to Dave.

[David Blackley:]

Thank you, Kevin, and good morning, everyone. I am going to review the consolidated results of the second quarter ended September 30, 2012 as compared the second quarter ended September 30, 2011. Revenue for the period was $204.2 million compared to $245.4 million in the second quarter of last year. The change in revenue reflects the reduction in Heavy Construction and Mining revenue, partially offset by continued growth in Commercial and Industrial Construction revenue. Gross margin was 12.7% in the second quarter compared to 13.6% for the same period last year. The change in margin primarily reflect lower volume in the Heavy Construction and Mining segment which reduced our recovery of equipment costs from projects and negatively profitability during the quarter. We’ve recorded operating income of $13.3 million in the second quarter compared to operating income of $18.3 million last year. This reflects lower gross profit during the current period partially offset by reduced G&A expense. G&A decreased by approximately $3.4 million compared to last year, reflecting benefits from our business restructuring activities and a $2.2 million reduction in short-term incentive program cost, partially offset by a $1.1 million increase in year-over-year stock-based compensation costs. Looking at our results on a segmented basis, Heavy Construction and Mining revenue was $116.6 million compared to $159.3 million last year. We continued to execute a large volume of heavy civil construction work on both the MSE wall and SAGD projects related to the Mildred Lake mine relocation. We also increased site development activity at the Joslyn north mine and the Dover SAGD facility. Construction on the two projects began in the second half of last year. Additionally overburden removal at Horizon returns to normal operation levels where activity was suspended due to a production facility. These changes were unfortunately offset by a significant reduction in mine services activity at the Jackpine, Muskeg River and Millenium. Segment margin in Heavy Construction and Mining was 8.9% in the current period compared to 11.5% last year as a result of the lower volumes. The lower activities reduced our ability to recover our equipment costs, particularly on the larger-sized fleet, resulting in a $5.8 million cost and the recovery in the period compared to the $3.6 million last year. Severity of the current year under recovery was mitigated by the reduction of the equipment overhead and outsourced equipment maintenance expenditures arising from office restructuring initiatives. Overhead commercial and Industrial construction revenues of $87.6 million were up slightly over last year’s revenue of $86.1 million. Piling activity was particularly strong with a high level of activity in Oil Sands more than obtaining reduced volumes in Saskatchewan. We also benefited from a structural fuel construction activity at our Milligan project in Northern BC and pipeline integrity work. These revenue gains were largely offset at a reduction in Mainline pipeline construction activity in the current year. Commercial and Industrial Construction segment margin was comparable to last year at 19.4%. Overall, it was another very good quarter for Commercial and Industrial Construction. Turning now to capital, local capital addition for the second quarter amounted to $5 million including $4 million of sustaining capital and $1 million of growth capital addition. Looking at liquidity, there were outstanding borrowings of $30 million and issued an undrawn mixes of credit of $5.1 million under the revolving facility leaving us with $49.9 million of borrowing availability. On October 1st, we announced amendments to our credit agreement extending the maturity dates of our agreement by one year, providing release from our consolidated EBIDTA related covenants while allocating the net proceeds from after sales from Q1 to reduce our term debt by an additional $8.7 million. We are the happy with the terms of the amendment and the continued support of our lending syndicate. The new agreement allowed us to pursue our planned debt restructuring and refinancing of certain operating leases into capital leases. During the second quarter, we executed the strategy refinancing $29.9 million of heavy equipment operating leases to capital leases. We expect this transaction to result in a $13.2 million reduction in annual operating lease expense partially offset by $1.7 million increase in interest expense and an increase in depreciation expense commensurate with the operating hours generated by the refinance equipment during the period. The expected impact of the refinancing is an annual $13.2 million benefits in consolidated EBITDA and an annual $4.2 million cash benefit from a net reduction in annual lease payments. We have reduced our long-term commitment by $27.1 million since March 31, 2012. Contributing to this was our obligation of the net proceeds of $8.7 million combined with the buyout of operating leases associated with these asset sales in Q1, which eliminated $15.7 million in operating lease state commitments. Our continued focus on using net proceeds from future asset sale and divestitures will be applied to pay down our Term B facility by April 30th next year, followed by an accelerated reduction of our Term A facility, providing a clear cost to debt reduction. That summarizes our second quarter results. I will now turn the call over to Martin for his remarks.

