CALGARY, Aug. 13 /CNW/ - HSE Integrated Ltd. ("HSE", "Our", "We", or the
"Company") today announced its financial results for the second quarter and
year to date ended June 30, 2008. Financial and operating highlights are
summarized below:
- Quarterly revenue was $28.1 million, the highest quarterly revenue in
the history of the company and 45% higher than the same period in the
previous year.
- EBITDA for the quarter was $2.2 million, a $4 million increase from
EBITDA of ($1.8) million last year.
- Six month revenue was $55.7 million, also the highest for two
consecutive quarters in HSE's history and an 18% improvement over the
previous year.
- EBITDA for the first six months was $4.8 million, a 60% increase from
the same period in fiscal 2007.
- Industrial safety revenues continue to grow, increasing to record
levels of $19.4 million for the second quarter, a 51% gain from 2007
and a 191% increase over the second quarter of 2006. For the first
six months, Industrial revenue was $31.0 million, a 48% gain over the
first half of 2007. In the first half of the 2008 fiscal year,
HSE's Industrial safety services group is approximately three times
the size it was during the same period in 2006.
- For the first time, Industrial safety revenue exceeded
Oilfield safety revenue for the first six months of the year.
- Oilfield revenues for the quarter were $8.7 million, an increase of
34% over 2007, reflecting a shorter spring break up and an
improvement in natural gas prices and related activity. However,
total Oilfield safety services for the quarter were still
significantly lower than the $13.3 million generated in the second
quarter of fiscal 2006.
- Oilfield safety service revenues for the first six months were
$24.6 million compared to $26.3 million in 2007 and $36.6 million in
the first half of 2006.
- Revenue from the Oilsands region of Northeast Alberta continued to
grow, accounting for 16% of revenues in the first six months, an
increase of 62% over the prior year and 558% higher than in 2006.
- Central and Atlantic Canada continue to enjoy strong rates of growth.
To June 30, revenue totaled $10.3 million, a 103% increase over the
same period in 2007.
- SG&A as a percentage of revenues continued to decline reflecting the
Company's commitment to fixed cost control and improved margins.
SG&A for the quarter was $2.5 million or 9% of revenues compared to
$2.6 million and 13% in the prior year. For the first six months,
SG&A declined to $4.8 million from $5.1 million and as a percentage
of revenue declined to 9% in 2008 from 11% in 2007.
- Announced May 7, 2008, HSE made significant progress in developing
its partnership with Boots & Coots International Well Control, Inc.
("Boots & Coots") to exploit expansion into the continental
U.S. marketplace. The first field service equipment is scheduled to
arrive in Texas in mid-August with more scheduled to follow in the
third and fourth quarters.
David Yager, Chairman and CEO, offered the following comments for HSE's
second quarter 2008 results:
"For four years HSE has invested in diversifying its revenue base away
from conventional oil and gas in order to offset the historical seasonal and
commodity-driven cyclicality that characterizes this business in Canada. This
makes for a better business in every way, from cashflow management to creating
a more attractive working environment for our valuable employees.
To accomplish this, for four years HSE has had a strategy of moving into
new industries and geographic markets in order to achieve and hopefully
sustain consistent levels of growth regardless of the historic cyclicality of
the oilfield services sector in western Canada.
With the financial results HSE is releasing today reflecting the
continued growth in markets in which the Company did not even have a presence
prior to 2005, we at HSE are confident our business model is sound and we have
demonstrated a proven formula for continued growth in the months and years
ahead. It is obvious from this growth that HSE provides essential and quality
services for our growing client base across the country.
Internal efforts to improve operating margins continue. With SG&A and
field delivery costs fixed, the Company is confident that profit margins will
increase with revenue and ongoing efficiency gains. An improvement in demand
for Oilfield safety services in Alberta - plus initiatives to expand into
other provinces and the United States - should help HSE achieve more historic
utilization levels for this capital asset class. This will continue to improve
revenue and margins.
