North American Construction Group Ltd

Good morning, ladies and gentlemen. Welcome to the North American Construction Group earnings call for the fourth quarter and year ended December 31, 2020. At this time, all participants are in listen-only mode. Following management's prepared remarks, there will be an opportunity for analysts, shareholders, and bondholders to ask questions. The media may monitor this for call in listen-only mode. They are free to quote any member of management but they are asked not to quote remarks from any other participant without that participant's permission. The company wishes to confirm that today's comments contain forward-looking information and that actual results could differ materially from a conclusion, forecast or projection contained in that forward-looking information. Certain material factors or assumptions were applied in drawing conclusions or in making forecasts or projections that are reflected in the forward-looking information. Additional information about those material factors is contained in the company's most recent management discussion and analysis, which is available on CDAR and EGDAR, as well as the company's website at nacg.ca. I will now turn the conference over to Martin Farron, Executive Chairman.

Thanks, Kenzie, and good morning to everyone. Well, after almost 25 years of doing quarterly and annual earnings calls, This will be my last one. I could not be happier that our great team of employees marked my final quarter as CEO with solid performance. In particular, they impressively met or exceeded all of our important goals in relation to safety, free cash flow, and diversification. 2020 was a really challenging year, and I'm very proud that we were one of very few companies so in control of our business to reset and beat financial guidance in an operating environment dominated by the COVID-19 pandemic. With that brief introduction, I will hand these quarterly calls over to Joe, but will remain on today to answer any questions directed at me. Beyond that, I will be actively supporting the executive team for the balance of the year. Jason will start us off here today with financials, and then Joe will provide his outlook for the future.

