North American Construction Group Ltd

Good morning, ladies and gentlemen. Welcome to the North American Construction Group earnings call. For the third quarter ended September 30, 2021. At this time, all participants are in a listen-only mode. Following management's prepared remarks, there will be an opportunity for the analysts, shareholders, and bondholders to ask questions. The media may monitor this call in a listen-only mode. They are free to quote any member of the management, but they are asked not to quote remarks from any participant without the participant's permission. The company wishes to confirm that today's comments contain forward-looking information, and the actual results could differ materially from a conclusion, forecast, or projection contained in a 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 EDGAR, as well as on the company's website at nacg.ca. I will now turn the conference over to Jason Winstra, CFO.

Thanks, Peter. Good morning, everyone. Joe Lambert, our President and CEO, is on the call here with us, but unfortunately is dealing with a rib injury, and therefore will be saving his energy for the Q&A session. He's asked that I deliver these prepared remarks, which we have shortened up a bit this quarter, given the one speaker approach. I'll start out with safety, then give a brief overview of the quarter, and then close out with our expectations for Q4 and a few subject areas for 2022 before Joe and I take any questions you may have. Slide four is our safety performance. Our recordable injury rate remains flat as we are again generally at our pre-pandemic workforce level, but need to continue to work in finding ways to engage our management and workforce to improve processes and practices and consequently lower the rate. We have put in additional training and effort into our green hand program as our headcount growth generally comes with less experienced operators. This is nothing new to us, but reinforces our need for training teams and ingraining our safety culture into all facets of the business. Our one word overview of the quarter would be transitional. Operational performance at all our sites was particularly strong and conditions were fairly steady throughout the three months. The macro factors outside of our control remain present and continue to hamper our top line potential, but we will uphold all safety and risk mitigation protocols for as long as it takes. Our oil sands work transition between different mine sites as Q3 experienced major fleet remobilization to commence recent project wins. Although we suffer a bit of utilization loss during these transitions, these fleets are now set up for, at a minimum, a couple years of 24-7 work. Speaking of transition and regarding these recent wins, it can be noted that we transitioned the majority of this work to our Miccosu joint venture, which is a win-win. For us, the producers in the region, and of course the Miccosukee First Nation. Our infrastructure, external maintenance and work in other resource areas are also transitioning. The Fargo Moorhead project reached financial close and is transitioning to project commencement and a more operational focus. The team at the Northern Ontario Gold Mine has transitioned to peak levels and our external maintenance program is transitioning to much higher capacities with the main shop expansion being completed on time and on budget, and now moving directly into a further expansion of our component rebuild facility. The financial review begins on slide 10. We have changed things up slightly this quarter, and moving forward, we'll be disclosing what we have termed as total combined revenues. For those of you that have followed us over the past few years, you'll know that the impact of our joint ventures has grown from zero in Q3 2018, only three short years ago, to what we see today, where in Q3 2021, approximately 35% of combined gross profit came from our share of the various joint ventures. Given the number of stakeholders involved, these joint ventures are incredibly complex in nature. But as we state in our Q3 financial report, our goal is to simplify our disclosure for the readers of these financials. Our intention is for reported revenue to reflect our wholly owned entities with all other revenue and gross profit flowing through equity earnings. For clarity, we have restated our results to ensure all comparables are accurate. So with all that said, total combined revenue for the quarter of $209 million was $90 million or 72% ahead of last year's Q3, which again is proving to be a difficult quarter to compare against for the pandemic reasons we are all aware of. The $209 million is actually a quarterly record for us as it slightly beat out the pre-pandemic quarter of Q1 2020. That said, Revenue came in generally as expected as the quarter enjoyed consistent operating conditions. Revenue achieved in the quarter was not driven by one specific factor, but by the broad listing of mine sites and business lines, which all continue to trend in the right direction. The Millennium, Curl, and Syncrude mines have maintained their demand recovery trends, and we continue to witness firsthand the long-term resiliency of the oil sands region. The remobilized fleet at the Ford Hills mine had a full quarter of operations, and we remain very excited to be back on that site as they ramp up to full production. Traditionally, utilization of our fleet in the summer months is lower than Q1 and Q4, but the 52% operating utilization achieved in Q3 was impacted by the real-world difficulties of workforce shortages, which we continue to experience. Revenue from our joint ventures of $43 million was an obvious record, beating last quarter's record by 20%, and was primarily driven by achieving full capacity at the gold mine in northern Ontario. Combined gross profit of 15.6% is a noticeable improvement from the Q2 equivalent margin of 12.4%, despite a decrease in support from the wage subsidy program. We are encouraged by the margins achieved in Q3, and they are trending in the right direction. Even as we continue to face pressure from additional costs, we need to incur related to isolation and quarantine protocols. We estimate that these factors decrease gross margin around $3 million, primarily due to workforce vacancies, but also the additional direct costs we incur. Moving to slide 11. Adjusted EBITDA of $47.5 million was up 28% for Q3 on the revenue factors mentioned already. The margin of 22.7%, which reflects total combined revenue, is a strong achievement across many business lines and indicative of where we see ourselves as trending in the right direction, but with improvements still possible. Included in EBITDA is direct general and administrative expenses in the quarter of $7.1 million, equivalent to 4.3% of revenue. This spending percentage is consistent with expectation and the slight uptick in expense relates to the G&A spending in Australia of DGI trading. Our low G&A rate continues to be achieved through cost discipline and strict attention paid to discretionary and non-essential spending. Going from EBITDA to EBIT, we expense depreciation equivalent to 11.2% of revenue, which reflected the depreciation rate of our entire business. When looking at just the wholly owned entities and our heavy equipment fleet, which