Gaston Tano - SVP, Finance and CFO Steve Orr - CEO

Greg Coleman - National Bank Financial

Good morning everyone. 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 the first quarter 2017 earnings press release that is available on SEDAR and on the company’s website at shawcor.com. I will now turn it over to Shawcor’s CEO, Steve Orr.

Thank you, Gaston and good morning to -- and thank you for joining us on this morning’s conference call. Before I start, I'd like to recognize Gary Lowe for his many contributions over the past 11 years and his participation in many of the results conference calls.

Today Gaston joins me. ShawCor’s newly appointed CFO, Gaston comes to ShawCor with a wealth of experience and expertise and with the guidance of Gary, has quickly gained an in-depth understanding of ShawCor.

I welcome Gaston to the ShawCor leadership team in his newly appointed role. Now turning to our results.

I'm very pleased with the company's financial performance in the first quarter as it showed a continued trend of improvement from the low point to 2016 that we expected/ The company is now well set up for a much improved result in 2017. Here is the strength for ShawCor in the first quarter were composite pipe sales, which are providing an early cycle in responding to the pickup in North America upstream activity and the continued successful execution of the Shah Deniz insulation coating and the Sur de Texas anti-corrosion coating projects in our Asia-Pacific facilities.

Also favorably impacting the first quarter was a successful startup of the production on the concrete coat weighing for the Sur de Texas to spend projects in Altamira, Mexico. Consolidated revenue grew by 9% from the fourth quarter of 2016 and adjusted EBITDA improved 29% to reach $43 million.

Compared to a year ago, revenue was slightly lower, but EBITDA increased by 17% as gross margins increased to 36% and SG&A expenses were 6% lower than the first quarter of 2016. We’re confident that the year-over-year trend of revenue growth and earnings improvement will continue throughout 2017.

I’ll comment in detail on our outlook and factors that will impact future performance in a moment, but first, I’ll ask Gaston to provide some details on the first quarter financial results.

Thanks Steve. As Steve noted earlier, we experienced positive results in the first quarter.

Revenue in the first quarter increased by 9% over the fourth quarter of 2016, primarily due to increased activity in the pipeline segment in the regions of Latin America and Asia-Pacific and the continued growth in the petrochemical and industrial segment. Compared with year ago, first quarter revenues decreased slightly, reflecting lower activity in the pipeline segment in the EMAR region, partially offset by the growth in the petrochemical industrial segment.

Reporting consolidated gross margins were 36%, an improvement over the 32.2% in the fourth quarter adjusted for non-recurring inventory valuation of $4.8 million booked in the fourth quarter in 2016 and also the higher than 34.7% in the first quarter a year ago. The pipeline segment gross margin improved to 36.6% from 35.7% a year ago, while the petrochemical and industrial segment, gross margin was 32.1%, higher than 28.2% in the prior year first quarter.

On a consolidated basis, adjusted EBITDA for the first quarter is $43 million compared with a $33 million in the fourth quarter in 2016. The improvement in EBITDA was due to increased gross profit of $22 million, partially offset by an increase in SG&A expenses of $7 million.

The increase in SG&A was largely due to higher incentive compensation expenses in the first quarter and the non-recurring provisioning reductions booked in the fourth quarter. Despite the slightly lower revenues compared to a year ago, EBITDA for the first quarter improved by 17% over the first quarter of 2016 due to higher gross margins and lower SG&A.

Let's now discuss cash flows for the quarter. Before changes in non-cash working capital, cash flow provided from continuing operations for the first quarter was $41 million, up from the $24 million in the first quarter a year ago and also up $34 million in the fourth quarter of 2016.

The increase over the prior year first quarter was primarily related to higher net income combined with a decrease in cash used in the settlement of provisions. The change in non-cash working capital in the quarter was a net cash outflow of $66 million compared to cash inflow of $62 million in the first quarter of 2016.

The cash outflow from working capital quarter was attributable to higher receivables and inventories, which were in line with increased revenues, partially offset by higher deferred revenue. Total net cash working capital at the end of the first quarter was $156 million compared to $83 million at the start of the year.

This reinvestment in working capital was expected versus growth in revenues and exceptionally low level working capital at the end of 2016. Cash flow used in investing activities in the first quarters were $13 million with capital expenditures on property planning equipment of $9 million, and increase in other assets of $4 million.

The capital expense in the first quarter were related primarily to the investments to support Sur de Texas’ Tuxpan project in Mexico and flexible production. During the first quarter, financing activities used net cash of $13 million, reflecting the payment of the regular quarterly dividend of $10.5 million and a decrease in bank dividends of $2 million.

The company's cash and short-term investment position decreased during the first quarter to $147 million, primarily due to investment in working capital. The company also has available unutilized credit facilities of approximately $397 million as of March 31st.

I'll now turn it back to Steve for his commentary on the outlook.

