Third Quarter Conference Call Transcript

Transcription

FINAL TTRANSC
CRIPT ShaawCor Ltd. Third Q
Quarter Results Event Date/Tiime: Novem
mber 8, 20013 — 10:000 a.m. E.TT. Length
h: 44 minuutes "T
Though CNW Group has used commercially
y reasonable efforts to produce this transcrip
pt, it does not represennt or warrant that this ttranscript
is error-free. CNW Grou
up will not be responsible for any direct, indirect, incidental, specia
al, consequential, losss of profits or other dam
mages or
lia
abilities which may aris
se out of or result from
m any use made of this
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or contained therein."
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co
ontient aucune erreur. CNW Telbec ne peut être tenue responsab
ble de pertes ou profits
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écoulant directement, indirectement, accidentellement ou corrélattivement à l’utilisation de ce texte ou toute eerreur qu’il contiendraitt. »
1
FINAL TRAN
NSCRIPT
No
ovember 8, 20
013 — 10:00 a.m. E.T.
S
ShawCor Ltd. Third Quarte
er Results
CORPORAT
TE PARTICIP
PANTS Gary Love fficer ShawCor Ltd. — Chief FFinancial Off
Bill Buckley ShawCor Ltd. — Chief EExecutive Offficer CONFEREN
NCE CALL PA
ARTICIPANTSS Dana Benn
ner AltaCorp C
Capital — Analyst Sarah Hughes Cormark Seecurities Inc.. — Analyst Scott Tread
dwell TD Securitiies Inc. — An
nalyst Dan MacDonald al Markets —
— Analyst RBC Capita
"Though CNW Gro
oup has used commerrcially reasonable efforrts to produce this tran
nscript, it does not reppresent or warrant thatt this transcript
is error-free. CNW Group will not be resp
ponsible for any directt, indirect, incidental, special,
s
consequentiall, loss of profits or othe
er damages or
ay arise out of or resultt from any use made of
o this transcript or any
y error contained thereein."
liabilities which ma
T
ait fait tous les efforts possibles pour produire cet audioscrript, la société ne peutt affirmer ou garantir q
qu’il ne
contient aucune errreur. CNW Telbec ne peut être tenue respo
onsable de pertes ou profits,
p
responsabilitéss ou dommages causé
és par ou
découlant directem
ment, indirectement, ac
ccidentellement ou corrélativement à l’utilisa
ation de ce texte ou tooute erreur qu’il contie ndrait. »
2
FINAL TRAN
NSCRIPT
No
ovember 8, 20
013 — 10:00 a.m. E.T.
S
er Results
PRESENTA
ATION Operator Good mornin
G
ng. My name
e is Kirk and I will be youur conferencce Operator today. At th
his time, I would like
e to welcom
me everyone to the Shaw
wCor Ltd. Thi rd Quarter R
Results Confference Call.. All lines have
A
e been place
ed on mute to prevent any backgro
ound noise. After the sp
peakers' remarks, th
here will be a question‐aand‐answer session. If yyou’d like to ask a question during this time simply pre
ess *, then the numbe
er 1 on you
ur telephonee keypad. Iff you'd like to withdraaw your question press the # ke
ey. Thank yo
ou. Mr. Gary Lov
M
e, Chief Finaancial Officer, you may bbegin your conference. Gary Love — Chief Financial Office
er, ShawCor Ltd. Thank you, a
T
nd good mo
orning. Beforre we begin this morning's conferen
nce call, I wo
ould like to take a moment to
o remind alll listeners that today's conferencee call includ
des forward‐‐looking statementss that involvve estimatess, judgmentss, risks, and uncertaintiees that may cause actual results to differ materially from those pro
ojected. The complet
T
e text of ShawCor's statement on fforward‐loo
oking information is inclluded in Section 4 of the third
d quarter 20
013 earningss press releease. It is avvailable on SSEDAR, and on the Company'ss website at shawcor.com. I'll now turn iit over to Bill Buckley, Sh
hawCor's Chhief Executive Officer. Bill Buckley — Chief Exxecutive Officer, ShawCo
or Ltd. "Though CNW Gro
s
er damages or
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3
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NSCRIPT
No
ovember 8, 20
013 — 10:00 a.m. E.T.
S
er Results
Thank you, G
T
Gary, and thaank you, ladies and genttlemen, for participating in our con
nference call this mo
orning. Yesterday we
Y
e released o
our third quaarter 2013 ffinancial ressults, and I'm
m pleased to
o report that the Company con
ntinues to generate g
strong results with record
d revenue, rrecord EBITD
DA, and record net income all aachieved in tthe quarter. During D
the third t
quarter, our reven
nue reachedd a new record level o
of $526 million, an increase off 35 percentt over the th
hird quarter of 2012. Ouur EBITDA o
on a consolid
dated basis rreached $129 millio
on, and our net income
e was also improved byy 37 percentt over the p
prior year to
o a new quarterly rrecord level o
of 73 million
n or $1.21 pe
er share. We had exce
W
ellent executtion from all of our busiiness operattions, but ass has been tthe case all year, th
he key area o
of strength ccontinued to
o be our Asiia Pacific pip
pe coating o
operations. R
Revenue from Shaw
wCor's Asia Pacific Pipelin
ne segment businesses eexceeded $2205 million, and generatted very strong marrgins and operating inco
ome. On O this point, margins continue c
to exceed ourr bid estimaates, which are a resultt of the continued excellent project p
execcution on th
he Ichthys ggas export pipeline, an
nd on the C
Chevron Wheatston
ne flowlines,, and the smooth ramp u
up, in additioon, of the Ap
pache Julimaar project. I would also p
point out that we have n
now compleeted over 8 m
million perso
on hours of w
work on these proje
ects withoutt a serious HSE incident. These resullts reflect ou
ur commitment to an injjury and "Though CNW Gro
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No
ovember 8, 20
013 — 10:00 a.m. E.T.
