Gary Love - CFO Steve Orr - CEO

Greg Colman - National Bank Financial Elias Foscolos - Industrial Alliance Dan MacDonald - RBC Capital Markets Scott Treadwell - TD Securities

Thank you and good morning. Before we begin this morning's conference call, I would like to take a moment to remind all listeners that today's conference call includes forward-looking statements that involve estimates, judgments, risks, and uncertainties that may cause actual results to differ materially from those projected.

The complete text of ShawCor's statement on forward-looking information is included in Section 4 of fourth quarter 2015 earnings press release; it is available on SEDAR and on the company's website at shawcor.com. I'll now turn the call over to ShawCor's CEO, Steve Orr.

Thank you, Gary and thank you ladies and gentlemen for joining us on this morning's conference call. We released our fourth quarter 2015 financial results press release yesterday.

Our results continue to demonstrate good performance in a very challenging market. As in the third quarter of 2015, we benefited from strong activity in our EMAR region from continued execution of the Shah Deniz and South Stream project.

However, the market environment deteriorated in North America, where oilfield activity declined as operators reduced capital spending on well completion, as they calibrated and adjusted for the certainty of an extended period of low commodity prices. Similarly in our international regions, we are now seeing a decline in customer commitments for new projects as they would seek to reduce capital spending in line with reduced operating cash flow.

In this environment, the company's ability to generate strong cash flow is particularly critical. This was evident in the fourth quarter cash flow from operations of $125 million.

For all of 2015, the company generated over $270 million in cash from operations and our cash balances increased to over $263 million at year-end. Executing flawlessly, managing working capital, reducing operating cost, and selectively focusing capital expenditures on opportunities that would generate near-term revenue have enabled our cash flow gains in 2015 and they will continue to be our focus in 2016.

I'll provide you with further details on our 2016 outlook and priorities in a moment, but first, I'll ask Gary Love, our CFO, to provide some additional comments on the fourth quarter financial results. Gary?

Yes, thanks Steve. The key drivers of financial performance in the fourth quarter were similar to the third quarter with strong results in EMAR offsetting weakness everywhere else.

Overall revenue was $455 million, which declined by 6% from the third quarter, and by 9% compared with the fourth quarter a year ago. Now compared to the fourth quarter a year ago, revenue decreased in each of the pipeline segment regions except EMAR which was up $11 million or 7% as a result of continued execution of Shah Deniz project work coupled with the restarted coding on the South Stream Lines 1 and 2.

For the full-year, the Shah Deniz and South Stream projects contributed over $350 million in revenue. As of the end of the year, we continue to hold approximately $170 million in the backlog for these two projects which will be executed in 2016.

In our other pipeline segment regions, revenue declined year-over-year in the fourth quarter by 16% in North America, by 27% in Latin America, and by 25% in Asia-Pacific. Now compared with the third quarter of this year, revenue decreased in all of the pipeline segment regions with the declines ranging from 3% in North America to 24% in Asia-Pacific.

In North America the decrease in revenue was concentrated in our oilfield leverage businesses, while in Latin America and Asia-Pacific, the quarter-over-quarter reductions in revenue reflected a broad decrease in pipe coating project activity. Now the story is considerably better in our Petrochemical and Industrial segment where revenue increased 7% over the fourth quarter of the prior year and was largely flat versus third quarter.

Modest growth in diverse industrial applications for heat shrink and control cable products continues to more than offset weakness in wire and cable shipments into the Western Canadian oil and gas industry. Gross margins in the fourth quarter were 33.3% in line with the third quarter but down from 35.5% a year ago.

This is due to the impact of the oil sector downturn particularly in North America that has negatively impacted utilization and efficiency as well as market pricing. The Pipeline segment gross margin was 33.6% versus 33.7% and 35.8% in the third quarter and year ago respectively.

While the Petrochemical segment gross margin at 30% was in line with the third quarter down slightly from 30.8% a year ago. We are reporting adjusted EBITDA for the fourth quarter of $66.5 million which is 11% lower than the third quarter, and down 13% from a year ago on the lower revenue and gross margin.

The consolidated adjusted EBITDA margin in the fourth quarter is 14.6% consisting of 15.9% in the Pipeline segment, and 17.7% in the Petrochemical and Industrial segment. Income from operations increased from a loss of $21 million a year ago to income of $46 million in the fourth quarter of 2015.