[Martin Ferron:]

Thank you, David and good morning everyone. At the end of the quarter, I’ve been with the company for just under four months and consequently I am really pleased that the mines are very positive quarter main results despite especially challenging all times related demand conditions. The good result was therefore achieved partly on the back of another strong quarter for our pilling group but it also should be clear from the numbers that our business improvement initiatives had a particularly meaningful impact. One my first call I laid out the four key priorities and the improvement plan and it is now gratifying to report steady progress on each of them. Just as a reminder the priorities were to one strengthen our balance sheet and liquidity, two significantly lower our cost structure, three improve the risk profile of our business and four regain profitability. Addressing the balance sheet is great to conclude a negotiation on the credit agreement amendment with our syndicated banks based on our few and find with these term dept or asset sales. This seal extends our agreement our far enough to complete our mining fleet rationalization process on the sale of other non-core assets in an orderly fashion. As David mentioned we are satisfied reduced our long-term debt commitment by more than $27 million over the last two months and now we’re fully committed to claim down $25.7 million of term-B by end of April next year and we are confident of achieving that. On the topic of cost reductions or the G&A cuts that David took us through are fully reflected in Q2 numbers. I am also more than delighted that we were able to reduce our equipment cost under recovery to $7.6 million from $15.3 million in Q1 despite a sequential drop in utilization analysis of more than 30%. This describe the prior logic of the cost under recovery must increase through the last utilization analysis. We still have considerable improvements to make in the area of asset management but I am confident that we are on the right track. We’ve also kicked off production initiatives related to our direct and indirect project costs and I expect those to start to bear fruit over the coming quarters. On the risk profile of our business we remain content with just a few and execute lower risk and reasonably profitable pipeline integrity work, while we continue to assess the market value of our pipeline assets. Also as mentioned last time, we will not take on any further largely subcontracted industrial projects. Lastly on profitability, again a very pleasing to return a reasonable profit in Q2, despite pretty low activity levels in our Heavy Construction and Mining business. But the trick now is to build on that performance. And this floor leads me on to comment on outlook. During the Q1 call, I remarked that we along with our competitors in the oil sands market were experiencing some near-term demand headwinds due to our customers being weary of well – difficult conditions and the overall macroeconomic environment. While those headwinds turned into a full-on gale in August and we did well to achieve around 40% of our expected equipment utilization levels. September ‘ a 12 little better, but we expect oil sands demand for the rest of this fiscal year, to continue to be impacted by project delays, project cuts and other customer supply chain margin initiatives. We do however expect improvement next year based on bidding activity and market intelligence related to the timing of new mine projects. I will not give any more specifics now in deference to our customer’s to keep a tight lid on that plans. I will say thought that although much of my commentary has been about cost, we are very focused on our oil sands customers and are looking at different ways to expand our revenue line also. Our outlook for the Commercial and Industrial Construction segment remains very positive. With demand, supply and forecast remains strong through fiscal 2013 supported by sound industry fundamentals and our large project backlog, this subject to suitable winter working condition. Industrial Piling work in the Northern Alberta region will continue to drive our piling business, both at mining and SAGD sites. We also anticipated high levels of demand continuing from Saskatchewan potash mines and from residential condominium constructions in the Ontario region. Thanks to this work is expected to provide steady volumes in the third quarter before entering its normal slowdown during the winter months. And finally our ongoing above ground industry work at the Mount Miligan project in Northern British Columbia is expected to remain steady to the end of the calendar year. In summary then, we expect the challenging demand conditions for our heavy construction and mining to potentially get worse before recovering towards the end of our fiscal Q4. Also weather conditions may impact the pace of project execution for our Piling group as we get deeper into the winter months. These more difficult market conditions will at least be partly offset by our continued efforts to reduce cost. If you look ahead to next year with more confidence of being able to address likely improved demand with better profitability of a much lower cost basis. My confidence should also be demonstrated by the fact that if I talk about my personal stock holding up to just shy of 575,000 shares before our trade-in blockout period commence. With that I’ll turn the call back to the operator to take any questions. Thank you.

[Operator:]

Thank you. Ladies and gentlemen we will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Stephen Volkmann of Jefferies. Please go ahead.

[Stephen Volkmann:]

Hi good morning.

[Martin Ferron:]

Good morning.

[Stephen Volkmann:]

I am wondering given the changes you’ve had if you have an updated approximation for the value of your fleet of equipment?

[Martin Ferron:]

I would say that our fleet values have not moved substantially, I would just take out what we’ve sold right now of assets $20 million to $40 million out of that value but substantially we are at the same amount where it was.

[Stephen Volkmann:]

Okay, and is there an opportunity to do more with that given the lower utilization level or you are sort of happy with that.