S
er Results
incident‐free workplace, and to flawless exxecution folllowing the disciplines embedded
d in the ShawCor M
Managementt System. With W the reccord revenu
ue and the continued eexecution off the $400 million Ichtthys gas export pipe
eline projectt during the quarter, our backlog didd decline to $646 million from $778
8 million at the startt of the quarter. With th
he Ichthys gaas export pippeline projeect now nearring complettion, we are expectting Asia Paccific revenue
e and earnin
ngs to be suubstantially lower in the fourth quarter of this year. Looking longer term, tho
ough, the Co
ompany's biddding activity is currentlly extremelyy strong, nce in the po
otential for ggrowth beyond 2014. and this prrovides us with confiden
And I'll have A
more to sayy on this late
er in the calll, but first I'lll turn it bacck to Gary Lo
ove, our CFO, to pro
ovide you with other keyy details on the quarter.. Gary Love Thanks, Bill. W
T
We are reco
ording record
d revenue inn the third q
quarter of 20
013 of $526 million, up 35 perccent over th
he third quaarter of lastt year, and also up 15 percent from the immediately preceding quarter. Year Y
over ye
ear, the mosst significan
nt sources oof revenue ggrowth weree Asia Paciffic, with revenue in
ncreasing $1
121 million or o 144 perccent, and ouur North Am
merican Pipeeline segment, with revenue increasing $19
9 million or 12 percent.
"Though CNW Gro
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5
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No
ovember 8, 20
013 — 10:00 a.m. E.T.
S
er Results
On a consolid
O
dated basis, reported gross margin s in the thirrd quarter are 43.6 perccent, up 2.4 percen
ntage points from the prior p
year. The Pipeline segment grross margin in the quarrter was 44.4 perce
ent versus 43.1 4
percentt a year ago
o, while the Petrochemiical segment gross marrgin was 33.1 percent versus 28
8.5 percent aa year ago.
Now N
compared to the second quarter this yyear, the Pipeline segm
ment gross margin improved by 1.6 percentage poin
nts. This incrrease was aa result of th
he very stro
ong marginss in Asia Pacific, and
d an improve
ement in performance aat Socotherm
m and at Flexxpipe. The year‐ove
T
er‐year incre
ease in grosss profit of $668 million w
was partially offset by th
he $19.5 million increase in SG&
&A, which w
we are reporrting at $96..3 million th
his quarter vversus a year ago at $76.8 millio
on. The major factors in
n the SG&A increase werre the inclussion of Socottherm, which
h added $8.4 million of SG&A, combined w
with an incre
ease in persoonnel and in
ncentive com
mpensation costs of es‐related co
osts of $2.5 m
million. $2.9 million, and increased facilitie
The T Company's overall consolidated
c
d EBITDA forr the third q
quarter is $128.3 millio
on, for a consolidate
ed EBITDA m
margin of 24
4.4 percent. For the Pipeeline segmen
nt, the EBITD
DA margin w
was 27.8 percent co
ompared witth 25.9 percent in the se
econd quartter, while th
he Petrochem
mical and In
ndustrial segment EBITDA margin came in at 19.7 perce
ent versus 144.1 percent in the secon
nd quarter.
Depreciation
D
and amortization in the
e third quartter is $20.7 m
million. This compares w
with $13 million a year y
ago. An
nd that incre
ease is the result of acccelerated depreciation in Asia Paccific, the "Though CNW Gro
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er damages or
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6
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No
ovember 8, 20
013 — 10:00 a.m. E.T.
S
er Results
addition off depreciatio
on from the Socotherm acquisition, and the inccreased amo
ortization relating to intangible assets that w
was recognizzed on the SSocotherm a cquisition.
As A a result of o the additiion of long‐‐term debt tthat we incurred to complete the plan of arrangeme
ent transaction in Marcch and the reduction in cash balances, net finance cossts have increased tto $4.5 millio
on compared with finan
nce income oof $307,000 a year ago. During D
the third t
quarte
er 2013, the
e Company has recordeed an effective tax rate of 29 percent, w
which is consistent with tthe second q
quarter, but is substantiially higher tthan the rate a year ago, and iss also higher than the C
Canadian staatutory tax rrate of 27 p
percent. As w
was the case in the second quarter, the re
elatively high effective ttax rate is ddue to losses in certain jurisdictionss where the Compaany is unable
e to record aa tax benefit. Turning T
to cash flows during the
e third quaarter. Cash flow provid
ded by con
ntinuing operationss before changes in workking capital and deferreed revenue w
was $100 million, an increase of 35 percentt over $74 million m
a yeaar ago, and also improvved by 28 p
percent from
m $79 million
n in the second quaarter. The net chan
T
nge in working capital and deferredd revenue w
was a net cassh outflow o
of $95.3 million, an
nd this was entirely the
e result of the t $112 m
million reducction in defeerred reven
nue that occurred d
during the th
hird quarter. Cash C
flow ussed in investting activitie
es in the thiird quarter, excluding rreductions in
n short‐
term invesstments, wass $19 million
n, and this co
onsisted pri marily of capital expend
ditures on property, "Though CNW Gro
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7
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No
ovember 8, 20
013 — 10:00 a.m. E.T.