Thanks for those comments Martin and good morning everyone. Given a unique call here today, I'll start us on the safety content on slide five. As is often stated here at North American, no financial outcome is worth celebrating if our safety culture or safety performance has been compromised. Although yet again, we did achieve the industry benchmark for safety excellence for the sixth year in a row, We did see an uptick in incident frequency in 2020 and are refocusing our efforts as the macro environment and operating protocols stabilize. As Joe will touch on later with our 2021 priorities, we will be doing everything in our power to make sure everyone gets home safe. Slides six to 11 provide a summarized view of 2020. But as with past protocol, These prepared remarks will focus on the quarter to avoid repeating commentary from previous quarters. And as such, we'll begin the financial review on slide 12. Revenue for the quarter of $137 million was $53 million below last year's Q4 as we continue to recover from the widespread impacts of COVID-19. The majority of the $53 million variance relates to the strong quarter we had in 2019 at the Fort Hills mine prior to their decision to temporarily reduce the operating capacity at that mine. The year-over-year variance represents a 28% decline in revenue but is trending positively when compared to the negative 60% and negative 43% posted in Q2 and Q3 of this year. The corridor enjoyed fairly standard fall and winter weather conditions and the revenue achieved was largely as expected. The resiliency of the oil sands mines remains strong and as access restrictions and safety protocols become more routine and predictable, we will continue to see our productive operating hours and utilization increase. As Joe will explain later, the 58% operating utilization achieved in Q4 is trending in the right direction from the low of 24% in Q2. While, of course, critical to our results, reported revenue inherently lends itself to the programs where we directly provide our own heavy equipment and where we provide the labour force. Equity-accounted interest, being primarily NUNA, as well as our external maintenance and mine management contracts do not factor prevalently into the reported revenue figure. but are strong contributors to EBITDA and particularly drive the 35% of adjusted EBIT that we generated from outside the Fort McMurray region in 2020. Furthermore, our strategic contribution of heavy equipment to these joint ventures is also increasingly becoming an important part of our business. Therefore, we expect our reporting to adapt slightly in Q1 2020 as our diversification efforts continue and we look to accurately represent this to the readers of our financial statements. Moving back to reported results, gross profit margin of 17% reflected a solid operational quarter as mentioned by Martin in his opening comments. The key drivers of the margin were effective utilization of our fleet as well as discipline cost constraints that remain in place. The Canada Emergency Wage Subsidy Program continue to support margins, and I'll touch on that later. With regards to cost constraints, Q4 was particularly impacted in a positive way by lower third-party costs, which has been a focus of ours. Lastly, margin was positively impacted by the mine management contracts, which provide strong returns. These positives in the quarter were offset by continued cost impacts at the Millennium Mine, as we continue to stabilize the equipment and labor performance of the complex operating conditions and the increasingly large heavy equipment fleet we have at that mine. Included in gross profit margin was depreciation, which was 19% of revenue for the quarter. The depreciation percentage in Q4 was higher then our expected rate given the continued higher proportion of larger equipment operated when compared to a typical three month period over the past few years. When stepping back and looking at the full very unique year of 2020, depreciation of 18% of revenue was higher than our historical run rate primarily due to this higher proportion of larger or ultra class equipment operated when compared to a typical fleet which includes smaller support equipment. Straight line depreciation on fixed assets during the low revenue quarters of Q2 and Q3 also contributed to the percentage increase. And lastly, the inefficiencies caused by poor haul road conditions, particularly in Q3, resulted in higher than usual operating equipment hours, which of course drives depreciation. General and administrative expenses in the quarter were $6.3 million, equivalent to 4.6% of revenue. This spending percentage was consistent with the trend in 2019 and was achieved through continued cost discipline and the complete halt in late Q1 of all discretionary and non-essential spending that has remained in place. Adjusted EBITDA of $46.2 million was consistent with Q4 2019 under, as we all know, a very different macro environment. Adjusted earnings for the quarter of $0.36 was consistent to Q4 2019, which generated $0.38. Interest specifically continues to trend nicely as the 3.7% rate and the $4.2 million cash expense in the quarter compares favorably to the 4.8% and the $5 million incurred last year. We continue to benefit from both reductions in posted rates as well as Competitive Equipment Financing. We provide slide 13 one more time for clarity to close out 2020 and as disclosed in detail in our financial statements, net income for the quarter includes $6.6 million of wage and salary subsidies received under the Canada Emergency Wage Subsidy Program. Consistent with past practice, these subsidies are presented with their correlated Employee Expenses in Project and Equipment Costs and G&A Expenses. These subsidies reimbursed us for a portion of the wages we paid and greatly aided our efforts in retaining workforce. As noted in the slide, the program reimbursed us for approximately 20% of the all-in employee costs, which in turn allowed us to maintain 20% of the headcount level we may have otherwise had to reduce either temporarily or permanently. From our perspective, the program has worked effectively and positions us well as we move forward here into 2021. Moving to slide 14, I'll summarize our cash flow. Net cash provided by operations of $63 million was produced by the business and includes a positive impact of $18 million of working capital changes that bolstered free cash flow. Similar to 2019, Cash from our joint ventures was collected in Q4 and was a primary driver in this working capital change. Sustaining capital of $26.7 million was dedicated to major component replacement in the heavy equipment fleet required for the stronger than expected recovery. As indicated, this spending level was required earlier than anticipated as we prepared not only for the strong finish to Q4 but also in preparation for the full year of 2021. Moving to our balance sheet on slide 15, liquidity of $148 million reflects our upsized credit facility that was extended on October 8th. EBITDA generation and positive changes in working capital had the correlated and desired effect of reducing our debt levels. On a trailing 12-month basis, Our senior leverage ratio as calculated by our credit facility agreement was 2.0 times which is well below our covenant of 3.0 and reflects our intentional capital allocation in Q4. To close out the financial review on slide 15, I'll briefly touch on our current debt structure. The three-year extension in October of our $325 million credit facility provides the stability and low-cost financing that we require over the next three years. As the slide highlights, we don't have a required financing decision to make until 2023. With those financial comments, I'll pass the call over to Joe.