[Martin Ferron:]

Well we do plan to sell some more assets during Q3 and Q4 to help us pay down our term dept commitment.

[Stephen Volkmann:]

Okay, so it would be that order and magnitude to $25 million, $26 million that you’re trying to pay down by next spring?

[David Blackley:]

Yeah, I think I comment that we are trying to get fair market value for this equipment. You know there is definitely no price quote going here. If we can get the pricing for the equipment then I will love to move it.

[Stephen Volkmann:]

Fair enough and then maybe on the same kind of concept are you seeing competitively up there with respect to equipment utilization has any of the competitors started reducing fleet have utilizations started to stabilize up there or is there still further an over capacity situation?

[David Blackley:]

You know I think that our competitors are seeing the same demand issues that we are and obviously depending on the site that might be on and might be slightly better off in certain areas but generally I think the industry conditions that I talk about affect everybody.

[Stephen Volkmann:]

Okay. Great. I’ll pass it on. Thank you.

[Operator:]

Thank you. The next question is from Greg McLeish of GMP Securities. Please go ahead.

[Greg McLeish:]

Hi guys, just was wondering if you can drill down a bit on outlook there. What I was wondering the heavy construction mining side. When you sort of looking forward and you say that Q3 is going to weaken just sort of demand dynamics, are you sort of thinking that weakening is maybe down about $10 million in that side or I’m just trying to sort of figure out on a revenue basis where you think you end up for the year?

[Martin Ferron:]

Yeah I can just talk in general terms Greg. I guess I’m trying to cheer the enthusiasm a little bit here. We are seeing a picked up in oilsands activities it’s just a question of timing, yeah. The customer are being careful about out of state enclosures and getting their cost in the right area. And some work might slip into Q4 might slip into Q1 next year. We’re just being cautious and the demand conditions are difficult in Q2 and what we’re seeing we don’t expect them to really get any better in Q3 and it could a little worse with all the weather conditions.

[Greg McLeish:]

Okay. Got it. And I guess you are seeing, I guess there are two big debt packages that were available. Have you heard any word on those?

[Martin Ferron:]

I can’t really comment except for the fact that we’re addressing those opportunities.

[Greg McLeish:]

Okay. And then on the commercial side and industrial side, I mean that was a very strong number that you put out in Q2. And you sort of indicated that with the backlog that you’re seeing that the strength should continue. Do you think you can, I mean is that sort of good number that we’re looking at or should we sort of be thinking maybe a little bit down in revenue through the back half of the year?

[Martin Ferron:]

You know, I think it all depends on the weather again. I think we dropped the demand to support the same number. It’s just I’ve been able to execute the work in decent weather conditions.

[Greg McLeish:]

Okay, great. And then I guess the just on the sale of equipment terms under the Term B facility you have to sell $25.7 million in equipment by year-end, is that the number that I need to look at?

[David Blackley:]

Yeah, you need to generate proceeds.

[Martin Ferron:]

Yeah, we need to generate...

[David Blackley:]

$5 million.

[Martin Ferron:]

Net proceeds, yeah.

[Greg McLeish:]

Just net proceeds. All right, I’ll get back in the queue. Thanks guys.

[Kevin Rowand:]

Thanks.

[Operator:]

Thank you. (Operator Instructions) The next question is from Ben Cherniavsky of Raymond Financial. Please go ahead.

[Ben Cherniavsky:]

Hi guys.

[Martin Ferron:]

Hi.

[Ben Cherniavsky:]

The sales part initiatives, I wonder if you can maybe just talk a little bit about what’s going on there because not that long ago that was supposed to be the next favorite thing and I think you were even actively doing a little bit of work on that front. Is that petered out or what I mean it seems like that was a regulatory requirement that you need to go forward. So, maybe you should talk a little bit about that.

[Martin Ferron:]

Yeah, I’ll make a general comment and maybe hand over to the guys to give a bit more detail. I mentioned in Q2 especially customer seem to cut right back on that but and since this type of work is non-revenue generated, it tends to be the first type of activity to get cut even though it might be mandated overtime. So, I think we saw a real slowdown in Q2 and expect that to continue in Q3. I don’t know if any of the guys want to improvise on that.

