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spk00: 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.
spk08: 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.
spk02: 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.
spk08: Thanks, Jason. On slide 15, you'll find our current operational priorities for 2021. This slide summarizes our objectives, and I will walk through the topics in the slides that follow and finish up with our outlook. Slide 16 highlights the milestone win of a major infrastructure job in our Red River Valley Alliance with partners Acciona and Chincun and Benue. As the largest infrastructure project in company history, we are prioritizing the planning, staffing, and pre-mobilization work to ensure a smooth project startup. We believe this project win and a smooth start could provide us additional experience we can leverage when tendering a similar Earthworks flood diversion project in Alberta that we expect to come out in RFP before the end of this year. On slide 17, you will see some highlights of our recent acquisition of DGI Trading. At approximately one month post-close, I am happy to report the business transition and integration has progressed smoothly, and we see future opportunity for growth as core machines and components have demonstrated to be the most economic method to support internal growth and likewise provides increased external maintenance sales opportunities. On slide 18, we again highlight our substantial progress in diversifying our marketplace. In particular, I would highlight both the 55% of backlog being awarded outside of oil sands, but also our expectation that we will grow our oil sands work. This level of backlog combined with continued non-Oilsands project entering the bid pipeline provide what we believe is clear visibility to meeting or exceeding our diversification target. As stated previously, we expect to continue to meet our Oilsands customer needs with high utilization of our large fleet, while at the same time improving the utilization of our smaller fleet outside Oilsands and reduce the consolidation risk by having more customers in more commodity markets in geographic regions. We will also continue to pursue diversification in low capital intensity growth areas such as the U.S. mine management contracts and major earthworks infrastructure projects. These contracts generally have fleets provided and as such don't affect our operating utilization measures and offer low to no capital entry and diversification into other commodities and regions. I'll skip to slide 20, which highlights the bid pipeline that drives our confidence in revenue projections and diversification success. In the previous quarter, I had mentioned a couple of near-term mining jobs in Quebec that we were unsuccessful in winning, and the major infrastructure job, which we did win. As the infrastructure win was larger than the two combined losses, we believe we won our fair share. In debriefing the Quebec opportunities, It appears one of the bids may have been used as an economic analysis for an in-house fleet renewal or expansion. We will continue to pursue the Quebec market and have another, albeit smaller, opportunity in active tender. Bid project inflow continues to main pace with the outflow, and we continue to see high demand and expanding opportunities in resources and geographic regions where commodity prices are strong. Lastly, and said previously, we simply believe in our strategy and that a safe, low-cost, experienced contractor with strong Indigenous partnerships, an extensive and well-maintained fleet, and a commitment to sustainability will have significant competitive advantage to win our fair share of these tenders. Our equipment utilization priority on slide 21 links closely to our diversification objective as we seek gains in utilization of the smaller end of the fleet, which is uncommitted and underutilized in oil sands. A couple of metrics I'd like to highlight here. One, this is our second best Q2 utilization in the last seven years. And two, had we not had the negative impacts of manpower from third wave of the pandemic, we would have probably been right up there close to Q2 2019. In closing out this slide on utilization, we believe our increasing demand, reduced and hopefully soon to be eliminated pandemic impacts, further diversification and counter cyclical summer works, including newness seasonal growth and the Ontario Gold Mine will continue to lessen the Q2, Q3 utilization troughs and provide more consistent and overall improved fleet utilization. Moving on to the next slide, 22, in our quarterly sustainability update. This quarter, we focused our ESG update on two key areas, being our work to lower emissions and our progress in improving diversity and inclusivity in our workforce. On the first topic, I would like to highlight the tangible actions we are taking to reduce our greenhouse gas emissions. As a seasoned mining guy that used to be responsible for our reserve classifications, I like to use the same nomenclature for classifying our actions to reduce emissions. These classifications are proven, probable, and possible. On the proven side of emissions reduction, we're actively building and growing our use of solar power in our head office, shop, and component rebuild facilities. In areas where we have permanent facilities, this solar conversion has shown to have clear, proven cost benefit, and we will continue to look at ways we can integrate more into our facilities. On the probable side, we have expectations that our rollout of fleet telematics will provide meaningful capability for us to reduce equipment idle time, increase operations efficiency, and extend asset life, which will correlate into reduced emissions related to those activities. Over the next two years, we expect to install telematics across our entire large equipment fleet and advance the analytic development into artificial intelligence and machine learning. We have an excellent team with great vendor support, and I look forward to sharing the benefits we have received as we implement and develop this system. On the possible side, but what we believe to be the greatest impact to emissions reduction, is a potential replacement of diesel with hydrogen and high-horsepower combustion engines. Hydrogen, especially in Alberta, looks to have good opportunity to be a cost-effective replacement for diesel. While we have much to develop and learn about hydrogen supply and distribution systems, we