Good morning, ladies and gentlemen. Welcome to North American Energy Partners Earnings Call for the Third Quarter of 2016. At this time, all participants are in a listen-only mode. Following the 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 webcast concurrently on the company's website at nacg.ca.

Now I'll turn the conference over to David Brunetta, Director of Investor Relations at North American Energy Partners Inc. Please go ahead, sir..

Thanks, Ruth. Good morning everyone and thank you joining us. Welcome to the North American Energy Partners 2016 third quarter conference call. I would like to remind everyone that today's comments contain forward-looking information.

Additionally, our actual results may differ materially from expected results because of various risk factors, uncertainties and assumptions. During this conference call any reference by management to EBITDA indicates consolidated EBITDA as defined in our financial statements and earnings release.

For more information about our results, please refer to our September 30, 2016 management's discussion and analysis, which is available on SEDAR and EDGAR. On today call, Rob Butler, VP of Finance will first review our third quarter results. Martin Ferron, President and CEO; will then provide his comments on our strategy and outlook.

After management's prepared section, there will be a question-and-answer session. I will now turn the call over to Rob..

Thank you, David. Good morning, everyone. Let's now review your consolidated results for the third quarter ended September 30, 2016 compared to the quarter ended September 30, 2015. For the three months ended September 30, 2016 revenue was $48.2 million down from $66.8 million in the same period last year.

Revenue was down in the current quarter due to a slower than expected ramp up of our summer work program after the Fort McMurray wildfire, which shut down all our operations in the Fort McMurray area during the second quarter.

Activity in the current quarter included mine support work at the Mildred Lake, Aurora, Millennium and Kearl mines combined with civil construction work at the Mildred Lake, Aurora and Millennium mines.

The reduced oil sands activity in the quarter was partially mitigated by the start of a new civil dam construction project at the Red Chris copper mine, located in northwest British Columbia.

For third quarter of 2016, gross profit was $5.4 million, or 11.1% gross profit margin, down from $7.4 million, or 11% gross profit margin, in the same period last year. The lower gross profit was primarily driven by the lower revenue in the current period.

We were able to maintain our gross profit margin at an equivalent level to the prior year with temporary cost savings initiatives implemented after the wildfire shutdown.

These cost savings initiatives included the temporary deferral of some of our preventative maintenance and repair activity typically performed during the quarter, where we would be preparing our equipment fleet for winter work.

It should also be noted that for the three months ended September 30, 2016, depreciation was $8.3 million, down from $10.1 million in the same period last year due to the lower demand for equipment in the current year.

For the three months ended September 30, 2016, we recorded an operating loss of $0.3 million, down from $1 million operating income recorded for the same period last year. G&A expense, excluding stock-based compensation, was $5 million for the quarter, slightly down from $5.3 million for the same period last year.

Also stock-based compensation expense decreased by $0.2 million compared to the prior year. For the quarter, we recorded $1.4 million net loss, basic and diluted loss per share of $0.05, compared to the $2.1 million net loss basic and diluted loss per share of $0.07 recorded for the same period last year.

Interest expense was $1.4 million for the quarter, down from $3.1 million for the same period last year, primarily due to the redemptions of the Series 1 Debentures and the write-off of related deferred financing costs in prior quarters.

We recorded a $0.3 million net income tax benefit in the current period compared to $0.7 million net income tax benefit recorded in the prior year. The prior year tax was affected by the reversal of temporary differences. Of note we ended the quarter with a net debt of $70.7 million which included $23.1 million of cash on hand.

On August 2, 2016, we announced a normal course issuer bid to potentially purchase upwards of almost 1.1 million of out voting common shares through the facilities of the Toronto Stock Exchange.

On September 30, 2016, we redeemed the remaining $10.0 million outstanding balance of our Series 1 Debentures for 100% of the principal amount, plus accrued and unpaid interest. I have summarized the third quarter results I will now turn the call over to Martin for his remarks..

