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Edited Transcript of CAM.TO earnings conference call or presentation 28-Apr-17 5:15pm GMT

Thomson Reuters StreetEvents

Q1 2017 Canam Group Inc Earnings Call

Saint-Georges May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Canam Group Inc earnings conference call or presentation Friday, April 28, 2017 at 5:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Marc E. Dutil

Canam Group Inc. - CEO, President and Non Independent Director

* René Guizzetti

Canam Group Inc. - CFO and VP

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Conference Call Participants

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* Mona Nazir

Laurentian Bank Securities, Inc., Research Division - Senior Special Situations Analyst

* Sara O'Brien

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Canam Group 2017 First Quarter Financial Results Conference Call. Your host for today will be Mr. Marc Dutil, President and CEO. Mr. Dutil, please go ahead.

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Marc E. Dutil, Canam Group Inc. - CEO, President and Non Independent Director [2]

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Thank you. I'm here with René Guizzetti and Marcel Dutil as well. I'd like to welcome to our conference call the media, our employees, suppliers, shareholders, customers and financial analysts. So good afternoon, everyone. Thank you for joining us with this review of our first quarter performance.

As you know, Canam specializes in designing integrated solutions and fabricating customized products for the North American construction industry. We take part in an average of 10,000 buildings, structural steel and bridge projects every year, and we operate 23 plants across North America and employ 4,650 people in Canada, the United States, Romania and India. I invite you to download the PDF presentation available in the Investors section of our website at canamgroupinc.com. You may also refer to our website to access the webcast archive of this call.

I wish to remind you that during the course of this call, we may make projections or forward-looking statements regarding future events. Actual events or financial results may differ from these statements. First, I would like to go through the highlights of this first quarter 2017.

The consolidated quarterly revenue stands at $463 million compared to $451 million for the same period last year. Revenues increased compared to last year for all divisions, except for heavy structural activities. Revenues from the United States represented 77% of this quarter's revenue. Adjusted EBITDA for the first quarter stands at $10.3 million compared to $22 million for the same period in 2016. The decrease of the adjusted EBITDA in the first quarter 2017 is mainly attributable to the compression of gross margins for certain activities, in particular, the favorable impact of bridge projects in the U.S.

The net loss for the first quarter is $1.6 million versus a profit of $8.3 million for the same period in 2015 -- in the same period in 2016. And the backlog at the end of March 2017 was $1,041,000,000 compared to $1,139,000,000 at the end of Q1 2016 -- at the end of the year, I'm sorry, okay.

If we review quickly the business operations. Our building and FabSouth divisions delivered another profitable quarter despite operating in a very competitive market. In the bridge business, the fabrication of the Champlain Bridge project remains on time and on budget. In the U.S., we've recently decided to cease the fabrication of bridge components at our Point of Rocks, Maryland facility. From now on, we'll service the U.S. bridge market exclusively from our Claremont, New Hampshire plant.

On the heavy structural steel market, we're almost done with all projects that started in 2015 and that were running through 2016. Regarding the projects at the origin of the provision we took in July 2016, our discussions with the client have yet to lead to final settlement.

René?

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René Guizzetti, Canam Group Inc. - CFO and VP [3]

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Thank you, Marc. Financial highlights for the first quarter of 2017. The quarterly output in tons increased for the quarter at 118,000 tons versus 117,000 tons in Q1 2016, and man-hours decreased to 997,000 man-hours versus 1,001,000 man hours in Q1 2016. We have had for Q1 2017 CapEx of $3.4 million versus Q1 -- versus Q1 2016 for capital investment of $11.5 million. At the end of March 2017, working capital is up to $356 million for current ratio of 1.92. Net debt stands at $315 million, an increase of $19 million versus December 31, 2016, which stood at $296 million. Shareholders' equity stands at $555 million for a net debt to equity ratio of 57% compared to 52% at the end of March 2016. Book value is at $12.24 per share.

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Marc E. Dutil, Canam Group Inc. - CEO, President and Non Independent Director [4]

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Thank you, René. So in conclusion, and I will note that the word conclusion has never been so appropriate, okay? In June 1984, the group Canam Manac went public. We raised just a little under $10 million and acquired 4,500 new shareholders, some of which with good health and a tremendous amount of patients may still be shareholders today. This led to several quick acquisitions of steel joist fabrication plants first in Ontario then in Missouri and quickly followed by Maryland, confirming from our very first days as a publicly-traded company that our heart was in the construction industry.

