North American Construction Group Ltd

good morning ladies and gentlemen welcome to the north american construction group earnings call for the second quarter ended june 30 2021 at this time all participants are in a 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 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 CDER and EDGAR, as well as the company's website at nacg.ca. I will now turn the conference over to Joe Lambert, President and CEO.

Thanks, Rebecca, and good morning, everyone. I'm going to give a brief high-level overview of the quarter, turn over to Jason for the financial details, and then we'll close with a deeper dive into a few areas of our business and finish up with the outlook ahead of us before opening it up to any questions you may have. While I'm excited to talk today about our solid Q2 operational and financial performance, I am even more eager to share with you the milestones achieved this quarter which are integral to our future success and reinforce the confidence we have in our overall corporate strategy. In particular, the progress made through items such as the major contract wins, the DGI acquisition, continued Indigenous partnership growth, expanding internal and external maintenance capabilities, progress on our sustainability plans, increasing market diversification, growth, record backlog, record free cash flow projections, record low senior leverage ratio, and increased overall opportunities with line of sight to achieve or exceed our strategic goals. I will talk more in depth on these impressive milestone achievements later on in the deck. These achievements were accomplished during a quarter where we had the largest impact on our workforce due to the pandemic. As stated in my shareholder letter, The third wave impact in Fort McMurray had a 70% increase in positive cases and close contacts requiring quarantine than any previous quarter. Thankfully, our pandemic plan minimized the spread of the virus in our workplace and employee recoveries were better than average. However, the loss of the available workforce in Q2 is estimated to have had a 5% to 10% negative impact on fleet utilization and top-line revenue. With that brief preamble, I'll touch on our safety performance on slide four before Jason goes into the financials. Our Q2 total recordable injury rate improved significantly from Q1, and our trailing 12 months is now back within our target range. We are continuing our focus on high hazard areas and improved communications to offset pandemic protocols. We do expect continued relaxing of pandemic protocols as infection rates decrease in vaccinations increase. However, we expect some protocols will continue through year end. With those opening comments, I'll pass the call to Jason for our financial review.

