Horizon North Logistics Inc. (“Horizon North” or the “Corporation”) reported its financial and operating results for the three months ended March 31, 2017 and 2016.
First Quarter Highlights
- On April 12, 2017, Horizon North announced the award of a $62.0 million three year contract providing camp services to a mining project in Nunavut;
- The Modular Solutions backlog of firm projects closed the quarter at $32.4 million compared to zero in Q1 2016 and $10.7 million in Q4 2016. The backlog represents contracted projects which will be executed in the next twelve months;
- Horizon North settled outstanding insurance claims related to the losses and damage experienced in the May 2016 Fort McMurray, Alberta wildfires. The total settlement was $34.1 million with the majority related to lost equipment and restoration of damaged equipment. An advance payment of $15.0 million was received early in Q4 2016 with the remainder received in Q1 2017;
- Results for Q1 2017, excluding the insurance settlement, were as expected but below Q1 2016. Lower activity levels in the Camps and Catering operations were only partially offset by stronger Q1 2017 matting performance;
- Effective May 3, 2017, the Corporation reached an agreement with its lenders to make certain amendments to its credit facility. The facility has been extended for an additional year, now expiring March 31, 2019. The amended facility includes a more flexible covenant package to accommodate additional working capital requirements related to the Modular Solutions business model. Management elected to reduce borrowing capacity as a cost saving measure to lower costs associated with unused borrowing capacity; and
- On January 1, 2017, Horizon North realigned its reportable segments reflecting the formalization of its diversification strategy which bifurcated the business base into two distinct business units. The Industrial Services business unit consists of the legacy Camps and Catering and Rentals and Logistics operations serving the Corporation’s traditional end markets. The Modular Solutions business unit consists of the supply of permanent modular structures serving both commercial and residential end markets across Canada.
First Quarter Financial Summary
- See Non-GAAP measures definitions within the press release for details.
As of January 1, 2017, the Corporation updated its reportable segments to more accurately reflect how management evaluates operations. The segment realignment is a result of a diversification strategy including the bifurcation of Horizon North’s business base into two distinct streams of product and service offerings. This change is intended to help reduce reliance on the resource and energy sectors and provide an additional avenue of growth.
The Industrial Services business unit contains Horizon North’s legacy operations which are primarily resource sector reliant and include: camp rental and catering operations, manufacturing sales, relocatable structures rentals, access mat rentals, other equipment rentals, used equipment sales, and the associated service and transport within each operation.
The Modular Solutions business unit consists of production, transportation and installation of commercial, retail, and residential modular buildings such as; hotels, office space, affordable housing complexes, seniors centres, multifamily housing projects and single family residences.
Throughout the following discussion, all 2016 comparatives have been realigned to reflect the updated business units and segments to ensure meaningful comparison.
Impact of Insurance proceeds and normalized comparisons
In early May of 2016, wildfires swept through the Fort McMurray, Alberta, area heavily impacting Horizon North’s operations. The fire completely destroyed the Blacksand Executive Lodge, caused varying degrees of smoke damage to nearby camps and required most operations to cease as a result of evacuation orders.
Since the fire, Horizon North has worked closely with its insurers finalizing a settlement in Q1 2017. Of the $34.1 million in proceeds received, $30.4 million was attributed to the assets disposed of in 2016. Anticipated proceeds equal to net book value were recognized in 2016 and the remaining proceeds received generated a $12.1 million gain in 2017. Business interruption proceeds of $1.0 million were recorded in 2017, with the balance of proceeds offsetting costs incurred related to the asset claim.
The impact of the settlement on the Q1 2017 results is outlined in the table below followed by the comparison to Q1 2016:
- Normalized to exclude insurance settlement received in Q1 2017.
To ensure a meaningful discussion and comparison of the Q1 2017 operational results to Q1 2016, the Q1 2017 operational results throughout this document exclude the impact of the insurance settlement where noted.
First Quarter Overview
Excluding the insurance settlement, the results for Q1 2017 were lower across all financial measures compared to Q1 2016. Lower demand in the Camps & Catering operations drove the majority of lower Q1 2017 revenues compared to Q1 2016. The majority of the decrease in demand was attributable to several significant contracts which expired in the second half of 2016 when the associated projects they were supporting were completed. Softer Camps & Catering revenues were partially offset by strength in the Matting operations and the addition of Modular Solutions revenues.
