Gary Love - Chief Financial Officer Stephen Orr - Chief Executive Officer

Greg Colman - National Bank Financial Elias Foscolos - Industrial Alliance Securities Inc.

Thank you and good morning. Before we begin our conference call this morning, 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 our first quarter 2016 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.

For several quarters now we’ve been discussing the fact that our financial performance has featured strong performance in our EMAR regions. So weakness in North America and now increasingly in our Latin America and Asia Pacific regions.

Our strength in our EMAR region has been due to the execution of Shah Deniz and South Stream projects. However, these projects are now winding down in EMAR.

Meanwhile, the market environment that has deteriorated in North America, while operators have reduced capital spending on new well completions and in our international regions were customers are holding back on new project commitments shows no sign of improvement. As a result we should expect the Company’s financial performance we challenged particularly in the second quarter, which is currently underway, though the Company expects to report a significant operating loss.

In this environment we must maintain an increased focus on priorities that will deliver cash flow and position us for improvement in 2017 and beyond. I’ll comment in detail on these priorities in a moment.

But first, I'll ask Gary Love, our CFO, to provide some details on the first quarter financial results.

Thanks, Steve. First quarter financial performance was again driven by strong results in EMAR and weakness everywhere else.

Overall revenue was $366 million, which declined by 20% from the fourth quarter and by 23% from the first quarter of 2015. Compared to the first quarter a year ago revenue decreased in each of the Pipeline segment regions.

EMAR shared best on a comparative basis with revenue declining only 2% as a result of continued execution of Shah Deniz project work and coating on South Stream lines one and two at our lease and rack facilities respectively. The balance for the year we expect to execute an additional $110 million for these projects, but much of this revenue will be in the second half of the year.

In our other Pipeline segment regions revenue declined year-over-year in the first quarter by 32% in North America that was despite the acquisition of the Flint Tubular Inspection business and Lake Superior Consulting. Revenue also declined by 25% in Latin America and by 60% in Asia Pacific.

In North America the decrease in revenue was concentrated in our oil field leveraged businesses, which continue to see lower capital spending by operators on new well completions. In our international regions we are seeing a decline in customer commitments for new projects as they seek to reduce capital spending in line with reduced operating cash flow.

Now compared with the fourth quarter of last year revenue decreased in all Pipeline segment regions with the declines ranging from greater than 20% decreases in North America, Latin America and EMAR and a 34% decrease in Asia Pacific. In contrast to the weakness in the Pipeline segment activity our Petrochemical and Industrial segment continues to perform very well with revenue up 10% versus a year-ago and also increased by 7% from the fourth quarter.

Gross margins in the first quarter were 34.7% an improvement over the 33.3% reported in the fourth quarter, but down from 35.8% a year-ago with reduced market demand particularly in North America continuing to negatively impact utilization and efficiency as well as market pricing. Pipeline segment gross margin was 36% versus 33.6% and 36.3% in the fourth quarter and year ago first quarter respectively.

While the Petrochemical segment gross margin at 28.2% declined from 29.7% in the fourth quarter and 30.8% a year ago. We are reporting adjusted EBITDA for the first quarter of $36.6 million, which is 45% lower than the fourth quarter and down 51% from a year ago, this is due to the lower revenue in margin.

The consolidated EBITDA margin in the first quarter is 10%; this consists of 11.2% in the Pipeline segment and 17.3% in the Petrochemical and Industrial segment. On a year-over-year basis, income from operations decreased by $40 million or 71% from $56 million to $16 million in the first quarter of 2016.

Lower gross profit of $42 million, higher net foreign exchange losses of $5 million and higher depreciation and amortization of $2.4 million were partially offset by a $10 million year-over-year reduction in SG&A. SG&A was $84 million and it stayed down $10 million from $94 million in the first quarter of 2015.

This was the result of decreases in personnel costs of $8.7 million and reduced other SG&A cost of $3.7 million. These reductions were partially offset by the addition of $2.5 million in SG&A from the acquisition of Lake Superior Consulting.