have seen enough positive potential that we believe a feasibility study for dual-fuel diesel-hydrogen blend high horsepower combustion engine is both warranted and a solid investment. Initial research suggests hydrogen replacement of diesel will reduce emissions near proportionate to the blend achieved. That is to say, a fuel mix of 40% hydrogen and 60% diesel would be expected to reduce greenhouse gas emissions by about 40%. Hydrogen and diesel systems have been commercially produced in lower horsepower applications, so we feel the potential for success at higher horsepower applications is reasonable and worth investing in. We expect to know the outcomes of our hydrogen feasibility study in the next six to nine months, and if positive, we would expect to advance into a prototype vehicle in the subsequent 12 to 18 months. On the lower half of the slide, I would just like to highlight the activities to improve inclusivity and diversity within our workforce. We have and continue to develop and implement policies, practices, and training to better attract, retain, cross-train, develop, and advance more female equipment operators and field supervision. We continue to solicit feedback and input from our management and workforce on how we can further improve. We will be rolling out women's mentoring program and site committees here shortly in support of these objectives. We believe our efforts here will not only provide the benefits of more diverse and inclusive workforce, but also grow and strengthen our access to skill and qualified labor. We likewise continue to expand our indigenous awareness training recognition and promotion of Indigenous leaders and cultures, and has significantly grown our work and backlog associated with our long-standing Indigenous partnerships. We are very proud of the work we have done and recognition received from our Indigenous partners in building long-term fiscal and employment benefits for Indigenous communities, and we fully plan and expect to build off that success. As an example, I mentioned in my last quarter presentation our Miccosuke partnership had purchased and put to work our first rebuilt 400-ton ultra-class truck. I'm pleased to say that the performance of this asset has led to our planning between three to five more assets rebuilds before the end of this year. In our outlook on slide 23, and as mentioned in my letter to shareholders, our achievements over the past few months will primarily impact 2022, and therefore our outlook for the remainder of 2021 remains largely consistent with what was disclosed in April. We have tightened the ranges while still allowing for inherent risk of scheduled changes in weather. In closing, we believe our opportunities both inside and outside oil sands have never been better and will continue to improve. We continue to believe our shares are undervalued and our continued positive progress in our strategy will create increased value, and like the marathon runner analogy I used in Letter to Shareholders, we will pace ourselves for the long haul and maintain our capital allocation flexibility for share purchases and or potential dividend increases while still providing the ability for meaningful debt reduction. Naturally, we will likewise pursue accretive M&A opportunities as they present themselves. I will now hand the call back to Rebecca for the Q&A session.
spk00: Thank you. To ask a question, please press star 1 on your touchtone phone. If you wish to withdraw your question, you can press the pound sign. Once you have completed your question and would like to return to the queue, please press star 1. We'll take a brief pause to begin the Q&A section. Your first question comes from Aaron McNeil with TD Securities.
spk07: Hey, good morning, guys. Thanks for taking my questions. Aaron, you touched on your... You touched on in your prepared remarks, but I'm just curious to know, what's your batting average on the diversified projects? And I'm also curious to know how you're identifying projects that you put on your bid pipeline slide. So are you only bidding on stuff you think you have a high probability of winning or are you pursuing a whole bunch of stuff and seeing what sticks? So just kind of trying to get a sense of that.
spk08: Well, I guess I'd start with we have a pretty extensive business development tracking system where, you know, we track projects in the resource industry from, you know, initial concepts or whether an expiration to where they go through feasibility and development and permitting. And then, you know, in expectations, if they look like they fit our fleet and our usage, that we're going to see a pre-qual or an RFP when they come out. As far as when we pursue them, we really look at the project itself and how it fits our strategy, our fleet availability, our access to other fleet, both in size, duration, what size fleet they're using versus what size fleet we might have more capacity in. As far as our win percentage, I don't know if that's something you can really put a finger on because it can be a quite a changing marketplace. You can have bids that actually never get awarded. You can have projects you track for 10 years that never get permitted. Once a bid's there and we put an RFP in, we usually have a pretty good idea who our competitors are and where we might have advantage or not. As an example, on these two Quebec jobs that we did lose, I think our risk there, and it was a risk we took clearly, was that we made an assumption that we'd need to be a remote workforce with camp and fly in, fly out, because we didn't see access. And our partners are extremely experienced in this area, and they were 100% on that. And when we reviewed it, we agreed with them. you know, that could have been something unrelated to fleet that could give somebody commercial advantage if they thought they could get people. But, you know, in reviewing that risk, you know, that just wasn't one. So that, you know, that's something where we weigh that into our ability that if there were a local guy there and he could get people, then might have a better advantage than us commercially on some of that work. So, you know, anytime we look at the bid pipeline, Putting a, hey, I think I'll be 10% or 40% accurate in winning these is pretty difficult. You know, on a per-project basis, I could tell you. Or give you my estimate. I can't really tell you. So it kind of bounces around a bit like that. So I don't know. That cover off what you were looking for, Aaron?