Recall that we recorded impairment charges of $79 million in the fourth quarter of 2014. Now, excluding the 2014 impairment, adjusted operating income decreased by $12 million, with lower gross profit of $25 million, partially offset by an $11 million reduction in SG&A and over $6 million in foreign exchange gains in the fourth quarter of this year.

Included in the fourth quarter 2015 SG&A are restructuring cost relating to the closure of Guardian's operations in the USA of $3.5 million, as well as an increase in legal provisions of $5.1 million. Now despite these charges, overall SG&A declined, as I mentioned, by $11 million from the prior year.

That's primarily a result of decreases in personnel costs of $14 million, partly a result in staff reduction undertaken during the year, and partly due to lower management incentive compensation. The effective tax rate in the quarter of 24% was unchanged from the third quarter and continues to be below Canadian statutory rate of 27% as a result of income being generated in low tax rate jurisdiction.

Let's now take a look at cash flow in the quarter. Cash flow from operations in the fourth quarter was very strong at $128 million, consisting of cash flow provided by operations before working capital changes of $50 million, down slightly from the third quarter, as well as a net change in non-cash working capital that generated a cash inflow of $78 million.

This cash inflow from working capital was attributable to lower receivables and inventories in line with reduced revenue as well as $11 million increase in accounts payable. These positive cash sources were partially offset by continued drawdown in deferred revenue associated with execution of the Shah Deniz project.

Total non-cash working capital at the end of the fourth quarter 2015 is $183 million. This compares with $260 million in the third quarter and $268 million a year ago.

Cash flow used in investing activities in the fourth quarter, excluding decreases in short-term investments was $53 million consisted of capital expenditures on property, plant and equipment of $19 million, investments in shares of Zedi of $4 million, and the acquisition of the Flint Tubular Inspection Management business for $34 million. These amounts partially offset by proceeds from the disposal of property, plant and equipment of $4 million.

Now, based on the cash flows in the quarter, cash plus short-term investments increased in the quarter to $264 million from $187 million at September 30. In addition to cash on hand, as of December 31, 2015, the company also has available unutilized credit facilities of $492 million and is in full compliance with all financial covenants under both revolving credit and senior note debt facilities.

I will now turn it back to Steve for his commentary on our outlook.

Thank you, Gary. I'll start off by stating that 2016 will be a very challenging year.

With this as a basis, I can summarize the company's key priorities with great clarity. First, we have compelling opportunities for projects we are bidding on today; we build our order backlog, and set the company up for much better performance in 2017 and 2018.

Therefore, bidding and winning these large projects is our most pricing objective. Second, with no visibility on the improvement in oilfield activity, we must continue to reduce operating costs while protecting the most important strategic growth program that we currently are investing in.

Starting with projects I'll elaborate in more detail. As noted in our press release, as of December the 31, we have over $900 million in outstanding firm bids.

This measure has increased from $600 million in the prior quarter. Within this amount, a number of projects have faced challenges to receipt, whether as a result of operators extending their engineering and development efforts to seek capital cost and risk reductions, or as a result of delays imposed by regulators.

Our job therefore is to ensure that we are best positioned to win the projects that go-forward. To achieve this, we are making substantial investments in staffing teams that have experienced commercial, engineering, operation, logistics, legal, and finance expertise to pursue large projects in Western Canada, Mexico, Northern Europe.

This investment is warranted when you consider the magnitude of the opportunity. With an outstanding bid amount of $900 million and over $1.6 billion for which we have provided clients with engineering estimates, we are in pursuit of projects with a combined level unprecedented in our history.

As anticipated, that by early third quarter of this year we should have visibility on whether several of these projects will be moving forward and to what extent we will participate. Our second key priority is to manage our businesses through the duration of the downturn.

This means continuing to generate positive free cash flow by controlling operating cost and by ensuring that working capital is freed up if revenue decline. It also means carefully prioritizing capital expenditures and resources to focus on investments that will generate revenue in near-term or closely align to key strategic goal.

2016, this will mean expending capacity in our Petrochemical and Industrial segment businesses to release capacity constrains that are holding back revenue growth. It will also mean continuing the product and market readiness of our large diameter competitive platform, FlexFlow, with a 6-inch 750 PSI production ramp up now possible.