On behalf of the Board of Directors, we're extremely proud of the
outstanding work and commitment our managers and staff have made in the past
two years to achieve this dramatic change in our business going forward, a
change for the better of all HSE's stakeholders: employees, clients, and
capital providers. The effort in the second quarter by everyone is
particularly commendable."
For further information and analysis please see the attached Management
Discussion and Analysis and Financial Statements.
CONFERENCE CALL
HSE will be hosting a conference to discuss their results at 10 AM
(Eastern Daylight Time), 8 AM (Mountain Daylight Time) on Thursday August 14,
2008.
Dial-In Number: 1-800-587-1893 or 1-416-915-5761
Conference Replay to August 28, 2008: 1-416-640-1917 or 1-877-289-8525
(Passcode: 21280295 followed by the pound sign)
Webcast: http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID(equal sign) 2368520
HSE is an integrated, national supplier of industrial Health, Safety and
Environmental services. From its head office in Calgary, Alberta, it serves
its clients from field service locations in Alberta, British Columbia,
Saskatchewan, Ontario, Nova Scotia, New Brunswick and Michigan. Expansion in
to the United States is underway. HSE trades on the TSX under the symbol
"HSL".
Forward Looking Statements
This news release may contain forward-looking statements concerning,
among other things, the Company's prospects, expected revenues, expenses,
profits, financial position, strategic direction, and growth initiatives, all
of which are subject to risks, uncertainties and assumptions. These
forward-looking statements are identified by their use of terms and phrases
such as expect, anticipate, estimate, believe, may, will, intend, plan,
continue, project, objective and other similar terms and phrases. These
statements are based on certain assumptions and analyses made by the Company
based on its experience and assessment of current conditions, known trends,
expected future developments and other factors it believes are appropriate
under the circumstances. Such statements are subject to numerous external
variables, both known and unknown, such as changes in commodity prices for
natural gas and oil, changes in drilling activity, weather conditions,
industry-specific and general economic conditions and exchange rate
fluctuations. If any of these risks and uncertainties materializes or if
assumptions are incorrect, actual results may differ materially from those
expressed or implied in the forward-looking statements. The forward-looking
statements included in this news release are not guarantees of future
performance and should not be unduly relied upon.
Non GAAP Measures
This report makes reference to EBITDA, a measure that is not recognized
under generally accepted accounting principles (GAAP). Management believes
that, in addition to net earnings, EBITDA is a useful supplementary measure.
EBITDA provides investors with an indication of earnings before provisions for
interest, taxes, amortization, gains or losses on the disposal of property and
equipment, foreign exchange gains or losses, and the non-cash effect of
stock-based compensation expense. Investors should be cautioned that EBITDA
should not be construed as an alternative to net earnings determined by GAAP
as an indication of the Company's performance. This method of calculating
EBITDA may differ from that of other companies and accordingly may not be
comparable to measures used by other companies.
HSE Integrated Ltd.
Management Discussion and Analysis ("MD&A")
For the Quarter and Year To Date Ended June 30, 2008 and 2007
The following management discussion and analysis is dated August 13,
2008, and is a review of the financial results of HSE Integrated Ltd. ("HSE",
"We", "Our", or the "Company") for the quarter and year to date ended June 30,
2008 and 2007. This should be read in conjunction with the documents filed on
SEDAR at www.sedar.com. Unless otherwise disclosed, the financial information
presented in this discussion has been prepared in accordance with Canadian
generally accepted accounting principles ("GAAP") and takes into consideration
information available to management up to August 13, 2008. Unless otherwise
stated, dollar figures presented are expressed in thousands of Canadian
dollars and per-share figures in dollars per weighted-average common share.
The following MD&A contains forward-looking information and statements. We
refer you to the end of the MD&A for the disclaimer on forward-looking
statements.
