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

Elias Foscolos - Industrial Alliance Securities Inc Wesley Nixon - National Bank Financial

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 the second 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. Thank you for joining us on this morning’s conference call.

In March of this year, our Q4 2016 results call, we spoke of increased confidence that our result will start to trend higher. If we recall at that time, we reported adjusted EBITDA of $33 million up from the negative $20 million from the cycle low seen in Q2 2016.

Then in Q1 of this year, we reported adjusted EBITDA of $43 million, which was an improvement of 29% from Q4. This quarter we are very pleased with the company's financial performance as it continues the trend of improvement with adjusted EBITDA of $53 million, a 24% increase on Q1 and $384 million of revenue, a 7% on Q1.

More importantly, this quarter demonstrates once again our ability to execute. Key areas of strength for ShawCor in the quarter was the execution of the large projects as the Shah Deniz installation coating and the Sur de Texas anticorrosion coating in our Asia Pacific plants seen the first quarter ramped down and was replaced by the Sur de Texas concrete weight coating from the two mobile plants located in Altamira, Mexico and our ability to meet increase in the day-to-day business activity.

With high churn need for continued strong performance in the second half of 2017, the overall level of activity from our day-to-day business expected to continue, coupled with advancement in material project opportunities that fit our strengths. We're returning to executing our growth strategy.

I’ll comment in more on this and our outlook in a moment, but first I’ll ask Gaston Tano, our CFO, to provide some details on the second quarter financial results.

Thanks, Steve. As Steve noted earlier, we're pleased with the positive results in the second quarter.

Revenue in the second quarter increased by 7% over the first quarter of 2017, primarily due to higher activity in the pipeline segment in the regions of Latin America and North America, partially offset by a slight decrease in petrochemical and industrial segment. Compared with the year ago, second quarter revenues increased by 50%, reflecting higher activity in the pipeline segment in Latin America, North America and Asia Pacific and slightly higher revenues in petrochemical and industrial segment.

Reported consolidated gross margins were 37.5%, an improvement over the 36% in the first quarter of 2017 and also much higher than the 27.8% in the second quarter a year ago. The pipeline segment's gross margin for the second quarter improved to 38.5% from 26.9% a year ago, while petrochemical and industrial gross margins were 30.5%, slightly below the 31.1% reported in the 2016 second quarter.

On a consolidated basis, adjusted EBITDA in the second quarter is $53 million compared to $43 million in the first quarter of 2017. The improvement in EBITDA was primarily due to increase in gross profit of $14 million from higher activity and plant utilization, partially offset by an increase of $7 million in SG&A.

The increase in SG&A was largely due to higher incentive compensation expenses in the quarter, which include additional expense related to government mandated employee profit-sharing in Latin America, adjusted EBITDA for the second quarter with a significant improvement over the loss of $20 million reported in the second quarter of 2016, primarily due to higher gross margins from increased large project activity, improved North America business activity and plant utilization. Now let’s discuss cash flows for the quarter.

Before changes in non-cash working capital, cash flow provided from operating activities for the second quarter is $37 million, up from the $22 million that was used in operating activities in the second quarter a year ago, primarily related to higher net income. Compared to $41 million in the first quarter of 2017, the second quarter was down primarily due to the net decrease in non-cash items.

The change in non-cash working capital in the second quarter was a net cash inflow of $4 million compared to a cash outflow of $10 million in the second quarter of 2016. The cash inflow from working capital in this quarter was primarily attributed to a net decrease in accounts payable, accrued liabilities and taxes payable, partially offset by a decrease in accounts receivable and deferred revenue in the quarter.

Total net non-cash working capital at the end of second quarter was $146 million, compared with $83 million at the start of the year. This reinvestment in working capital is expected with the growth in revenue and the exceptionally low level of working capital at the end of 2016.

Cash flow used in investing activities in the second quarter was $7 million with capital expenditures on property, plant and equipment of $15 million, partially offset by proceeds on disposal of property, plant and equipment of $4 million and a decrease in other assets of $4 million. The capital expenditure in the second quarter were related primary to the investments to support the Sur de Texas, Tuxpan project in Mexico and higher activity in our Composite Production Systems business.