Thanks Gaston. As noted previously, we’re confident that Shawcor’s financial performance in 2017 will be solid.

This belief is supported by our booked order backlog, our proven ability to execute, and our increased confidence that well completions in North America will continue to strengthen as the year proceeds. Our backlog has been rebuilt with the award last year to Sur de Texas to expand project in Mexico.

During the last two quarters, we executed at our two Asia-Pacific plants, the anti-corrosion coating for pipe that is being supplied by the Japanese pipe mill for project. This pipe along with pipe from the Mexican mill is now being delivered to our location in Altamira, Mexico where we will perform in a concrete way to calling for the project.

During the first quarter, we reached full production on the first mobile plant and in late April, we commenced the start of production on the second plant. By the second -- by the end of the second quarter, both plants will be operating at full production and will continue counting until it is complete at the end of the first quarter 2018.

To-date we have completed approximately 20 million of the 350 million project with a balance included in the company's $648 million backlog as of March 3st, 2017. Many of you will have heard comments from other oilfield service companies regarding the divergence in outlook for oil selectivity levels between North America and international markets.

This divergence is highly relevant Shawcor’s outlook. In North America, upstream activity is accelerating following the build in rig count since this time last year.

This is translating for Shawcor to higher demand for a number of our products and services. Leading new way for us is Flexpipe carpeted pipe products the fast delivery and installation of composite pipe has proven to be very compelling for North American oil and gas operators who have incurred the investment to drill and complete well and want to minimize the kind of production.

This is leading to increased acceptance of composite pipe and gathering line applications in substitution for steel. For Flexpipe, the combination of the return of North America and success in international markets have resulted in revenue levels in the first quarter that we're back to 2014 levels.

Right now we can say demand is outstripping supply. Overall, in North America, we expect that Flexpipe will sustain current production volumes and we will see a steady pickup in demand of our other upstream driven services such as small diameter coating, weld inspection and tubular management.

Longer term, we will need to be vigilant to any changes that demand is undoubtedly North America upstream activity has the potential to shift to much shorter cycles and higher volatility. Internationally, national oil companies and international oil companies or NOCs and IOCs continue to be very cautious on committing capital.

This is impacting both new greenfield projects, but also small production sustaining projects. As a result, we’re unlikely to see a pickup in activity at our EMAR or Asia-Pacific pipe coating facilities in 2017.

We believe, however, that capital spending can only be deferred so long and thus we expect to start to see a renewed flow of smaller orders as we move it into 2018. The small project order flow has historically been an important base for revenue at our facilities in EMAR and Asia-Pacific.

Where we are seeing projects move ahead is for investments in new natural gas pipeline infrastructure that is underpinned by economic growth in emerging markets and political mandates to reduce hydrocarbon emissions and electricity generation. Both the Sur de Texas Tuxpan project in Mexico and the recently awarded PPT Fifth Transmission pipeline project in Thailand are examples.

We continue to pursue other projects of this nature in both EMAR and Asia-Pacific regions with both firm bids and budgetary estimates. On our future outlook, it is well worth noting that continued growth of our petrochemical and industrial businesses.

To the end of 2016, this segment has generated seven years of consecutive revenue and earnings growth. In the first quarter of 2017, the trend of year-over-year growth continued and we have every reason to believe that this is sustainable.

I'd like to take a moment to update you on two important organic developments in the company. First is our new flexible composite pipe platform, which is now being commercialized -- commercially launched with the fully validated 16-inch and 8-inch 750 psi product.

We're very optimistic about the potential for these products in the rapidly growing market to produce water transportation solutions. We are currently building inventory in event of the start of commercial sales in the second quarter.

Although, the impact to revenue in 2017 will be limited and we expect that flex flow platform will be meaningful in 2018. Also gaining increased focus is our effort to expand our integrity management market share in midstream pipeline inspection.

During April, our Shawcor inspection services business secured their first real-time radiography inspection on a long distance transmission pipeline. This success builds on the technology development of our Shaw pipeline services business and deploys it through the technician pool that we acquired through the Desert NDT acquisition.

Working with customers through collaboration is directed to address industry challenges result in differentiation for Shawcor. Recently, Shawcor completed a project with technique [ph] FMC that used the expertise of both companies coupled with testing and analytical modeling to better understand the interface of parents and field joint coatings in real-line pipe applications.

If in-depth understanding will increase the execution certainly and in turn reduce the cost of letting offshore pipeline. Another such example is the recently signed worldwide exclusivity technology agreement with Shell for innovative flow assurance coating technology that provides benefits through increasing hydrocarbon throughput and reducing well intervention and chemical program cost.

It is expected that the first application of this new technology will be in the Gulf of Mexico in early 2018. On that note, I'll now turn the call over to the operator, Kevin, for any questions that you may have.

Hi gentlemen, thanks for taking my questions. I wanted to start by talking a little about margin expectations.