Selected Financial Information
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Three Three Six Six
Months Months Quarter Months Months Year
Ended Ended Over- Ended Ended Over
June 30, June 30, Quarter June 30, June 30, Year
2008 2007 % Change 2008 2007 % Change
------------------------------------------------------------
Revenue $ 28,087 $ 19,352 45.1% $ 55,656 $ 47,300 17.7%
Operating and
materials 23,440 18,545 26.4% 45,992 39,175 17.4%
------------------------------------------------------------
Operating
margin 4,647 807 475.8% 9,664 8,125 18.9%
Operating
margin % 16.5% 4.2% 292.9% 17.4% 17.2% 1.2%
------------------------------------------------------------
Selling,
general &
admini-
strative $ 2,460 $ 2,598 (5.3%) $ 4,844 $ 5,113 (5.3%)
Net (loss) (568) (3,113) (81.8%) (579) (2,209) 73.8%
- per share
basic &
diluted (0.02) (0.08) 75.0% (0.02) (0.06) 66.7%
------------------------------------------------------------
EBITDA(1) $ 2,187 $ (1,791) 222.1% $ 4,820 $ 3,012 60.0%
EBITDA % 7.8% (9.2%) 184.8% 8.7% 6.4% 35.9%
------------------------------------------------------------
Total assets $ 72,232 $ 98,025 (26.3%)
Total long-term liabilities 20,474 23,977 (14.6%)
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See Non-GAAP Measures for (1)
Financial Review
Revenue
HSE operates in a single industry segment, which involves providing an
integrated package of asset, worker and community safety protection services
including: on-site safety supervision; gas detection; fixed and mobile air
quality monitoring; breathing equipment rentals and services; fixed and mobile
firefighting and fire protection services and equipment; worker
decontamination (shower) services; on-site medical services; worker safety
training; and safety management and consulting services.
For the three months ended June 30, 2008, the Company had one customer
representing more than 10% of revenue (June 30, 2007 - nil).
The Company currently provides services to its customers in two main
business areas: Oilfield Services ("Oilfield") and Industrial Services
("Industrial"). Oilfield is the conventional upstream, or "wellhead", sector
of the oil and gas industry. Industrial represents non-conventional upstream
oil development and production including oilsands extraction, oil and gas
processing and refining plants and facilities, petrochemicals, pulp and paper,
utilities, power generation, diverse manufacturing industries, worker safety
training, and safety management and consulting services. The Company had
previously separately disclosed revenue for air quality monitoring
("Environment"), but has now grouped these services into either the Industrial
or Oilfield market in which these services are deployed.
The revenue for these customer groups is shown below:
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Quarter ended Quarter ended Quarter ended
June 30, 2008 June 30, 2007 June 30, 2006
-------------------------------------------------
Oilfield $ 8,667 $ 6,486 $ 13,253
Industrial 19,420 12,866 6,671
-------------------------------------------------
Total Revenue 28,087 19,352 19,924
-------------------------------------------------------------------------
As a % of Revenue:
Oilfield 30.9% 33.5% 66.5%
Industrial 69.1% 66.5% 33.5%
-------------------------------------------------
Total Revenue 100.0% 100.0% 100.0%
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Six months Six months Six months
ended ended ended
June 30, 2008 June 30, 2007 June 30, 2006
-------------------------------------------------
Oilfield $ 24,628 $ 26,285 $ 36,642
Industrial 31,028 21,015 10,747
-------------------------------------------------
Total Revenue 55,656 47,300 47,389
-------------------------------------------------------------------------
As a % of Revenue:
Oilfield 44.3% 55.6% 77.3%
Industrial 55.7% 44.4% 22.7%
-------------------------------------------------
Total Revenue 100.0% 100.0% 100.0%
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Oilfield
--------
Oilfield revenues in the quarter experienced a 33.6% gain compared to the
second quarter of 2007, and a 34.6% decline as compared to the second quarter
of 2006. The year over year gain from 2007 to 2008 is due to increased overall
activity levels within the conventional upstream, or "wellhead", sector of the
oil and gas industry: oil and natural gas well drilling, completion and
work-over (repair and maintenance) operations. Services provided in the
Oilfield sector are primarily oriented towards supporting the development of
natural gas, particularly sour gas containing hydrogen sulphide. The primary
driver of revenue fluctuations in the three comparative reporting periods
relates to an increase or reduction in natural gas drilling and work-over
activity caused primarily by significant fluctuations in natural gas prices
and external factors such as interest rates, currency exchange rates, equity
and debt markets, and federal and provincial taxation and royalty policies.