Revenues from Camps & Catering operations for Q1 2017 decreased compared to Q1 2016 mainly as a result of several significant contracts which expired mid – 2016 as the associated projects they were supporting were completed. As these contracts completed and ramped down throughout 2016, refilling the backlog was particularly challenging given ongoing low levels of project spending and capital investment by our customers which limited the number and scope of bidding opportunities. Decreased pricing and lower large camp activity levels in Q1 2017 drove revenue per average available bed (“RevPAAB”) and utilization of $43 and 50% respectively compared to $66 and 64% in Q1 2016.
Revenues from the Rentals and Logistics operations for Q1 2017 increased compared to Q1 2016 as a result of higher mat sales and stronger transport and installation activity related to the sales and higher rental activity. The increase in activity was driven by generally strong drilling activity in the Grande Prairie, Alberta, area combined with very wet ground conditions. Although mat fleet utilization was significantly higher in Q1 2017 compared to Q1 2016, lower revenue per mat rental day offset the utilization increase. Utilization and pricing of the mat rental fleet was 50% and $0.88 per mat rental day respectively, compared to 28% and $1.58 in Q1 2016. Relocatable structures continued to experience decreased demand with utilization of 35% in Q1 2017 compared to 38% in Q1 2016.
There are no comparatives for Modular Solutions operations as this product offering did not materially commence until Q1 2017. Revenues in Q1 2017 consisted primarily of the production and installation of an 85 room hotel in Revelstoke, British Columbia, and several residential housing projects.
Normalized EBITDAS in Q1 2017 decreased compared to Q1 2016 mainly as a result of the significantly lower activity levels and downward pressure on pricing compared to Q1 2016 in Industrial Services. Normalized operating loss and loss per share for Q1 2017 increased compared to Q1 2016 due to the reduced revenues and EBITDAS discussed above. Depreciation and amortization for Q1 2017 decreased compared to Q1 2016 as camp setup costs became fully depreciated throughout the year and due to the disposal of the Blacksand Executive Lodge assets.
Horizon North continues to maintain a strong focus on managing the Statement of Financial Position through monitoring working capital and managing a reduced capital program. Total loans and borrowings remained relatively consistent at the end of each comparative quarter at $70.8 million for Q1 2017 compared to $70.1 million for Q1 2016. As a result of the decreased trailing twelve month EBITDAS, Horizon North’s relative leverage increased with a Debt to trailing twelve month EBITDAS ratio at March 31, 2017 of 2.84:1.00 compared to 1.51:1.00 at March 31, 2016.
Horizon North announced today that its Board of Directors has declared a dividend for the second quarter of 2017 at $0.02 per share. The dividend is payable to shareholders of record at the close of business on June 30, 2017 to be paid on July 14, 2017. The Board of Directors regularly monitors the strength of the Statement of Financial Position, cash from operations and capital requirements to ensure the overall sustainability of Horizon North is not compromised. The dividends will be eligible dividends for Canadian tax purposes.
For the three months ended March 31, 2017, capital spending was $5.0 million compared to $7.5 million in the same period of 2016 as a result of a focused and disciplined 2017 capital program. Capital spending in Q1 2017 was mainly focused on fulfilling land improvement commitments related to the Kitimat, British Columbia, property in preparation for future development and matting to supplement the mat rental fleet.
Management evaluates and manages its capital spending plans, taking into account proceeds from the sale of property, plant and equipment, resulting in net proceeds from disposals for the three months ended March 31, 2017 of $9.6 million compared to $3.8 million net capital spending for the same period of 2016. The net proceeds in Q1 2017 related to the insurance claim for the loss of the Blacksand Executive Lodge.
Horizon North does not currently have any material capital commitments associated with contracts to supply equipment or to purchase property, plant and equipment. Capital spending was funded primarily from cash from operations and the credit facility.
Although there is increasing optimism with oil prices being relatively stable in the $45 – $55 range, Horizon North expects pricing of its services to lag any improvement to utilization and anticipates results to remain relatively flat for the remainder of the year. 2017 will continue to be focused on cost reduction and efficiency initiatives across all operations to maintain and improve margins including assessing Horizon North’s portfolio of assets to ensure a focus on core business lines.
