Management Q&A

Dedicated to keeping investors informed, Churchill gathers and answers questions about its company, holdings and operations during quarterly conference calls and online. Q&As are updated quarterly.

Q: What strategic goals did you achieve in 2010?

A: In our 2009 Annual report we said that our focus in the years to come would be to grow by expanding geographically and adding new services to our business mix. We advanced both of those objectives in 2010. With the Seacliff acquisition we gained a much broader geographical footprint with additional offices and project locations throughout western Canada. As well, we added new capabilities in three ways.

First, we gained a key merger benefit by growing and high-grading our General Contracting segment through combining Stuart Olson and Dominion to form Stuart Olson Dominion. It is all about putting the best people on the highest bang per buck projects and then excelling in the execution of those projects. The key is to match the best people to the job at hand with a philosophy of value creation. Operational excellence is the mindset that we nurture at Churchill.
Second are the institutional and commercial electrical and data communications systems of Canem.
Third are the aggregate processing, earthwork, civil construction and concrete production services of Broda Construction.

We have emerged as a much bigger company capable of taking on larger projects and presenting a much broader integrated service offering, which is a big focus this year and beyond.

As well, we increased the organizational capability of our Churchill corporate group. We had been getting by for several years with essentially a skeleton staff and, now that we were managing a much larger company, we concluded it was time to increase the strength of our accounting, finance, corporate development, human resources, information systems and investor relations groups. Our timing took advantage of the current state of the Western Canadian economy, which was rapidly emerging from the recent global recession but not yet back in boom, so we were able to add some very talented people to our team.

We also implemented a new SAP-based enterprise resource planning system in SODCL, Laird and IHI. It allows us to do a better job at cash management and improving our balance sheet.

Q: Has the Seacliff acquisition grown value for Churchill’s shareholders?: A: We have already achieved cost synergies as we integrated the Seacliff companies into Churchill, through reduced insurance and procurement expenses, closing down the Seacliff and Dominion corporate offices, eliminating duplicative public company costs and advancing the organization to develop and grow the best people while eliminating redundancies. We originally expected to achieve cost savings of $7 million and revenue synergies of $3 million annually for 2012 and beyond. With the aid of improved systems, processes and internal controls at SODCL, we now expect annual cost savings of $10 million to $13 million.

Another benefit we’re working to gain from the Seacliff acquisition is transitioning legacy Dominion operations from a low-margin fixed-bid culture to Stuart Olson’s higher-margin construction management culture. In the short term we’ll need to work through Dominion’s backlog of lower-margin projects, but going forward we expect margins to improve as new higher-margin projects replace them.

Further, Churchill expects to realize significant revenue synergies due to the ability of SODCL to secure certain large projects that may not have been awarded to Dominion or Stuart Olson as stand-alone entities. We have announced several projects of this nature in the first half of 2011, which greatly exceed our projected $3 million in revenue synergies in SODCL alone. In addition, we are realizing revenue synergies in the Industrial Services segment by producing bundled products and services offerings to customers and expanding the operations of Laird, IHI and Broda beyond their traditional geographies.

Q: Stuart Olson had large projects prior to the Seacliff acquisition, as did Dominion. Why is SODCL better able to win large projects than Stuart Olson or Dominion was?: Our increased size gives us increased financing and bonding capabilities, so we can take on larger projects, and at a lower cost of capital. As well, managing large projects effectively requires an experienced and talented team. With the integration of Dominion, SODCL has increased its number of such teams, so we can now compete for more large projects at the same time.

Q: What work remains to be done to integrate the operations of legacy Churchill and legacy Seacliff?: The integration of Stuart Olson and Dominion is complete, including the implementation of a new SAP-based enterprise resource planning, or ERP, system to enable us to run the business more efficiently. This system has also been implemented in Laird and IHI. Canem Systems has been kept as a stand-alone company in a separate business segment because, while it serves the same commercial and institutional markets as SODCL, Canem has many opportunities to partner with other general contractors and we want it to retain that freedom. Broda also remains as a stand-alone operation, giving us the opportunity to add earthwork, civil construction and concrete production to the bundled services that we can offer to our industrial customers, as needed. We expect to extend our new ERP system to Canem and Broda in 2012.