Thanks Rob and good morning to everybody. As expected the devastating wildfires that swept through the Wood Buffalo area in Q2 had a knock-on effect on our Q3 financial performance. One mine site in particular was much slower than anticipated to get back to pre-fire activity levels.

While other customers further deferred spending on summer construction work due to cash lost to the fires. In the extremely tough circumstances we were pleased with our quarterly results which was helped by revenue diversification from construction work at the Red Chris copper mine in British Colombia.

Overall for the year despite a 30% drop in revenues, largely due to the fires we are remarkably in my opinion $1.5 million of EBITDA and $6.8 million of net income ahead compared to last year. I keep challenging my team to find cost improvements and they continue to respond. I will be congratulating them in a staff meeting later today.

There were many highlights in the quarter which Rob Butler covered with my favorite being the retirement of the last of the original 225 million issue of 9.125% interest rate debentures. This move brings our annual interest payment run rate down to around $5 million from over $30 million a few short years ago.

This has very important implications for capital allocation optionality and I will talk more about that later. Now I want to turn to our medium, sorry to our near to medium term outlook. As I'm really excited about it firstly as I mentioned last time. The worst of the cyclical downturn in the oil business could well be behind us.

Judging by a sequence of all inventory draws in the USA, another evidence of rebalance between supply and demand. If this is the case and of course we're not out of the woods entirely yet. We're hopeful of a return to a more normal summer construction season in the oil sand next year. As much of that type of work is being deferred.

Next I'm really pleased that we’ve managed to secure significantly more winter earthworks volume than was available last year. Some of this work was deferred then and will be executed this year on a constant basis starting in Mid-November. And continuing through Q1 2017.

We introduced some equipment innovations last year to much enhanced productivity of our fleet. And invested around $5 million of incremental CapEx in Q4 to continue that theme. Payback on the expenditure is expected to be less than two years.

Thirdly we are delighted to have signed a fresh and expanded MSA type arrangement with a key customer in October that covers existing mines sites and new mine sites that will begin production next year and a large SAGD site. Contributions from these agreements could underpin our revenues for the next five years.

Interestingly all though the MSA carries an all firm work commitments, one of the other successful contractors recently published a revenue estimate of over $800 million for the work they expect to generate from their MSA.

Fourthly the competitive landscape in our oil sands segment has markedly improved since the start of the cyclical downturn with three contractors exiting and disposing of around 15% of the available number of trucks with over two hundred tons of capacity.

Another contractor has parked about 5% of the similar size truck population, and is likely to move them outside the oil sands. Lastly we continue to make sound headway in our efforts to find and secure a profitable work outside the oil sands. Activity is likely to continue next year at the Red Chris copper mine.

And we have several bids in to support construction or reclamation of other natural resource mines.

In addition we've been targeting infrastructure projects that have meaningful earthworks and so to that end we're thrilled in October to be short-listed to bid on a major flood mitigation project Fargo-Moorhead in the northern USA, as part of an impressive consortium.

Early next year we also hope to bid for a similar but smaller flood prevention project here in Alberta. All in all based on this improved outlook we are confident of at least matching, the EBITDA we made last year for the full year of 2016.

Beyond that we believe that we have the organic growth opportunities to improve the EBITDA and cash flow significantly over the next three years. Absent future natural disasters, we think that a growth rate of around 15% could be achievable.

With the application of modest incremental capital, this would provide us with access cash to keep lowering debt and or to continue to reward shareholders with additional stock buybacks, or an increased dividend.

If we were able to achieve, this we would return to earnings profitability this year but would not pay any cash taxes over the next three year term due to our current tax loss position.

If we are right with our anticipated growth rate and excess cash is used to reduce debt, our stock is presently trading at a enterprise value to EBITDA multiples of around 3.4, 2.6 and 2.2 for 2017, 2018 and 2019 respectively. With that positive illustration made and I would now like to hand the call back to the operator Ruth for the Q&A session..

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

Hi good morning man..

Go on Yuri..

Any just curious on the agreement with the unnamed oil company in the release and the green fields oil sands mine, the $800 million number that you’ve referenced, I mean is that, is that kind of equal share for the contractors that have been selected.

