North American Construction Group Ltd

Good morning, ladies and gentlemen. Welcome to the North American Construction Group LTD four-quarter and year-ended results conference call and webcast on Thursday, February 16, 2023. 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. Feel free to quote any member of management. but they're 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 prediction contained in that forward-looking information. Certain material factors or assumptions were applied in drawing conclusions or in making forecasts or predictions 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 CEDAR and EDGAR, as well as on the company's website at nacg.ca. I will now turn the conference over to Joe Lambert, President and CEO.

Thanks, Julie. Good morning, everyone, and thanks for joining our call today. Similar to previous calls, I'm going to start with our operational performance analysis before handing it over to Jason for the financial overview. And then I will conclude with the operational priorities, bid pipeline, outlook for 2023, and our capital allocation before taking your questions. On slide three, our trailing 12-month total recordable rate of 0.53 represents a significant improvement from the start of the year, and the Q4 rate of 0.30 was the best quarter of the year. The 0.53 achieved is slightly above our industry-leading target frequency of 0.5, and we will be focusing our efforts in 2023 on prevention of high potential injury events, implementing our acts of safety program, auditing critical tasks, and further advancing our use of developing technology in areas such as collision avoidance, fatigue management, and drone use for remote safety monitoring. On slide four, we highlight some of the major achievements of 2022. I'm not going to go through this list individually, but I would simply summarize that we resolved our first half issues, executed well on our Winter Works programs, safely and efficiently closed out the year, and are focused on carrying our momentum forward into 2023 and looking to take advantage of the opportunities presented in this continuing strong demand market. Slide five shows the cumulative financial results for the year, and I am proud to say all four of the noted metrics of revenue, EBITDA, EPS, and free cash flow are company records. As you can see on the following slide six, the trend for continuing improvements is consistent. More than doubling both EBITDA and EPS in just four years is an impressive pace that we are eager to maintain. The next two slides represent two areas of our business, that are key to continuing those positive trends. On slide seven, you will see we achieved our highest Q4 utilization on record after just having posted our highest Q3 on record, and the demand for our fleet remains high. The Q4 utilization of 75% was directly correlated to increased maintenance manpower and improved fleet mechanical availability. We expect the high demand to remain throughout 2023, and continuing into 2024 and beyond. We likewise expect our progress on increasing the maintenance labor workforce will directly correlate to continuing improvements in fleet utilization. Lastly on this slide, I would just like to point out that other than the obvious pandemic impacts in 2020, our diversification efforts over the last several years have delivered into expectation and demonstrated higher Q2 and Q3 fleet utilization as we have moved the smaller, underutilized portions of our heavy equipment fleet out of oil sands and into other geographies and commodities where they have achieved more operating hours. The diversification now built into the business has removed much of the seasonality and cyclicality seen in previous years. Slide 8 describes our advances in technology. and represents another area of our business that is key to continuing the positive financial trends. I spoke earlier about the technology being used to improve safety and would like to expand here on our telematic system. Our telematic system is now installed on about half of our fleet and it's on the biggest and heaviest half of our fleet. We will continue adding to the remaining portion of our fleet and might be subsequently looking into our support equipment as well. In 2022, The telematic system directly saved over $2 million of machine components through proactive interventions and saved an additional 1,200 hours of maintenance labor. We expect these costs and labor savings to about double in 2023 with full-year monitoring and additional assets brought online. The telematic system also contributes to improved operations through alerts and mapping that identify operator behaviors and provides locations complete with heat maps for alert events and frequency. The telematics program is really just hitting stride, and the more machines we get monitored and the more knowledge we build up from our analyses, the better we will get in improving maintenance and operations efficiency.

With that, I'll hand over Jason for the Q4 financials.

