Horizon North Logistics Inc. Announces Results For The Quarter Ended March 31, 2014

TSX Symbol: HNL

CALGARY, April 29, 2014 /CNW/ - Horizon North Logistics Inc. ("Horizon" or the "Corporation") reported its financial and operating results for the three months ended March 31, 2014 and 2013.

First Quarter Highlights

• Consolidated revenues and  EBITDAS decreased 13% and 36% respectively compared to Q1 2013; but increased by 12% and 15% respectively as compared to Q4 2013;
• Camp rental and catering operations revenues and EBITDAS were consistent with Q1 2013 but increased by 46% and 75% respectively as compared to Q4 2013;
• As anticipated, manufacturing sales revenues declined by 44% as compared to Q1 2013; manufacturing sales margins were eroded as a result of delays on two significant projects;
• Q2 2014 manufacturing activities to be focused on internal projects; 62% of manufacturing capacity for the second half of 2014 booked with strong bidding activity continuing.

First Quarter Financial Summary

(1)  See financial measures definitions on the last page of the press release for details.

Overview

Horizon's results for the three months ending March 31, 2014 ("Q1 2014") were softer than the three months ending March 31, 2013 ("the comparative period" or "Q1 2013") primarily due to decreased revenues and margins from manufacturing sales and reduced margins on new mat sales.

Revenues from camp rental and catering operations were relatively consistent between Q1 2014 and the comparative period.  Utilization of the rental fleet was slightly lower at 60% in the first quarter of 2014 as compared to 67% in the comparative period, but was offset by improved revenue per bed rental day which was $157 for Q1 2014 as compared to $142 in the comparative period.  EBITDAS margins in the camp rental and catering operations were consistent year over year at 28% for Q1 2014 as compared to 29% for Q1 2013.

Revenues from manufacturing sales were significantly lower in Q1 2014 as compared to Q1 2013.  Total direct manufacturing hours, including direct hours worked in the manufacturing plants and installation hours undertaken on project sites, were relatively consistent in the comparative periods.  However, 48% of direct manufacturing hours were allocated to third party contracts in Q1 2014 as compared to 69% in Q1 2013, reflective of the mix of projects undertaken.  In addition, customer driven delays on two significant manufacturing projects continued during the quarter resulting in increased costs being incurred.  Horizon is working with these customers to finalize and negotiate settlements related to the delays. As a result, these delays had a negative effect on EBITDAS margins from manufacturing sales in the quarter but are not expected to impact EBITDAS margins going forward.

Matting revenues were consistent in the comparative quarters but with a different revenue mix.  Mat rental revenues decreased by 11% as compared to Q1 2013 as colder weather lead generally to lower utilization and revenue per mat rental day.  Mat sales volumes were up significantly in Q1 2014 as compared to Q1 2013 but pricing was tempered by increased competition, while margins were further reduced by higher costs related to the US/Canadian exchange rate which affects raw material costs.

Operating earnings and earnings per share decreased in Q1 2014 as compared to Q1 2013, driven by lower EBITDAS and higher depreciation. Increased depreciation was the result of addition of camp assets and camp setup costs related to new camps added throughout 2013.

Outlook

As anticipated, camp rental and catering activities in Q1 2014 were significantly stronger than the fourth quarter of 2013.  Activity levels will be somewhat tempered by seasonality typically seen in the second quarter, but will continue to increase and drive improved fleet utilization during the second half of the year as several previously announced projects begin operation. 

Manufacturing activity for Q2 2014 will be focused mainly on building and installing the capital equipment required to meet the needs of recently announced projects. Manufacturing sales revenues for Q2 2014 are expected to be similar to Q1 2014 with 30% of total direct manufacturing hours, including direct hours worked in the manufacturing plants and installation hours undertaken on project sites, dedicated to third party contracts with EBITDAS margins anticipated to return to normal levels.

In the second half of 2014, 62% of direct manufacturing hours are committed and Horizon anticipates visibility improving with respect to utilization of its manufacturing capacity for the second half of 2014 based on continued strong bidding activity.

Dividend payment

Horizon North Logistics Inc. announced today that its Board of Directors has declared a dividend for the second quarter of 2014 at $0.08 per share. The dividend is payable to shareholders of record at the close of business on June 30, 2014 to be paid on July 15, 2014. The dividends are eligible dividends for Canadian tax purposes.