Thanks, Joe. Good morning, everyone. We'll begin the financial review on slide nine. Revenue for the quarter of $140 million was $69 million ahead of last year's Q2, which was, as we all know, an unprecedented quarter and proves to be a difficult quarter to compare against. The year-over-year variance represents virtually a 100% improvement in revenue and generally came in as expected. The quarter enjoyed fairly standard weather conditions, but as mentioned by Joe, was noticeably impacted by the third wave of COVID-19 in the Fort McMurray region. The case counts in April and particularly May reached a level which resulted in a significant part of our workforce being temporarily unable to report for work. The safety protocols, as well as various risk measures in place, really mitigated what could have been a much worse situation at the mine sites. But we did see impacts to top line revenue, productive equipment hours, and overall operating utilization. Revenue achieved in the quarter was driven by various mine sites and business lines, which all continue to trend in the right direction. The Millennium, Curl, Aurora, and Mildred Lake mines have maintained their demand recovery, and we are once again witnessing firsthand the long-term resiliency of the oil sands region. In addition, we have mobilized fleet once again into the Fort Hills mine, and while not meaningful to Q2 results, We are excited to be back on that site as they ramp up to full production. Gross profit margin of 10.9% reflected the COVID-19 impact on profit margins as understaffed work crews are inherently less efficient. As disclosed, the Canada Emergency Wage Subsidy Program continued to support our workforce, which is its stated intention. Outside of COVID-19, The Millennium Mine continued to be a challenging mine site for us, but we feel we have now stabilized the performance of the complex operating conditions and the increasingly large and varied heavy equipment fleet that is commissioned there. Lastly, gross margin was impacted by some upfront bid costs associated with the successful Fargo Moorhead project, as well as some one-time mobilization costs related to the gold mine project in Ontario. Included in gross profit margins was depreciation of 18.9% of revenue for the quarter. The trend in depreciation as a percentage of revenue has been impacted by our ever-increasing ultra-class fleet, which consists of haul trucks with load capacities greater than 320 tons. We have been strategically investing in these haul trucks over the past two years, by a complete machine rebuild and major component overhauls. These investments result in increases to depreciable costs, which consequently drive higher depreciation as a percentage of revenue, resulting in us settling in the high teens as a trend. Direct general administrative expenses in the quarter were $6 million, equivalent to 4.3%. This spending percentage is consistent with expectation and was achieved through continued cost discipline and strict attention paid to discretionary and non-essential spending. Adjusted EBITDA of $42.4 million was 33% up for Q2 over 2020 on the factors already mentioned, in addition to the NUNA group of companies, which I'll touch on in the next slide. Adjusted earnings per share for the quarter of $0.32 was driven by adjusted EBITDA less the routine impacts of depreciation for which we booked $26 million this quarter as well as interest and taxes. Interest specifically continues to hold nicely at a 4% rate and was a $4.2 million cash expense in the quarter. We continue to benefit from both posted bank rates as well as competitive rates in equipment financing. Slide 10 is new for us and is a simple start in highlighting our growing interest in joint ventures. Figures from this slide can be found in Note 7 of our financial statements. For all of these joint ventures, we fulfill the operator role but do not own a majority interest and therefore are required to report under the equity method. Our share of revenue in Q2 of $37.9 million is the highest equity accounted revenue we've ever recorded and was primarily achieved within the NUNA group of companies, which is historically fairly slow in Q2. If we look back at Q2 2020, $11.2 million was generated, which at that time was considered solid and was not overly impacted by COVID-19 due to the location of the mine and infrastructure sites. This 250% increase is driven by the gold mine in Northern Ontario and reflects well the successes we are seeing in NUNA. The gross margin in the first half of the year of 19% reflects operational excellence being rewarded in the remote and harsh operating conditions that NUNA operates. Depreciation in the joint ventures is tracking at 5% of revenue, highlighting the smaller sized equipment fleets and the higher labor proportion when comparing to our more traditional heavy equipment fleet business. 2021 is proving to be another step year in our diversification efforts, and this slide quantitatively highlights that. For the first half of 2021, 40% of adjusted EBIT has been generated from outside Fort McMurray, and we are tracking nicely to our 45% target for 2021, following up from 35% in 2020 and 26% in 2019. We will be continuing to enhance our disclosure related to joint ventures in the upcoming Q3 and Q4 reports, as their materiality continues to increase, in particular with the addition of the Fargo-Moorhead project. Moving to slide 11, I'll briefly summarize our cash flow. Net cash provided by operations of $26 million was produced by the business and includes the negative impact of non-cash balances that aren't immediately apparent. These primarily relate to the accumulation of cash in our joint ventures, which don't hit our cash flow until the JVs formally declare distributions. In addition to this, the continued progress of our rebuild program and the related build of inventory in advance of those rebuilds resulted in the use of cash for inventory of roughly $8 million in this quarter alone. Given the visibility we have of the rebuild program, we do expect inventory to return to normalized levels by year end. Sustaining capital of $19.2 million was dedicated to the maintenance of our existing fleet following a very busy winter season. As our stakeholders are aware, sustaining capital is front-weighted in the year primarily for this reason. As a good reference point and ignoring the 2020 exception, additions in the first half of 2019 were approximately 65% of the eventual full year of spending. Moving to our balance sheet on slide 12, liquidity of $211 million reflects our strong position. The improvement in the quarter was driven by the issuance of $75 million of convertible debentures. On a trailing 12-month basis, our senior leverage ratio, as calculated by our credit facility, dropped to 1.5 times as at June 30th, primarily due to the issuance of that junior debt, and it's the lowest level we've ever had. Net debt levels remained consistent over the three months, as the modest free cash flow generated in the quarter was used for financing costs, dividends, and share purchases. Lastly for me, on slide 13, we provided our current debt composition, which is now conveniently split into three primary buckets, being our credit facility, equipment financing, and convertible debentures. As mentioned earlier, our cost of debt continues to hold at 4%. Despite talks of increases, we haven't experienced anything noticeable yet. And with those financial comments, I'll pass the call back over to Joe.