[Joe Lambert:]

This is Joe, Ben. Actually we’ve some, some of the clients going back to the Regulatory Agencies and having discussions on the timing of pushing forward on some items before, before their assessment proper horning is done. So any pushing is a bit of jockeying in timing right now on some of those activities. We still have some of the locations and challenging equipment at work. It’s usually winter becomes the time when we aren’t using them because most of them are used in – on water or in wet area conditions, which is around the tailend, so that timing isn’t really affected that much but certainly the past spring and summer we saw a reduction in deferrals, some of the tailing work and we’ll be looking to see how those turns out in this coming spring and summer.

[Ben Cherniavsky:]

That’s helpful thanks. And then on the Commercial and Industrial side, I realized and I appreciate that you consolidated the results of the pipeline, but maybe just for a little bit of help on year-over-year comparison. What was going on in the pipeline activities this quarter? Because – it’s time you guys consider scale it all back. So was there any pipeline revenue in the quarter or are you doing a little bit of work in the hard margin and how does that look?

[Martin Ferron:]

There are few things happening Ben. There’s obviously been some summer cleanup work related to the legacy projects and we were recognizing revenue there but that revenue was at zero margin. And then the revenue associated with the integrity work and that has been at pretty good margins for June, but it hasn’t been a big contributor to the number this year.

[Ben Cherniavsky:]

Up a $1 million or..?

[David Blackley:]

Yes.

[Ben Cherniavsky:]

In that range?

[David Blackley:]

Yes, round about the 10 to 20 range.

[Ben Cherniavsky:]

Okay. That’s helpful. Thanks a lot.

[Operator:]

Thank you. The next question is from Bert Powell of BMO Capital Markets. Please go ahead.

[Bert Powell:]

Thanks. Martin just wondering if you could just give us a little bit more insight into you sense and I apologize if you already talked about this but when you talk to your customers or look at their behavior patterns today are they deferring necessary maintenance, is this really deferral of expansionary work I am just trying to understand where their behaviors are driving changes in your business.

[Martin Ferron:]

Yeah, I did talk about it last time in regard to them managing it highly for cost, okay. So when do that they take their time over everything you know the allocation of projects, making sure schedules are right and things can drag out you know they generally stand left and take more time over spending less so it was competitive for the time being.

[Bert Powell:]

Is there been any change in their desire to continue to in-source or outsource does that how does that continue to be a trend towards in-sourcing? Does that change or does that stay the same?

[Martin Ferron:]

I think it stays the same, you know some customers are experimenting with in-sourcing I think we covered that previously.

[Bert Powell:]

Yeah.

[David Blackley:]

You know I mentioned other supply chain initiatives they are going through. So it’s all related to focus on cost on their side and given the uncertainty in the market economic climate, I don’t blame us for doing that. It’s fine we just have to position ourselves to deal with that.

[Bert Powell:]

Okay. And what’s the total fleet utilization right now?

[David Blackley:]

I think we do a capital rate utilization and based on size of the equipment and so I don’t know if that number would even mean anything to you because we were aided by the non-capital owned equipment.

[Bert Powell:]

Okay. Thanks.

[David Blackley:]

Well, we’ll take that offline. We’ll look at it and get back to you, okay.

[Bert Powell:]

Okay. Thanks.

[Operator:]

Thank you. The next question is from Matt Duncan of Stephens Inc. Please go ahead.

[Matt Duncan:]

Hey guys this is Stephen in for Matt this morning. Thanks for taking my question. Just during the follow-up on the revenue outlook, I’m just trying to get a feel for how we should think about overall revenues I guess on a sequential basis over the December quarter here. I guess it sounds like HCM sales considering maybe a little lower and Commercial and Industrial might be up but not enough to offset the clients in HCM. So overall or maybe down $5 million to $10 million. Is that fair or could you comment on that?

[David Blackley:]

Well, I can’t comment on specific numbers but I think it will be down some based on the factors that that I mentioned.

[Matt Duncan:]

Okay. And then I guess just my other question. The roughly 7% G&A expense as a percent of sales, is that a pretty good number to use going forward?

[Martin Ferron:]

I think the way I would maybe characterize it, if you break it into the few pieces, just one more variable and on things like share price. So our stock based compensation rates. I’ll talk about that separately but I would say in terms of just a dollar run rate on G&A we would be looking at somewhere between $14 million and $15 million per quarter. The fourth cost base compensation, the at our current share price assuming it doesn’t move much. So we would be looking at roughly a $1 million of quarter expense. And then if you get any movement in share price, (inaudible) for down a dollar, we would expect to see that stock based comp vary by anywhere from $1.5 million to $2 million. 2000 numbers would roll out on a quarterly basis.

[Matt Duncan:]

Okay. All right. Thanks guys.