The outlook for Modular Solutions is encouraging, closing the quarter with a firm project backlog of $32.4 million, establishing a key distribution relationship in the Fort McMurray, Alberta area and being designated an official Holmes Approved Homes builder. For the remainder of the year there is strong line of sight to multiple commercial projects which are expected to convert into firm backlog and achieve the $40 to $60 million 2017 revenue expectation previously discussed. As the backlog continues to build through the second half of 2017, we anticipate production planning and plant efficiencies will drive a more stable revenue stream. As a result of being in the ramp up phase, infrastructure costs related to the design and technical activities have preceded revenue; however, moving into Q4 2017, Modular Solutions is expected to be a positive contributor as the backlog progresses to production and installation.
The strength of the Statement of Financial Position is a key priority and Horizon North will continue to closely manage debt levels and working capital. Focus will be on maintaining a manageable leverage position and to balance cash outflow with cash inflow through reducing debt, managing working capital and minimizing capital spending. As well, revised covenants in the recently amended credit facility will provide additional ongoing working capital flexibility and, as part of our cost reduction efforts, management elected to decrease borrowing capacity from $200.0 million to $150.0 million to reduce costs associated with unused borrowing capacity.
A copy of the Corporation’s Condensed Consolidated Interim Financial Statements for the three months ended March 31, 2017 and related Management’s Discussion and Analysis have been filed with the Canadian securities regulatory authorities and is available on SEDAR at www.sedar.com and www.horizonnorth.ca. Unless otherwise indicated, the consolidated financial statements have been prepared in accordance with International Financial Reporting Standards and the reporting currency is in Canadian dollars.
Horizon North will host a conference call and webcast to begin promptly at 9:00 a.m. MT (11:00 a.m. ET) on – May 4, 2017 to discuss Horizon North’s first quarter results.
To access the conference call by telephone the conference call dial in number is 1-888-231-8191
An archived recording of the conference call will be available approximately two hours after completion of the call until May 11, 2017 by dialing 1-403-451-9481 or 1-855-859-2056 – Passcode: 9986447.
Caution Regarding Forward-Looking Statements and Information
Certain statements contained in this MD&A constitute forward-looking statements or information (“forward-looking statements”). These statements relate to future events or future performance of Horizon North. All statements other than statements of historical fact are forward-looking statements. The use of any of the words “anticipate”, “plan”, “continue”, “estimate”, “expect”, “may”, “will”, “project”, “predict”, “potential”, “should”, “believe” and similar expressions are intended to identify forward-looking statements.
In particular, such forward-looking statements include:
- Under the heading “Outlook” the statement that:
“Although there is increasing optimism with oil prices being relatively stable in the $45 – $55 range, Horizon North expects pricing of its services to lag any improvement to utilization and anticipates results to remain relatively flat for the remainder of the year. 2017 will continue to be focused on cost reduction and efficiency initiatives across all operations to maintain and improve margins including assessing Horizon North’s portfolio of assets to ensure a focus on core business lines.”
“The outlook for Modular Solutions is encouraging, closing the quarter with a firm project backlog of $32.4 million, establishing a key distribution relationship in the Fort McMurray, Alberta area and being designated an official Holmes Approved Homes builder. For the remainder of the year there is strong line of sight to multiple commercial projects which are expected to convert into firm backlog and achieve the $40 to $60 million 2017 revenue expectation previously discussed. As the backlog continues to build through the second half of 2017, we anticipate production planning and plant efficiencies will drive a more stable revenue stream. As a result of being in the ramp up phase, infrastructure costs related to the design and technical activities have preceded revenue; however, moving into Q4 2017, Modular Solutions is expected to be a positive contributor as the backlog progresses to production and installation. “
“The strength of the Statement of Financial Position is a key priority and Horizon North will continue to closely manage debt levels and working capital. Focus will be on maintaining a manageable leverage position and to balance cash outflow with cash inflow through reducing debt, managing working capital and minimizing capital spending. As well, revised covenants in the recently amended credit facility will provide additional ongoing working capital flexibility and, as part of our cost reduction efforts, management elected to decrease borrowing capacity from $200.0 million to $150.0 million to reduce costs associated with unused borrowing capacity.”
- The Corporation’s focus of its manufacturing infrastructure on permanent modular construction to decrease the dependence on the resource sector to provide a smoother and more reliable business operation;
- The impact of the revisions to the credit facility, including the maturity date thereof;
- The payment of a dividend for the second quarter of 2017 at $0.02 per share and payable to shareholders of record at the close of business on June 30, 2017 to be paid July 14, 2017; and
- The timing of cash outflows related to trade and other payables and loans and borrowings.