S
er Results
plant and equipmentt. The majo
or growth capital exppenditures in the third
d quarter included completion
n of our new
w DSG‐Canu
usa facility in
n Europe, thhe expansion of our reaal‐time radio
ography capacity, expenditures
e
s for the ne
ew Guardian
n pipe inspeection facilitties in Texaas, and finallly, field equipmentt capacity ad
dditions at Flexpipe. Cash flow pro
C
ovided by fin
nancing activvities in the third quarteer was $27.6
6 million. Sources of cash from financing acctivities include a $30.8
8 million inccrease in ban
nk debt, and
d $6.7 millio
on from the issuancce of common shares. TThe only sign
nificant use of cash wass the regularr quarterly d
dividend of $7.5 million. nded the quarter with caash and sho rt‐term inveestments of $
$111.4 millio
on. Finally, we en
mments on oour outlook.
I'll now turn iit back to Billl for his com
Bill Buckley Thank you, G
T
Gary. We noted in our p
press releasee that duringg the third q
quarter our backlog declined by b $130 milllion to $626
6 million at the end off the quarteer. Howeverr, the fact tthat the backlog de
eclined by on
nly $130 million while w
we generatedd quarterly revenue of $
$525 million
n speaks to the conttinuing stron
ng flow of sm
mall project orders throuughout our vvarious pipeeline businessses. The T reductio
on in backlogg, in fact, was w due to tthe continueed execution
n of the two
o major projects in
n the Asia Pacific P
regio
on. As of the end of thhe third quaarter, we have compleeted the Chevron Wheatstone W
trunkline project, p
and we are suubstantially complete o
on the Wheeatstone flowline prroject. "Though CNW Gro
s
er damages or
T
qu’il ne
p
és par ou
découlant directem
8
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NSCRIPT
No
ovember 8, 20
013 — 10:00 a.m. E.T.
S
er Results
With respect
W
to the Inpex Ichthys pro
oject, we haave completeed approxim
mately 90 percent of the $400 m
million gas e
export pipeliine, the GEP
P, but we'vee only just started production on th
he $100 million Ichtthys flowline
e project. W
With these tw
wo major prrojects ramp
ping down in
n the fourth quarter and being fully comple
ete by mid‐2
2014, we exp
pect that Assia Pacific reevenue will d
decrease by at least 50 percentt in 2014 verrsus 2013. With W this deccrease in mind, we are expecting tthat ShawCo
or's consolid
dated revenues and earnings w
will decrease
e in 2014 fro
om the reco
ord levels wee are on traack to reporrt this year. Beyond 2014, we're very optim
mistic regard
ding the Com
mpany's poteential for gro
owth. As A we indicaated in our press p
releasse, ShawCorr's bidding aactivity remaains very strrong, as evidenced by the valu
ue of outstaanding firm bids for prrojects that now exceeds $900 million. In addition to
o the outstaanding firm bids, we've
e provided bbudgetary eestimates fo
or projects tthat will involve pip
pe coating values v
that exceed e
$350
0 million, annd we are tracking further projectss with a potential vvalue of close
e to $1 billio
on. Many M
of the projects where we havve outstandding bids could start up
p production
n in late 2014 and e
early 2015, and this bodes well forr revenue grrowth in 2015. Should w
we be succeessful in securing th
his work, the
en the poten
ntial exists fo
or 2015 activvity to surpass the recorrd levels of 2
2013. In
n addition to
o the large p
project activity, we're reealizing stead
dy operation
nal improvement at Socotherm
m. During the
e third quartter, Socotherrm reportedd a significan
nt improvem
ment in perfo
ormance compared to the second quarter. We have
e now estabblished a neew manageement team
m at the "Though CNW Gro
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er damages or
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qu’il ne
p
és par ou
découlant directem
9
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No
ovember 8, 20
013 — 10:00 a.m. E.T.
S
er Results
Socotherm
m location in
n Channelvie
ew, Texas, and we accoomplished an
n importantt objective w
with the restart in the third quaarter of the P
Pozzallo, Itally facility aftter four yearrs of inactivitty. In
n the quarte
er, we succe
essfully com
mpleted a coomplex syntaactic polypro
opylene insttallation project for deployme
ent offshore
e West Africca. Althoug h it will take until thee end of 2014 for Socotherm
m to reach the level of profitabilitty of our B
Bredero Shaaw pipe coaating busineess, the improveme
ent program
m is well un
nderway an
nd will beneefit from th
he improvem
ment in Soccotherm profitability on a quartter‐over‐quaarter basis ovver the nextt five quarters. At A our otherr business units, u
I woulld highlight three initiaatives that w
will be catallysts for profit grow
wth. First iss the contin
nuing growtth at Flexpi pe, where our compossite spoolab
ble pipe products are gaining sh
hare in North America, LLatin Americca, and Australia. The success w
T
we're havingg with the ggeographic eexpansion off Flexpipe and the trem
mendous growth potential of th
his business was again d
demonstrateed, with Flexxpipe reportting record rrevenue in the third
d quarter. Second is ou
ur expansio
on of real‐tiime radiogrraphy techn
nology, or R
RTR, for pip
pe weld d third is thee ramping up
p of producttion at the two new inspection in the US land pipeline market. And
f
in the US, one
e located in
n the Eagle Ford area o
of East Texaas, and the second Guardian facilities located in Midland, Texas to servicce the growtth activity in the Permian Basin. Lastly, I would highlight our expectaation that thhe Company will be incrreasing its effforts to nd complete
e acquisitions of both re
elated tuck‐uunder busin
nesses, as well as new b
business identify an
"Though CNW Gro
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qu’il ne
p
és par ou
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No
ovember 8, 20
013 — 10:00 a.m. E.T.