We got distracted once or twice, but always we returned with renewed commitment to the construction industry. Some of you may think we love punishment. We prefer to think we just love building things. Through the years, both environments in which we maneuvered, the construction industry and the public markets, grew gradually at odds with one another. The cyclicality and inherent risky nature of the construction industry, especially under the constant pressure to grow the business, vexed and sometimes annoyed the public markets who looked for increased stability and predictability from firms.

We will never fault our shareholders because what we really owe them is gratitude. They made the last 34 years possible. They were patient with us. We shared in the good years together, we endured tough years together. I'm also grateful to the financial analysts who make a living, a very tough living, trying to understand a moving target and then describe it as precisely as possible with the impossible goal of starting all over again 3 months later. Knowing that a single project, good or bad, swings our results 180 degrees and that our competitive dynamics can penalize in a very real way any excessive disclosure, building a stable financial model for Canam Group with an outside view is quite a task. I'm thankful that our relationship with all of you has always been cordial, professional and respectful.

On this call, I will wear both hats of management and a member of the family making an offer. René represents management and my father, Marcel, our Chairman, is both a member of the group making an offer for the company but also the Chairman of the company. So you may ask questions talking to both groups, if you wish to. The dialogue with our colleagues, customer and business partners will go on in many other discussion forums. But in closing, I do need to thank them for their dedication, hard work and loyalty during this important period of our history.

So operator, we can turn it over for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Sara O'Brien from RBC.

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Sara O'Brien, RBC Capital Markets, LLC, Research Division - Analyst [2]

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Can you comment on if the management team has had any solicitation for offers in the past year and maybe a little bit of commentary on the process for going private when the talks began for that?

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Marc E. Dutil, Canam Group Inc. - CEO, President and Non Independent Director [3]

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We have no conversations, no offer, no indication whatsoever of any party being interested in an acquisition of Canam in the last year or more. The process -- in a subtle way, Sara, the process began 5 years ago when our sister company, Manac, entered into a relationship with AIP. Manac was going private. My brother Charles is the CEO of Manac, and the relationship with AIP proved profitable for AIP, profitable for Manac. They were very strong in helping them transform Manac's manufacturing operations. And after 3.5 years, AIP left. As you know, Manac is now a privately-owned company with Québec shareholders. But that's when we began to know the potential value of such partners. The last, I don't -- I can't comment on the stock market for Canam but, ultimately, we all watched the same story in the last year. And over the course of the last 4, 5 months, we realized that the public markets, because of their mechanism and because of the things Canam had, had a difficult time delivering, the public markets really valued us at a deep discount towards what we thought the firm was worth. And the conversation with AIP began by us reaching out to them. We thought they were potentially good partners, and we then reached out to the Caisse and the fonds, and we began a process to search for a fair transaction between shareholders and potential acquirers. And I had a colleague this morning who said, "Don't forget what the word Canam means, okay?" So in 1960, when this company began, it was called Canam for Canada America. 77% of our business is in the U.S. Most of our plants are in the U.S., so it's a natural relationship that I think, over the course of the next 5 to 7 years, will help the firm while giving to the shareholders what we think is a very fair value for their shares.

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Sara O'Brien, RBC Capital Markets, LLC, Research Division - Analyst [4]

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Okay. And then maybe just a few questions on the quarter itself. And I know it's a little bit moot, but it does have bearing on the value of the company. So just because we're in a steel inflationary environment or have been in the last quarter, how fast would Canam realize the bidding opportunity on that both from a revenue standpoint and a margin standpoint? And I guess maybe if you can give some kind of an outlook on the revenue for the remainder of the year.

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Marc E. Dutil, Canam Group Inc. - CEO, President and Non Independent Director [5]

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I need to answer the unasked question. Management, through this process, gave the independent committee and the outside firm a 5-year forecast for the revenues of Canam and our anticipated performance, okay? So the outlook that we looked at was for 5 years. The recent increase in the price of material has actually been an impediment to us because our pricing of finished product did not keep up with the rise in raw material, especially in the joist market. We do catch up. Historically, we catch up within approximately 2 quarters and then it turns around. But so far, there are no positive impact for the rising steel prices in our results.

