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Edited Transcript of SDY.TO earnings conference call or presentation 1-Mar-19 3:00pm GMT

Q4 2018 Strad Energy Services Ltd Earnings Call

CALGARY Mar 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Strad Energy Services Ltd earnings conference call or presentation Friday, March 1, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Robert C. Pernal

Strad Energy Services Ltd. - CEO, President & Director

* Michael R. Donovan

Strad Energy Services Ltd. - CFO

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Conference Call Participants

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* Elias A. Foscolos

Industrial Alliance Securities Inc., Research Division - Equity Research Analyst

* Jason Tucker

Paradigm Capital Inc., Research Division - Analyst of Cdn. Energy Services

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the Strad Energy Services Ltd., Fourth Quarter Results Conference Call.

Certain statements that will be discussed in this conference call will constitute forward-looking statements. The forward-looking information and statements included in this discussion are not guarantees of future performance and should not be unduly relied upon. Forward-looking statements will be based on current expectations, estimates and projections that involve a number of risks and uncertainties, which could also cause actual results to differ materially from those anticipated and described in the forward-looking statements. Such information and statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information and statements. These factors include, but are not limited to, such things as the impact of general industry conditions, fluctuations of commodity prices, industry competition, availability of qualified personnel and management, stock market volatility and timely and cost-effective access to sufficient capital from internal and external sources. The risks just outlined should not be construed as exhaustive. Although management of the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Accordingly, listeners should not place undue reliance upon any of the forward-looking information discussed in this call.

I would now like to turn the call over to Andy Pernal, President and CEO of Strad Energy Services. Please go ahead, Mr. Pernal.

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - CEO, President & Director [2]

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Thank you, operator, and good morning, everyone. Welcome to Strad's 2018 financial results conference call. With me today, as usual, is Michael Donovan, our Chief Financial Officer.

For today's call, I'll start out with some high-level commentary on the year and our business. From there, I'll hand it over to Michael to review our fourth quarter and year-end financial highlights. After which, I'll outline what we expect for 2019 before turning it over to any questions.

2018 marked a pivotal year for Strad as we realigned the company to focus on the growing Industrial Matting market, allowing us to participate in a broad range of industry sectors across North America, including the construction and maintenance of large-scale infrastructure projects. In Q3, we've set a goal of doubling our matting fleet to 180,000 units by 2021. And to accomplish this, we invested $31.3 million or over 90% of our capital in 2018 to maintain and grow our matting business. We're committing to do the same in 2019 by dedicating $29 million of our planned capital spend of $30 million to this product segment, knowing this division can drive growth and profitability.

The fundamentals for Industrial Matting remained strong in Canada and the United States as evidenced by our fourth quarter results, our strongest quarter since 2014. The fourth quarter, which included the start of a large-scale matting project in Canada, helped drive our Industrial Matting segment to annual revenue of $60.5 million, a 5% increase over our 2017 results. In Canada, where the timing of these large-scale projects is often difficult to predict, we earned a significant portion of our revenue in the fourth quarter, resulting in revenue for the year of $43.6 million, 12% lower than in 2017 in Canada. Revenue variability is a trend we expect to continue as the timing, size and scale of these projects affects our top line numbers. In the United States, we continue to make inroads and grow our market share in Industrial Matting. For 2018, our revenue of $16.8 million was more than double the results in 2017, and we expect this momentum to continue. To date, most U.S. matting opportunities have been driven by oil and gas, drilling and completions activity. However, we continue to explore and bid on matting opportunities outside of oil and gas in the U.S. and have dedicated additional bench strength to meet this growing demand.

The equipment rental market -- rentals market in Canada continues to be negatively affected by macroeconomic conditions for the energy sector. And in particular, the market access restrictions in Canada have resulted in reduced producer spending. However, the Equipment Rentals segment remained consistent with the prior year, generating $59.5 million in revenue in 2018 compared to $60.1 million in revenue in 2017. In 2018, the United States has been the primary driver for Equipment Rentals activity, offsetting lower year-over-year results in Canada. We expect Canada to further soften as current conditions have led to reductions in 2019 capital budgets by major Canadian producers which will impact activity levels in the Equipment Rentals segment throughout the coming year. In the U.S., we expect Equipment Rentals activity to remain similar to 2018 levels.

I'll now hand the call over to Michael to provide context to some of our financial information.