Camps & Catering

Camps & Catering revenue is comprised of camp rental and catering operations revenue, manufacturing sales revenue, space rental revenue and the associated service revenue within each operation.

Revenues from the Camps & Catering segment for the three months ended March 31, 2014 were $106.7 million, a decrease of $19.2 million or 15% from the comparative period. EBITDAS for the three months ended March 31, 2014 were $24.4 million, a decrease of $11.5 million or 32% compared to the same period of 2013.

In the first quarter of 2014 the Camps & Catering segment saw 40% of Horizon's revenues being generated from the Alberta oil sands compared to 70% in the same period of 2013. This movement is reflective of the timing of specific projects in the oil sands with a large manufacturing project being in the final stages of completion in the first quarter of 2014. Horizon continues to diversify its camp & catering operations with several additional operations in the northeastern British Columbia region related to natural gas exploration and development activities.

Camp rental and catering operations revenue

Revenues are derived from the following main business areas: large camp operations, drill camp operations, catering only operations, and the associated service work within each operation. Service work includes the transportation, set-up and de-mobilization of camp and catering projects.

The table below outlines the key performance metrics used by management to measure performance in the large camp and drill camp operations:

Revenue from large camp operations for the three months ended March 31, 2014 increased by $3.1 million or 5% as compared to the same period of 2013.

Bed rental days decreased by 27,441 days or 6% as compared to Q1 2013, with utilization during the quarter slightly lower at 63%.  Activity levels at several large camps were lower than in Q1 2013, which more than offset increased volumes from a number of shorter term projects operating during Q1 2014.

Revenue per bed rental day increased by $17 or 12% as compared to Q1 2013, with the majority of the increase related to the mix of contracts in place.  The first quarter of 2013 had a number of longer term contracts which typically have more favorable rates in exchange for a longer term commitment.  In the first quarter of 2014, a larger portion of activity was driven by shorter term projects which commanded higher rates.

The large camp rental fleet size was down slightly in the comparative quarters as a number of rental fleet beds were sold to operators in 2013 and a number of drill camp beds being utilized on large camp projects in 2013 were transferred back to the drill camp fleet for the quarter.

Revenues from drill camp operations for the three months ended March 31, 2014 decreased $3.9 million or 41% compared to the same period of 2013. The decrease was a result of lower activity levels in the first quarter of 2014 than the comparative quarter. On average there were 12 fewer camps operating in the first quarter of 2014 compared to the same period of 2013 and camps operated for fewer days compared to the same period of 2013. The decreased activity is mainly due to the increasingly competitive environment with downward pressure on pricing.

The table below outlines the key performance metrics used by management to measure performance in the catering only operations:

Revenues from the provision of catering and housekeeping only services, with no associated bed rentals, for the three months ended March 31, 2014 decreased $1.4 million or 24% as compared to same period of 2013. The majority of the decrease was a result of lower volumes primarily in the catering only for customer owned drill camps. The revenue per catering only day increased in the comparative quarters as a result of the contract mix and the additional services requested by the customers. The lower volumes in the catering only for customer owned drill camps are a reflection of the increasing competitive environment.

The table below outlines the service revenue generated from the camp and catering operations:

Service revenues are related to the transportation, set-up and de-mobilization of relatively short term camps for customers. Revenues for the three months ended March 31, 2014 increased $1.6 million or 24% compared to the same periods in 2013. The increase was mainly due to the timing of the specific service projects undertaken in the comparative periods, with the majority of drill camps being de-mobilized earlier than in 2013.

Manufacturing sales

Manufacturing sales revenues include the in-plant construction, transportation and installation of camps sold to third parties.  Revenues for the three months ended March 31, 2014 were $23.8 million, a decrease of $18.5 million or 44% as compared to the same period of 2013.

Direct manufacturing hours, including direct hours worked in the manufacturing plants and installation hours undertaken on project sites, in the three months ended March 31, 2014 were 262,207, a decrease of 24,448 hours or 9% as compared to the same period of 2013.  The decrease in direct manufacturing hours was a result of Horizon managing production capacity through reduced overtime and headcount to align with manufacturing visibility for the upcoming year. In the first quarter of 2014, 48% of direct manufacturing hours were allocated to external sales projects, as compared to 69% in the same period of 2013.