[Operator:]

Thank you. The next question is Maxim Sytchev of Alta Corp Capital. Please go ahead.

[Maxim Sytchev:]

Yes hi good morning.

[Martin Ferron:]

Good morning Max.

[Maxim Sytchev:]

Just a quick question in term of that the covenance, are you guys comfortable with being able to be onsite for the next quarter.

[Martin Ferron:]

Yeah you know I think David and I both mentioned that we’re very happy with its deal we struck with the bank and we were careful stepping in the new covenance there and you know we are confident that we can do fine with that.

[Maxim Sytchev:]

Okay, that’s great and then one of the comments that you made in your prepared remarks was in relation to potential expanding revenue base with your existing clients I was wondering can you please comment in terms of what additional services potentially you could be thinking of or any color would be great.

[David Blackley:]

Yeah, I mentioned that as well as focusing on cost I am getting in front of the customers and trying to think ways to expand our services on the sites we’re on already. We want to grab as much work there as we can so you know that’s one area of expansion at the top line. I think the second area is getting presence on new mine sites. We are going to be coming down probably here in the next year or so and we’re bidding one or two of them and we want to make sure that we get our first because first in advantage there is really important so we are looking at expanding revenues in those two ways.

[Maxim Sytchev:]

Okay fair enough. In terms of the services I mean it’s still is it more on the heavy construction side or you feel that there is some additional product that you could be selling to as to the customers?

[Martin Ferron:]

If you ask me maybe on the next call, I’ll have more color because I really got into this aspect of our business in this quarter.

[Maxim Sytchev:]

Okay, fair enough. But that seems the lot from me.

[Operator:]

Thank you. The next question from Jeremy Lucas of Scotia Capital. Please go ahead.

[Jeremy Lucas:]

Just quick follow up on the covenants. Can you disclose where you – I’m not sure you did disclose or can you disclose where you were on the new debt ratio and the interest coverage ratio?

[Martin Ferron:]

I think the – going from memory here the covenants that we set now were 1.5 for the quarter. Previously it was at, I think it was at 2.25 on the interest coverage. The senior leverage was two time in the previous agreement and we got relief in this quarter here as we disclose. I think in terms of where we were at the end of the second quarter, I believe we were just over that 2.25 on the covenant. So we did have just enough room but we tried to take a collective approach just because of some of the weakness in senior activity in the July, August timeframes and make sure that we have the cushion in price in case things didn’t go well for us in the latter half of August and September. As it turned out we didn’t need that relief, that’s why it is always good to be proactive and (inaudible).

[Jeremy Lucas:]

Is the senior debt ratio, the covenant that, the one that you’re closer on, or is it the interest coverage ratio?

[Martin Ferron:]

Historically, it’s been the interest cover ratio, that’s been the area where we’ve struggled to be onside with the covenant.

[Jeremy Lucas:]

And just the impact of capitalizing the operating leases, is that is the payment associated with the capital leases going to increase interest for the interest coverage ratio population?

[David Blackley:]

Yeah, there will be some increase in interest as I identified in our prepared remarks. I think it was 1.7 on an annualized basis for the interest side but I think when you look at the, the benefit on the EBITDA side of that $13 million of reduced operating lease expenses more than, than offset. But I believe we’ve got more than adequate coverage there.

[Jeremy Lucas:]

Okay, great. Thanks.

[Kevin Rowand:]

Okay.

[Operator:]

Thank you. The next question is from AJ Strasser of Cooper Creek. Please go ahead.

[AJ Strasser:]

Hey guys thanks for taking my questions. Good morning.

[Martin Ferron:]

Good morning.

[AJ Strasser:]

Hi, nice execution there good to see. I wanted to just get your thoughts here, all things considered kind of given the weakness in some areas and the strength in others. How you, how are you looking at cash-flow generation over the next couple of quarters?

[Martin Ferron:]

Well, I think, I think AJ as we get into preparing for our winter work, I’m expecting to see a bit more of a draw on our cash and on our liquidity, that’s pretty usual with our seasonal activity as we transition from summer construction to winter. I expect our cash-flow to start improving as we move through the fourth quarter. And again that will be weather dependent on when we realize that whether the work we accept in March or April, dictate when the cash finally comes in.

[AJ Strasser:]

Okay. And then I just had a follow-up question. Always roping on the revenue line on the pipeline side, can you maybe comment whether or not you were profitable this quarter in price line and how you perhaps mitigated the operating losses going forward, and whether or not we should be perhaps profitable in that business?