Thanks, Joe. This quarter's financial review begins on slide 10 with a few of our key performance indicators. Combined revenue of $320 million represented the highest level of revenue this company has ever had in a quarter and is a step change for a variety of reasons that we will briefly touch on. This revenue culminated with trailing 12 revenue exceeding $1 billion and conveniently occurred in the last quarter of a fiscal year. The $1,054,000,000 mark exceeded a previous company record of $1,000,000,000 $16 million, but under a much different margin profile. From this gross margin perspective, we realized 17.8% in the quarter, which is more in the range of what we expect and is based on the improved context that Joe touched on and is much discussed throughout this quarter's materials. Moving to slide 11. On a combined basis, revenue was 36% ahead of Q4 2022. Revenue generated primarily by our core heavy equipment fleet was up 30% quarter over quarter, with the drivers of this increase being equitable contributions from adjusted equipment and unit rates, as well as improved equipment utilization. In Q4, We had a full quarter of revised equipment and unit rates, which were updated in late Q3 to reflect the inflationary cost pressures experienced in the Fort McMurray region. Equipment operating hours were up over 15% in the quarter, and stable operational and maintenance headcount yielded utilization of 75%, which was significantly higher than Q3 2021 utilization of 64%. Vacancy rates related to the heavy equipment technician roles were steady in the quarter, and combined with increases in third-party vendors were the primary factors in the overall equipment utilization achieved. Fully owned business lines, primarily being DGI Trading and the external sales of equipment of rebuilt haul trucks, each posted strong revenue in the quarter consistent with Q4 of last year. ML Northern, acquired on October 1, 2022, provided a full quarter of operations after a seamless integration. Our share of revenue generated in Q4 by joint ventures and affiliates was $87 million compared to $54 million in Q4 2021. Nuna Group of Companies had another solid quarter of activity at the Goldmine in Northern Ontario, and the core businesses and their core businesses operated at better than historic levels. Of note, though, the primary drivers of the increase in combined revenue included the continued growth of top-line revenue from rebuilt haul trucks, now owned by our joint venture with the MICASU, and the increasingly important impact of the joint ventures dedicated to the Fargo-Moorhead flood diversion project. We had our first full quarter of construction work at the Fargo project, and the ramp up of activities remains underway with the project on budget and schedule in this very early stage of the project. As mentioned earlier, combined gross profit margin of 17.8% was a quarterly improvement from the 14.7% we posted last quarter, Q3 2022, and reflected strong operational performances in the quarter as our primary operations in Fort McMurray, Northern Canada, and Northern Ontario experienced predictable and productive cold weather conditions for the majority of the quarter. Our joint ventures continued their strong, consistent operating margins, and the updated equipment and unit rates were key factors for the four McMurray operations returning to historical margin levels. Operating margins benefited from the ML Northern acquisition from both lower internal costs as well as strong margins from services provided to external customers. The Second Life rebuild program commissioned and sold another 240-ton haul truck during the quarter to close out what was a very successful 2022. Moving to slide 12, adjusted EBITDA of $86 million was easily a company record, beating the previous record by over 40%. as a step change in revenue translated to a step change in EBITDA on strong margins previously mentioned. Included in EBITDA is direct, general, and administrative expenses, which were $6.6 million in the quarter, predictably identical to Q3 and equivalent to 2.8% of the strong revenue quarter. As always, we pride ourselves on G&A discipline, and Q4 was, again, no different in that regard. Going from EBITDA to EBIT, we expense depreciation equivalent to 12.5% of combined revenue, which reflected the depreciation rate of our entire business. When looking at just the wholly owned entities and primarily our heavy equipment, the depreciation percentage for the quarter was 15.5% of revenue and reflected an effective use of our fleet during a quarter which incurs a higher degree of idle time due to the colder temperatures. Adjusted earnings per share for the quarter of $1.10 was 51 cents up from Q4 2021, as the revenue improvements translated all the way down to net income. EPS was driven by $45.7 million of adjusted EBIT net of interest and taxes. The interest rate for Q4 was 7.1% as we trended up from the Q4 2021 rate of 4.7% from the well-known interest rate increases. The gross interest expense of $7.8 million should be a high watermark for us as we pay down debt late in Q4 and expect rates to be fairly stable moving forward. Moving to slide 13, I'll summarize our cash flow. Net cash provided by operations of $64 million was produced by the business, with the difference between this figure and the $86 million of EBITDA being cash interest paid in the quarter and the timing of joint venture cash distributions in relation to the EBITDA they generate. Sustaining maintenance capital of $26 million was dedicated to maintenance of the existing fleet as we invest in the fleet that drives our core business. Working capital changes generated cash in the quarter as expected. For the year, and given the fairly straightforward nature of the year from a cash perspective, the use of our $70 million of free cash flow that was generated can be easily broken down into its three categories. $44 million related to shareholder activity, primarily share purchases and dividends. $13 million on growth acquisitions, being ML Northern. and $13 million on net debt reduction. Moving to slide 14, total liquidity is back above $200 million and reflects the impact of free cash flow generation in the quarter. Net debt levels decreased $52 million just in the quarter as $67 million of free cash flow was primarily dedicated to deleverage with the remainder invested in ML Northern. Net debt leverage is now at 1.5 times and end of the year consistent with expectation. Due to the timing of cash receipts in the last couple days of 2022, we ended the year with $69 million of cash on hand, which is higher than our targeted balance of between 15 and 20 million. On a trailing 12-month basis, our senior leverage ratio, as calculated by our credit facility, dropped to 1.5 times, but did not benefit from this high cash balance and coincidentally is at the same level as net debt leverage. I'll briefly end on slide 15, which includes ROIC and return on equity. In particular, we are proud of the ROIC metric of 13.0%, which quantitatively showcases our objective to prudently and profitably leverage both our equipment fleet and our expertise. And with those summarized financial comments, I'll pass the call back to Joe.