Let’s now take a look at cash flow in the quarter. The four changes in non-cash working capital, cash flow provided by continuing operations was $24.5 million that’s down from $65 million in the first quarter a year ago and also down from $54 million in the fourth quarter of 2015.

The reductions were in line with a lower net income combined with a negative movement in deferred income taxes and an increase in the settlement of provisions. The change in non-cash working capital in the first quarter was a net cash inflow of $61 million and this compares with a cash outflow of $49 million a year ago.

The cash inflow from working capital this quarter was attributable to lower receivables and lower inventories which fell in line with reduced revenue. Total non-cash working capital at the end of the first quarter is $109 million and this compares with a $183 million at the start of the quarter and $321 million a year ago.

Cash flow used in investing activities in the first quarter was $43 million is consisted of capital expenditures on property, plant and equipment of $80 million and the acquisition of Lake Superior Consulting with an acquisition cost of $25.5 million. These amounts were partially offset by proceeds from the disposal of surplus fixed assets for approximately $1 million.

During the first quarter, financing activities used net cash of $9.5 million, which was largely the regular quarterly dividend of $9.6 million. Now based on the cash flows in the quarter, cash plus short-term investments increased to $281 million from $264 million at December 31, 2015.

In addition to cash on hand as of today, the Company also has available unutilized credit facilities of approximately $400 million. We are in full compliance with all financial covenants under the revolving credit and senior note debt agreements and this week we completed amendments to these agreements to provide us with additional covenant flexibility through the first half of next year.

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

Thank you, Gary. Let's begin by restating what I have said in the past calls.

2016 will be a very challenging year. Compared with the first quarter, we will experience some material decline in revenue and earnings in the second quarter that we expect will result in a significant operating loss.

In the third quarter, we should see an improvement as we execute flow assurance portion of Shah Deniz. However, results are unlikely to exceed the first quarter until the fourth quarter at the earliest.

Based on this the Company's priorities are few and focused. First, although we do not control the market environment we do control where the Company's energy and resources are employed.

Winning the projects that we are actively pursuing is the top priority and in this regard the news is encouraging. Today, we have firm days outstanding on projects with an aggregate value of approximately $2 billion.

Capturing these projects is our most pressing objective as this offers us the best opportunity to rebuild our backlog and realize improved performance in 2017. To support this effort, we are making substantial investments in both staffing and operational readiness.

Staffing is in the form of multiple dedicated pursuit teams that have commercial, engineering, operations, logistics, legal and finance expertise and the operational readiness is focused on derisking project execution through upgrades, qualifications and positioning of equipment implants. The large projects in Western Canada, Mexico and Northern Europe are the opportunities we are focused on at this time.

In addition, as timing of the projects for cycle recovery is not certain, our recent senior note and credit facility amendments ensure we can commit to take on one or more of the large projects without restriction. Based on customer indications, we should have visibility in the third quarter on our degree of success plus a significant majority of the $2 billion of the outstanding from bids.

Second we will continue to reduce operating costs. Since September 2014, we have reduced staffing levels by 28% and in the second quarter we expect to reduce total Company staffing by an additional 6% or approximately 370 employees.

These reductions will require termination payments in the second quarter. However, we expect a rapid payback in terms of reduced SG&A and operating costs and what we have seen in the second half of the year.

Our third priority is to manage our businesses to ensure that we continue to generate positive free cash flow by ensuring that working capital is freed up from inventory receivables as inventory declined and by limiting capital expenditures to investment that support our large project pursuits or to generate incremental revenue in the near-term. Investment examples include our plant capacity expansion in our Petrochemical Industrial segment businesses and additional investment to develop the 8-inch 750 PSI version of the FlexFlow composite pipe platform.

Finally, we continue to action our key strategic goal of building a comprehensive pipeline integrity management service offering. With a completion of Lake Superior acquisition, we have already begun the development of new service opportunities for NDT inspection businesses.

Initially, these will include joint efforts by Desert NDT and Lake Superior to offer field services in the area of integrity digs and in service inspection. The past 18 months has been exceptionally difficult for our employees as the Company has had to make difficult decisions that have resulted in the release of colleagues and friends.