spk07: Yeah, that's great. Maybe a more specific question then related to the gold project. I assume the answer is yes to the first one, but do you see it as a reference for bids on future work? And then if the answer is yes, is there enough work in that area that it could kind of become a second core area for you and somewhere where you constantly have a level of activity?
spk08: Well, when we won the Ontario Goldmine Project in our NUNA joint venture, we highlighted what we thought was Our advantage there, both with NUNA and our experience, the very strong Indigenous partnerships that NUNA has in regions, in addition to being Inuit-owned, and felt we could bring that to other areas. And, you know, I believe in the last quarter or two, I've also highlighted that we felt there was a job in Saskatchewan to be coming up where the procurement team had actually asked us to bid under that same joint venture arrangement because they felt it would be stronger for us. And we've actually received our first RFP from that project. And we'll be submitting a bid as the same joint venture structure as we have in Ontario Goldmine. So, you know, I do believe it's proven. We'll see as far as winning this job. You know, that would be a pretty good success ratio if in two bids with Arnuna JV, we win them both. So that would bode well for it. But I think that structure of Our experience, NUNA's experience, the combined fleet efficiency, the manpower efficiency, and the Indigenous relationships is a pretty powerful, along with being a safe, low-cost provider. It's a pretty compelling RFP we're going to put together.
spk07: Fair enough. And final question for me, just bringing it back to the core business. I mean, the scope and volume increase of that program That announcement with the partnership last week was pretty large in the context of the original agreement. So I guess I'm just wondering at a higher level across here, you know, oil sands customers, when you talk to them, are you getting the sense that they're sort of playing catch up right now, given the reduction last year? And if that's the case, how long do you think this sort of surge in activity might last before things start to. or maybe you'd characterize it completely differently. So just trying to get your sense of how you're seeing the oil stands out look in general.
spk08: Well, yeah, I think it's pretty easy to state that the demand is far higher than last year just because of the downturn from the pandemic. But, you know, longevity, I think what we're seeing is there's a, I certainly perceive a stronger demand longer term. And I think with this, I think we're getting clients that see the value of, tying us up longer term. So as demand increases and you want to confirm that you have somebody there that you trust and value to do it, I think we're going to see more longer term commitments from our clients because of increasing demand and they want to lock down their guys. Makes sense.
spk07: That's all for me. I'll turn it over. Thanks, guys. No worries. Thanks, Aaron.
spk00: Your next question comes from the line of Yuri Link with Canaccord Genuity.
spk03: Hey, good morning, guys. Morning, Yuri. Morning. I guess I wanted to just dig in a little bit on the DGI acquisition, wondering a few things. Just from a modeling perspective, if you'd be able to put any – expected revenue on that or EBITDA margin profile of that business. Is this a cost synergy play for you guys or more on the revenue synergy side as you look at maybe further moves in Australia related to DGI?
spk08: I'll let Jason take the first part, and I'll answer the second as far as that.
spk02: Yeah, I'll just pull up the slide, Yuri. So as far as revenue versus cost, we've said about 25% of DGI sells into us, so that would be a cost synergy to us. You can see from the EBITDA multiple that we disclosed of three times, we're kind of in the $8 million range. EBITDA impact range, some of that will come through cost savings, as I said, about a quarter of that, and then the remainder will just hit our revenue and costs. You know, they should be, you know, virtually zero depreciation in margins in the 30 to 40 range, like a parts supplier would normally enjoy. So much different business model than us, but, you know, we'll be definitely accretive and I would say is not indicative of our M&A typical targets. This is a vertical integration move. Joe can elaborate more on strategy, but those are some of the high-level figures.