Our efforts will move to completing by year-end 2016 the development of the 8-inch 750 PSI version. Another area of focus will be on integrating Flint Tubular Inspection & Management and extracting the cost synergies offered by integration of that business with our existing Guardian division.

Finally, we will continue to pursue our strategy of building a comprehensive pipeline integrity management service offering by completing the development of our ready remote data evaluation technology and the transition of Desert NDTs field service teams into the midstream markets in the U.S. We will also now be able to gain the benefit of pipeline engineering and integrity management expertise of the recently acquired Lake Superior Consulting, which in combination with ShawCor's advanced nondestructive testing technology and field service deployment capabilities has a potential to open up new market opportunities for the company.

While we cannot be certain when the outlook of the industry will begin to improve by remaining focused on the priorities I have outlined, we are convinced that ShawCor will emerge from this prolonged downturn in a strong and competitive position. On that note, I like to turn the call over to Stephanie, the operator, for any questions.

Hi, gentlemen. Congratulations on a decent quarter and a pretty challenging time.

Yes. Thanks.

Just have a couple of quick ones here for you. I was wondering if we can start off by talking about working capital.

You mentioned that that's one of the areas you're going to be focusing on. We didn't see a decent harvest come out in Q4 as things continue to kind of trend downward.

I'm wondering are we close to hitting a level where even if revenue continues to trend down in 2016, we don't see any more capital coming out of working capital, or no more harvest there as we're sort of hitting, sort of structurally low levels or would we continue to see that being a positive cash flow item?

Greg, it's Gary, I'll take a stab at that. The goal going forward is certainly to match working capital with revenue.

So if there are further declines in revenue which I think a possibility, certainly we've indicated that in our outlook then we would want to the extent possible mitigate that with further reductions in working capital. When we look at our key working capital metrics today, our -- as of the end of the year, our days sales outstanding on receivables is about 60 days and that's a good level from our historical perspective, but it’s certainly not let's say fully optimized.

So even in a static revenue environment there is a little bit of potential in receivables. Our inventories at 6.7 turns that's improved quite a bit over where it was in 2014, but I also see a little bit of potential on increasing inventory turns and we will continue to focus on that.

So we're not done yet, but important caveat, when you look at our total non-cash working capital at the end of the year in the $180 million range that is a historically low level for us certainly relative to revenue. So the further potential is somewhat capped, I would have to say.

Okay. Thanks Gary, that's good color on it.

Switching over a little bit to talking about growth potential. Can you give us a bit of reminder and I'm actually not sure if you would be -- you're willing or able to quantify this but you've got a backlog that's shrinking obviously as projects wrap up.

But a decent bid book and then a massive potential bid book or the terminology for the two quick $5 billion there. Historically what kind of success rate have you had in converting it from each level there from potential into bid and then bid into backlog?

So I think it's -- probably the thing to look at mostly is the time to converge which is the unknown. So in markets where are remote or challenge for our customers is where we have the highest market share, so that would translate and we have a fairly high success rate in because what mostly goes into the -- what we call the bid numbers are usually large projects in excess of $20 million.

So we do quite well. The big uncertainty is what is the conversion time and I think historically on this call, I've made the comment of 18 months.

When we look back over like-for-like when the -- and we're not in a downturn 18 months is when we kind of have visibility on first site of project. On an average when it translates into a confirm contract it would strike into our backlog.

But I don't think we have a very good handle on what that time is now but it certainly is longer than 18 months. So to answer your question very exactly where we have high market share is in challenging markets of high large projects which is the majority of what's in the $900 million that we mentioned and the time which it's translate is the uncertainty right.

No that makes perfect sense; it actually transitions into my third and final question. Your outlook is sort of almost a tale of two markets here because you point to a very challenging 2015, but then also give us indication that beyond that there actually could be a significant potential upside with the $2.5 billion of potential projects and $900 million in the bid backlog and not converting into -- sorry not bid backlog but the bid converting into backlog.

Will it be an accurate rephrase to say that we're definitely going to be or not definitely but very likely going to be in a very challenging time period 2016 but should these projects materialize beyond 2016 into late '16 and '17 that could be the potential for material revenue increases if when we see those come in through the backlog and then into revenue?

I will be much clearer right, 2016 is going to be very challenging and our outlook for 2017 and '18 is going to be visible while we exit 2016 and with that we will have a permutation or we will have some certainty on cash flow. So and so large projects and I'm saying this because we’re not assuming the commodity prices are going to strengthen.