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Michael R. Donovan, Strad Energy Services Ltd. - CFO [3]

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Thank you, Andy, and good morning, everyone. As Andy mentioned, the fourth quarter was our strongest since 2014, and our revenue increased 17% to $32.3 million compared to $27.5 million in 2017. And EBITDA increased 110% to $10.6 million compared to $5.1 million in the prior year. It is encouraging to see how one large-scale matting project can have such a positive impact on the fundamentals of our business.

On a segmented basis, for the 3 months ended December 31, 2018, Industrial Matting revenue and EBITDA increased 48% and 93% to $18.5 million and $8.7 million compared to the same period in 2017. The increase in revenue was primarily due to the timing of matting projects in comparison to the same quarter of 2017. For the full year in 2018, EBITDA increased 2% to $21.5 million compared to the same period in 2017. Industrial Matting utilization rates were up significantly in the fourth quarter in both Canada and the U.S. On an annual basis, utilization rates were relatively consistent at 35% in 2018 compared to 36% in 2017 on a matting fleet that grew 31% year-over-year.

Turning to our Equipment Rentals segment. For the 3 months ended December 31, 2018, revenue decreased 8% to $13.8 million, primarily due to lower Canadian activity, which was, in large part, the result of the discontinuance of the drill cuttings management service line that was still operating in the fourth quarter of 2017. The decrease was partially offset by an average utilization increase from rig counts in the Bakken and Marcellus. EBITDA for the quarter increased by 78% to $2.9 million compared with the same period in 2017. The increase in EBITDA was driven primarily by lower operating expenses in Canada.

During the fourth quarter, the company deployed $12.2 million of capital, of which $12 million was allocated to Industrial Matting. Capital additions totaled $33.8 million for 2018, of which $31.3 million was deployed to maintain and grow the company's Industrial Matting fleet to meet the expected demand in Canada and the U.S.

With our available cash flow for the year, we ramped up our matting capital investments by over 50% for the year and bought back 5% of our shares through our NCIB. As of December 31, 2018, our balance sheet remains strong, and we continue to focus on cost containment. The strong position combined with $35 million in unused credit facilities provides a solid footing to grow our matting fleet organically and by acquisition.

That concludes my comments for this morning. I'll now turn the call back over to Andy to speak to our outlook.

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - CEO, President & Director [4]

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Thanks, Michael. Strad's board and management team are optimistic regarding the company's outlook. Environmental and safety best practices, as well as overall project cost efficiencies, continue to drive the demand for matting in Canada and the U.S. Projects such as LNG Canada and the associated Coastal Gaslink pipeline will provide significant opportunity for the Industrial Matting segment beginning in 2019. The Trans Mountain expansion project will similarly provide multiyear opportunities for Strad. However, any delay in construction could impact timing of these potential matting projects.

Looking forward, we have a goal to organically double our matting fleet by 2021 and build on our foundation as a large and highly scalable matting provider in North America. We entered 2019 with an expanded matting fleet, a growing list of opportunities and committed capital as we look to increase our market share in this growing segment.

With that, I'd like to hand the call back to the operator, and we'll be happy to take any questions at this time.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Elias Foscolos from Industrial Alliance.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [2]

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I've got a couple of questions to ask. I'll start with the Equipment Rental business and the margins, in particular, in Q4, that were up. I think Michael commented it was lower costs in Canada. Question I have is are we looking at those margins potentially as the new run rate type margins? Or do you think they might revert to the margins kind of in the past?

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Michael R. Donovan, Strad Energy Services Ltd. - CFO [3]

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Elias, I can handle that one. Yes. So from a fourth quarter perspective, we did see some lower operating expenses in Canada. And as we mentioned, we discontinued that drill cuttings management business, so we had some impact there, trading some lower-margin business for increased U.S. exposure at a higher margin. And in terms of looking at the margins in that business going forward in 2019, we expect to see that segment be impacted by the softness in the Canadian business and see that business in a longer term more in that 10% to 15% range. And I'd say for 2019, expect it to be closer to the 10% than the 15% in the go forward, again just given that softness that we expect to see in Canada. From a U.S. perspective, steady state at this point. Don't really expect much difference from 2018, looking at forecasted rig counts that are relatively flat year-over-year. So the impact in that segment from a margin perspective will come from the Canadian side.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [4]

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Okay. Focusing now to Industrial Matting, a couple of questions related to that. We increased -- or the company increased matting approximately 20,000 with its capital budget for '18. Can we anticipate a similar increase in the number of mats at year-end or Q4 '19 to be roughly the same increase, about 20,000? Is that a reasonable assumption?