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Sara O'Brien, RBC Capital Markets, LLC, Research Division - Analyst [6]

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Okay. And then maybe if you can comment on just the magnitude of the write-downs in Q1 for heavy structural and U.S. bridge and when those contracts are expected to be completed.

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Marc E. Dutil, Canam Group Inc. - CEO, President and Non Independent Director [7]

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An additional $1 million, was it U.S., René? Additional USD 1 million in the U.S., in the large U.S. structural project. We had short of CAD 1 million on the structural project in Western Canada. The bridge business in the U.S. had probably a couple million dollars of provisions taken on both Tappan Zee and Goethals projects, so between $4 million and $5 million, Sara.

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Sara O'Brien, RBC Capital Markets, LLC, Research Division - Analyst [8]

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Okay. And those projects are expected to be completed in Q2 or is there a longer time line there?

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Marc E. Dutil, Canam Group Inc. - CEO, President and Non Independent Director [9]

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The tail end of the structural project in the U.S., the very large one, will probably go into Q3 with minor work in Q4. The bridge projects will be fabricated by the end of Q2 but will probably be still invoicing material through Q3.

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Sara O'Brien, RBC Capital Markets, LLC, Research Division - Analyst [10]

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Okay. And then maybe just last. So you commented on the U.S. Maryland facility being stopped or the work stopping there. What are the plans for that facility? And maybe if you can just comment on the real estate value at Canam overall in terms of redundant value on real estate.

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Marc E. Dutil, Canam Group Inc. - CEO, President and Non Independent Director [11]

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I was with a colleague from the Maryland facility this week and she said, "Marc, it's -- the mood is not very good, okay?" And I said, "You know, give it 2 years. It will become the very best." I want it to become the very best joist plant we have. We'll put in the resources and the time and the lean expertise. So these things tend to swing. We expect the Maryland facility to become a very good joist plant for us. It's already good. We expect to make them very good. In terms of the real estate, as you probably know, we own all our land, all our buildings and most offices in which we operate. We -- is there redundancy? We've looked at the map on a regular basis, and construction is still a market of proximity. So where we are right now, we believe, if we were to leave, we'd create a hole that would hurt us commercially. So I think there's no redundancy in our layout at this point.

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Operator [12]

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Our next question is from Mona Nazir from Laurentian Bank.

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Mona Nazir, Laurentian Bank Securities, Inc., Research Division - Senior Special Situations Analyst [13]

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So I just had one quick question. You spoke of AIP in relation to Manac, their exit and how you called them up to kind of start the discussion. Where you are today, I know you have some internal changes and margin compressions, some top line deterioration a little bit maybe going forward. Do you ever envision becoming a public company again?

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Marc E. Dutil, Canam Group Inc. - CEO, President and Non Independent Director [14]

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Well, I was raised in the last 30 years hearing in my father said that the biggest regret he ever had was going public. So that's a pretty strongly ingrained message. But at the end of the day, we're here to serve the organization, okay? I think we can serve the organization very well as a private company. We have access to capital. We have access to expertise. We have strong Québec partners in the current deal, with pockets deep enough to help us make this a Québec company if ever the time comes. But I can't -- I've learned never to say never, okay? But it is not -- it is absolutely not in our plan right now. Mona, are you saying you will miss us? Is that your way of saying that?

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Mona Nazir, Laurentian Bank Securities, Inc., Research Division - Senior Special Situations Analyst [15]

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Yes, that's it.

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Marc E. Dutil, Canam Group Inc. - CEO, President and Non Independent Director [16]

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Thank you.

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Operator [17]

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(Operator Instructions) So Mr. Dutil, we have no further questions registered at this time. I would now like to turn the meeting back over to you.

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Marc E. Dutil, Canam Group Inc. - CEO, President and Non Independent Director [18]

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Okay, so listen, we mean it when we say thank you. I hope we've been respectful to everybody who were part of this adventure, and we look forward to working with you again. Thank you.

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Operator [19]

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Thank you. The conference has now ended it. Please disconnect your lines at this time, and we thank you for your participation.