Space rental revenues

Space rental revenues were relatively consistent in the comparative periods. Utilization in the comparative periods declined to 67% from 87% mainly a result of the larger fleet size. An additional 296 units were added throughout the first quarter of 2014 and it is anticipated the utilization will increase in the near term as the newly added units go on rent.

Direct costs

Direct costs for the three months ended March 31, 2014 were $80.7 million or 73% of revenue compared to $88.6 million or 70% of revenue for the same period of 2013. Direct costs are closely related to business volumes, the decrease in direct costs were primarily due to lower volumes in the manufacturing sales operations. As a percentage of revenue, direct costs increased primarily as a result of the nature of projects flowing through the manufacturing sales operations. The first quarter of 2014 manufacturing sales had numerous smaller projects which could not approach the same efficiencies achieved in the first quarter of 2013 when there was a long single run product project.

Matting

Matting revenue is comprised of access mat rental revenue, other mat and rental equipment revenue, mat sales revenue, installation, transportation, service, and other revenue as follows:

Revenues from the Matting segment for the three months ended March 31, 2014 were $16.0 million, a decrease of $0.3 million or 2% compared to the same period of 2013. EBITDAS for the three months ended March 31, 2014 were $2.7 million or 17% of revenue compared to $3.9 million or 25% of revenue in the same period of 2013, a decrease of $1.3 million or 32% compared the same period of 2013.

The decrease in revenues from the comparative period was a result of moderated customer demand for trucking and installation services. The decrease in service activity was partially offset by higher mat sales in the first quarter of 2014 compared to the first quarter of 2013.

Mat and rental equipment revenue

Access mat rental revenues for the three months ended March 31, 2014 were $1.5 million, down $0.2 million or 11% compared to the same period of 2013. Rental revenues decreased as a result of lower activity levels and softer revenue per mat rental day. Total mat rental days in the three months ended March 31, 2014 decreased 30,667 or 4% compared to the same period of 2013. Utilization of the owned mat fleet for the three months ended March 31, 2014 was 41% compared to 49% in the same periods of 2013. Compared to 2013, the 2014 decreased utilization was driven from both a larger owned mat rental fleet and lower activity levels. Revenue per mat rental day decreased by $0.17 or 7% primarily due to competitive factors with revenue per mat rental day for the three months ended March 31, 2014 of $2.28 compared to $2.45 in the same period of 2013.

Mat sales revenue

Revenues from mat sales for the three months ended March 31, 2014 were $7.9 million, up $3.0 million or 61% compared to the same period of 2013. The increase in revenue in the first quarter of 2014 compared to the same quarter of 2013 is mainly reflective of the timing of customer projects. The higher sales revenue was due to the larger volume of mats sold in the first quarter of 2014, however revenue per mat was $684, a decrease of $36 or 5% compared to the first quarter of 2013. The decrease in price is reflective of the current competitive environment in mat sales.

Installation, transportation, service, and other revenue

Installation, transportation, service, and other revenues are driven primarily from the level of activity in the mat rental and mat sale businesses and are charged for separately from rentals and sales. Revenues for the three months ended March 31, 2014 were $5.5 million, a decrease of $3.0 million or 35% compared to the same periods in 2013. The decrease in revenue is a primarily a result of softer demand for these services.

Direct costs

Direct costs for the three months ended March 31, 2014 were $13.0 million or 82% of revenue compared to $12.1 million or 74% of revenue for the same period of 2013. Direct costs are driven by both the level and mix of business activity. The increase in overall direct costs was driven primarily by higher mat sales which reflect the associated direct costs of mat manufacturing. As a percentage of revenue, direct costs increased in the three months ended March 31, 2014 as a result of the mix of business activities and as a result of upward cost pressure mainly driven by oak lumber costs.

Corporate

Corporate costs are the costs of the head office which include the President and Chief Executive Officer, Chief Financial Officer, Vice President of Health, Safety, and Environment, Vice President of Aboriginal Relations, Senior Vice President of Corporate Development and Planning, Corporate Secretary, corporate accounting staff, information technology, and associated costs of supporting a public company. Corporate costs for the three months ended March 31, 2014 were $3.6 million, an increase of $0.4 million or 12% compared to the same period in 2013. Corporate costs, as a percentage of total revenue, increased to 2.9% compared to 2.2% in the same period of 2013. The increase is primarily a result of the decrease in revenue quarter over quarter as these costs are relatively fixed in the short term.