I hear that's the number that you agree with and over how many years and when might we start to see that kick-in. I'm assuming not till 2018 when production starts..

Well the revenue number the other contractor quoted was for all of the sites over a five year term. There were three of us with these type of agreements. So our expectation would be similar as long as all of the work that is in the mine plan actually occurs. And we believe that it will. As far as the new mine in concerned it was pretty exciting.

I think in 2017, it's only light construction work and access roads. So not much real contribution but in 2018 onwards there's major overburden removal to be done. Over 50 million cubes a year is in the mine plan. So that could lead to significant upside for us and plus some of the other contractors because not one contractor can do all of that work.

So we expect that new site to really contribute in 2018 onwards..

Is that implicit in the 800..

Yeah..

Yeah okay. And can you talk about how the pricing on that, on this new agreement went I'm sure in this environment they were turning the screws pretty good on pricing any color on that..

Yeah you know they negotiated the agreement over a 6-month period and then a lot of back and forth negotiating so the usual. Obviously the fire slowed things down a little bit and gave them more time to negotiate..

The pricing, is reasonable and I think. The improvements we're making in terms of the productivity of our fleet will help us maintain our margin I believe..

Okay, I think I've taken up at least two questions. So I’ll turn it over to the other guys. Thanks very much..

Thanks Yuri..

Your next question comes from Ben Cherniavsky from Raymond James. Your line is open..

Good morning guys..

Good morning Ben..

Can you just help maybe quantify or help us with our modeling around the deferred preventative maintenance work that was done in the third and what of that affects the fourth quarter?.

Hi Ben it is Rob. We saw probably $0.5 million to $1 million of deferrals in our preventive maintenance program that probably pushed into the final quarter this year..

Okay.

First of all it is not a big factor Ben..

Alright and on the new MUA you mentioned that there will be some complimentary [ph] SAGD work and typically you haven’t done a lot of SAGD work.

So could may be elaborate on the role you are playing there and may be again how material it might be or at least does it mean anything for future opportunities in that application or there is sort of – circumstances in this particular contract..

Yeah the agreement does cover the major SAGD site of the customer halves. We are not expecting massive volumes of work from that particular area. But it is good that it is included because they certainly expect something to happen over the five year term.

But in SAGD in general I think the contracting community is being decimated during this down turn and we are looking to kind of re-invigorate our SAGD strategy to participate once that area of the business returns to a more normal activity level..

Does that require any purchase or any kind of specialized equipment or like what kind of applications are you performing there..

We’ve got the light civil equipment in our fleet, that is entirely suitable to the type of work that is done on an active SAGD site. Obviously there is the Aspen SAGD project that is coming down the pipe hopefully in the next few years. That will be a major start of exercise that will involve heavy end of our fleet.

So we are looking to positive contributions from SAGD here over the next two three years..

I don’t want belabor it, and I apologize if I am – if this sort of a daft question but I am just trying to pretty like this is earthworks or like on the mines you guys are building walls and moving overburden and things like that. What is it’s in particular on the SAGD projects that you guys would be performing. Most of this stuff is all underground.

So is that once the project is up and running what is role of a contractor like you guys..

Well, our contribution is more of the [indiscernible]. That’s why I mentioned Aspen, you’ll recall a few years ago we were involved in the Dover project. And we earned more than a $100 million of revenue putting in major access roads and other initial infrastructure to allow the sites to start continue start-up operations.

So that is the contribution we are mainly looking for, beyond that it is just maintenance of infrastructure and some small light civil work activity on the sites..

So it is like road building and support infrastructure in the early stages of the building a new – of starting a new project..

Correct.

Accessing the site et cetera..

Yeah.

Okay, that helps great. Thanks very much..

Your next question comes from the line of Bert Powell from BMO Capital Markets. Your line is open..

Yeah thanks, good morning everybody..

Good morning Bert..