During the second quarter, financing activities used net cash of $10 million, reflecting the payment of our quarterly dividend of $10.5 million. The company's cash and short-term investments position increased during the second quarter to $167 million related to improved business activity.

The company also had available unutilized credit facilities of approximately $402 million as of June 30th. We are also pleased to report that post Q2, the company will no longer be under the modified covenant and the higher pricing from the debt amendments made in December 2016.

As a result, the company expects to benefit from reduced financing cost for the remainder of the year. I will now turn it back to Steve for his commentary on the outlook.

Thank you, Gaston. A little caution is warranted regarding our industry as commodity prices and associated spending continues to be uncertain.

ShawCor is well-positioned to generate financial performance results in 2017 and has increasing optimism longer term. I'll elaborate on both.

For the remainder of 2017, our confidence comes primarily from two areas, large projects and a continue base level of drilling and completion activity in North American land and the associated demand for our products and services. The most visual large project in Sur de Texas is the Sur de Texas, Tuxpan project including the $90 million concrete weighted coating that was carried out in the second quarter, we have completed approximately 40% of the total 350 million that the project is expected to generate.

The remainder will be completed over the next three quarters with the majority in Q3 and Q4 of this year. On North America, we are starting to see indications of a potential pullback in growth.

However, we expect that a combination of newly drilled wells and the inventory drilled but not completed wells will continue to generate a strong level of activity in our North American upstream businesses. This activity is supported by customer hedging programs and is expected to result in continued demand for our products and services associated with gathering lines and tubulars at a minimum Q2 levels for the remainder of the year.

An additional point that supports our confidence for 2017 is that Q2 had a Canadian seasonal impact of approximately $10 million from Q1 and should start to return as we move into the later part of the year. Turning to the basis of our optimism for the longer term, I'll reference the same three distinct elements we commented on the last quarter.

North American upstream activity, capital spending and large material projects are projects that are greater than $100 million. North America land activity is trading from the low point of Q2 2016 when there was 420 rigs in the U.S.

and 37 rigs in Canada to now where there are over 900 and 200 in the U.S. and Canada respectively.

There is a balance between the limitation for commodity prices, hedging programs and access to capital and the support for better reservoirs, reduced supplier cost and technology. Certainly, there is a potential for a [back] of activity in the short term.

However, the unconventional shale plays with their short cycle payback profile and steep decline curves have demonstrated that they can be responsive and that the operators that develop these plays will continue to innovate to make the economics work. ShawCor is positioned to address possible volatility associated with shorter cycles through the work we've done over the last two years to reduce our cost base and expand our portfolio of products and services.

With the introduction of FlexFlow during the second quarter we introduced a new platform for additional market opportunities beyond oil and gas gathering flexible will be able to address was the water infrastructure needs as water volumes increase in trucking cost become prohibitive FlexFlow during the second quarter, we introduced a new platform for additional market opportunities beyond oil and gas gathering systems. FlexFlow will be able to address oil-filled water if a structure needs as water volumes increase and trucking cost becomes prohibitive.

FlexFlow is now commercial with the six-inch and eight-inch 750 PSI products and we're building to cover received orders. The global poly brand of single-layer high density polyethylene pipe is providing additional coverage in these areas as well as increased penetration in municipal, irrigation and pipeline rehabilitation markets.

Our Integrity Management Group continue to increase their service offering in Q2 with their event service line that builds on their core NDT service. These services include heat treat, computed radiography, 3D, surface laser scanning and mechanical integrity inspection which is not dependent on well completions, but rather on other part of the operator system, associated more with their ongoing expenses.

Our line tubing in sucker rod product lines complement the inspection and repair capabilities in the upstream segment of our oil-filled asset management group. These product line are closely tied to production from existing wells and are a part of the operator's reoccurring expense in managing their assets.

The overall level of global capital spending on infrastructure in an industry is particularly important as it is heavily tied to our resource utilization, particularly coating facilities. Utilization in turn is a critical factor in the margins we achieve, a case in point EMAR and Asia-Pacific base order flow has historically been an important factor in the margins delivered.