Other Items

Selling and administrative

Selling and administrative expenses for the three months ended March 31, 2014 were $5.4 million, an increase of $0.6 million or 12% compared to the same period for 2013. As a percentage of revenue, selling and administrative expenses were 4.4% compared to 3.3% in the same period of 2013.

Depreciation and amortization

Depreciation and amortization costs for the three months ended March 31, 2014 were $13.2 million, an increase of $0.3 million or 2% compared to the same period of 2013. The increased depreciation was mainly a result of camp asset additions throughout 2013 including camp set-up and installation costs. These costs are depreciated over the term of the contract, generally a shorter time frame than the camp assets. Depreciation related to camp set-up and installation was $1.3 million higher in the three months ended March 31, 2014 as compared to the same period of 2013.

Amortization costs related to customer relationships decreased $1.2 million or 60% as compared to the same period of 2013 as a portion of these assets have now been fully amortized.

Financing costs

Financing costs include interest on loans and borrowings and accretion of notes payable. For the three months ended March 31, 2014 financing costs were $1.0 million, a decrease of $0.1 million compared to 2013. The decrease in financing costs was mainly a result of slightly lower average debt levels in the first quarter of 2014 compared to the same period of 2013. The effective interest rate on loans and borrowings for the three months ended March 31, 2014 was 3.6%, consistent with the comparative period.

Income taxes

For the three months ended March 31, 2014 income tax expense was $2.7 million, an effective tax rate of 26%, compared to $5.6million, an effective tax rate of 25% in first quarter of 2013.

Gain/Loss on disposal

For the three months ended March 31, 2014 Horizon recognized a gain on disposal of $1.6 million compared to $0.2 million in the comparative period of 2013. The gain on disposal of assets in the three months ended March 31, 2014 came mainly from the disposal of camp assets and disposal of land related to the Marine business.

Financial Measures Definitions

EBITDAS

EBITDAS (Earnings before interest, taxes, depreciation, amortization, impairment, gain/loss on equity investments, gain/loss on disposal of property, plant and equipment, and share based compensation) is not a recognized measure under IFRS.  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 and operating earnings provides an indication of the results generated by the Corporation's principal business activities prior to consideration of how those activities are financed or taxed.  Horizon's method of calculating EBITDAS may differ from other entities and accordingly, may not be comparable to measures used by other entities. EBITDAS should not be construed as alternatives to total profit and comprehensive income determined in accordance with IFRS as an indicator of the Corporation's performance.

Debt to total capitalization

Debt to total capitalization is 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.

Caution Regarding Forward-Looking Information and Statements

Certain statements contained in this Management Discussion and Analysis ("MD&A") constitute forward-looking statements or information.  These statements relate to future events or future performance of Horizon. 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 statements that " Activity levels will be somewhat tempered by seasonality typically seen in the second quarter, but will continue to increase and drive improved fleet utilization during the second half of the year as several previously announced projects begin operation. 

Manufacturing activity for Q2 2014 will be focused mainly on building and installing the capital equipment required to meet the needs of recently announced projects. Manufacturing sales revenues for Q2 2014 are expected to be similar to Q1 2014 with 30% of total direct manufacturing hours, including direct hours worked in the manufacturing plants and installation hours undertaken on project sites, dedicated to third party contracts with EBITDAS margins anticipated to return to normal levels. In the second half of 2014, 62% of direct manufacturing hours are committed and Horizon anticipates visibility improving with respect to utilization of its manufacturing capacity for the second half of 2014 based on continued strong bidding activity."

The foregoing statements are based on the assumption that the contracts entered into at this time with respect to such activity will not be amended or terminated and that oil sands development in Alberta and other resource development in western Canada will strengthen. Many factors could cause the performance or achievements of Horizon to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements.

These include, but are not limited to, general economic, market and business conditions.  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's operations and financial results are included in Horizon's annual information form which may be accessed through the SEDAR website at www.sedar.com.  The forward-looking statements and information contained in this MD&A are made as of the date hereof and Horizon does not undertake any obligation to update publicly or revise and forward-looking statements and information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.

Corporate Information

Additional information related to the Corporation, including the Corporation's annual information form, financial statements, and MD&A is available on SEDAR at www.sedar.com. Unless otherwise indicated, the consolidated financial statements have been prepared in accordance with IFRS and the reporting currency is in Canadian dollars.

SOURCE Horizon North Logistics Inc.