S
er Results
platforms that expand
d ShawCor'ss breadth off products aand servicess that we b
bring to the energy industry. We have the
W
balance she
eet, the man
nagement, aand the busiiness system
ms to executte on an effective acquisition prrogram, and
d I expect thaat this will bbe an importtant complem
ment to our organic growth pro
ograms. And with tha
A
t, I'll turn it back to the Operator for questions. Kirk? Q&A Operator At A this time, I would like
e to remind
d everyone in order to aask a questiion, please press *, then the number 1 on your telephone keypad. And your firs
A
st question ccomes from the line of D
Dan MacDon
nald from RBC Capital M
Markets. Your line iss open. Your next qu
Y
estion come
es from the line of Danaa Benner fro
om AltaCorp Capital. You
ur line is open. Dana Benn
ner — AltaCo
orp Capital Morning, guy
M
ys. Bill Buckley Morning. M
"Though CNW Gro
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er damages or
T
qu’il ne
p
és par ou
découlant directem
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No
ovember 8, 20
013 — 10:00 a.m. E.T.
S
er Results
Gary Love Morning, Dan
M
na. Dana Benn
ner I wanted to sstart with th
he—I mean iit's the quarrterly questiion, but the individual p
projects, the more—
—the larger ones that arre out there
e and maybee in nearer‐tterm focus for when theey could get awarde
ed, which on
nes those maay be, say, in
n the next si x months?
Bill Buckley Sure, Dana. SSome of the
e project names that arre likely to cconvert into
o orders in tthe next hs would be projects like
e the Moho Nord projecct, off West Africa. Some of the others that few month
are close in, there's th
he IDD proje
ect, which we've w
talkedd about in the past. Negotiations ccontinue between o
our clients and the Gove
ernment of Indonesia. W
We've been asked if wee would extend our bid, and w
we've agreed to do that, so that will likely maniffest itself in
n an award w
within, let's say, the next six mo
onths. That m
might be a liittle farther out, but it iss one of the larger ones.. Some of the other projeccts, there's ssort of a ran ge of projeccts that we h
have with th
he major ompanies in
n Western Canada. C
In one o of the two cases we're covered under aa frame pipeline co
agreementt, so there's a series of relatively siignificant prrojects that will be awarded and arre being awarded o
on a monthlyy basis. Some of the other largerr projects that we're foccused on in tthe EMAR reegion would include Deniz Phase 2 project, w
which is nearing, I woul d say, the final negotiation stage. A
And the the Shah D
"Though CNW Gro
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er damages or
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és par ou
découlant directem
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No
ovember 8, 20
013 — 10:00 a.m. E.T.
S
er Results
one other project is th
he South Caucasus proje
ect in the Caaspian regio
on. Those arre both BP p
projects, and I would think it's—it would be b likely thaat there'll bbe awards on one or bo
oth those, ccertainly within a sixx‐month tim
me frame. One O of the other o
projeccts that we'vve gone thrrough PQTs on, a qualiffication thatt's quite complex because of the coating and a then alsso because of the heatt treatment that we're actually going to giive to the stteel pipe, is the South SStream projeect where w
we are qualiffied now, an
nd that's moving to the final bidding b
stage
e. And if yo
ou've been following th
hat in the p
press, Gazprrom has approvals from all of tthe countrie
es involved in that projeect, and deccided to go to the EU laast, and have been in discussions with Brusssels on thatt project. So that's looking quite possitive as well. I think there is a good probability, lett's say probaability, that tthat will be awarded within the next six mo
onths, and itt is a large p
project. So th
hat gives you a little bit of flavour o
on some of tthe day‐
to‐day projjects and some of the laarger projectts that are likkely to be aw
warded in th
hat time fram
me. Dana Benn
ner Thanks. The—
T
—clearly the
e dynamic fo
or investors right now iis calibratingg when the backlog stops fallin
ng and then when it starrts to accele
erate. I noticced in your d
disclosure yo
ou talked ab
bout the probabilityy for reacceleration of backlog b
in ‘014. Are wee likely to ssee it in terms of the w
way you manage in
nvestor expe
ectations? Are A we likelyy to see it dip a little bit further in the coming two quarters be
efore it reacccelerates? W
Would that b
be a reasonaable way to ccalibrate this? "Though CNW Gro
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er damages or
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qu’il ne
p
és par ou
découlant directem
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No
ovember 8, 20
013 — 10:00 a.m. E.T.