Industry capital spending, supported by the number of Final Investment Decisions (FID) that has already surpassed the number in 2016 is expected to gradually improve from current levels. It is expected that with recent reduced supplier costs and configuration standardization, coupled with pending need to address reservoir depletion, projects will be sanctioned.

Projects with short cycle returns and lower capital investments such as tie-ins, brownfields and step outs will be the first to be actioned, until improved economics and confidence justify larger and longer tenure investments, such as greenfield developments. Increased project sanctioning will increase the revenue opportunities for the company’s pipeline products and services that are delivered from the company’s global footprint.

There continues to be visibility and movement in large projects that are not directly linked to the current oil and gas commodity prices. These projects are driven by domestic energy requirements, energy security or market share protection, emission reduction and/or opportunist fiscal incentives and regulatory windows.

Since these projects are large, complex and have high execution risk, they will provide material opportunities for the company’s pipeline product and services. Let me now tie back our optimism for the remainder of 2017 and beyond to the backlog, bid and budgetary numbers that we released.

First, the backlog. $572 million from the current -- for the current quarter is down from the $640 million at the end of Q1 as expected, especially when you consider that over $90 million of concrete weight coating for the Sur de Texas Tuxpan project was executed.

However, the positive trend is that we are seeing bid to backlog conversion that was absent in previous quarters. The bid number is down from $600 million to $500 million with a high percentage being converted into backlog.

This trend is expected to continue. Of note, the current bid does not contain any project with potential revenue over $100 million, but this is expected to change by the end of Q3 as we have recently received the formal tender for a large $100 million plus project with a submission date in September.

The real excitement is around the large number of projects and the scale of several in the budgetary. Here the number has remained strong at $1.6 billion and based on the discussions with our customers, we expect this to stay at a high level.

Due to our global footprint, track record of execution and technology, we expect to get our share of those projects that move forward. In summary, we expect the second half of 2017 to deliver at a minimum level of Q2 run rate.

There is a possible scenario that there will be absent with no contribution from $100 million plus project for several quarters in 2018 and therefore our performance for the year will be determined by the strength of the base business and the execution of smaller capital projects. Beyond 2018 into 2019 and 2020, we see the emergence of the next wall of work with increased confidence in our base business project visibility and a strong balance sheet we are now returning to actions in support of moving our growth strategy forward, including organic and potential inorganic investments.

On that note, I'll the call to the operator for any questions you may have.

Good morning.

Good morning, Elias.

Wanted to dive a little deeper on your bid and backlog of you mentioned you had about $1.6 billion and budgetary bids, how would that if you know broken down between large projects and small ones and if there -- has there been a shift in those categories over the last few quarters, in other words are they becoming fewer, larger, lumpy projects? And is the small projects still absent?

So maybe I'll start first with the bid because I inferred it in my prepared remarks. So first of all, the bid, the $500 million that we have released, has no large $100 million plus projects in it.

In fact, I would say the majority or $40 million or less and so that's a good sign for us because it has good diversity both in terms of customer mix and geography and we anticipate several of them will move forward into final award in Q3. So that’s good news for us.

Now, when you turn to the budgetary, it’s a little bit of a different story because we have commented, we've given direction previously that there's several large projects that are in the budgetary that are in excess of the $100 million. So, if you take the budgetary number that we recorded and you say, okay, there is three projects larger than $100 million and when I say $100 million, there's two that are quite substantial for us in excess of $100 million.

You're now probably looking at a mix of 20-plus projects and under $50 million projects for the remainder of them. So, there's a good distribution of smaller projects, but there's certainly larger projects in the budgetary.

The other comment I would make and which also provides optimism, we are now seeing projects in which we've executed in the past that were material, that those fields now are having to spend money to address decline. And so, we were very well positioned to win the first order.

We’re now talking to customers directly and it is not in our budgetary. So, I would expect that if not Q3, Q4, we will see a ramp up in our bid number and I made a comment, we now have a large tender in hand that we submitted in September.

So, I kind of hedge the comment. We will see the bid number jump because of this one large project is expected to go into bid.