Thanks, Jason. Looking at slide 17, this slide summarizes our priorities for 2023. I have previously discussed our leveraging of technology shown in item two, but wanted to highlight the other three areas that will be particularly important to progress in 2023. The first area of focus and core to our culture and values is our ongoing efforts to ensure each and every one of our employees returns home safely at the end of every workday. I mentioned earlier how we are using technology to improve safety through implementation of collision avoidance systems, fatigue monitoring, and using drones for assessing and monitoring remote work areas. With that said, we are likewise focusing on the workforce. We feel our growing workforce requiring increased new hires and an industry supplied low in experience will be best served with an increased focus on further developing our front-run supervision and expanding our green hand training programs. Jumping over item three to item four, we continue to prioritize increasing our skilled trades workforce. NACG has an extensive and comprehensive program to expand both our Atchison and field-based maintenance workforce. We have likewise used our procurement team to bring additional vendors from other provinces and countries to support our maintenance needs as the existing vendors and OEMs have struggled to support the increased industry demand. There's a slide in the appendix on page 31 which we have expanded to show both NACG and vendor maintenance workforce numbers for those interested in seeing how we have built up this skilled trade workforce over time. The ongoing priority will be to continue adding to both internal and vendor capacity until we have maximized our mechanical availability and fleet utilization, and then continuing hiring and training internally to replace higher-cost vendors. As stated previously, we expect our progress on increasing the maintenance labor workforce will directly correlate to continued improvements in fleet utilization and see opportunity to consistently achieve 75% to 85% utilization. Last but not least, item three describes our prioritizing of winning bids and achieving our target of greater than $2 billion in backlog by the end of the year, which is a great transition to our next slide 18. Slide 18 highlights the continuing strong demand and active project tenders. In Q4, we awarded a couple of projects for our NUNA partnership totaling just over $40 million for work on a gold mine in BC and some roadworks in the Northwest Territories. We are likewise starting to see increased bidding activity in oil sands. Two projects of note in oil sands are first, our expectation that the large regional oil sands five-year scope will be re-tendered in late Q1 for likely award in Q3. We continue to expect to win our fair share of the large red dot regional oil sands tender. and look forward to seeing the updated tender package and work scopes. Second tender of note in oil sands is an approximate $75 million scope for fueling and servicing an oil sands customer's equipment fleet over the next five years and represents our first major tender of our newly acquired ML Northern equipment servicing business working under our MICASU partnership. We believe we have a good chance of winning this work and continuing to expand our ML Northern business while simultaneously utilizing our skills internally to lower our equipment servicing costs and improve efficiency. Last item of note is that we have what we believe are four great opportunities outside oil sands, which are the four upper left blue dots, which we believe would fit the timing for our fleet transitioning from our Northern Ontario Goldmine partnership with NUNA. We look forward to having another blue dot win outside oil sands over the next quarter, which will continue our diversification success and potentially offer some upside to our forecasted smaller fleet utilization. On slide 19, our backlog sits at 1.3 billion, and we continue to replenish and win our fair share of work across all resource sectors. What I continue to believe is a key takeaway on this slide is that our backlog is roughly proportionate to our diversification target, demonstrating both confidence and sustainability of our diversification efforts. Lastly, on backlog, we continue to have expectation of exceeding 2 billion before the year is out. On slide 20, we have provided our enhanced outlook for 2023. With our strong Q4 results, progress on priorities, and carrying some of that momentum into the new year, we've been able to modestly increase the midpoints for a couple of our key financial metrics. We have had a great winter work season so far, and are definitely looking to continue to build on our success and beat even this enhanced outlook. But it is early days, and our middle two quarters generally carry the highest risk on fleet utilization. I know I'll get the question on how our quarters break out in the Q&A, so I will use our EBITDA as an example here. Our EBITDA is roughly equal between the first half and second half of the year, with Q1 being our largest and roughly largest of annual EBITDA, and Q4, usually second largest, but just slightly higher than Q3. As I stated in my letter to shareholders, capital allocation is always a key priority for NACG, and our free cash flow range of $85 to $105 million provides us with the flexibility to assess all four options of deleverage, share repurchases, dividends, and acquisitions. Our first step, which we announced yesterday, was to increase our dividend by 25%. De-leverage is the current obvious next focus, with our cost of capital increasing with interest rate hikes. As I've said many times, our capital allocation decisions are continuously analyzed, and we will, of course, redirect cash flow to share purchases or growth opportunities if they provide superior returns to our shareholders. On slides 21 and 22, we provide a bit of capital allocation to history and trends, which we trust you will agree has been disciplined, shareholder-friendly, and prudent. Over the past few years, we've been fairly consistent with our NCIB programs, as the earnings outlooks we've communicated have generally not correlated to the value of our shares. And finally, on slide 23, I'd like to highlight and provide the link for our sustainability report, which was also released yesterday. I really like the direction our sustainability work has taken with a focus on tangible, measurable progress and look forward to reporting back next year on our continued progress. In closing, I'd just like to thank the great team I have here at NACG for all your efforts and support in helping us achieve these record annual financial results in a challenging economic environment. With that, I'll open it up for any questions you may have.

