Napec Inc (TSX:NPC) CEO Interview


Napec Inc
CEO: Pierre Gauthier



WSA: Good day from Wall Street, this Juan Costello Senior Analyst at the Wall Street Analyzer.  Joining us today is Pierre Gauthier the CEO of NAPEC Incorporated.  The company trades on the Toronto Stock Exchange ticker symbol is NPC.  Thanks for joining us today there Pierre.

Pierre Gauthier:  Thank you, my pleasure.

WSA: Great, so starting off, please give us a little bit of a background of the management team behind the scenes.

Pierre Gauthier: Alright.  Well myself I joined the board of NAPEC in late 2013.  At the time I was managing Alstom, a large manufacture of high-speed trains and power generation equipment.  I was based in Washington DC, North American operations were almost a $4 billion US organization with over 15,000 employees.  But in the spring of 2014, General Electric bought the power generation activities of Alstom and I thought that was a good time for me for different reasons to retire, which I did.  But also in the spring of 2014 the board of NAPEC back then called CVTech and I’ll explain that later, decided to recruit a new CEO and I was asked if I would be interested and I did.  So I joined the NAPEC team in August of 2014.  I’ve been here now for about a year and a half.

My management team has now – we’ve merged pretty much our US activities into one company.  It’s led Mr. Steve Zemaitatis he’s grounds up a young very good manager.  Riggs Distler by the way which is the name of the company that we use in the United States, it’s a 100-year-old company so it has good experience management.  It’s a solid organization.  In Canada we just announced in earlier this month the merger of the two Canadian operations, which are Quebec and Ontario.  Now they’re under the leadership of Mr. Sébastien Delorme who’s coming from outside a 15 year experienced manager in heavy construction, which fits very well.  And then the rest of the staff, I’ve got two Ex-Alstom guys– I was kind of lucky to be able to have those two experienced managers in HR and also in I.T.  And I have a long time, 18-year veteran with NAPEC, as CFO and also a legal advisor.  So that pretty much is the management.  I think we have a good set of people to assume the growth that is coming in the next few years.

WSA: Good and can you give us a little bit more of an overview there of NAPEC and your subsidiaries?

Pierre Gauthier: Absolutely.  Well the company started in 1978 under the name of CVTech IBC, which was a manufacturer of transmission and gears.  It got listed on the Toronto Stock Exchange in 2005 and made the acquisition of our Canadian operations, which, operate under the name Thirau, and in 2009 it proceeded to acquire our US operations of Riggs Distler and company. Then in 2012 we sold gear and transmission activities, and at the same time sold the name of CVT which is why in mid 2014 we changed the name to NAPEC, North American Power Energy Corporation.  In 2013 we made the acquisition of B.G.  High Voltage in Ontario and last year in the fall of 2015 we acquired a company called Bemis, which operates in New England and does high voltage and distribution electrical activities but also provides matting for operations.

Our activities span Canada with two provinces, Quebec and Ontario.  In the United States now we operate in 11 states that go from Northern Virginia right up to Illinois.  So we’re pretty much exclusively based in the northeast of the United States.  Our activities we do construction, installation maintenance of electrical transmission, and distribution grids.  These go from the low voltage residential distribution grids right up to the very high voltage, so 735 KV transmission that you see in the long distance transmission of electricity.  We also do in the United States networks for gas utilities, which are not the main pipelines but we do the industrial pipelines that will lead to a gas power plant. We will also do all the gas installation within that power plant connecting the boilers and the gas turbines and so on, which also includes refineries and petro-chemical plants.

In early 2015 I produced a strategic plan which calls for us to double our revenues by the end of 2017.  And also come back to our historical margins, which had been usually around 7-8% on an EBITDA basis.  And we’ve achieved in this quarter and I’m quite comfortable in saying that this will continue also in the near future.  Our order book with the recent announcements have now reached a record half billion and I’m talking Canadian dollars here.  So this comes from a solid Canadian market, which is not a big growth market but it’s a very stable steady market and a very dynamic and growing US market.  I think I can say a few words on why this is happening.

WSA: Right yeah, well I was going to ask you about the key trends in the sector and how is the company positioned to capitalize?

Pierre Gauthier:  When I came to the United States I was based in Washington D.C, it was back in 2008–Just when the market was just falling apart.  And so our major customers, utilities started reducing their activities and not only on construction but also in maintenance.  And this continued up to about I’d say almost 2012.  So it was a real tough declining market.  Since then the economy has started to turn around and our customers now are faced not only with a growing demand from their customer base but also in recuperating all these years of under investments in their networks.  Plus the last storm in 2012 the Sandy storm launched a process by the utility board to strengthen the networks in order to avoid what has happened during that storm where it took several days to bring back large cities like New York.

And finally I’ll add the last piece of it, is that this is a big change and that is due to new EPA regulations which will make it almost impossible for new coal power plants to be built, and also decisions that will be made by utilities because it’s not worth the investment to shut down the older and smaller coal power plants and most of that because natural gas has seen a tremendous change.  It went from in 2008 to we’re going to run out of it by 2020 to now a 200 year supply.  So natural gas is the main fuel that will replace all those coal power plants.  Now these coal power plants were built in areas usually far away from cities and generally the consumer.

Natural gas power plant can be built much closer and that is what is happening, and therefore this creates a whole new transmission network in order to adapt to these different locations of power plants.  So you put all of that together and we’re seeing now pretty much in the United States but mostly in the North East record demand in transmission and distribution investments, plus record demand also in gas–not only the pipelines but also the secondary mains and also the demand at the commercial and residential level.

