North American Construction Group Ltd

Good morning, ladies and gentlemen. Welcome to the North American Construction Group earnings call. At this time, all participants are in 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 Joel Lambert, President and CEO.

Thanks, Joelle. Good morning, everyone, and thanks for joining our call today. Today's call is clearly different than ones in the past, given the share purchase agreement we signed yesterday, and we fully expect the majority of the discussion to involve the transformational acquisition of the McKellar Group. Therefore, we'll do things a bit different this morning. I've asked Jason to summarize our Q2 performance, and then I'll jump right into the commentary and context on McKellar. At the end of the prepared remarks, we are happy to address Q&A on either Q2 or McKellar. With that, I'll hand it over to Jason.

Thanks, Joe, and good morning, everyone. As mentioned, to focus on McKellar, the quarterly comments this morning will be brief. On slide three, as a standard practice here, we start with safety and our everyone gets home safe commitment. Our trailing 12-month recordable rate is now at 0.27 and represents a significant improvement from last year, which ended above our company target. We are primarily focused on leading indicator initiatives, with several outlined on the slide, but are encouraged by the lagging indicator trend. On slide four, you'll see two things. One, 61% was the highest utilization we've ever had in a second quarter. But two, and probably more noticeable, the month of June was well below expectation. April and May benefited from the strong momentum carried from Q1, an average 70%, which was very encouraging. However, the surprisingly wet weather in June and a required mobilization of equipment into Fort Hills drove utilization in that month to below 50%. a level we haven't seen since mid-2020. High demand remains for our heavy equipment, and we expect this throughout 2023 and into 2024. We likewise expect our maintenance teams to continue their strong work and correlated improvements in the mechanical availability of our fleet. We remain on track with our utilization goals to be in the targeted range of 75 to 85% on an annual basis, with the trailing 12-month average now at 70%, compared to the 65% we posted in 2022. Moving to the financials, slide six. Combined revenue of $277 million represented the highest level of revenue this company has ever had in a Q2, and correlated to the typical impacts that the spring season has on equipment utilization in the oil sands. Return on invested capital of 15.3% is the highest we've ever achieved and surpassed the company goal we had set of 15% as trailing 12 EBIT of $143 million outpaced increases in invested capital, which now sits at $731 million. Slide seven, on a combined basis, revenue of 21%, revenue was 21% ahead of Q2 2022. Reported revenue generated primarily by our core heavy equipment fleet was up 15% quarter over quarter, with the drivers of this increase being slightly improved utilization and the adjusted equipment and unit rates, which were applied in Q3 2022. ML Northern, acquired on October 1, provided another full quarter of operations of fuel and lube delivery. And as we approach the one-year anniversary of welcoming them, To NACG, we are happy to consistently report the strong performance of that critically important support fleet. Our share of revenue generated by joint ventures and affiliates was $83 million compared to $60 million in Q2 2022, but notably up from Q1 2023 revenue of $78 million as their projects are not as significantly impacted by the spring season. The NUNA group of companies had another busy quarter of activity at the gold mine in northern Ontario. Of particular note, though, the primary drivers of the increase in combined revenue included the continued growth of top-line revenue from rebuilt ultra-class haul trucks and excavators now being 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 another full quarter of construction work at the Fargo project, with the project passing the 10% completion mark and hitting its stride. Combined gross profit margin of 13.1% was a quarterly improvement from the 9.6% we posted last year, as our operations in the Fort McMurray region experienced the challenges of Q2 weather. Our joint ventures continued their trend of strong, consistent operating margins and margins benefited from the ML Northern acquisition from lower internal costs as well as strong margin from services provided to external customers. The Second Life Rebuild Program commissioned and sold another ultra-class haul truck during the quarter. Moving to slide eight, adjusted EBITDA of $52 million is the best Q2 we've ever posted and reflective of the commentary thus far. Included in EBITDA is general and administrative expenses which were $7.2 million in the quarter, equivalent to 3.7% of revenue, and remained under the 4% threshold we set for ourselves. Going from EBITDA to EBIT, we expensed depreciation equivalent to 10.4% of combined revenue, which reflected the depreciation rate of our entire business. Diversification efforts into less capital-intensive services continues to have a noticeable impact on the depreciation percentage. When looking at just the wholly owned entities and our heavy equipment fleet, the depreciation percentage for the quarter was 12.6% of revenue and reflected an effective use of our fleet during a challenging quarter. Adjusted earnings per share for the quarter of 47 cents was 30 cents up from Q2 2022 as revenue increases translated down to net income. EPS was driven by $23.1 million from adjusted EBIT net of interest and taxes. The average rate for Q2 was 6.9% as we trended up slightly from the Q1 rate of 6.7% from continued interest rate increases. Excluding the acquisition, Joe will discuss the gross interest expense of $7.5 million should be a high watermark for the year. as free cash flow is generated in the second half and we pay down debt. Moving to slide nine, I'll summarize our free cash flow. Net cash provided by operations of $40 million was generated by the business, reflecting the strong EBITDA performance. Free cash flow was a use of $4 million as sustaining maintenance capital of $38 million was invested in the fleet. Moving to slide 10, net debt levels increased $10 million in the quarter as $4 million of free cash flow used was financed with debt in addition to the growth assets purchased and dividend payments. Despite the modest increase, net debt and senior debt leverage remained fairly steady at 1.4 and 1.3 times, respectively. Slide 11 provides our bid pipeline. which according to our estimating team is the fullest it's ever been and highlights strong demand and active project tenders. Similar to last quarter, we added another $300 million in new tenders, about half of which is outside the oil sands and roughly matches our diversification. The process for the regional contract in the oil sands is going as expected, and we estimate that process to wrap up in early Q4. We have close to 50 average active projects and remain encouraged by the activity we see across various commodities. Our contractual backlog now sits at $920 million as we complete the scopes awarded to us, and we continue to have expectations of exceeding $2 billion before the year is out. And with those comments on the quarter, I'll pass the call back to Joe.