spk08: You know, I think we're too early to quantify some of these things, Yuri, but I certainly see synergies and opportunities in the crossover of business, both with the vertical integration. But, you know, just to give it a bit more color, you know, DGI's access to used components worldwide and knowing where these things are is of extremely high value to us. I'll give you an example that if for some reason you fail a component on a piece of equipment, an engine, a transmission, a final drive, a diff housing, and there are occasions when there's not used cores readily available. You can't find somebody that has a used core to remanufacture and you have to actually go out and buy a new one, a new core or a new engine completely rebuilt, the cost differential is massive. So having somebody who can find you those used cores and knows where to look for them and is focused not just on their business of selling but on our business, I think we're going to have some synergy off that, both from a component basis and from a whole machine. So finding whole machines and Historically, DGI has been one of our largest providers of finding used whole machines for second life rebuilds. And, you know, as I've stated before, those are great value for us. And I mentioned in the text that, you know, rebuilding whole machines for second life versus new, you know, we've been doing that at 50% to 60% of the cost of new and actually having better warranty on our components than a new unit would. So, you know, That's kind of DGI for us. Us for DGI would be certainly, I believe it's about 25% of their work is done in Alberta. I believe we have an opportunity to not only cross-sell or provide some of our clients access to DGI, but also to support them in whether it's finding and tearing down equipment in our own facilities or support in the field where we already have maintenance personnel. So I don't have a lot of quantifiable information yet, but I'm certain in the quarters going forward, we'll be able to identify those synergies and those opportunities that we've been able to, between us and, between DGI bringing into us more so and us bringing into DGI more so.
spk03: Okay, that's helpful. Second and last one for me, maybe just for Jason. I wanted to clarify, are you saying now that the, Depreciation is going to be in the high teens kind of on an annualized basis going forward. And if so, are you able to help us at all with revenue guidance, some kind of revenue range so we can better model DNA given it's a pretty large expense item?
spk02: Yeah, I would say it's trending in that way. Obviously, we've been going through a step change since really since the ACON purchased in 2018. We've seen steady increases in depreciation as a percentage. So I think high teens is a good modeling input and then backing into that gross expense based on revenue. I think our core business, which is reported revenue, you know, 2019 is, you know, laid out a pretty good roadmap for what our kind of core fleet is able to do. And so I think that's a good, you know, revenues profile to look at. What will be interesting, obviously, is the equity accounted revenue, which, you know, we think for 2022 is going to be, you know, 30 to 40%. of combined revenue. And within equity-accounted investments, depreciation should be in the 5% to 10% range. So we could see depreciation much different between our joint ventures and our core fleet. So hope that's helpful for modeling, but that's the trend that we're seeing right now.
spk03: Okay. I'll turn it over. Thanks.
spk00: Your next question comes from the line of Brian Fass with Raymond James.
spk06: Thanks. Good morning, guys. Good morning, Brian. Just on the big project win in the U.S., could you talk about your strategy in expanding in the U.S. market? And do you think that this project win opens up similar P3-type opportunities?
spk08: You know, I think whether U.S. or Canada, the large infrastructure jobs that have a major component of earthworks, those are the ones we're interested in. So as they come up, they're not a consistent flow, but they do come up like the one in the flood diversion in Calgary. I think I've been talking about it for five years, but it looks like it's going to be coming forward now. That's one where There's a bit of road and a bit of bridge work, but there's an awful lot of earthworks, and that's where we would see opportunities for us to participate in infrastructure jobs. So any, you know, there are hydro projects that have earthworks, roadworks that have flood diversions. Those would be the ones, and obviously we'll continue to look at mine management opportunities that we've been successful in in the U.S. We'd look at those additionally. Does that cover off what you're looking for, Brian?
spk06: Yeah, you bet. Thanks, Joe. And then just further on that contract, how much of the contract award is slated for the construction portion of the project, and then how much is tilted towards the O&M part of the contract?
spk02: About 65% of the headline number, which was Around $2.2 billion was the entire project. Well, 65% of that is the construction project, and then the tail is the remainder.
spk06: Okay, thanks. And then just on labor supply issues, beyond the impacts of what's happening with COVID, I mean, has it been difficult to source labor in this market?
spk08: You know, we've always... struggling, continue struggling, are putting in a lot of practices as far as getting maintenance. We haven't seen a lot of issues in getting operations and operators. I think probably the continuing issue besides the pandemic is the limited travel. So when we're bringing people in from different areas and doing fly-in, fly-out operations, you know, the There's not really convenient flights in a lot of places anymore, and so people aren't willing to come. If I'm going to spend 25 hours to get from the East Coast to northern Alberta and I get a week off, it makes it pretty hard to do. I think as those travel restrictions loosen up here in the next few months and we get more flights to more places, we'll see better access going forward. Okay, that's good color.