Industry sources have indicated that over the past three years, new
conventional oil and gas well drilling activity levels in the Western Canadian
Sedimentary Basin ("WCSB") have declined sharply from 2006 to 2007 but
remained approximately the same in 2008 as compared to 2007. Well workover and
stimulation activities on existing wells have followed a similar pattern. In
addition to the overall activity decline, there has been a commodity-price
influenced shift in new wells drilled in the first six months of 2008 from
natural gas to crude oil. This has also contributed to the contraction of
overall demand for the Company's Oilfield safety services.
To meet growing industry demand in British Columbia and Saskatchewan,
equipment and personnel were redeployed from Alberta generating increases in
Oilfield revenue. This trend should continue as customers redeploy capital to
these markets because of new discoveries and attractive fiscal regimes for oil
and gas development.
HSE has experienced some pricing pressure with customers caused primarily
by additional capacity added by competitors and overall industry reduction in
demand. As conventional oil and gas exploration and production has become less
profitable for E&P companies because of lower gas prices and higher overall
operating costs, there has been pressure to sustain profitability by asking
vendors like HSE to provide products and services at flat or lower prices.
Industrial
----------
The Company continues its successful business diversification strategy,
and reports a 50.9% ($6,554) increase in Industrial revenues in the second
quarter when compared to the prior year, and an almost 191.1% ($12,749)
increase when compared to the similar period in 2006.
The continuing growth in Industrial revenues is from increased demand for
safety equipment and services from oil and gas processing facilities, thermal
heavy oil recovery, and oilsands extraction and construction projects in
Alberta; safety services, fire suppression, gas detection and breathing air
equipment rental services to diverse industrial and commercial markets in
British Columbia, Alberta, and Ontario; safety services for the refining,
mining, offshore drilling and production and other industries in Atlantic
Canada; and worker safety training and safety consulting services in all
markets.
The second quarter of 2008 was characterized by a significant increase in
processing plant (oilfield and industrial) shutdown and turnaround safety
services which tend to take place in the spring and fall of the year. The
Company's increased revenue in this area is a combination of repeat business
from satisfied clients from prior years, a more focused marketing effort in
this area, increased expertise in this specialized area through the addition
of some key operations and marketing personnel, more service contracts for
services on a continuous basis, and growing customer acceptance of HSE as a
viable provider of these services.
A significant portion of the increase in Industrial revenues came from
continued growth in demand for a growing range of HSE's services to oilsands
construction, extraction and processing operations in Northeast Alberta based
from Fort McMurray. This geographic area experienced growth rates of 62% over
the prior year, and 558% when compared to the same period in 2006. In the
second quarter of 2008, revenue from this region represented 16% of total
revenue.
Equipment and services delivered in Central and Atlantic Canada, and the
North Eastern United States, is classified as Industrial revenue. Revenue from
these areas in the first six months of 2008 was $10.3 million and has
increased by 103% when compared to 2007.
Building upon the acquisitions completed in April 2006, and increased
demand created by more aggressive marketing efforts in new and existing
markets, the Company continues to gain customer recognition as a capable,
qualified and reliable provider of safety services.
Prior to HSE, no single industrial safety services company in Canada has
ever been able to offer its clients the capacity and diversity of services
from a single source. The continued growth of Industrial safety revenues
reflects both customer acceptance of HSE as a capable and reliable vendor and
validates the Company's business model that this is an essential and viable
business.
Operating and Materials Expense and Operating Margin
Operating and materials expense consists of costs directly attributable
to the delivery of safety and related services to customers. These include:
wages and benefits for field employees and contractors; equipment rentals and
leases; field service centre property costs; transportation; fuel;
consumables; equipment repairs and maintenance; and field office
administration including field sales.