Thank you. To ask a question, please press Star 1 on your touch-tone phone. If you wish to withdraw your question, you can press Star 2. Once you have completed your question and would like to return to the queue, please press Star 1. After a brief pause, we will begin the Q&A section. Your first question comes from Yuri Lake from Canaccord. Please go ahead.

Good morning, guys. Great quarter.

Thanks, Yuri.

On the utilization, I think you said you're targeting 75% to 85%. So should we think about that as the seasonally weaker quarters are at the lower end of that range and quarters like Q4 could be towards that mid-80s level? Is that a way to think about it for this year?

It's certainly getting to that point where we're consistently in that range. I would expect the Q4s and Q1s to be on the higher end and the Q2s and Q3s on the lower end of that range. And that's really what we need to demonstrate this Q2 and Q3 is that we can get into the lower ranges of that.

Okay. Okay. And the main driver there is that small fleet of construction equipment that's exited the oil sands. Is that right? And where have you put that to work? Is it on kind of small and medium-sized jobs, or is it on larger?

I'd split it into a few things, Yuri. There's still... you know, 100-ton, 150-ton trucks in oil sands that stay very busy during the winter that have not, you know, in the past half a dozen years had high utilization during summer civil construction. So during the winter, they're usually very well engaged in reclamation activities, but historically it slows down in summer. And then in addition to that, our progress on utilization outside of oil sands which really is, you know, we're forecasting the completion of the Northern Ontario gold job. And with that, we've got that fleet transitioning. And, you know, I'd say conservatively, we have it coming out of that mine and going into oil sands and having lower utilization and obviously a period of non-use while it's demobbing and being transported. So there is upside opportunity on those assets as well.

Okay. Suncor is out there talking about looking to trim their contractor headcount or use of contractors for a variety of reasons, but is that an opportunity for you guys or a threat, or how do you think about that?

We haven't seen that coming in the earthworks side, so... I guess our impression, Yuri, is that it's mostly happening on plant site side, and they're consolidating vendors, which makes a lot of sense. We've got a lot of work consolidated in the earthworks side already, so I don't think this is an area that they're looking to reduce contractors. And from what we see on the demand and the volume requirement side, we don't see any reduction in that demand for a long time.

Okay. I'll leave it there, guys. Thank you. You bet.

Your next question comes from Aaron Macmill from TD Securities. Please go ahead.

Hey, guys. Thanks for taking my questions. Joe, if I compare your Q4 slide deck with the Q3 one, it looks like that large oil sands bid got pushed out a couple quarters. Am I right in interpreting that correctly?

It was actually – it's supposed to be put on the commencement dot, and we put it on the tender dot in the previous one. So these contracts run through the end of 2023, so the dot was always supposed to be on January 1, 2024. So the dots are supposed to be when the work commences. And so it hasn't – that side of it hasn't changed. We just made a mistake where we put it in Q3.