Q: Construction companies have been experiencing significant margin pressure. Can you discuss the margin outlook for Churchill?: A: In 2010, Churchill’s EBITDA margin was 7.2%, compared to 8.5% in 2009. Overall, we expect margins to begin to improve in late 2011, early 2012, as demand for our products and services improves.

For SODCL, which comprised about two-thirds of Churchill’s revenue in 2010, the EBITDA margin was 8.0%, compared to the 10.6% margin reported in 2009. We expect continued margin compression for SODCL in 2011 as we work through the lower-margin, fixed-bid projects in the Dominion backlog and the projects awarded in the more competitive bidding environment during late 2008 and into 2009. We are seeing go-in margins rise in 2011, which will likely start being reflected in results reported in late 2011 or early 2012.

In our Industrial Services segment, which derives a large part of its business from oil sands projects, revenues were up in 2010 but this was partly offset by lower margins as the project mix shifted to larger projects with more competitive margins. While this segment’s revenues increased by over 150% in 2010, EBITDA margin decreased to 8.2% from 10.0% in 2009. As industrial activity in Alberta and Saskatchewan increases, and as Broda’s higher-margin business contributes more to the segment, we expect to see margins begin to rise in 2011. Volumes for Laird and IHI are expected to moderate somewhat they transition from the large commissioning projects of 2010 to lower volume but higher margin maintenance and debottlenecking work in 2011.

Our new Commercial Systems segment’s EBITDA margin was 14.6% on $80.3 million of revenue for the last 5½ months of 2010. We expect Canem’s margins to be under pressure in 2011, but to remain in the low double-digit range.

Q: Are you expecting to grow outside of Western Canada? Will you add further construction services? Under what circumstances?: A: We will continue to be focused on Western Canada, because we know the region well and we believe it has excellent construction and industrial services growth opportunities. We intend to grow our service offering through organic growth and reasonably priced tuck-in acquisitions, and we are also open to another impactful acquisition, but only if it makes sense for shareholder value creation.

Q: How are Churchill’s industrial businesses positioned to win work on new oil sands projects?: A: IHI and Laird, thanks to their first-rate safety and work execution records, are very well positioned to benefit from the resurgence of the oil sands. Safety is engrained in our culture, and Laird actually achieved zero recordable safety incidents in 2010. A proven ability to execute projects safely and on schedule is the most important competitive factor in securing oil sands work because the large-scale economics of oil sands projects make them more schedule-sensitive than price-sensitive, since a delay in commissioning date can have a major impact on project economics. Large customers insist upon top-level safety performance along with sophisticated safety management systems.

Q: On Broda, wet weather in Saskatchewan proved to be a major impediment in 2010. How does the 2011 pipeline look?: A: Broda's customer base includes Agrium, Potash Corporation and Cameco. They are all planning significant expansions in 2011 and beyond and Broda is well-positioned to capture a significant share of this work. As well, we are starting bundling Broda’s product offering with that of Laird and IHI for their Alberta customers, and with the win of the Calgary Airport New Runway Project, Borda has won its first major earth-moving project outside of Saskatchewan. Assuming a return to something closer to average weather conditions, Broda is well-positioned for an improved 2011.

Q: What changes are on Churchill’s agenda for 2011?: A: In 2011 we are continuing to focus on growth that adds value for our shareholders. We are executing organic growth through targeting new projects with strong profit margins. Our business segments are cooperating more closely to lever each other’s customers and provide bundled or grouped services. We are also continuing to look for acquisitions that are accretive to our shareholders on a per share basis. These may include small “tuck-in” acquisitions that add products, services or geographic reach to our existing operating companies, and we are not ruling out further transformational transactions of a similar size and scope to the Seacliff acquisition. We are also paying down our debt and in May 2011 we instituted a $0.12 quarterly common share dividend to add yield for our existing shareholders and attract new investors with a yield mandate.