And so as a management team our energy and we're prepared to continue to put resources on the pursuit of large projects because the opportunities are there and as to your earlier question is our success rates on large challenging projects are quite high, so we do not want to -- we want to make sure we have the best opportunities to provide our customers the best solution and to do so that takes resources to do it. But yes, 2016, is going to be a very challenging but we will have an outlook on '17 and '18 and I think it won't take much longer as we mentioned early in the third quarter we should have their visibility.

Just focusing on North American Pipeline and Pipe Services, there is some large diameter pipeline work that apparently started in Q3, do you see that continuing throughout 2016 or will it potentially tail off partway through the year?

Well there is sort of two elements in play here, we indicated in our outlook commentary in our press release that there is the potential for weakening in North American large diameter activity in 2016 and that is the result of a couple of things that are happening. There has been some notable issues around regulatory approvals for large diameter pipelines and recently two weeks ago, I don't know if you caught this but Enbridge did announce that they were going to delay the in-service dates for two of their large diameter projects Sandpiper and replacement of the Line 3, Mainline Line 3.

And so I think that's probably indicative of the environment that we're in today. That regulatory delays coupled with uncertainty around North American oil and gas production in the context of $30 oil we think could translate into a weakening of large diameter activity in North America in 2016 particularly in relation to 2015 and 2014 when it's been a notable area of strength for us.

Okay. Just thanks very much for that color.

Focusing on a comment in the press release, I think you said that 50% of the revenue in the North American Pipeline, Pipe Service business was port, backing the two large diameter or I guess conversely to well completion. Was that what's going on currently at 2016 outlook or 2015 comment?

That was a -- that was let's say backward looking or current state type of commentary, so in -- at this moment in time approximately 50% of our North American business is derived from gathering lines that in turn are driven by well completions and 50% would be larger infrastructure related activity, and then most prominently onshore large diameter transmission lines. So that's kind of where we are today.

Okay, great. Thanks for that color also.

Focusing a bit on the bid book and the backlog I'm just interested if you can give a comment on for both of those the percentage of the bid book that is international and scope and I'm going to say non-outside North America, how you want to define North America I guess versus outside North America. And in the same with the bid book I guess what I'm looking at is, is there a shift from what I'm gathering this bid book I mean the current backlog is mostly international to some North America.

So I think let me address the backlog first because we and Gary has stated it, so of our current backlog of $170 million continues to be related to South Stream and Shah Deniz. So that tells you that there is a heavy weighting in the backlog on international.

The $900 million that's under bid, I can give too much definition and I think the reason for is because we're in active bidding process to this work. But if I include the Mexico in the international it is dominantly internationally.

Okay, great. And one last question Q2 margins were impacted through selling out of inventory and I'm assuming or recalling that that was mostly North American Pipeline and Pipe Services.

Do you see that situation occurring at some point in 2016 or you're done your inventory full?

I think that we did it primarily to get I'm assuming one business in particular that you saw substantial drop, which was Flexpipe where we choose to stop production and burn inventory that was in place. At the current level our inventory as Gary mentioned, 6.7 turns, Flexpipe of course is in that number.

If we were -- there is improvement to get the number down through the operations, but if we were to see another step down in activities we would again use the -- use a suspension tool and burn inventory. So right now, I think we're not forecasting because of what we've taken down.

Our inventory reduction or optimization will come from efficiency and we probably will not do another plant shutdown. However, we struggled into the seasonal shutdown and if we see a step-down in activity we will go away and shutdown the plants, right.

Just one, Steve may be you can give us a bit more your thoughts on acquisitions. You've got a couple of good tuck-in ones here.

Have you sort of gotten see the ones that you're chasing after and now you might be a bit more patient, now just given we, we continue to hear a lot of commentary about sellers getting sort of incrementally motivated as the environment continues to deteriorate here this year?

So I think this is pretty. We can give you a near-term and then a longer-term.

So the near-term protection of the balance sheet is critical. We're going to continue to staff an M&A pursuit organization so that we can filter the opportunities.

But until we have visibility on future cash flow I would suggest you are not going to see much excitement around acquisitions for us. Now, upon securing feature cash flows, we're going to go back to -- and I think you may see transactions in very specific areas that are strategically important.

But we will not do it until we have certainty on cash flow.