The forward-looking statements and information are based on certain assumptions made by Horizon North which include, but are not limited to, assumptions relating to:
- industry activity for oil, natural gas and mineral exploration and development in the western Canadian provinces and northern territories;
- commodity prices;
- capital investment in the Canadian oil and gas sector;
- dividend payments;
- anticipated activity levels for 2017;
- operational results and capital spending;
- future operating costs and Corporation’s access to capital;
- the effects of regulation by governmental agencies;
- the competitive environment in which the Corporation operates;
- the ability of the Corporation to attract and retain personnel;
- the development of LNG and commodity transportation infrastructure;
- the relationships between the Corporation and its customers; and
- general economic and financial conditions.
Although Horizon North believes that the expectations and assumptions on which the forward-looking statements and information are based on are reasonable, undue reliance should not be placed on the forward-looking statements and information because Horizon North cannot give any assurance that they will prove to be correct. Since forward-looking statements and information address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of known and unknown risks and uncertainties. Such risks and uncertainties include, but are not limited to, the following:
- volatility in the price and demand for oil, natural gas and minerals;
- fluctuations in the demand for the Corporation’s services;
- availability of qualified personnel;
- changes in regulation by governmental agencies, including environmental regulation; and
- other factors listed under “Risks and Uncertainties” in this MD&A and other risk factors identified in the Corporation’s annual information form.
Readers are cautioned that the foregoing list of risks and uncertainties is not exhaustive. Additional information on these and other risk factors that could affect Horizon North’s operations and financial results are included in Horizon North’s annual information form which may be accessed through the SEDAR website at www.sedar.com. In addition, the reader is cautioned that historical results are not indicative of future performance. The forward-looking statements and information contained in this MD&A are made as of the date hereof and Horizon North does not undertake any obligation to update publicly or revise any forward-looking statements and information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.
Certain information set out herein, including certain information under the heading “Outlook”, may be considered as “financial outlook” within the meaning of applicable securities laws. The purpose of this financial outlook is to provide readers with disclosure regarding Horizon North’s reasonable expectations as to the anticipated results of its proposed business activities for the periods indicated. Readers are cautioned that the financial outlook may not be appropriate for other purposes.
Certain measures in this MD&A do not have any standardized meaning as prescribed by generally accepted accounting principles (“GAAP”) and, therefore, are considered non-GAAP measures. These measures are regularly reviewed by the Chief Operating Decision Maker and provide investors with an alternative method for assessing the Corporation’s operating results in a manner that is focused on the performance of the Corporation’s ongoing operations and to provide a more consistent basis for comparison between periods. These measures should not be construed as alternatives to total profit and total comprehensive income determined in accordance with GAAP as an indicator of the Corporation’s performance. The method of calculating these measures may differ from other entities and accordingly, may not be comparable to measures used by other entities. The following non-GAAP measures are used to monitor the Corporation’s performance:
EBITDAS: Earnings before interest, taxes, depreciation, amortization, gain/loss on disposal of property, plant and equipment and share based compensation (“EBITDAS”). Management believes that in addition to total profit and total comprehensive income, EBITDAS is a useful supplemental measure as it provides an indication of the Corporation’s ability to generate cash flow in order to fund working capital, service debt, pay current income taxes and fund capital programs, and it is regularly provided to and reviewed by the Chief Operating Decision Maker.
Debt to total capitalization: Calculated as the ratio of debt to total capitalization. Debt is defined as the sum of current and long-term portions of loans and borrowings. Total capitalization is calculated as the sum of debt and shareholders’ equity.
About Horizon North
Horizon North is a publicly listed corporation (TSX: HNL.TO) providing a full range of industrial, commercial, and residential products and services. Our Industrial division supplies workforce accommodations, camp management services, access solutions, maintenance and utilities. Our Modular Construction division integrates modern design concepts and technology with state of the art, off-site manufacturing processes; producing high quality building solutions for commercial and residential offerings including offices, hotels, and retail buildings, as well as distinctive single detached dwellings and multi-family residential structures. As a result of our diverse product and service offerings, Horizon North is uniquely positioned to meet the needs of our customers in numerous sectors, anywhere in Canada.
For further information, please contact Rod Graham, President and Chief Executive Officer or Scott Matson, Senior Vice President Finance and Chief Financial Officer, 1600, 505 – 3rd Street S.W., Calgary, Alberta T2P 3E6; Telephone (403) 517 – 4654, Fax (403) 517 – 4678; website: www.horizonnorth.ca