Yeah, yeah, no problem.

The tender process has pushed out from last year to this year, but obviously there's plenty of time to have it awarded before next year.

And I guess just as a quick follow-up on that, how much of that work would be work you currently have versus incremental work?

I'd say probably half of it is work we're currently doing. The difference being that obviously right now our backlog reflects one year left of it and this would be five years of so you know we're going to peak at every cycle of five years in backlog with those oil sands awards and then they're going to work their way down over the five years and then get awarded again so we're kind of at the low level of our backlog right now and that award of that work and I'd say probably half it is work we're currently doing and the other the other but not work that we have five years of scope on, work we're doing this year, I'd say. Is that clear, Aaron?

Yeah, I know. That's perfect. Joe, you mentioned in your prepared remarks that Q2 and Q3 have the most uncertainty around utilization. You're guiding to a relatively flat year next year on a year-over-year basis. There's obviously some puts and takes. So, I thought it might be a good opportunity for us to kind of just get a bit more context around the various moving parts. Like, from what I can think of, I'm sure there's other ones too, but, you know, you've had the negative impact of inflation in 2022 versus 2023. You've got a full year of Fargo-Moorhead in 2023, and then offsetting that, you've got maybe the negative impact of the Cote project in 2023. So I guess, could you frame how materially – all three of those impacts are.

I think you've almost finished answering your own question there. That's exactly what I would have said, is that where we place that Cote fleet, there's actually opportunity even on the same site and in the same regions that could have great improvements on utilization from forecast. The Fargo-Moorhead ramp up, but it is lower risk, lower margin work at Fargo with the big infrastructure work, which I think we've always said. And then there's some areas in projecting the improvements in utilization and projecting the benefits that we're achieving in telematics where I'd say we're cautious to project trends that are going up very quickly without a lot of data points. And, you know, we certainly want to get a few more dots on the map or data before we confidently project things higher than where we currently are. So I think those are all opportunities that, you know, we'll see really how the Q1 and what we've seen happening in Q2 and get a little closer to it.

Maybe I'll ask the question a bit differently. I'm wondering on materiality. Like, if you take those three factors...

and forget everything else, like net-net, are those three factors positive or negative year-over-year? They would all be positive. Okay.

So there's potential for upside revisions to your guidance, to the extent that... Yeah, I... Yes, and what I would say...

You know, you've heard me use the term stronger for longer in the commodity marketplace. You know, I've been in mining business for 40 years now. This is the strongest across all commodities from a demand side and one that looks like it's going to run a long cycle because of the EV metals. Certainly, I've seen, you know, whether we're talking about energy, coal, met coal, thermal coal, base metals, precious metals, Lithium, graphite, this is an extremely high-demand market that looks like it's going to stay this way for a good long time. And to me, it's a generational kind of demand cycle we're seeing in commodities, certainly for my generation anyways. I've never seen it. And I think that's an overall driver that gives us confidence that, you know, if demand's there, it's getting the mechanical availability and utilization out of our fleet and executing it.

And that's what we do. Thanks, Joe. I'll turn it over. You bet.

Your next question comes from Jacob Bout from CIBC. Please go ahead.

Hi, good morning. This is Rahul on for Jacob.

Good morning, Rahul. Morning. So I just had a question on... 2023 guidance and the current backlog. So, so guidance, you know, if we look at the EBITDA guidance, it implies an improvement over 22, but the backlog levels are lower both quarter on quarter year on year. So is this really just a factor of not winning that, you know, five-year project yet? And maybe if you could just talk about backlog duration and, and, whether you expect to use more from backlog this year compared to last year.

No, as I stated a couple times in the presentation, we expect our backlog to be over $2 billion by the end of the year. It's just the cyclical nature where we've got a regional contract, which is aligned for main producing sites, and they're on a five-year cycle. So you're going to have you're going to peak every time they're awarded, and over the next five years, those are going to draw down. And I'm just talking about half the business that's in the oil sands right now. So the decline quarter to quarter would be expected because these contracts are only awarded every five years. We thought it originally came out and looked like it was going to be awarded last year, but because of all the inflationary pressures, And because they can, they pushed it off until this year. And so, you know, we expect that to be five years of our, you know, about 75% of our work in oil sands is going to get committed to a five-year contract. And so, you know, the quarter-to-quarter decline in backlog from three to four really didn't matter. Every time after these awards occur, that's going to happen in oil sands. And we've had, you know, significant winds outside, even like the big infrastructure project in the States. You know, that's got a six-and-a-half-year operating construction and 29 years of operations and maintenance. That number is just going to draw down over that six-and-a-half years of construction more than anything else. Does that cover up what you're looking for, Ron?