spk06: That's it for me. Thanks.
spk00: Your next question comes from the line of Tim Monticello with ATB Capital Markets.
spk05: Hey, thanks for taking my questions this morning. First one is just on utilization. One of the slides you showed the utilization progression to the quarter and it looks like it's kind of trending down April, May, and June. I just wanted to round that square with the commentary in the MD&A saying that June was a pretty strong quarter relative to the first two months of the quarter. Sorry, strong month relative to the first two months of the quarter.
spk08: I'm not sure as far as April, May, June, what those exact numbers are. Do you have those, Jason?
spk02: Yeah, just pull them up here.
spk08: I know that the 53 that was the average of the quarter is the average of the month. But.
spk02: Yeah, so we we saw it. You know the momentum really carried us through June and did post. You can see it in the graph on slide 21 that it was June was a lower utilization than May. I think where we saw efficiencies was just in our planning around. You know, getting getting work force to the equipment that was available so. We saw a nice profitability increases, but we expect utilization to turn the corner here in July and moving forward.
spk08: I wouldn't focus a lot on month-to-month accuracy, Tim. When we pick up and we move, in this instance, into Fort Hills, you lose several weeks moving equipment from site to site in operations opportunities, too. So it's not... In June, you might not have had the issues of the third wave as we're coming off of that, but we are mobilizing fleet, and in any one month, that can have a significant impact.
spk05: Okay. I guess, you know, more importantly, it would just be, you know, are you seeing pretty strong rebounds into the third quarter?
spk08: Yeah, absolutely. And, you know, what I would hesitate to say is that I saw that for the second quarter, too, and we were talking in April, and... We were coming out the second wave. We were at the trough after the second wave. And vaccinations were rolling out. Really didn't anticipate that third wave at all. And for it to actually not only be a third wave hit us, but to hit us worse than the other two damn near combined. So I hesitate to jump out in front and say too much. But in general, yes, if things progress as planned with vaccinations rolling and decreasing cases and opening up, yeah, we would fully expect that to happen, Tim.
spk05: Okay, great. And is that basically the one, I guess, sort of pivotal factor which underpins the range in your EBITDA guidance for the year?
spk08: Yeah, I would say so.
spk05: Okay, got it. Second question here is on Ford Hills. Suncor released results today and and they kept the production guidance for Ford Hills, uh, for the year. And I think one of the factors that they mentioned was sort of, um, inability to get third party contractors. So, you know, that, that points to sort of a tightening of the market and, you know, um, sort of dovetails with the extension in the contract you saw in the OSAN earlier, or I guess, uh, subsequent to the quarter. All right. What are you seeing in pricing dynamics? And, um, is that market pretty tight for equipment?
spk08: Certainly the large equipment is tight and, you know, demand, but you really don't know whether clients have opportunities to defer, to balance out. But, you know, from an RFP perspective, we certainly see increasing demand. You know, opportunities at repricing there. I think, you know, one of the things we see is, and I would highlight, is that, you know, Q2 is usually our lowest kind of margin on the project perspective because our Our escalations, both in contracts and negotiated, generally apply in the second half of the year. And on the other side of that, the cost side, our labor because of burdens, and these aren't huge differentials, but our burden in the first half of the year is higher than the second half. So, you know, those are a bit of an impact too. So some of the pricing will improve because an escalator applies in June. And typically that's when our... annual escalations applying contracts is in the second half of the year.
spk05: Okay, got it. Do you think across the remainder of your portfolio in the oil sands you can see some similar expansions to contracts?
spk08: Yeah, you know, we think there's opportunities to extend terms. You know, I think over the next year we've We might have better opportunities to extend on those MSAs and have the associated commitments on them. So, yeah.
spk05: Okay, great. That's all the questions I had. Thanks a lot. Thanks, Tim.
spk00: And as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Your next question comes from the line of Maxim Sitchef with National Bank Financial.
spk04: Hi, good morning. Joe, I guess operationally, we've had obviously some strange weather. How is that shaping any impact or negative impact on how you're ramping up through Q3?