And when you say areas that are strategically important will it be continued kind of business line expansion that's strategically important or geographic potential?

So as we talked about tuck-under technology -- so we talked about acquisitions under, technology, tuck-unders and platform of growth. What this cycle was telling us is what we're started at the very, very beginning is the large projects that are critical to the success of the company, but we have a real opportunity on aging infrastructure and build out on the integrity management space.

And so integrity management space provides us the opportunity to deal an offering, which means acquisitions could be used with new products and services but it also provides us the opportunity for technology and geographical expansion. And that's why I made the comment if you saw acquisitions from what's next, Lake Superior in our strategy is a pivotal or a compelling event, because it brings an understanding to the company that we were really lacking.

We now understand or have access to the understanding of pipeline engineering and integrity management that has a pipe coding material sign strong company we did not have. And so now, as we go forward, and as I mentioned, that's one of our priorities and we can understand and leaver the expertise in Lake Superior we're going to better define on what we're going to do next.

And that will include the attention of using a balance sheet to do acquisitions, but only once we have visibility on cash flow. But at the same time that works very well, because we need time to absorb the knowledge of Lake Superior.

Just first jump into the composite discussion, you gave us some color there. I'm just wondering from a high level.

Can you give us a sense -- I know in the past you talked about there being a drive from producers switching from steel into composite and then below that a market share gain. Is the inertia or resistance to moving into composite increasing or decreasing or is there just hesitance to make any changes or perhaps you're just not seeing enough of a market that you can draw any conclusions about trends?

So I think -- first of all, I'll address our core products. So our core product has dropped, but we -- so the conversion of field to composite continues.

And our core revenue in our core composite let's say 3 -- 4-inch, 3-inch and 2-inch, has survived better than the decline of the rig activities. So that's a per se mainly.

So conversion continues and our market expansion continues. So we are not seeing a full impact of the declining rate.

Now, on the built-out on FlexFlow it really is a matter of ensuring success. So we have built some plans and it think we have given visibility on the number.

The plan that we built in our model has a capacity to add $100 million worth of revenue. And this $100 million of revenue has become from a product or products and because of the way it's been engineered, if we launch the 6-inch our opportunity to penetrate and be profitable in the lowest period of time will be increased if we do the 8-inch.

And so the market for the 6-inch has gone down of course as those wells are completed and is really an opportunity to move water and grow through water. If we retract a little bit on the plan on building out the plant which is really the staffing of the plant and the staffing of the field services organization and just delay and complete the 8-inch 750 PSI, which is made on the same manufacturing equipment, when we turn the plant on we have a much better chance to decrease the time from initial buildup until profitability.

And so Scott, that's been something what we're doing. We're just hedging our bed to ensure the model time for profitability is ensured.

Okay. Perfect.

Second one for me. With the focus certainly from my point of view on the large potential growth in the bid book and what that might mean for 2017, can you just give us some color on any competitive dynamics that have shifted either new competitors or changes in biding strategy?

Obviously, there is probably some financial distress in some of those. Or are -- has everyone been to put in quotations playing nice with these potentially pretty large projects?

Scott, I can't comment. It's a great question.

But I think it's very difficult to discuss projects that are in pursuits or the dynamics to the strategy or capital investment or even our competition in a different market right now. And I hope your understanding is there.

We really truly have the potential to be a early cycle payer upon these projects going ahead and us ensuring our competitors advantage to secure them.

Okay.

And so that's why critically just -- we just can't comment right.

No, that -- I thought I take a stab. Potentially, in other words --

Good try.

Thanks. You may -- there may be another one here you might not want to give us too much color on.

But you've obviously have very strong relationships with a number of midstream providers in North America some of those may be involved in the Mexico project. Rather than giving may be specific color, is there anything in your contractual relationships with existing customers that gives you a structural advantage in projects you're bidding, whether that's Mexico or anywhere else?

The only comment we can say is it's very nice to see activity in the North American marketplace with no one operator.

Perfect. That's the last one.

Yes. The other element though is relationship.

We've always said that the long history of work for pipeline operators around the world has really given us a competitive advantage around relationship and track record and that continues to be a key element in this work.

All right. Well, thank you very much for attending today's call.

I'd like to thank everybody for their participation and interest. And we look forward to talking to you again at the end of next quarter.

And Stephanie, with that we can conclude the call.