North American Construction Group Ltd

Good morning, ladies and gentlemen. Welcome to the North American Construction Group earnings call for the first quarter ended March 31, 2022. At this time, all participants are in listen-only mode. Following management 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 management, but they are asked not to quote remarks for any other participant without the participant permission. The company wishes to confirm that today's comment contained forward-looking information and the actual result could differ materially from the conclusion. Forecast or projection contained in a forward-looking information. Certain materials, factors, or assumptions are applied in a drawing conclusions or in the making forecasts or projections that are reflected in a forward-looking information. Additional information about those material factors is contained in the company's most recent management discussion and analysts with available on CEEDAR and EDGAR as well as on the company's website at nacg.ca. I will now turn the conference over to Mr. Joe Lambert, President and CEO.

Thanks, Rayne. Good morning, everyone, and thanks for joining our call today. I'm going to start with our Q1 2022 operational performance before handing it over to Jason for the financial overview, and then I will conclude with the operational priorities and outlook for 2022 before taking your questions. First off, I want to state up front that you're going to hear about what I call booming market issues in which during these times of high demand and high commodity prices, we face skilled labor shortages and inflationary pressures. I can assure you we are not complaining, and we fully understand that booming market issues are much more desirable than the alternative. Secondly, and as an overall theme for today, our outlook remains unchanged as we believe our long-term contracts, transparent client relationships, and long-standing experience together with our well-maintained fleet will serve us well in managing through these inflationary times. With that, I'll get into the deck starting off on slide four, where we have had a slight uptick in our total recordable rate, but remain close to our industry-leading target frequency of 0.5. And we'll be focusing our efforts on further developing our green hand new hire training programs, reducing hand and lifting incidents, and prevention of high potential injury events. On slide five, we show the diversification of our business across commodities and customers. NACG is often categorized by others as an oil field services company or as an oil and gas business, and the fact is we are neither. We are a heavy construction and mining contractor working across multiple commodities with multiple clients across three countries. Half of our EBIT comes from four investment-grade companies mining bitumen-rich sand which we have been working for continuously since their inception, including two that we have working relationships dating back to the 70s. We see our business diversification as a strength and are perplexed that some reports still highlight consolidation as a risk to our business. We believe the current business diversification has allowed us to achieve a true win-win in reducing customer, commodity, and geographic risk while maintaining margins and improving utilization of the smaller end of our fleet. As such, we are looking to grow in all areas and expect to maintain this diversification for many years to come. Our backlog has a similar split, which supports our plan going forward. Moving on to the Q1 operational performance shown on slides 7 through 10. In summary, while Q1 was slightly below our own expectations due to the previously mentioned market issues, we see recovery around the corner and several areas of results and trending which we believe signal a positive future. To demonstrate these positive trends, I would like to speak to four specific points highlighted across these four slides. Number one is, with the exception of the first two quarters of the pandemic, our business has shown consistent profit and growth by almost every measure. Our year-on-year and even quarter-on-quarter results are becoming far more consistent and reliably profitable. We expect this trend to remain while continuing to post consistent and improving quarterly results moving forward. Secondly, as highlighted in many of these graphs and associated descriptions, we have ample opportunity, capacity, and abilities to improve upon these results. Third, and probably the least obvious in these slides, is the growing and stabilizing effect of our equity-accounted partnerships. From our indigenous partnerships with NUNA, the Miccosuke Group, and Dene North, to our component remanufacturing partnership with Great Supply, and our Red River Valley Alliance working on the Fargo Moorhead project, Our partnerships continue to grow, smooth out our seasonality, and provide profitable diversification to NACG. The fourth and last on the list, posting consistent results in high single-digit positive CAGR trends, doesn't really make for front-page headlines, and some would even call us boring. While my ego may take a bit of a hit, our shareholders and balance sheet will certainly benefit with continued stable profitable growth. With that overview of Q1 operations, I will hand over to Jason for the financial summary.