We saw very impressive gross margins in the first quarter here, even though the revenue was a little bit below what we were expecting, I think we're already seeing the effects of that operating leverage kick-in as more facilities come on line. But what I wanted to talk to you about was what should we be thinking for the balance of the year from a margin growth or contraction perspective?

And what I mean there is we're pretty confident that your North American margins be actually dilutive to your overall corporate margins, but that does seem to be an area of very strong growth. Would the impact of this Sur de Texas project and the related utilization growth internationally more than offset the growth in the lower margin business, that being North America, what I'm getting at here is should we continue to expect margin expansion over the balance of the year?

So, I think Greg, maybe I'll go first and then maybe Gaston can tighten up the range or margin. So, first is the growth that we're seeing in North America currently is primarily on the better margin products, so our composite production – our composite pipe actually had strong margins.

And so that's the first correction I would make is that we have yet to see the full build up on our girth-weld inspection or maybe as you have highlighted that more -- the lower margin businesses of the tubular management inspection has yet been kicked-in fully. So, the North American margins were actually currently quite happy with, but we're not happy with the overall revenue.

The second comment I would make is what's key to increase the margins higher than what we demonstrated in Q1 is utilization. And, in particular, utilization in the pipe coating facilities across the globe and that will not step-up again until we see the return of these smaller projects that were always the base utilization in the facilities, in particular, EMAR and Asia-Pacific.

However, certainly as we get up to full speed and this is not a Q2 event, but interest Q3 and Q4, if you can expect North America continue to be strong and Sur de Texas kicking-in, we should see another step up in margins when that project is running. But, again, that's a project-driven margin increase versus an overall utilization.

So, to think that's to happen, North American business has continued to be strong and competition, in particular, and our girth-weld inspection have to be strong in North America. And then Sur de Texas has to be fully kicked-in in Q3, that's not going to happen in Q2.

And then the other half if we can break out 2017 with a return of the smaller and I call them discretionary capital spending or production sustaining projects in our international plant, we may see another step-up in the margins. But I think 36% if we were to peak-out at 38%, I would be very happy.

Without this return of day-to-day capital spending or discretional spending in our international plant.

Yes, I think I agree full heartedly with Steve. It’s -- really the key issue is the return of that capital for that small projects discretionary spend and the full ramp up of our mobile sites in Sur de Texas on the concrete weighing side.

And again that's not going to happen until the second -- until Q3, the second half of the year. We will be ramping up in Q2 and not be fully operational our expectations until Q3.

That's great color guys. I really appreciate it.

My second and final one was to do with the bid book, if we net out the win in Thailand on Line Five there, which I think was $40 million-ish, it looks like we saw modest contraction in the bid and budgetary book for the 2.4 to - sorry, 2.35 net of that to 2.2-ish. This would -- I would qualify to be sort of within the margin of standard quarter-over-quarter just, what I would call, noise of a project or a project there.

But is there anything significant or anything in particular in the bid book or the budgetary book that is no longer there? A project which has been awarded elsewhere or is this just sort of standard flex from one quarter to the next?

I think the first one, you're correct, or there’s the standard movement of projects. You win some and the competitors win some of course and that reduces your firm bid number.

But probably the biggest change was the time elapsed from pricing and in contractual terms that we had outstanding for one of the Canadian LNG projects that now is absent. So, one of the -- and I’m sure you guys can speculate which one, our time has elapsed where our -- where we think it's reasonable that our pricing and our terms and conditions are expected to be -- to happen.

So, we pulled it out, it’s no longer there. And so that was the biggest change.

Absent of that have you seen much in the bid book that would cause you to become more optimistic or less optimistic as to converting it into the backlog from last quarter?

Again, I want to emphasize this one more time. So, the bid and budgetary numbers are probably the strongest that we’ve seen for what I would call large projects.

So, these are large projects in excess of $60 million, $70 million. What's absent from the firm’s bids and budgetary is -- and it’s despite the number of sheets in which we track these with absentees of $20 million or the smaller projects are not there.

So, we are very apprehensive until those come back again. So, that still is what the first dominant -- when you first look at our firm bid and budgetary, that's the first thing that hits you, not the swinging or movement of projects, these large ones that we're tracking continue to be there.

I’d say as a side point, I think you’ll see in Q2 that -- and if you recall when we were in pursuit of Sur de Texas and Nord Stream project, we communicated a burn rate of I think around $8 million of project pursuit cost. These projects that we're tracking now are getting closer and closer and in Q2, I expect that we will now have to spend money in capital in events or part of the pursuit strategy on several of these large projects now.

That's good color as well. Thanks very much Steve.

That's it for me.

Well, I guess that concludes the conference call. So, thank you everyone for taking the time for joining us this morning.

And we look forward to touching base again with you at the end of next quarter. Thank you.