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Michael R. Donovan, Strad Energy Services Ltd. - CFO [5]

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Elias, Michael here again. From a capital perspective in 2019, we've indicated the plan is $30 million again this year '18 approved thus far. $29 million of that will be allocated to maintaining and growing the matting fleet. So I'd say from a net increase year-over-year, depending on sales attrition, et cetera, probably in that 20,000 to 25,000 range is likely a good estimate at this point.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [6]

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Okay. I think I'll ask one more question, and maybe I'll focus on Andy. You spoke about the growth in Industrial Matting in the U.S., and I'll keep it very simple essentially. With the doubling 2018 over 2017, I think you said you expect to see the trend to continue. I could look at the trend in a number of manners. I think doubling it would -- might be aggressive. But you would see a substantial increase in the U.S. matting. Clearly, there was an increase from Q4 into Q2 '18. It was a relatively slower increase at that point of time. How can you see that shaping up?

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - CEO, President & Director [7]

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The U.S. matting business for us, as I mentioned, Elias, is today largely focused on drilling completion sites. We do, do some industrial job and have for a number of years a few smaller-type power transmission pipeline type jobs, but the vast majority has been related to oil and gas. So we expect the oil and gas part of it to continue to increase reasonably. I think continuing on a double trend is probably a little aggressive. But certainly, we would expect some modest improvement on the oil and gas side where we're being a little conservative. But again, we're aggressively going after this space as the industrial part of the U.S. opportunities in Industrial Matting where there are a lot of different projects going on. So as we've kind of reconfigured our sales team and brought in some new talent to go after that market, we're remaining cautiously optimistic on that front. So in total, yes, we're expecting some increase. And hopefully, we can be reporting by this time next year that we've secured some larger projects in the U.S. in the industrial side as well.

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Operator [8]

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(Operator Instructions) And we do have a follow-up from Elias Foscolos from Industrial Alliance.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [9]

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Sorry to follow up again but maybe a couple more questions. First one, I guess, would be focusing on your capital allocation strategy. Clearly, we've got the investment side on matting primarily. We also have the issuer bid that we see. Could you talk to potential acquisitions? Is that something on the table, off the table or not?

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - CEO, President & Director [10]

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Yes. I mean, in general, our investment focus, organic or acquisition, would be on the Industrial Matting side. We feel we have a comfortable position on the Equipment Rentals side in terms of market share. We've got great market share in the regions we operate. We've got great customer connectivity, and we're well positioned for recovery in the space. And we've seen that recovery somewhat in the U.S. over the last year and hope we can be seeing that in Canada in the future. So on the Equipment Rentals side, we're content where we're at, generating free cash flow and being well positioned in the marketplace. On the Industrial Matting side, definitely a big push on the organic side. That will continue as the overall market grows, and we're definitely open to looking at potential acquisitions on the Industrial Matting side in both countries. Again, it's finding willing participants, parties that are motivated to transact and have reasonable expectations in terms of valuation, et cetera. And we're also looking for talented people to bring on our team. We did a matting acquisition in Canada a couple of years ago in Manitoba with a great little company out there, and the principles of that company continue to be a key part of our organization today and driving the market in the Manitoba, Saskatchewan and Northwestern Ontario regions. So we're looking for the right people, the right assets, willing participants, and we're open to those discussions.

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Operator [11]

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(Operator Instructions) And our next question comes from Jason Tucker from Paradigm Capital.

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Jason Tucker, Paradigm Capital Inc., Research Division - Analyst of Cdn. Energy Services [12]

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Just want to talk -- obviously, the Industrial Matting thing and the growth, I think you identified that what you see is a possible $2 billion industry across North America. And obviously, growing the fleet helps push growth in that division. But just looking at the utilization for the quarter still sitting around 45%, just wondering if you could maybe give us some color around where that sort of caps out and the kind of growth from the existing fleet without adding any additional pieces at this point.