Yep, yep, that's helpful. Thank you. And maybe just on the Fargo Moorhead project, so has that project been fully ramped up or would you say there's still more runway, you know, from a quarterly contribution perspective over the next couple of quarters?

We just opened it up in roughly September of last year. We just started Earthworks and the Earthworks side of it will get pretty close to peak this year. So we'll get full year operating We had roughly a quarter last year. We'll have a full year of contributions this year. And really, this year and next year are getting to where we'll have peak production and peak workforce on those sites. Generally, it'll happen during the summer, but they run all year long. So they've been operating. They're operating today. They were operating last week. And they'll operate continuously now for the next six years.

Right, right. And... And maybe this last one for me. So when we look at your guidance ranges, I guess the question is, what determines the low and high end? And does it assume a relatively quick transition of the Cote gold mine fleet?

We've got a pretty conservative estimate of that fleet coming out of Cote, taking a reasonable amount of time for transportation, and then going into a lower utilization aspect. But, you know, if we had a very quick transition and got it into a 24-7 high utilization, which is what we'd like to do, and what I talked about is those four blue dots on the upper left of that chart, you know, it may be as a $25 million top line impact. So it's not a huge amount. It's not going to change that range. But there's a lot of other contributing factors, predominantly our utilization and whether our fleet mechanical availability is a told people before about every point of utilization is worth about a million dollars a month in top line. So continuing to add, and if you look at last year's averages versus this year, if we can continually add and get better and get into that range of 75 to 85, it'll have positive impacts going forward.

Thanks. Thank you. I will pass it over. Thanks.

Your next question comes from Tim Monacello from ATB Capital Markets. Please go ahead.

Hey, good morning, guys. Good morning, Tim. Congrats on blowing the roof off on the score. It's been a long time coming. I also got to say, you know, you got to be quick on the trigger finger to get a question in this queue, these analysts. I don't think I could win a duel with some of these guys. Holy cow. Anyways, a lot of my questions have been covered off. One of them, though... The maintenance headcount slide, it's an interesting detail that you provided here between the third-party vendors and your NACG headcount. It looks like the gap between that is widening out a little bit, but it seems to be within your historical range. You made some comments in your prepared remarks that you're hoping to ramp both of those two lines higher and then try to close the gap, basically. and convert or just sort of reduce the amount of third-party vendors. Where would you like to see that ratio of NACG headcount to third-party vendors, and what could that mean to your margin profile if you were to close that gap?

I don't know if I've calculated that one, Tim. I could take a stab at it. But we'd probably want a good 90% of that workforce to be our own internally. We've always got some around generally you want for any kind of warranty work, as well as some technical support if you need it. I'd have to sit down with Jason and calculate that number, but external guys are probably roughly twice as much as internal guys in the expense side. You're carrying, obviously, a lot of another company's costs and overheads in not just the direct labor. And they're not doing it for free also. So we've been good. We've dropped them out when we've needed to. Obviously, you'll see during the pandemic. Last year it dropped because they couldn't give us guys. That's what that drop is. And we had to build up more vendor support just to get to where we needed to. But as we increase our own and approach that high utilization, then we'll start pulling vendors out.

Okay. Got it. And, um, you know, obviously it doesn't seem like it's much of an issue anymore, uh, having, you know, trying to staff and, um, so maybe you can just put in context, like, what does the market look like now for heavy equipment mechanics compared to what it looked like, uh, you know, in the middle of 2022 and is there any work that you weren't able to complete in Q4 just given, um, you know, mechanical equipment availability?

We could have done more. We weren't anywhere near the top end of our mechanical availability of our fleet, even with that utilization, and we had demand that would have kept every piece of gear running that we could have got running, and we could put operators. It's not over, Tim, and this is not going to be an issue that even goes away in years' time because this is going to be an ongoing issue of skilled trades in Canada, and that's the way we're looking at this. This isn't a seasonal, this isn't a year, this isn't a cycle. We're changing the way we do this business and looking at how we do apprentices, looking at how we bring in vendors, how we bring more equipment down here and do more work in regional shops that we can get more people at, continue to expand our facilities. This is going to be something that is long-term... They'll be talking about it 10 years from now because it's not going to get easier. And we definitely want to be on the leading edge of this because, as you've seen, it drives utilization, and utilization is key to our business.