Thanks, Joe. This quarter's brief financial review begins on slide 12. Total combined revenue for the quarter of $237 million was $45 million ahead of Q1 2021. The $237 million sets another record for our company as it very narrowly beat the Q4 2021 mark of $235 million, less than a 1% difference. Across a wide variety of financial metrics, Q1 2022 was incredibly consistent to Q4 2021, albeit under much different circumstances. As Joe will touch on later, the primary driver for what otherwise could have been a notably higher revenue achievement for our wholly owned businesses is the ongoing heavy equipment technician shortage in the oil sands region. Although difficult to gauge exactly, we estimate that this factor alone reduced our top line potential by approximately $15 million. The revenue that was achieved in the quarter was driven by a broad listing of mine sites and business lines, which are all showing strong demand for our services. The re-mobilized fleet at the Fort Hills mine again had another full quarter of operations, and we remain very excited to be operating on that site, especially when comparing to those time periods of not being there. As everyone is aware, the outlook in the oil sands region is robust. And we experienced this firsthand this quarter as the focus on production means our equipment is critical to our customers' success. Revenue from our joint ventures of $60 million was the key driver of the record as it beat Q4 2021 by 11% as the continued volumes at the gold mine contract in Northern Ontario were coupled with the increasing prominence of our Miccosu joint venture and initial progress made on the Fargo-Moorhead Flood Diversion Project. The combined gross profit margin of 13.7% is actually exactly the same as Q4 2021, but was influenced by a different range of factors, and most notably, and as mentioned, by the short workforce shortage in the skilled trades. Several secondary drivers impacted this quarter's margin, including the timing impact of rate escalations, which lag based on published index values, workforce availability in January due to high COVID-19 Omicron cases, and the early onset of spring breakup in late March. Moving to slide 13. Adjusted EBITDA of $58 million was slightly down from last year on the factors just mentioned. The margin of 24.4% reflecting total combined revenue is again a solid achievement across many business lines, but with realistic improvements within our grasp. Included in EBITDA is direct general and administrative expenses, which were $5 million in the quarter, equivalent to 2.8% of revenue. As always, G&A's spending remained disciplined in the quarter, but, and again, similar to Q4 2021, benefited from a specific receipt received from a Fargo-Moorhead joint venture. Excluding this recovery, G&A was 4.6% of revenue which is indicative of the level we see moving forward with DGI as part of the mix. Going from EBITDA to EBIT, we expensed depreciation equivalent to 14% of revenue, which is reflective of the depreciation rate of our entire business. When looking at just the wholly owned entities and our heavy equipment fleet, the depreciation percentage for the quarter was 17.3% of revenue, and reflected an effective and very active use of our fleet during, at times, a very cold quarter. Both of these measures compare fairly consistently to the Q4 2021 measures of 12.3% and 16% as we establish run rates for our diversified businesses as well as our important ultra-class fleet. Adjusted earnings per share for the quarter of 51 cents was driven by $24.7 million from adjusted EBIT net of interest and taxes. Our overall interest rate was 4.5% in the quarter, and we incurred a $4.5 million cash expense. Additionally, and of note, we booked approximately $750,000 of interest through our equity earnings, primarily in our Fargo joint ventures, which will have interest expense as they incur debt leading up to initial milestone payments from the authority. Moving to slide 14, I'll briefly summarize our cash flow. Net cash provided by operations of $45 million was produced by the business with the difference between this figure and the $58 million of EBIT being cash interest paid, of course, in the quarter and cash being managed by our joint ventures. Sustaining maintenance capital of $34 million was primarily dedicated to the maintenance of the existing fleet as we made our way through another very busy winter season. Working capital drew cash of $28 million and had a material impact on free cash flow in the quarter. Pausing for a moment on free cash flow, I'd like to point out again that operationally, this quarter was very similar to Q4 2021, which was a quarter where we posted positive free cash flow of $48 million. The difference in free cash flow of these two quarters of nearly $60 million highlights the impact of working capital and our joint ventures. Our understanding of the temporary nature of these timing impacts is why we remain confident in the full year range of $95 to $115 million. I'll end with slide 15. Total capital liquidity of $225 million reflects our strong position as we continue to benefit from the legacy of disciplined investment in the years past. On a trailing 12-month basis, our senior leverage ratio, as calculated by our credit facility, remains at 1.5 times. Net debt levels increased $13 million in the quarter due to the aforementioned free cash flow performance. And with those comments, I'll pass the call back to Joe.