many of you are used to us talking about, the depreciation percentage for the quarter was 13% and reflected an effective use of our fleet this quarter. Adjusted earnings per share for the quarter of 50 cents was driven by $24.1 million from adjusted EBIT net of interest and taxes. Interest specifically continues to hold, posting a 4.3% rate and a $4.5 million cash expense in the quarter. We continue to benefit from both posted bank rates as well as competitive rates in equipment financing. Moving to slide 12, I'll summarize our cash flow. Net cash provided by operations of $32 million was produced by the business and includes the impact of non-cash balances that aren't immediately apparent. Given the neutral working capital result in the quarter, the difference between this figure and EBITDA, besides of course interest, is the accumulation of cash in our joint ventures which typically declare dividends in Q4. Sustaining maintenance capital of $19.8 million was dedicated to the maintenance of the existing fleet in anticipation of what we see as being a very busy winter season. Moving to our balance sheet on slide 13, liquidity of $190 million reflects our strong liquidity position this year as we benefit from the issuance of $75 million of convertible debentures early in June. On a trailing 12-month basis, our senior leverage ratio, as calculated by our credit facility, is now at 1.6 times. Net debt levels remain consistent over the three months as the free cash flow generated in the quarter was used for the initial cash acquisition costs to purchase DGI trading. On slide 14, we have provided our current debt composition, which is conveniently split into three primary buckets being our credit facility, equipment financing, and convertible debentures. With the extension now out to October 2024 and the strength of our current leverage ratios, we have no near-term financing decisions on our plate at the moment. Moving along to slide 16, you will see our Q4 priorities. This slide provides insight into the immediate objectives that we are currently focused on, and you will see them coming up again as they relate to our 2022 outlook. On slide 17, we have provided our guidance for 2021. Of note, and of course, is an increases to EBITDA and EPS, which are primarily driven by our expectations of the Fargo-Moorhead project now that it has officially reached financial close. The initial quarter of this complex project is challenging to forecast, and this is reflected in the ranges we have provided. Furthermore, given the cash distribution profile of the two joint ventures managing that project, we have left the free cash flow range constant. We couldn't be more excited about the prospects for this project, but it is difficult to estimate the exact cash timing of how the joint ventures will distribute cash. Looking out to 2022, on slide 19, we have started with our equipment utilization chart. This is such a critical KPI for us and one that we'll track closely for 2022. As was mentioned earlier, we had strong demand, but fleet mobilization and some opportune pre-winter maintenance items made the Q2 to Q3 gains quite modest. We fully expect pre-pandemic levels going forward and being more closely following our longer-term trend line. Slide 20 highlights the major milestone win of the infrastructure project in our Red River Alliance with Axiona and Chacon Invenui. As the largest infrastructure project in company history, we have, of course, identified the success of this project as critical to our longer-term goals. We have prioritized the manning, planning, fleet management, and procurement work with the goal of a smooth project start when we commence earthworks in the spring. We have mentioned previously that we can leverage projects like this. The flood diversion project here in Alberta, the Springbank Reservoir project in Calgary to be more specific, is an example of this. We are pleased to say our partnership with the same Quebec company we were bidding the Quebec mining projects with has qualified to bid on Springbank and we are looking forward to submitting a competitive bid early next year. On slide 21, we reiterate and show the progress of our diversification strategy. As we've consistently messaged, we expect to grow diversification while growing and supporting our long-term oil sands clients with high utilization of our large fleet while at the same time improving the utilization of smaller fleet outside the oil sands region. Slide 22 is self-explanatory and we would note that the increasing awards are coming with longer terms and create a multiplying effect on backlog. Slide 23 highlights our robust bid pipeline. Two tenders we would highlight are again the Springbank Reservoir Project which after many years of starts and stops is now moving forward with RFP for submittal. And the other is a return of one of the Quebec mining contracts which we originally thought we had lost. We have re-tendered this project with our same Quebec partners and are looking forward to seeing the outcome. Slide 24 highlights some of our operational ESG initiatives. As you can see, we are putting a major focus on the emission side of our business. Solar power, idle reduction, machine monitoring are all areas we can get quick, tangible emission reductions with existing technology. Longer term, we are looking at alternative fuels, electric vehicles, and hybrids for emission reduction. We established fleet fuel measurement processes here in 2021 and will set baselines and targets for our 2022 program. On slide 25, we highlight our continued push for a more diversified workforce. We have great training and development programs and can teach safety and proficiency in all areas of our business. Slide 26, highlights the growth in our Indigenous partnerships. This structure continues to grow in the mining industry as it's a win-win for all parties. There is a direct correlation between our partnerships' top-line growth and the benefits received by the Indigenous communities they represent. Lastly, but certainly not least, is our quantitative 2022 outlook. contained on slide 27. We believe this slide, again, albeit quantitatively, illustrates the success we have achieved by sticking with our strategy and our commitment to be the safe, low-cost, sustainable contractor. The outlook is predicated on operational excellence and we couldn't be more excited heading into what we consider to be a landmark year for NACG. As Joe mentioned in his letter to shareholders, and while we all knew we were part of building something very impressive, the ability for us to project out earnings in the range of 215 to 255 is the result of a decade's worth of steady momentum. We fully understand the need to execute, but feel confident that we have the people, the projects, the contracts, and the equipment in place to do so. I will now hand the call back to Peter for the Q&A session.

Thank you. To ask a question, please press star 1 on your touchstone phone. Again, that is star 1. If you wish to withdraw your question, you can press the pound sign. Once you have completed your questions and would like to return to the queue, please press star 1 again. After a brief pause, we will begin the Q&A session. And your first question will come from Tim Monacello with ATB Capital Markets. Your line is open.