In addition, employees are being asked to do more to compensate for personnel reductions. I personally truly appreciate their efforts and I'm confident that their commitment will see the Company emerging from this prolonged downturn in the strong position.

To be certain, our employees coupled with ShawCor's financial strength and competitive advantages will see ShawCor's continues to lead our industry and generate superior returns throughout the cycle. On that note, I'll now turn the call over to the operator Kelly to start for questions.

Thank you.

Good morning, everyone. Challenging times as you mentioned.

I wanted to start by talking a little bit about things that are going to happen in the future - could happen in the future? Could you discuss a little bit the timeline of the Mexican bid and the Texas bid, it seems to be delayed a little bit versus a prior views of sort of early Q3 visibility now maybe late Q3.

So I was just wondering if you can give us some color as that as well as reminding us where we are today on sort of what we would view as the two major bids Nord Stream 2 and Texas. Do you have visibility on sort of specific award dates or any changes in what's going on kind of on the ground in those bids today?

Yes, first let me – so Greg first let me restate what I just stated in the statement that I read out. We should have visibility on I would say three of the projects.

So Mexico, non-Europe of course we refer to as Nord Stream 2 and also FID or the West Coast Petronas project in particular and the environment's approval associated with that project. If Mexico is a publicly run the tender process and you correctly identified the bid’s missions have been delayed by two weeks.

At the request of the operators that are competing to construct and operate the pipeline. Primarily the speculation was to secure additional financing for some of the operators were being challenged to do so.

It is now pretty firm that the submissions will go in on May 19 and what has not been subject to change is the pressure on the operators to build and construct and have first gas by September 2018. So that project and so the start now submissions and we’ll start getting greater visibility and confidence of where we sit once the submissions go in.

Of course as the operators and we have visibility on the operators and we work with them in advance them submitting we will only know who submits on May 19 and then we will kind of have a [parameter] on where we sit at that point. So that's a good calibration point for us.

On Nord Stream as everyone is aware the pipe has been awarded and the contracts have been signed including the signing celebrations both for these two pipe suppliers in Russia and the German supplier have signed the contracts, our bids are in place and the commercial and technical evaluations are now on going. And I guess we’ll touch on the West Coast of Canada everyone's reading the press.

It looks like it will be a late summer fall decision on both environmental and FID for Petronas project but I’d suspect it may even push it into fourth quarter even first quarter or next year.

That's great color. Thank you.

Yes, I’d agree with you on that Petronas side there. Taking a look at bit in a more near-term you commented on significant negative key to operating income.

I'm just wondering and I don't need to back anyone into corner here, but significant is an interesting word. I’m wondering if we can get any view as that we are talking negative $5 million or we talking negative $50 million.

Again not looking to have you give guidance but significant can cover a broad range here?

Yes. Greg, I’ll take a stab at that.

I think the thing to focus on is what's going to happen with revenue and what are the implications of that for gross margin and here's I would think about that. We have a big gap in the second quarter in terms of large project activity in our international regions.

So EMAR we've been very clear on this EMAR has been riding the work that we've been doing on Shah Deniz and the Caspian and also the South Stream project and so that won't be there in the second quarter. Now in the third quarter we'll start up the Shah Deniz for insurance work and we are going to execute that work partially in EMAR but mostly in Asia Pacific.

So EMAR is coming down and it's coming down significantly in the second quarter. Now in addition we're seeing broad weakness everywhere else.

North America will be down in the second quarter versus the first quarter we have certainly the Canadian market where we've got spring break up. We will have in all likelihood the lowest level of activity in small diameter pipe coating in the second quarter in North America that we've ever seen.

There will be virtually no activity in small diameter coating in the second quarter. So really across the board in our Pipeline segment we are going to see weakness in the second quarter.

We could have Pipeline segment revenue down as much as 30% over where we were in the first quarter. It will come back in the third quarter we've got is big gap in the second quarter.

In addition, when we see that level of weakness in revenue there will be an impact on gross margin. Our Pipeline segment gross margin in the first quarter was 36% that could fall to as low as 30% conceivably in the second quarter.