S
er Results
Bill Buckley Yeah. Y
I thinkk that's exacctly right. We W would sa y you should expect peerhaps a dip
p in the backlog in the first hallf of ‘14, and
d then stren
ngthening in the second
d half of ‘14 to achieve tthe kind of growth numbers thaat we expectt in ‘15. ner Dana Benn
Right. Just tw
R
wo more que
estions. I reccall about a year ago yo
our belief waas that you ffelt that $150 millio
on to $160 million in Asia A Pac wass probably yyour headroom, and yo
ou'd be blow
wing the doors off tthe factory w
with activityy to hit that, and here w
we are at 205. What doees this tell u
us about ShawCor generally? Orr that region
n in particulaar? Gary Love Well, I believ
W
ve we are re
eplacing the doors as wee speak. It w
was an extraaordinary qu
uarter. It was a true
e testamentt to the excceptional effforts of the managemeent and the employees in that region, and
d the work tthat they've
e done to op
perate thosee two facilitiies, the Kabil, Indonesiaa facility and the Ku
uantan, Malaysia facilityy, at levels o
of efficiencyy and perforrmance that I think are beyond anything th
hat we could
d have hoped for. So they've acccomplished, I think, an incredible feeat to have executed the work that they've executed to t date with
h the operattional perforrmance, andd particularlly as Bill allu
uded to earlier, the HSE perforrmance has been excep
ptional. So yyes it is, Danna, you're qu
uite right. Itt's certainly beyond what we had thought w
was possible
e. "Though CNW Gro
s
er damages or
T
qu’il ne
p
és par ou
découlant directem
14
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NSCRIPT
No
ovember 8, 20
013 — 10:00 a.m. E.T.
S
er Results
But I did say,
B
and I know Bill has also
o echoed thiis point in th
he past, thatt those plantts won't stop. If we
e were able tto run the w
work and the
e pipe was aavailable, wee were goingg to do the coating. And that's precisely wh
hat's happen
ned. The result is we've obviously pu
ulled more o
of the work fforward than we haad expected
d would happen, but I th
hink that's thhe right thin
ng to do from an efficiency and from a profitability perrspective. An
nd that's pre
ecisely what they've don
ne. Dana Benn
ner Great. G
Just one o final que
estion. Reco
ognizing thatt you've beeen looking h
hard at a vaariety of M&A oppo
ortunities, as evidenced
d by, I guesss, the deplooyment of m
more specific resourcess in that area, I just wonder if yyou can mayybe provide aa bit more ccolour as to the range of options yo
ou might look at without—I'm sure you don't want to be specific, b ut any colou
ur would be great. Bill Buckley Dana, D
we do
on't want to be specific about the pparticular co
ompanies orr description
n of the companiess, but I can te
ell you that the funnel iss very activee right now. And we're in
n discussion
ns with a number off parties and
d the colour that I can giive you is I w
would expecct that we'll have some positive announcem
ments in thiss regard with
hin the next six months for certain.
Dana Benn
ner Okay. I'll turn
O
n it back. Thaank you. Operator "Though CNW Gro
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ovember 8, 20
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Your Y
next qu
uestion comes from the
e line of Sarrah Hughes from Cormaark Securitiees. Your line is open
n. Sarah Hughes — Corm
mark Securities Inc. Hi, guys. You
H
had provide
ed some collour in term s of what yo
ou think abo
out revenue in 2014 to some de
egree, and I'm just tryingg to get an idea if you caan give us so
ome colour o
on potentiall margin performan
nce, just give
en the strenggth we saw tthis year on the back of the large co
ontracts? Gary Love Yeah. Sarah, Y
the key elem
ment to marrgins is the ttransition off activity in A
Asia Pacific, and it is very eviden
nt, and I thin
nk we've bee
en quite ope
en on this pooint that thee profitabilitty in Asia Paccific this year has been b
very sttrong, both at a gross margin level and then
n in particullar at an op
perating income or EBITDA leve
el. down in So we will haave a transition, that's absolutely tthe case. Reevenue will be coming d
Asia Pacific. We've in
ndicated thaat in our prress release and in our commentss. And we will see of revenue iin some of o
our other arreas, but I t hink on a to
otal compan
ny mix, prod
duct mix increases o
perspective, we will have h
some catching up
p to do. Andd so there will be som
me impact o
on gross margin. I think that'ss inescapab
ble as the Asia A
Pacific revenue ccomes down
n because it is so incrementaal to our grross margin this year. I think beyoond 2014, w
we see the potential fo
or gross margins moving m
back into the 20
013 levels. Again, A
it'll deepend, obviously, on th
he projects tthat we book and tthe execution of those p
projects. "Though CNW Gro
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The other fac
T
ctor on grosss margins, aagain, is we 're going to be transitio
oning operattionally. We will haave personne
el who we w
will be redep
ploying into other areass. So there w
will be somee margin impacts ass we go thro
ough that trransition, pro
obably in thhe early to m
mid‐part of 2014. I thin
nk that's something that should
d be expected. So the net re
esult is, I thiink it will be
e difficult too match the margin leveels that we have to date achie
eved in 2013, and will ultimately report r
for aall of 2013, but as we move throu