Okay.

That's great. One other thing that I wanted to touch on, and I think Yuri asked about it, was just around – that utilization range that you're alluding to in the 75% to 85% range and thinking that you might be able to get to the bottom end of that range in a Q2. Historically, your Q2s are sort of maxed out around the 60% range in terms of utilization. How do you get that extra 10 points of utilization in Q2 in the oil sense?

Well, it's availability of our big truck fleet that we know we have demand on is the biggest driver. That's the one we can control. And then what we're looking for is some increased demand on the smaller end of the fleet with increased civil construction works over the summer. So we've got to have the demand first, and then it's in our hands to make the equipment available and put operators in the seat. We have the demand on the big equipment year-round. We're looking to see if there's increases further in the small stuff or even moving some of that outside of oil sands again to improve utilization. And then it's up to us to execute on the maintenance and the maintenance planning to get mechanical availability over and above what our needs are there. That's why I said committing to those kind of numbers and projecting it You know, we've got to put a few more runs on the board. You can't draw a line with a single data point. We need a few. And, you know, I'm very pleased with how we've progressed, and we've exceeded our expectations so far. But, you know, there's a lot of moving parts in this. And Q2 and Q3 will be great telltale signs if we can get into that range, and even on the low end in those quarters. feel a lot more confident projecting it year-round.

Where would utilization be in Q1 so far? We're in the 70s. Actually, we're in the high 70s.

Again, you're talking Q1, and that's a January number.

So it's continuing from where it was in December. Okay.

That's really helpful. And then what would be the utilization that you're assuming for the year in your guidance range?

I don't have that number offhand. I'd have to get back to you, Tim.

Okay. No worries there. And then the other question that I have is just around the free cash flow guidance. I noticed that there's a $25 million deferral. I think that has to do with just sort of distributions from the Fargo Moorhead project and then wasn't added back or it seems sort of flat from in 23 from 22. So I'm curious, like if you were to include the cash being held in the Fargo project or any of your JVs is not being distributed, how much free cash flow, what would the free cash flow profile look like for the entire business year over year?

I can take that one, Tim. It's a bit of a loaded question. I don't know if you're asking to normalize 2022, but yeah, between 20 and 25 is the impact we've seen between earnings and then cash distributed. So whether you want to add that 20 or 25 to 2022 or 2023, you know, is up to the reader. I would say for 2023 purposes in our range, as you noted, we left the range the same. We've modestly increased kind of the core business cash generation and then kept the expectation from our JVs the same as we had planned out in October of last year. So we've left it the same. We understand the volatility of JV distributions and we're in the kind of 40 to 45 million of distributions coming from the JVs. That was our expectation last quarter, continues to be our expectation. You know, if the JVs are able to exceed that, you know, we would see upside. But, you know, clearly with the impact we had in 2022, we didn't want to over-promise for 2023. And so 85 to 105 is still a very strong cash flow generation. Another step change in our capital allocation flexibility, but there clearly is volatility with free cash flow.

No, absolutely. I'm just trying to sort of understand better, I guess, the underlying operational free cash generation of the business rather than, and I understand and know why you would only talk about the distributions out of the JV, but I think from a To understand the value proposition here, we need to understand the actual cash generating aspect of those JVs as well. So that's just what I was trying to touch on. Anyways, I'll turn it back, and thanks very much for the details.

Thank you.

Your next question comes from Brian Fast from Ram & James. Please go ahead.

Yeah, good morning, guys.

Morning, Brian.

Just on the inflation adjustments midway through the year, is it safe to say that that was fully reflected in Q4 or is there any lag there?

It was fully reflected in Q3 already, Brian. So yeah, there's no lag and no lag or retro in Q4 either. Okay, thanks.

And then I appreciate the color on the telematics, but Are you able to quantify maybe the returns or payback relative to your investments just on that installation?

I'd say it's already – savings already exceed cost operating even in its first year last year, and we expect that to continue. I think we expect it to double this year, and we aren't adding any people or cost to it. The operating cost per machine hour is less than what we had forecasted, and the savings are higher. And it pays for itself very quickly.

Okay, that's it for me. Appreciate the call.

Your next question comes from Maxim Sychev from National Bank Financial. Please go ahead.