Operating and materials expense for the quarter ended June 30, 2008
totaled $23.4 million or 83.5% of revenue as compared to $18.5 million or
95.8% of revenue in 2007. Operating margin for the quarter increased from
$0.8 million or 4.2% of revenue in 2007, to $4.6 million or 16.5% of revenue
in 2008.
The significant increase in operating margin is due to higher revenue in
all business categories and increased utilization of all the Company's capital
assets compared to the same period in the prior year. Higher input costs (such
as fuel) negatively impacted the quarter.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expense consists of costs
not directly attributable to the delivery of services to customers. These
include costs generally associated with the following; corporate head-office
functions and services; administrative personnel; corporate sales and
marketing costs; liability insurance; professional fees; and investor
relations expenses.
SG&A for the quarter ended June 30, 2008 totaled $2.5 million, which
represents a 5.3% reduction from the same period in the prior year. This was
achieved despite a 45% increase in revenue during the period. On a
year-to-date basis, SG&A is down 5.3% year over year while revenues have
increased by 17.7%. This is in line with the Company's ongoing fixed cost
reduction and efficiency initiatives which have been underway since the second
quarter of 2007.
EBITDA and Net Earnings (Loss)
Reflecting a 45% increase in revenues for the quarter June 30, 2008
compared to the prior year, EBITDA (see "Non-GAAP Measures") increased to
$2.2 million from $(1.8) million in Q2 2007, an improvement of $4.0 million.
This was caused by significant revenue increases and higher equipment
utilization rates in all areas. This was also assisted by tightly controlled
SG&A and field fixed cost expenses.
Total amortization for the quarter was $1.9 million. This was comprised
of $1.7 million in property and equipment amortization, and $0.2 million in
intangible asset amortization. Property and equipment amortization has
increased by $0.1 million when compared to the prior year due to previous
investments in property and equipment and from similar assets acquired through
acquisitions.
Stock-based compensation for the quarter was $0.2 million (2007 -
$0.3 million).
Interest on long term debt in the quarter decreased slightly from the
same period in the prior year, and other interest and bank charges increased
slightly. Decreased interest from obligations under capital leases was offset
by some increases due to a draw on the operating line of credit early in the
reporting period and an increase of non-interest bank and finance charges.
For the second quarter of 2008, the loss on disposal of property and
equipment was $326 as compared to a loss of $30 for the same period in the
prior year. Asset divestitures in the period were the result of an ongoing
review of all the capital assets of the Company to ensure optimal utilization
and ongoing commercial viability. Non-essential assets were sold in a
sale/leaseback arrangement resulting in a deferred gain.
HSE had an income tax recovery of approximately $0.1 million in the
second quarter, which represents an improvement from the $(1.3) million
recovery recorded for the same period in the prior year primarily due to
increased profitability.
The net loss for the second quarter was $0.6 million, which represents an
increase compared to a net loss of $3.1 million for the same period in 2007.
The greatly reduced loss is due to higher levels of revenue and EBITDA.
Liquidity and Capital Resources
The Company's principal sources of capital are cash flows from
operations, borrowings under an established credit facility with its senior
lender, and equity financing.
The Company, through the conduct of its operations, has undertaken
certain outstanding contractual obligations as noted in the following table:
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Years ended December 31, 2008 2009 2010 2011 2012 Total
-------------------------------------------------------------------------
Capital lease obligations $702 1,094 296 111 6 $2,209
Vehicle operating leases 845 1,507 1,419 739 21 4,531
Property & other leases 1,509 2,597 2,015 1,267 707 8,095
Long-term debt 88 1,138 13,853 9 - 15,088
-------------------------------------------------------------------------
Total contractual
obligations $3,144 6,336 17,583 2,126 734 $29,923
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Cash Provided by Operations
Cash provided by operations in the quarter was $4.2 million as compared
to cash provided by operations of $2.9 million for the same period in the
prior year. The primary cause for the change was a higher level of earnings.
