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 30th, 2022. At this time, all participants are in listen-only mode. Following management's report remarks, there will be an opportunity for analysts, shareholders, and loanholders 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 the participant's permission. This 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 containing 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. Some information about those material factors is contained in the company's most recent management discussion and analysis, which is available on Seller and Ether as well as on the company's website at nacg.ch. I will now turn the conference over to Joe Lambert, President and CEO. Please go ahead.

Thanks, Sergio. Good morning, everyone, and thanks for joining our call today. I'm going to start with the Q2 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. In today's Q2 operational review, I want to give listeners some clarity on the issues affecting our business, what areas of the business are being affected, what we are doing about it, what progress we have made, and lastly, when we expect to have the issues resolved. On slide three, our Q2 total recordable rate of 0.51 was a 40% improvement to our Q1 standalone results, but the trailing 12-month remains above our industry-leading target frequency of 0.5, and we will continue 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 four, we show the three major issues affecting our business. The first is a good issue to have, high demand. I will speak more directly to this when we get to slide six, where we highlight fleet utilization. The second issue, inflationary pressures, is due to parts and labor price increases from key suppliers and vendors, which are at historical highs. These inflationary pressures are immediately increasing equipment costs, which are not yet being captured in the contract escalation clauses, which use lagging indices. Third on the list is the skilled labor shortage, which impacts our ability to promptly repair equipment. The skilled labor shortage in oil sands in particular has also driven a wage escalation of almost 30% for mechanics as competition for their services increases. The parts price increase impacts all of our businesses, but the oil sands wage escalation is impacting the 50% EBIT of our business typically generated in the oil sands. The diversification of our business across increased commodities and customers has definitely helped us limit the extent of the skilled trade wage escalation impacts. However, the cost escalation impacts from items two and three are driving the historically low Q2 margins. Operational execution and safety were in line with our expectations, but the continued increase in vendor parts pricing Our need to match oil sand wage escalation for skilled trades to prevent further quits, and the current disconnect between actual costs and lagging indices is a reason for margin reductions. Moving on to slide five, let's get into our response and how we are progressing against these core issues. First and foremost, we continue to develop, attract, and retain our skilled maintenance tradespeople to improve fleet utilization. NACG has an extensive and comprehensive program to expand both our Atchison and field-based maintenance workforce. As an example of this progress, on our Q1 call, I noted that we added approximately 20% more employees into our apprentice program since the beginning of the year. That increase is now over 50%. The total increase in heavy equipment technicians and apprentices in Q2 was just over 6%. Our shop expansion with additional remanufacturing capacity and services and a central telematics control room is complete and will allow for continued growth in our bench hands program and machine health monitoring for our current around 260 real-time connected assets. Since the start of 2022, our bench hands program has grown by 30%, and our telematics program is estimated to have saved just under $1 million through a reduced in-house monitoring cost and early machine health issue identification and interventions. I look forward to sharing more of the benefits of our telematics system with you as connected fleet and data increases and our systems and reporting mature. On the cost control side, we are seeing opportunities to increase in-house component remanufacturing and equipment servicing work and are actively looking at source suppliers and inventory management to reduce costs and increase efficiency in parts delivery. Lastly, we have added senior maintenance leadership to better support the field work. In summary, we're actively addressing all areas of cost and skilled trades development within our control. Moving on to slide six, while Q2 financial performance was well below our own expectations due to the previously mentioned market issues, the demand for our fleet remains high. The Q2 utilization of 59% was essentially equal to the previous Q2 high of 60% achieved in 2019. We expect the high demand to remain into and possibly beyond 2023. We likewise expect our progress on increasing the maintenance labor workforce will directly correlate to improved fleet utilization. Between this high demand, our progress on manpower issues, and our in-house maintenance capability as highlighted in the following slide seven, we remain confident in our future business success. Slide eight is a quick snapshot of our current positioning as a company. Our indigenous partners and the contracts and fleet we have in place, coupled with our ever-improving maintenance capabilities, gives us solid and tangible confidence moving forward. I will expand more on our future outlook after Jason reviews the Q2 financials.

Thanks, Joe.