Another aspect which I haven’t discussed is renewables.  We are right now the 4th largest builder of solar powered farms in the United States.  So I see renewable especially wind and solar to continue in that strength.  So I’d say in the near future I think for the next at least three years we’re going to see that these record investments in the electrical networks to continue, and on the gas probably another ten years of growth in that area.

WSA: Can you elaborate on some of your recent contracts?

Pierre Gauthier:  Yeah well it’s a variety of contracts and your questions enable me to specify.  We have really two types of contracts.  One of them is a more service type contract, which are usually three-year terms with maybe a two-year option.  And on these we negotiate a fixed fee and the work is planned by our customer, so it’s a no risk business.  It’s pretty much time and material and that totals about almost pretty much half of our business in general.  So it’s a solid business with no risk.  Obviously when you have no risk the margins are not as high as other types of business, and the other one is more a fixed fee.  These are more constructions projects such as transmission lines and as such therefore we take on the construction risk but the margins especially as you go into the high voltage area are much higher because there is not that many competitors that can do these high voltage transmission lines.  So these are pretty much the two sides of our business and if we manage them well I would say the only risk even in the fixed cost or the fixed price contract I would say is mostly weather related and so if there are storms or unusual rainfalls then we may be delayed a few days but this is something we’re typically used to manage and we have all the equipment to be able to handle that.

WSA: So what are some of the other key factors here that you feel make NAPEC unique from some of the other players in the sector?

Pierre Gauthier: There’s two big factors today, One of them is typically in the declining market companies like ours which are totally unionized struggle a little more against competitors which are non unionized and typically have lower cost.  However, in a rapidly growing market these competitors which are non unionized have difficulties in supplying the manpower needed because they have to train them themselves where we go on the union halls and we can hire pretty much all the manpower that we need.

So right now our customers are asking their current suppliers to double in some cases triple their level of activities which makes these non-union companies puts them in a position where they cannot fall, and therefore that opens a great opportunity for us because we have that flexibility to increase very rapidly.  The second thing is there’s been utility business.  And now a big part of the electrical supply is being made by large utilities, which cover multiple states.  So for instances cities like Baltimore, Washington, Philadelphia are now – they went from individual power companies and now belong under the umbrella of a company called Exelon which is one of the larger utilities in the United States.

And what is happening now is the procurement is starting to look at suppliers able to supply them into a much larger geography than what the current suppliers are doing on the local basis.  So the more local suppliers in our business are struggling because they cannot grow to the level very quickly that is being required by these larger utilities.

WSA: Certainly and so what are some of the key goals and milestones that you’re hoping to accomplish over the course of the next year?

Pierre Gauthier:  We’ve, I expect our yearly results will be coming out in late March but I expect that we will have achieved our first year of our strategic plan.  And so we’re looking at our second year of our strategic plan and with our order book and with also the growing market.  I’m quite confident we will have achieved our second year.  And because our strategic plan calls for about a 16% year over year growth organic, and the rest of the growth will come from acquisitions.  So we’ve made one in 2015, I’ll be looking at probably another one during 2016 or early ’17 in order to achieve that.  So I’m quite confident that we will achieve that and afterwards this will position us into I’d say one of the probably smaller of the larger suppliers in our field, and then we’ll look at the possibilities that we can have to join that select group of maybe five/six suppliers in our business that are the major players.

WSA: So as far as investors and the financial community here do you believe that your company story is completely understood and appreciated by them and if not, what do you wish they better understood about NAPEC?

Pierre Gauthier:  Well first of all I have to say we had two bad years so 2013, ’14.  I would say these were bad years because we had some bad contracts, and the company operated pretty much as a portfolio of companies where our subsidiaries had full authority and full decision making.  I’ve changed that model.  NAPEC is now an integrated company with two operations one in the United States under Riggs Distler and one in Canada under Thirau.  And I have put in controls in order to make sure that these bad contracts do not happen again.  So we’ve pretty much cleared the financial issues that we had relating to that past.  So the second half of 2015 shows that we’re back to our traditional margins and maybe a little more because the market is so dynamic, so I don’t see a recurrence of these issues.  But obviously it takes a bit of time for investors to believe that we’re back on track and we’re operating in a more secure and growing environment as before.  So I understand it does take a bit of time and certainly I expect that we will show investors that the strategic plan is something we can certainly accomplish.

WSA: Right and so one again joining us today is Pierre Gauthier the CEO of NAPEC Inc.  The company trades on the Toronto Stock Exchange.  Ticker symbol NPC.  Currently trading at 71 cents a share market cap is about $56 million Canadian.  And before we conclude here Pierre to recap some of your key points, why do you believe investors should consider the company a good investment opportunity today?

Pierre Gauthier:  Well it’s an incredibly cheap stock at 71 cents, its way below what it should be with our EBITDA situation actually.  Our asset value is over $1.20 so you can see the spread between the two.  And if you look at it with current foreign exchange I mean it’s a penny stock for much of the US investors, with operations that are now over 75% in the United States, and a market that is growing and management now that has a much better control in making sure the bottom line is achieved.  So I think right now it’s an incredibly very inexpensive stock, which has excellent growth potential.

WSA: Well we certainly look forward to continue to track the company’s growth and report on your upcoming progress.  And we’d like to thank you for taking the time to join us today Pierre and update our investor audience on NPC it was great having you on.

Pierre Gauthier:  Thank you Mr. Costello, it was a pleasure.



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