Just that – wanted to just go back to comments around competitors’ exiting and fleet leaving, what do you think the total as we kind of bottom along here and maybe see some inflection up? What do you think the capacity utilization is for what you would define as your industry today? If you can – I mean I don’t know if you can really answer that question but I am just trying to figure out.

Okay I’ll can try and give you some color on that. The heavy end of our fleet, we are expecting to be flat or busy from pretty much mid-November through March. We want all truck or an extra bit available and we may be looking to rent some equipment as we did last year so, that’s a level of utilization is obviously pretty encouraging..

Okay.

So if I think about the 2017 utilization relative to 2016 I mean the wildfires obviously have an impact there but, is it reasonable to look at 2017 with catch up and whatnot that they the utilization what’s just what’s the uptick in utilization in here?.

I am just starting to figure out can you improve that?.

The uptick in utilization will occur in Q2 and Q3 with hopefully a return to the more normal construction season. And also in Q2 and Q3 this year we didn't do very much in the oil sands largely due to the fire. The Red Chris copper mine helped us out. But the utilization on our light civil equipment was quite low.

We'll expect a reasonable pickup in that not back to pre-down turn levels but at least a pick up in Q2 and Q3 next year..

Okay. And the $5 million invested in CapEx where you talk about a payback less than two years and then you also mentioned $3 million in growth CapEx that was spent so far this year, and mostly in this quarter and expect that to be five.

Just want to – is those the same numbers that the five?.

Yes they are the same thing..

Yes same thing.

And so what is it – what is it that that incremental growth capital is going to do?.

I don't want to get into too many specific on it because our competitors are listening and just giving us an edge in terms of productivity. So we're investing in some enhancements to our equipment to improve their efficiency and effectiveness essentially we can do more with the same equipment and therefore improve our margin.

You saw that come in Q1 last year sorry this year, where we produced more than $25 million of EBITDA largely due to the innovations we introduced then. And we've just expanded that’s – that program to a larger plan of our heavy fleet this year and we think that's going to pay real dividends for us..

Okay. So it's our growth capital in the sense that oh we have won extra work we need to now go expand the fleet..

Well I call it improvement capital and incremental capital to improve our fleets so that we can earn more money with it.

Right?.

Okay. Got it. Okay Thank you..

Your next question comes form the line of Maxim Sytchev from National Bank Financial. Your line is open..

Hi Good morning gentlemen..

Hi Max..

Martin I just wanted to, was wondering if you can please repeat the implied multiple that's you think in a way is treading at right now and 2019 you just said 2.2 or 2.9?.

2.2 for 2019..

And I guess.

Sorry..

Did you keep EV constant I guess so is that how you back into that number?.

Well if we just use excess cash to pay down debt and not illustration. And obviously we could do other things with the cash including buying shares but for that including buying of shares but for that more than exercise I will just assume we pay down debt..

Great. Okay now that's helpful.

And then in terms of the winter works and is this more of a sort of catch up dynamic to some of the deferrals that we experienced over the last 12 to 15 months or is it really sort of a normalization spend that you see right now from the clients?.

With some element of catch up no doubt, we expected one customer to have more reclamation last year than they actually carried out. And they’ve decided to do it this year. But we're anticipating that will have a similar volume next year.

So we are encouraged by the amount of work that's available, obviously the increased production on all of the sites that the customers are going for is increasing the volumes of earthworks that has to be done. We're seeing that, really playing out this winter..

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

Hi guys just a quick follow up on housekeeping maybe for Rob, so you mentioned all the tax losses like how should we think about the tax line for the rest of this year and for the foreseeable future is that a negative number or how do we?.

We’ll continue – as we get into the net income side of things we’ll continue to drive down our tax losses. And as Martin said we that the volume of our tax losses will help us not pay cash taxes for at least in other three years..

Okay that is helpful, thanks..

Okay..

There are no further questions at this time. I’d turn the call back over to the presenters..

Well thanks for joining us today and we look forward to speaking to you next time. Thank you..

Thank you. This concludes the North American Energy Partners Conference Call..