ugh the transition aand then particularly as we start to move into 22015, I thinkk the potenttial is there tto meet and exceed
d our curren
nt levels. Sarah Hughes And A then, Bill, what perrcentage of your bid boook do you think would
d‐‐this time, do you think would go into pro
oduction in 2015? Bill Buckley Of the bid bo
O
ook, of the firm bid bookk, a very highh percentagee would be eexecuted in ‘15. Sarah Hughes Okay. O
And so
o just so I heard you co
orrectly. Youu think theree is a poten
ntial, depend
ding on, obviously, timing, but if things wo
ork out right that 2015 ccould be high
her than 201
13 on a proffitability basis? Bill Buckley Yeah. Y
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ovember 8, 20
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Gary Love The potentia
T
l exists. Bill Buckley l exists for th
The potentia
T
hat with what we're working on at tthe momentt. Sarah Hughes And would m
A
most of that sstrength be coming from
m the EMAR
R region? Likee is that goin
ng to be the big swiing area for you to get th
here in 2015
5? Bill Buckley Well, I think W
that's correct, and more generally what we're going to seee is the focu
us is not going to be
e in one area only in Asia Pacific, bu
ut it's going to be in EM
MAR, and it'ss also going to be in the Americcas. Sarah Hughes And A would you y need an
n acquisition
n to be able to do that in 2015? O
Or do you th
hink you could do th
hat on the cu
urrent busin
ness in the biid book? Bill Buckley Sarah, with the work we're w
bidding, it is posssible for uss to do it w
with strictly organic projects with no lift fro
om acquisitio
on. It is posssible for thatt. Sarah Hughes Okay. Okay. T
O
That's it for me. Thank yyou. "Though CNW Gro
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ovember 8, 20
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Operator Once again, i
O
f you would
d like to ask a question, please presss *, then thee number 1 on your telephone keypad. And A your nexxt question comes from
m the line off Scott Treadwell from TD Securitiees. Your line is open
n. Scott Tread
dwell — TD Securities In
nc. Thanks. Good
T
d morning, gguys. Bill Buckley Good mornin
G
ng. Scott Tread
dwell Maybe turn t
M
to the other side a little bit there. Thhe Petrochemical and In
ndustrial group, nice sequential step up in m
margin. You made note in the MD&A about som
me G&A costts for relocating the Canusa faccility. I'm not sure if you
u could discllose kind of what that G
G&A numbeer might havve been, but where do you thin
nk the margin sort of run
ns for that ggroup going forward? W
Was it sort off peaky? orward? Or is this kind of relativvely sustainaable going fo
Gary Love Well, the—th
W
he third quarter operatin
ng margin inn the Petrochemical and
d Industrial ssegment was quite extraordinarry at 18, 18..3 percent, aand I think I also mentio
oned the EBITDA margin
n in that w 19.7 percent. And I don't thinkk that segm
ment's been at that leveel before. M
Maybe—
segment was "Though CNW Gro
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ovember 8, 20
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S
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yeah, it probably was there back in 2011. We
e had one q uarter, again, at that saame level, 19.7, but what really benefited us in the third quarte
er was we had a reasonably significant projeect that involved so
ome very higgh specificattion nuclearr power cablle, and we m
manufactureed and shipp
ped that out in the tthird quarter and it was high margin
n. It was veryy high margin work, and
d there will b
be more of that wo
ork in the future, partticularly if OPG O
move forward with the refu
urbishment plan in Darlington, but it's nott something that we sho
ould expect on a quarterly basis. It'lll happen fro
om time to time, bu
ut it's not som
mething thaat's going to happen eveery quarter.
So that segm
ment probably should be back in the 15‐ish percent EB
BITDA marggin level nd a half. moving forrward. That'ss where theyy've been ovver the last, say, year an
Scott Tread
dwell more broadly. Given you've got Okay. Perfect
O
t. I guess maaybe to ask D
Dana's questtion a little m
sort of $90
00 million in the bid boo
ok; if you sorrt of just brooke it down into a perceentage on yo
our best guess, firstt half, second
d half of 201
14, how do yyou think thaat breaks do
own in termss of awards?? Gary Love had, and I th
hink you I don't know that I can even do that. It's—the chhallenge wee've always h
und and theey're—it's veery, very diffficult to preedict. So know this, is that conttract awardss move arou
any attemp
pts to predicct the timingg of award o
of that work would be a pure guess on my part. It truly would be. dwell Scott Tread
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ovember 8, 20
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S
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Okay. O
But it's probably fair f to say that t
it's weiighted to th
he back halff from sort of what you'd... Gary Love No, N no. I thiink Bill in answer to th
he previous question, B
Bill did indicate that th
here’s a chance, a p
probability tthat some of the larger projects in tthat total off 900 million
n could be aawarded in the nexxt, say, three
e quarters, so between
n now and tthe middle of 2014. W
We do see th
hat as a distinct possibility. Can
n we guaranttee it? No.