But because we see additional work on the horizon that we’re now talking to customers that we have not provided costing for yet or execution plans, I expect the budgetary to remain strong.

Okay. And this one large project that’s come up with the September deadline that -- would that be on a relative -- if it goes through, would that be on a relatively tight timeframe also?

I know Sur de Texas went on a relatively tight timeframe or is that -- without that be quite a few quarters out even if it was awarded?

I am a little bit uncomfortable with the large project. This is probably the first time that I’ve been familiar with a very, very large project where we’ve been required to sign an NDA.

Okay.

What I can tell you though is, and I made this comment in past is in 2013, 2014, we were tracking and it was about 18 months from a regional entry into our budgetary before we would recognize revenue will be in execution. This one large project that we’re in the process of pursuing is expected to FID in the foreseeable future and has been in our budgetary for some time now and we are moving back to our historical trends of 18 months compared to in 2016 where I would suggest it was infinity, from we would see projects but they weren’t moving anywhere.

So, we're going back to what we’re comfortable with the state is about 18-month period.

Okay. Thank you for the color on that or as much as you could give.

One last question before I turn it back. Focusing on the North American pipeline and pipe services segment, we did see a sequential increase if my numbers are correct, Q2 over Q1 despite the pullback.

I think you're indicating that there's been maybe a bit of a stall and maybe it’s coming out of the U.S. versus Canada.

Yet, we probably would continue to see at least this level -- would it be fair to say we continue to see at least this level of activity if not a slight improvement breaking up for Canadian seasonality going forward. Would that be fair?

Yes. The message is and again, we've kind of hedged it because we called out $10 million of negative delta between Q1 and Q2 just from the Canadian impact.

So now, if you think we’re going to get back as we go back and there is a winter build up expected now in Canada, we will start to recoup that $10 million. But the other comment I would make, the other thing that we’re quite comfortable with is that, the majority of our North American upstream businesses are related to non-drilling but completion.

And I called out drilled, but not completed, we’re at a very high level especially in the four major plays in the U.S. Even if drilling was expected to pull back a little bit, operators will complete -- will continue towards the end of the year with some certainty to complete the drill.

but not completed. So, your observation is supported.

I would say that's absolutely correct.

Okay. I'll turn the call back.

Thank you very much for your color.

Thank you.

Good morning, gentlemen. Just a quick one here for me, we're seeing deepwater exploration costs, they're continuing to come down and it's quite encouraging to see some projects kind of getting towards that breakeven in the $40 to $50 a barrel mark and I'm curious has that impacted the ShawCor's level of involvement in the tender process, just given the level of expertise that you guys have in some of the most -- some of the more complex work offshore?

I think first of all to put it in context, I think what's important to call out is because operators now and it's supported by the FIDs that are moving for it. Operators are moving forward on investments that have reduced the overall capital investment per barrel of oil equivalent and study just recently from a large operator where their FIDs that are going forward, in the past it was about $17 of capital expenditure per barrel of oil equivalent and now it's down to $7.

So that's what we're seeing forward. We are now being pulled in and I think in the subsea sector in particular, you're seeing alignment of integrated or vertical integration of the subsea provider.

So certainly, the FMCs and tech need with the one subsea offering and our alliance with Subsea 7, they're being pulled together and therefore us as a supplier within the vertical train -- the vertical train of supplying new services we're getting pulled in way further, which is positive because it means we have greater confidence of award and also improving the technology that's being deployed. So absolutely.

The other comment I would make, if you look at the competitive landscape that was present in 2013 versus now, I would suggest technical ability, track record of execution, but also strong balance sheet puts us in a quite strong position to be involved in these project earlier. I'll take the opportunity to make another comment is we will not risk the company for terms and conditions or execution risk that we don't think we can deliver and I am not sure that's always going to be the case with our competitors.

Right. And we saw that on the Nordstrom for example.

I think that story is yet to be played out. I think there is a potential there that it's quite a difficult project for the company that won it.

That's great. Thanks for the color and your time.

Thank you, Wesley.

Well, thank you very much for again taking the time to attend the quarterly call and I look forward to speaking to all of you again at the end of next quarter. Thank you very much.