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - CEO, President & Director [13]

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Sure. I can start to comment, and then Michael can chime in, Jason. But with the matting utilization, first of all, that's -- our utilization is calculated, as I think you know, on when mats are on rent. It's also calculated on a gross value basis, so there's -- predominantly, our fleet is wood mats, but we have a lot of rig mats and other specialty mats. Probably about 10,000 of them of 110,000 fleet that exists that are much higher value. So they -- having those mats utilized is more difficult because there are more specialty mats, but they would -- they can pull the utilization number down a little bit given the value, disproportionate value there. So that's just one data point there for you. We've always said foot from a wood matting perspective that if we can achieve 50% utilization on those mats, 183 days a year at pricing levels that historically have been in place that we like those metrics. Those -- that internal rate of return goes around vis-à-vis that capital investment. So yes, I think if we -- certainly, we would see an overall utilization, matting utilization number that we achieved this quarter being fairly high. It's close to that 50% level. And again, that includes a lot of the lower-utilized, high-priced mats in that mix. So going forward, we would again expect that we can achieve similar overall utilizations in that 35%, 40% range for next year. We're going to be doing okay because the wood component of that will be higher.

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Jason Tucker, Paradigm Capital Inc., Research Division - Analyst of Cdn. Energy Services [14]

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Okay. Great. And then I guess maybe just to follow on there. And I realize there's some probably competitive issues that you may not want to get into too much detail. But with regards to how you're contracting those, are -- is the mats going out on sort of a take-or-pay contract and that there's guaranteed days and regardless of sort of the term on how long they're out? Or are you getting paid basically on a day by day and you can receive a call for cancellation at any point in time? Maybe just walk us through like general structure in terms of the contracting there.

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - CEO, President & Director [15]

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Yes. I think this is a pretty industry-wide characterization. But I think, for the most part, our experience has been, certainly on the matting side, is that the commitments are really made to us on a project-by-project basis. So for example, the North Montney project we've talked about, which was full -- in full swing in Q4. For us, it's -- we've talked about it being about a 6-month project. It's starting to reduce in terms of its intensity here in January, and we'll see that trail off in March. So we have visibility project by project. Typically, there's no guarantees. Typically, there aren't take-or-pay situations, not that we don't try to negotiate those things. But typically, we get project term commitments that are commensurate with the construction schedule. So we have pretty good visibility on what those larger projects look like in terms of term but not to the extent of take or pay.

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Jason Tucker, Paradigm Capital Inc., Research Division - Analyst of Cdn. Energy Services [16]

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Is it unreasonable to think that if construction cycles sort of continues to increase here and the matting supply gets tighter and tighter that, that could be a progression to a take-or-pay strategy if supply sort of tightens up to a certain degree?

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - CEO, President & Director [17]

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It's not unreasonable to think that. We would certainly push that in different situations as supply tightens, and I'm sure our competitors would do the same thing. So we would -- if it came to a tight supply situation, I think we'd be having those discussions with our customers.

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Jason Tucker, Paradigm Capital Inc., Research Division - Analyst of Cdn. Energy Services [18]

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Okay. Great. And maybe the last one for me then. I think you just alluded to the fact that there is some contribution from the Northern MainLine project here into March being it maybe lowering as the kind of months have gone on. And what indications are you getting now from customers in terms of when work on maybe Canada LNG and Coastal Gaslink are expected to kick off? Or is it too early to kind of comment there?

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - CEO, President & Director [19]

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No. I think it's been pretty reasonably well publicized that LNG Canada preliminary work has started on that project. And that even on CGL on the westernmost spreads, things have commenced in terms of land clearing and things like that. So yes, we're -- that's certainly spread by spread. There's different construction schedules, and we're actively involved in pursuing those contractors and the owners and also the indigenous communities that are involved along that route to be active and bidding for those segments.

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Jason Tucker, Paradigm Capital Inc., Research Division - Analyst of Cdn. Energy Services [20]

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So in a perfect world, it's not unreasonable to assume that some of the mats, as they roll off of some of the Northern Montney work, could go straight back to work for Coastal Gaslink's related...

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - CEO, President & Director [21]

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Yes. That project and other projects, absolutely, Jason.

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Operator [22]

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(Operator Instructions) And I am showing no further questions from our phone line. I'd now like to turn the conference back over to Andy Pernal for any closing remarks.

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - CEO, President & Director [23]

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Thanks, everybody, for joining us today. We look forward to chatting with you again next quarter. And thanks, operator, for your assistance today. Have a great day, everybody.

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Operator [24]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.