spk08: I don't think the weather has impacted as much as the pandemic. I mean, weather is really, especially in Alberta, is predominantly which month you're going to get rain in in the summer. And sometimes it's June, sometimes it's July, sometimes it's August, sometimes it's the whole summer. But I don't, you know, we aren't expecting anything unusual. It just may be heavier in June than in July or heavier in July than in August. So, you know, I don't expect any weather impacts. We always, you know, qualify that with I don't predict the weather either. But, you know, We haven't seen in a longer period of time, looking at quarter over quarter or year over year, a significant impact from weather this year.
spk04: Okay, that's helpful. Thank you so much. And then just wanted to circle back to the Fargo project. I was wondering if you don't mind maybe first of all talking about sort of the risk profile of this project and how sort of you're managing that part. And then maybe the second part is a question to Jason about in relation to how we should be thinking about revenue progression kind of between T0 and for the next couple of years, just from a modeling perspective. Thank you.
spk08: On the first part, Max, I think it's no different than any other project. We want to maintain a very strong focus on the planning, planning of getting people in there, equipment in there, having the fit, making sure you get the right gear at the right time and qualified operators. And more than anything else, it's doing good planning and expecting changes to happen and having plan Bs and Cs and Ds for when they do. So, you know, for our part, it's really putting good guys on the job that have the experience and the skills to perform here and then doing the planning associated with it so that This is an earthworks job. It might be a big P3 in North Dakota, but it's another damn construction job for us. That's with an M, not an N on the end of it. We just want to be very focused on doing good planning, good scheduling on people and assets, making sure we're setting up training programs to bring in skilled operators and mechanics. and anticipating anything that can happen there, weather-wise or anything else.
spk04: There's no issue in terms of shifting people around right now, despite obviously challenges with the border and things like that. I didn't mean to interrupt.
spk08: No, we have current North American employees on other sites that will be heading to this one. I don't think we'll find an issue recruiting or finding skilled operators or even staff people in those areas. We've done quite a bit of recruiting with our UOS coal mine management contracts in and around the U.S., so we've got a pretty good understanding of that marketplace. Okay, thanks.
spk02: Yeah, I guess just off the top, obviously revenue for this project will go through equity accounting, Max, so be careful where you put it as far as Revenue projections, very little revenue we expect to recognize this year upon financial close in Q4. The lion's share, 75% of the $650 million will be over the four years of 2022 through 2025, with the biggest year being 2024. So it will continue to escalate. in 22, 23, and then 24 is what's modeled as the biggest year and then comes down in 25. And then outside of that, you know, there's a couple years of inspection before substantial completion and then the O&M contract. So definitely a lot of activity in those critical years, 22 through 25.
spk04: Okay, that's helpful. Thank you so much. And then the last question, there was a remark in terms of capital allocation and potential dividend increase. Just curious if you don't mind maybe talking about, you know, how you think about that as a percentage of, I don't know, net income or free cash flow. Like what are the parameters that you are using internally to drive your decision making on that side?
spk08: All right. Those would be the parameters. And, Max, every fall we have our board meeting where we review our dividends. And we'll be having that discussion coming up. And, you know, we'll share that outcome with you guys when it comes.
spk04: Okay. Fair enough. That's it for me. Thank you so much. Good. Thanks, Max.
spk00: And your final question comes from the line of Richard Durnley with Longport Partners.
spk01: I'm intrigued with the Fargo-Moorhead contract. Who in general were you bidding against there? It's intriguing that a Spanish-Israeli-Canadian company would win a contract in the U.S., and maybe I just don't understand big contracts. Could you talk about that?
spk08: Sure. This started with multiple consortiums. Generally, every team that's putting something together here is a mix of several groups of construction people and experienced construction people. Then it was shortlisted down to three, of which our team was one. I think it's a bit misleading as far as where companies' headquarters are. As an example, Acciona... I think they just celebrated their 20th year in North America, you know, and same with Shinkano and Benue had been doing operations across North America. You know, some of these large international construction contractors, they might have a headquarter somewhere, but they're very experienced, you know, in North America. So, you know, I think it comes down to the technical package, the execution, and the pricing along with our experience in particular areas. that we believe carried us across the finish line on that particular project.
spk01: I see. Great. Thank you.
spk08: No worries.
spk00: Okay, this concludes the Q&A section of the call, and I will pass the call over to Joe Lambert, President and CEO, for closing comments.
spk08: Thanks, Rebecca. And my thanks to all of you for joining us today and for your continued interest in our growth and diversification projects. I'm very excited about the opportunities to advance the business this year. And, you know, obviously we all hope and expect to be a much healthier and more stable environment going forward. Thanks again.
spk00: Thank you. This concludes the North American Construction Group Q2 2021 conference call. You may now disconnect.
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