Hi, good morning, gentlemen. Good morning, Max. Just a couple of quick ones for me, if I may. Joe, I guess, do you mind providing a bit of color on your initial perception around Fargo, how that's ramping up, sort of any changes? I think you made some comments a number of months ago, like in terms of how inflation could be potentially impacting the economics. Just wondering if you have some refreshed math, as obviously some of the things have normalized. So yeah, maybe any color on that, please.

Sure, you know, it's ramping up well. We've been hitting our productivity numbers. We peak for the year coming up in the summer, but on the earthworks side, which is what's being executed right now, it's progressed very well. So equipment and people and everything's working fine. We'll start getting into some of the bridge work with our partners. We don't actually execute that side of it, but our partners will be coming up this summer and commencing that. We did our initial... kind of forecast reviews and where we were on inflation and the impacts on our risk assessments. And those initial items said that the increases incurred were within our risk matrix and were covered off by that, and that our project margins and schedules remained intact. And, you know, our next will probably be towards the end of this year, beginning of next year, where we do kind of the full-on, full-blown forecast of the whole job for the first time after everything's commenced. That'll be our first real test of how the project sits versus how it's being executed. Hopefully, we have some positive impacts with what we see in our earthworks side over the summer and we're able to beat our targets in the big ramp up this year. I guess it's a stay tuned kind of a message, but the other side of it is we've gone through model that inflationary pressures in and we haven't seen a reduction in our expected project margins.

Okay, super helpful. Thank you so much. And the last question pertaining more to capital allocation and some of the earlier comments, Joe, that you made around sort of EV, you know, battery metals and how it's such a robust market. Do you mind maybe, I mean, painting a bit of a picture in terms of, you know, how that potentially could fit sort of the preference for M&A or, yeah, just maybe any color from that perspective. Thanks.

You know, I think to put some color on it, when you look at that bid map and those dots on that map, the blue dots, and there's some significantly large ones, you know, those are areas of iron ore, copper, nickel, gold, um and opportunities that we see that have what we tend to call a high go win percentage that they are going to go forward and there we have a good opportunity to win them so from a bidding perspective the work outside of oil sands and the other commodities been as strong as we've seen it um you know we continue to look at other markets around the world for m&a opportunities and um That's when we will look at, and this fits in just with the overall capital allocation, Max. Obviously, we addressed our dividend. We're looking at the debt because of the high interest rates. But we also see some opportunities in the M&A side. Obviously, we've had success in vertically integrated bolt-ons like ML Northern and DGI. Those have been great value, and we see them continuing to be. So if opportunities come up like that and they're – great returns, or even if bigger ones do, we're going to pursue them. And we've consistently seen the small ones, and we do think there's some opportunities for some bigger ones that have historically struggled to be accretive. But they have to have the returns we're looking for. Otherwise, we're going to look at deleveraging, which there's nothing wrong with that either, right?

Yeah, no, absolutely. And maybe, do you mind maybe providing a bit of sort of read-through on how the expectations of sellers changed, or maybe not over the last kind of nine months? Has it been static, or have you seen sort of a reset of expectations on that side as well?

Yeah, I don't know if I've ever seen anything consistent in that regard anyways. I think it's opportunistic. You find opportunities. sellers are in the right spot at the right time when you're looking at something. I just think we've found great fits and timing with sellers on our DGI and our ML Northern and great fits in those cultures that made for extremely smooth integration into our business. I wouldn't call those normal. I think it's just been a great opportunistic setup for us. But, you know, every seller is a little different and I don't think there's a consistent trend there. But, you know, when we see opportunities where the integration of the business and the culture and there's synergy and there's opportunities to learn from one another and grow off each other, they tend to be the ones that provide the best financial sides as well. So that's what we look for is things that vertically integrate in our business, have a good return for us, help us lower our costs while giving us opportunity to expand in external services or other businesses similar to us. We think we can increase our diversification geographically and in commodity and customers and have good accretion numbers. Those are the ones we're looking for.

Yeah, makes sense and appreciate all the comments. Thanks so much. No worries, man. Anytime. Thanks, Max.

This concludes the Q&A section of the call, and I will pass the call over to Joel Embert, President and CEO, for closing remarks.

Thanks, Julie, and thanks, everyone. I really appreciate you joining us today and look forward to talking to you again next quarter.

Ladies and gentlemen, this concludes your conference for today. We thank you for joining and ask that you please disconnect your lines. Thank you.