[David Blackley:]

I would say AJ that we did make a small profit this quarter with pipeline. Again it’s not a lot of revenue. It has been a reasonably good margin. I think as we roll forward there with the integrity work, again, we don’t expect this to be a big contributor to revenue and I think it will bring in a provision profit to cover off any fixed cost there. It’s not going to be a big generator to the bottom line on the near term.

[Martin Ferron:]

We’re also not going to be generating any operating losses, I can assure you.

[AJ Strasser:]

Okay. Thank you for taking my question.

[Operator:]

Thank you. (Operator Instructions) The next question is from Matt Duncan with Stephens Inc. Please go ahead.

[Matt Duncan:]

Hi, this is actually Matt Duncan, I was on another conference call. I’ve got a question for you on gross margin. Martin, you guys have obviously made a lot of changes to try and improve profitability in the business. So we could understand that the top line is going to still be under a little bit of pressure here for the next quarter or so, but as we think based both over the next couple of quarters why your revenues are under some pressure and then as you look out may be better days ahead in your FY ‘14, how should we be thinking about your gross margin at this point?

[Martin Ferron:]

Well, I would like to think that we can steadily improve this. As I mentioned on the call we’re done with our cost cutting initiatives yet. I think there’s still some way to go. I would like to think that we can remain profitable in this lower demand level. But boy if demand picks up then I think you’ll see our gross margin really expand and that’s what we trying to achieve here. I think, again, as I mentioned on the call I don’t know if you’re listening in, I think demand will be better next year based on our demand conditions and I’m trying to position us to take maximum advantage of that.

[Matt Duncan:]

Sure. I don’t know Dave is there is any way to sort of clarify, you were at 12.7% gross margin this quarter, is that – look forward, do you think it’s going to continue to march higher from here and a year over demand is better. What do you think the gross margin can be. I mean historically, we’ve seen you guys on gross margins above 15%, 16%, 17% before, can you get back there or is that maybe a little bit of stretch just kind of help us think through what the profitability potential is?

[David Blackley:]

I think Matt in the near term what I would see is small incremental improvements in our marginal growth. I don’t expect there to see big jumps in the margins here over the next few quarters. I think a lot of that margin improvement will come out of the things that we’re doing on the cost side. Steady revenues and it continue to play a variable in that equation. So we can only cut that cost so far. I think longer term if demand starts to get back to the historical levels then I think we could get back to those higher margins. But, I think that’s a much longer term view.

[Matt Duncan:]

Okay and then the last thing from me then it’s going to be on your cash flow sort of back-t-back. Do have any thoughts about what your free cash flow maybe in FY ‘13. I know you said that the December quarter is going to be a little bit of draw yet you’re around break even basically. I think you’ve got about a $1million of free cash flow so far this year. Can the margin December quarter’s balance out to where free cash flow – it was a sort of a zeroish kind of number or do you think you can be a free cash flow generator in FY ‘13?

[David Blackley:]

Yeah, I think that with some of the things that we’ve done here on the refinancing we will see a slight improvement in our free cash flow. I’m not expecting it to be a big spike up but if you think that we’ve been able to generate roughly $1 million quarter benefit just from financing that along would help take us into that slightly positive territory.

[Matt Duncan:]

And then the priority for that cash is dept repayment at this point.

[David Blackley:]

Correct.

[Matt Duncan:]

Okay. Thank guys.

[Operator:]

Thank you the next Greg McLeish of GMP. Please go ahead.

[Greg McLeish:]

Sorry guys, I think, I missed something on your G&A, Dave where you saying that the run rate on G&A is about $14 million to $15 million normalized per quarter?

[David Blackley:]

Yes and that’s before stock based compensation.

[Greg McLeish:]

But I was just wondering because then the when you reduce the 60 salary positions you mean that was going to result in annual savings of $12 million?

[David Blackley:]

Right but keep in mind Greg that that was also what we were projecting as higher numbers previously we were looking at G&A run rate there before stock based comp of round about $18 million plus.

[Greg McLeish:]

So for the balance of the year should we be thinking that that’s more on the $14 million range $14 million, $15 million for G&A?

[David Blackley:]

Yes.

[Greg McLeish:]

Okay great thanks guys.

[Operator:]

There are no further questions in the queue at this time. I would like to turn call back over to management for any closing remarks.

[David Blackley:]

Okay, thanks for joining us today. We look forward to talking to again in the near future. Thanks.

[Operator:]

Thank you ladies and gentleman this does concludes today’s teleconference. You may disconnect you’re line at this time. Thank you for your participation,