Scott Tread
dwell Okay. O
One other o
questio
on on the bid b book, annd again I'm
m not sure w
what level o
of detail you'd wan
nt to go into here. Of that bid bo
ook, roughlyy how much of that p
project amount the engineering solution has h been de
ecided on by b the custoomer, i.e. if f it's coated steel riserss versus flexible risers? And ho
ow much of that there'ss still a deci sion about w
ng go, in which way tthey're goin
addition to
o who they're going to use? Bill Buckley Yeah. Perhap
Y
ps I could answer that. O
On the firm bid book, tyypically we'vve gone thro
ough the alternative
es with the client and we're now on the ba se and finaal case, and
d there's veery little likelihood of the engineering con
nfiguration changing c
froom rigids to
o flexibles att that stagee. Those decisions w
were made e
earlier. Scott Tread
dwell "Though CNW Gro
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ovember 8, 20
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S
er Results
Okay. O
Perfect. That's exaactly want I wanted to hear. Turning to Flexpipe. Just waanted to maybe gett an update. I know therre's a long te
est for approoval with the Alberta go
overnment. Roughly where are you in terms of being co
ommercial w
with the large diameter vvariants in FFlexpipe? Bill Buckley Yeah. We co
Y
ntinue to m
make good p
progress the re. Two weeeks ago we did a cold w
weather installation
n and hydro test of the product north of Calgaary which weent very succcessfully. That also proved outt the jointingg system in outdoor con
nditions beccause I can tell you on th
hat day it was quite cold. oing to have
e the producct out for lim
mercial releaase early neext year. So we are go
mited comm
f
trials, which w
are u nderway no
ow, and as yyou know th
here's a And it will be going through its final 10,000 hour test, whiich takes so
ome time to
o qualify in Alberta. Pro
obably we'll see a com
mmercial e United States before C
Canada, but that will be happening tthrough release as a result of aall that in the
next year. But progress is good. dwell Scott Tread
And on track A
ort of earlier plans? with your so
Bill Buckley Yes. Y
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ovember 8, 20
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S
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Scott Tread
dwell Okay. O
Perfecct. The last thing, and I guess it maybe touches on Gaary's commeents on margins. G
Given that th
he Asia Pac rrevenue base
e is coming down, obvio
ously I'm not sure if guid
dance is the right adjective a
he
ere or not, but b is there
e a thought about do yyou shut do
own some o
of these facilities? You Y talked about a
movin
ng some staaff around. Is there anyy sort of onee‐time costss that at least at this point you kind of see coming? I ge
et the sensee you're thinking about tthe first halff of next year. Any ffurther colour there lesss about volu
ume‐related margins, bu
ut more abo
out sort of one‐time stuff? Gary Love Well, no. Cer
W
rtainly there won't be an
ny shutteringg of either o
of the two plants in Asiaa Pacific. Those two plants are ggoing to be o
operating daay in, day ouut for foreveer. What we''re doing, though, is ucing the maanning levells. And that will happenn over time because it'ss not as if th
he work we're redu
suddenly stops. It's mo
ore of a succcessive sort o
of pulling baack of effortss. And A so when
n you're in a ramping‐down modee there are some—theere are timees when there could
d be some impacts on m
margins, and
d so that waas really whaat I was gettting at in answering the previous question that as we ggo through tthe first halff of 2014, w
we're still goiing to be fin
nishing a lot of the w
work, but we
e're also going to be red
deploying soome of the p
personnel. And so that w
will have some marggin impacts. "Though CNW Gro
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No
ovember 8, 20
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Scott Tread
dwell Okay. My las
O
t one on EM
MAR. Dana again had meentioned thaat you had ssort of thougght Asia Pac was kiind of $150 million a quarter, blow
wing the dooors off. Is th
here an equ
uivalent num
mber for EMAR once
e the Socoth
herm plant iss kind of up and runningg at full speeed? Gary Love Yeah. That's Y
a good quesstion. I don'tt know that—
—of course we were wrrong on the original estimates aas it related to Asia Paciific, so chancces are I'll heesitate to give you a firm
m number. B
Basically in the region we have
e significant capacity in a number oof areas. Obvviously Nortthern Europe we've got the tw
wo big plantss, one in No
orway, one in Scotland,, and there'ss obviously a lot of cap
pacity in those two facilities. Th
here's easily a couple hu
undred millioon dollars peer annum caapacity in those two ectively. plants colle
We have our
W
r very imporrtant facility in the Midddle East in th
he Emirates at Ras Al Kh
haimah. That facility, with some
e additional if we neede
ed to add a l ittle bit of caapacity we ccould easily do that. b a very siignificant op
peration. An
nd then, of course, wee have the SSocotherm P
That can be Pozzallo facility, wh
hich has a range of capabilities that encompassees virtually aall of what w
we do in oil and gas pipe coating: internall coating, external antii‐corrosion ccoating, con
ncrete weigght coating, and of course ourr deepwater flow assurance insulatio
on coating.
"Though CNW Gro
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ovember 8, 20
013 — 10:00 a.m. E.T.
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That plant ca
T
an do all thaat work, and
d has lines tthat are cap
pable of doin
ng all that w
work. So we're not—
—I don't believe we're ggoing to be capacity connstrained in the region. I think we need to book some
e of the big orders, and then we're going to exxecute them
m in a range of facilities that we already havve in place. Scott Tread
dwell Okay. Perfect
O
t. Knowing yyou're not caapacity consstrained is prrobably the best answerr I could hope for. TThanks very much. I will turn it back,, guys. Operator Once again, i
O
d like to ask a question, please presss *, then thee number 1 on your f you would
telephone keypad. And your nex
A
xt question ccomes from the line of D
Dan MacDon
nald from RBC Capital M
Markets. Your line iss open. Dan MacDonald — RBC Capital Maarkets Hi. Good mor
H
rning guys. Bill Buckley Good mornin
G
ng. Dan MacDonald Ju
ust maybe ttrying to loo
ok at the maargin questioon in a diffeerent way, aand not to b
belabour the point, but how wo
ould you desscribe the m
margins that are in your backlog now in comparison to "Though CNW Gro
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ovember 8, 20
013 — 10:00 a.m. E.T.
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kind of wh
hat you've gone through
h at year‐en
nd ’14? Is thhere a big diifference beetween whatt was in that backlo
og for the larrger projectss versus whaat's in there now from a margin perspective? Gary Love No, within th
N
he backlog to
oday, in the $646 millioon backlog, is representaative of whaat we've done this yyear. Absolutely. Dan MacDonald Okay. O
And th
hen just loo
oking at Asiaa Pacific, kinnd of exclud
ding the tw
wo big projects that you've bee
en working o
on, how wou
uld you charracterize thee base busin
ness in that region? Is itt kind of up from where w
it wass before yo
ou started th
hese large pprojects? Orr has it beeen trending kind of flattish? Gary Love No, N I would say it's definitely up, and I thinkk the—prob
bably the keey change, and it's coincident,, I guess, witth the fact th
hat we've be
een executinng the big Australian LNG work, butt what is happening in Asia Paccific is there
e is a deepw
water insulattion, pipe co
oating insulation markeet that's emerging aas deepwate
er oil and gass developme
ent begins inn that region
n. And A that's so
omething ne
ew to the re
egion. The rregion has n
not had deeepwater oil and gas developme
ent to speakk of in the paast. So whatt we expect in the futurre is that a lo
ot of the traaditional work that we do in So
outheast Asia, a lot of the t gas trannsmission wo
ork in Malayysia, in Thaiiland, in a
other areas, that’’ll all contin
nue, but thhere’s this emerging o
opportunity around Vietnam, and "Though CNW Gro
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No
ovember 8, 20
013 — 10:00 a.m. E.T.