In the first quarter of 2008, a new invoicing software system was installed
that provides the benefits of increased administrative efficiency, and greater
controls over the timely recognition of revenue. The launch of this software
created initial delays in invoicing, and accounts for much of the relative
rise in accounts receivable in the first quarter. These delays have been
largely remedied in the second quarter through increased training and user
experience. Approximately 3% of accounts receivable is aged greater than 90
days, the full amount of which has been provided for in the allowance for
doubtful accounts.
Cash Used in Financing and Investing
During the quarter, the Company paid down its operating line of credit by
$3.7 million. This leaves $7.5 million available for future use. The Company
also made scheduled debt reductions of $1.0 million toward capital lease and
other long term debt obligations.
Purchases of property and equipment for the quarter amounted to
$1.1 million, the majority of which was revenue generating safety services
rental equipment.
Liquidity
The Company's credit facilities include a $25 million three-year
interest-only revolving facility and a $7.5 million operating facility. The
revolving facility matures on June 25, 2010, with an ability to extend the
term at the lender's option. The operating facility is renewable annually and
is margined to accounts receivable. The credit facilities are subject to
covenants that are typical for this type of facilities, and are collateralized
under a general security agreement.
At June 30, 2008, the draw against the revolving facility was
$14.0 million and the Company was in compliance with its financial covenants
and continues to maintain a favourable relationship with its primary lender.
Outlook
Oilfield
--------
Due to a steady increase in the price of crude oil, a significant
recovery in the price of natural gas, and resolution of some of the
"unintended consequences" of Alberta's new Crown royalty regime intended to
come into effect January 1, 2009, demand for Company equipment and services
from clients in the Oilfield sector in Alberta - HSE's largest market - is
improved compared to the prior year. Indications from Company clients are that
their capital programs - particularly for natural gas - will be steady or
increased in the second half of 2008 compared to the second half of 2007. This
will benefit the Company and should increase demand for, and utilization of,
the larger capital assets specifically oriented towards natural gas drilling,
completion and development. Recent announcements of increased capital budgets
for natural gas development in Alberta give the Company some confidence that
the period of lowest demand for its specialized assets and services for this
market segment has passed.
HSE's strategy will be to continue to carefully monitor demand and
redeploy capital assets outside of the Oilfield sector in Alberta (either in
Industrial markets or Oilfield markets in other jurisdictions) in order to
achieve asset utilization rates that will generate a more satisfactory return
on invested capital than the Company has achieved in recent reporting
quarters.
Due to attractive fiscal regimes and new discoveries of hydrocarbons in
British Columbia and Saskatchewan, demand for the Company's Oilfield equipment
and services in these markets will continue to grow.
United States Expansion
-----------------------
As announced on May 7, 2008, HSE continues to pursue the expansion of its
Oilfield safety services division in the continental United States through a
new company called Boots & Coots HSE Services, LLC. ("BCHSE"), jointly owned
by HSE (90%) and Boots & Coots International Well Control, Inc. ("Boots &
Coots") (10%). In the second quarter, progress was made in launching this new
venture including incorporation of the operating entity, selection of a joint
Board of Directors, development of operating policies and procedures, review
of opportunities available from Boots & Coots existing facilities, budgets,
recruiting and training strategies, ongoing marketing, insurance and
regulatory matters, and other undertakings congruent with starting up a new
operation in another country.
Initially, BCHSE will provide fire protection and worker decontamination
services during well stimulation operations. This will involve the relocation
of the necessary specialized and proprietary capital assets, designed and
manufactured by HSE in Canada, to selected US markets. The first equipment, a
high capacity fire/shower combination unit, is scheduled to be shipped to the
Boots & Coots service location in Decatur, Texas, in mid-August. The Decatur
location, northwest of Fort Worth, Texas, services the active Barnett Shale
gas play in the region. Other equipment has been identified for shipment in
the third and fourth quarters of 2008.