So the combination of those two factors will flow through to the bottom line and they will generate an operating loss.

Gary, that's great color. Can you remind us what Shah Deniz contributed in Q1?

The combination of Shah Deniz plus the two South Stream projects was well over half of the revenue in the EMAR region.

That's great. And then my last one, I don't want to hog up all the airtime here.

But just looking at SG&A, we saw it only down about $5 million from Q4 2015 despite the one-time stuff in Q4. Can you just kind of help us out as to what will be an appropriate run rate for the balance of the year?

We're struggling a little bit to get clarity on that. We would have expected it to be down more because of the Guardian restructuring, the litigation stuff that kind of thing and then your ongoing cost controls.

So can you give us an idea of if is this $84 million kind of what we should be looking at for the balance of the year on a quarterly basis or is there other factors?

We are going to share this one because I think this is an important question. So, first of all the Company is pursuing and staffing including associated plant trials that are not capital expenditures on three large projects.

And I can’t give you the number because it's a competitive – if I give a number out it is an indication of what we're doing in a bank. But I can provide some guidance that we are spending quite a bit of money both North Stream in Mexico and even in Western Canada should continue to have resources on the ground to secure this work.

In addition, SG&A is heavily – the way we thought the SG&A is heavily impacted by Lake Superior where the – even though the revenue is generating, the overheads of Lake Superior came into the SG&A number so it's not apples-to-apples, quarter-on-quarter. I’ll turn the call over to Gary to give some color on relative SG&A on historic for the Company.

Yes. Well, okay.

So first of all let me say this, the $84 million of SG&A in the first quarter was a relatively clean number. We did not have the magnitude of one-off or positive and negative factors that we had in the fourth quarter.

The fourth quarter was not a clean number because it had some very big one-time expenses I think up to about $13 million of one-time expenses, but it also had $9 million of accrual reversal. So we had some significant reversals of accruals for our employee benefit pension costs and also for incentive compensation both the short-term and long-term.

So that $89 million in the fourth quarter of 2015 on a net basis was kind of comparable to the $84 million that we had in the first quarter. So on a clean basis, our current rate $84 million.

I think that's a good go forward number. However, we're going to take that down some more in the second quarter.

And so the second quarter is going to be impacted by some one-time costs that Steve alluded to and then we should see a lower run rate in the second half of the year.

That's great color. Steve what you alluded to at the beginning and I know you're not going to release it for competitive reasons which makes kind of sense, but once we see resolution on these bids whatever expenses associated with that preparation should then fall away and we will leave it up to ourselves to kind of determine what that impact to be?

So as you upon awarded the projects SG&A will go up. And why it will go up because included in our SG&A salaried employees that are associated with coating the pipe the supervisors in the plant so SG&A be accounting the purchasing the supply chain is all included in SG&A.

However, on a negative note if we do not land large projects, the cost associated to the pursuit of the large projects will go away.

Well, thank you very much. That’s it from me.

I talked enough time.

Good morning.

Good morning.

Good morning.

Just focusing on the North American pipeline and Pipe Services segment, you talked about regulatory delays for a large diameter pipeline project that impacted the Q1 results. Is it possible to give an order of magnitude of the impact of the loss of that and do you view that is temporary and coming back or which we all hope for or is it something that might slide off further?

So can’t give you much color on the project because it still has not fully received regulatory approval. The news though is that we continue to receive pipe and we continue to coat pipe on behalf of the project under the direction of the end operator and he's dragging out both the procurement process until you seek regulatory approval.

So I think before we - probably a little bit more negative than we should have been. The revenue was less and it certainly is less than we anticipated, but it's dragging out over a longer period of time and we're quite happy for it by the way.

Okay. So it wasn't a total drop off in revenue it's just – it's been reduced and it just might drag out longer than?

And the other color I will add is that before we were executing it in two facilities and now they've centralized it to one.

Okay. I think that's probably all that I would focus on because lot of the questions I had were answered earlier.

So that's it for me. Thanks.

Thank you so much. End of Q&A

I certainly appreciate everybody attending the call this morning and we really look forward to hosting the next quarter's call. Thank you.