S
er Results
deepwaterr developme
ent. And of ccourse, what we bring tto that is thee highly speecialized proprietary flow assurance insulattion coatingg system. So
o we think tthat's going to be additive to whaat we've traditionally done in th
he region. Dan MacDonald Okay. And th
O
hen just lookking at Flexpipe again. H ow has the internationaal opportuniity been evolving fo
or that produ
uct post the one big sale
e that you haad earlier? Bill Buckley Two areas of
T
f focus, Latin
n America an
nd Australia;; maybe I'll sstart with Australia. Wee're very active in the t Cooper Basin, with
h a major gas producerr in that reegion. And w
we are, I th
hink we commente
ed before, th
he enabling technology for certain pportions of that field. TThey just can
nnot get the weldin
ng crews, insspection crews, et ceterra to the rig ht‐of‐way. A
And our products, which
h allows them to ro
oll it out in llengths of 1 kilometre tto 2 kilomettres and havve a small crew put on a crimp fitting and then go another 1 or 2
2 kilometress to very rem
mote well siites and testt sites, are aallowing them to exxecute. So the busin
ness there has h gone from one prooject or one program trial to now
w being adopted ass the standard execution
n method, so that businness is increaasing. We'ree going to bee adding staff. Flexp
pipe is adding support an
nd sales stafff in Australi a to the base that alread
dy exists theere. And of course, we're looking at over the t next two
o or three yyears wheree we might manufacturee in the Asia Pacificc region. "Though CNW Gro
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No
ovember 8, 20
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Turning to La
T
atin Americaa. Business iss being led aat the moment by Veneezuela. Workking out the contractual arranggements to ensure payments, of coourse, is very importan
nt on that business, and we haave accomplished that. Our product's being ussed, a speciaal version off it, which u
uses our We have an FlexCord technology. t
a anti‐buoyyant versionn that's being used on
n the wells in Lake Maracaibo
o, where the
e product ju
ust actually sinks s
to thee lake floor, and operattes in 20 to 30‐foot water deptths. So that's a little bit off a productt addition w
with an app
plication in that counttry, and application
ns that we'll be able to execute on
n elsewhere in the world. So those are the two major areas, and in both case
es the trend of business is up, is incrreasing. Dan MacDonald Can C
you give us a sense of how much interrnational saales represeented of Fleexpipe's business in
n Q3? Bill Buckley Yeah. I could
Y
characterize it as still b
being small. Where mosst of our growth is coming from is the US market, m
and
d US growth
h is strong, the Canadiaan market iss strong, an
nd the intern
national business is coming off a small base
e, but with a very high g rowth rate.
Gary Love "Though CNW Gro
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No
ovember 8, 20
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I think by next year, 2014, we should see very meaningful contributio
on from internation
nal sales; could be hittin
ng as much as even 10 to 15 perceent of our to
otal compossite pipe sales will come from outside of No
orth Americaa. Dan MacDonald Okay. Great. O
That's all I h
had. Thank you. Operator Your next qu
Y
estion come
es from the line of Danaa Benner fro
om AltaCorp Capital. You
ur line is open. ner Dana Benn
Yeah. Thanks
Y
s. Just wante
ed to follow up. I wondeer if you, and
d maybe Stevve's on the lline, but wondered if you could maybe com
mment on the apprenticeeship of Stevve Orr. Bill Buckley Well, W
Steve Orr, O as we announced, a
started withh the Comp
pany in earlyy September. Steve and I and o
others have been tourin
ng our variou
us operationns in Asia Pacific, Europee, Russia, an
nd in the Americas, as well as w
working on e
establishing the strategic plan for th
he Companyy for the nexxt three years and ttaking that tto the Board. So I would saay Steve's be
een busy. An
nd early in thhe New Yearr we would w
want to get him out to meet the investor co
ommunity. ner Dana Benn
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No
ovember 8, 20
013 — 10:00 a.m. E.T.
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Right. Does h
R
he look like aa pipe coaterr at heart? Bill Buckley Well, W
the background on him, serio
ously, is he comes from
m a major—
—one of the leading energy serrvices compaanies. He wo
orked aroun
nd the worldd in a varietyy of roles. H
He knows this space very well. He knows how to manaage growth. He knows hhow to manaage technolo
ogy. He kno
ows how to manage
e acquisitionss. So he's a ggreat additio
on to the teaam. Dana Benn
ner I'm sure he iss. Thank you. Operator We have no f
W
further quesstions at thiss time. I'll tu rn the call back over to tthe presenteers. Bill Buckley Okay. O
Thank you, Kirk. I'd I just like to take thiss opportunity to thank everyone ffor your participatio
on in the calll this quarte
er, and we lo
ook forward to giving yo
ou an updatee at the end
d of next quarter. Th
hank you. Operator This conclude
T
es today's co
onference caall. You may now disconnect. *****
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30

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