North American Construction Group Ltd

Good morning, ladies and gentlemen. Welcome to the North American Construction Group conference call regarding the fourth quarter ended December 31, 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. 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. Some 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's discussion and analysis, which is available on CDAR and EDGAR, as well as the company's website at nacg.ca. I will now turn the conference over to Joe Lambert, President and CEO.

Thanks, Joanna. Good morning, everyone, and thanks for joining our call today. I'm going to start with a few slides showing our 2023 operational performance before handing it over to Jason for the Q4 financial overview. And then I'll conclude with our 2024 operational priorities, our bid pipeline outlook for 2024, and finish up with our capital allocation plan before taking your questions. On slide three, our record Q4 safety performance contributed positively in achieving a trailing 12-month total recordable rate of 0.29, which is the second-best annual rate in company history and remains well below our industry-leading target frequency of 0.5. We will continue to focus our efforts on further advancing our training systems and processes to identify and eliminate hazards and health risks in our business. On slide four, we highlight some of the major achievements of 2023. The McKellar acquisition was the obvious major accomplishment during the year, and with the strength of the Australian resource industry and the strength of our own team down there, I'm confident our Australian businesses will be highlighted in our annual accomplishments for many years to come. Our Fargo-Moorhead flood diversion project completed its ramp up for its first full year of construction in 2023, and we enter our largest year of Earthworks construction in 2024 with confidence in our productivity and our overall project plan. Our telematics system continues to provide more detailed and meaningful operations and maintenance data every day, and the 95% reliability is an impressive achievement. Also impressive is the $5.3 million of maintenance savings achieved in 2023 and systems operating costs more than 30% below budget. We are targeting to have this same or similar telematics system tested in Australia in 2024 with full rollout expected to commence in 2025. And last but not least, we successfully completed our Ontario Gold Mine construction project through our NAMJV partnership. and have several active bids in the Ontario and Quebec regions. Slide 5 captures all of our financial highlights for the year, and the 17% to 28% year-on-year increases include only a Q4 of McKellar contributions and a negative contribution from NUNA. Good side, I guess. I'm sorry. I'm already eager to see what this slide looks like this time next year with a full year of McKellar contributions and a new and returned operational excellence. On slide six, you will see our EBITDA and EPS results for the last five years, which I hope you agree is an impressive trend and one that we expect to continue. When people try to tell me how risky and volatile our resource-based business can be, I like to point them to graphs like these and remind them this is what was achieved with a pandemic in the middle. On slide seven, we have updated our calculation methodology and added our Australian fleet to our utilization graphs. One of the inherent benefits in the Australian market is the 5% to 15% upside utilization potential when demand is strong. We remain on trend and confident in our ability to hit our Canadian target range of over 75% by the end of this year, and we'll also be looking to similarly increase our Australian fleet to over 85% during this same period. With that, I'll hand it over to Jason for the Q4 financials.

Thanks, Joe, and good morning, everyone. To start, I will provide brief context regarding the McKellar transaction, which closed effective October 1, 2023. As disclosed in our financial statements, the overall purchase price for the McKellar Group was $383 million, which included $394 million of PP&E, which in our case is the heavy equipment fleet. This overall purchase price included $14 million of cash, which McKellar had in their bank accounts on close. And when factoring $35 million of equipment we purchased after October 1, the all-in cost was $405 million and consistent with expectation. EBITDA generation to date is slightly higher than initial expectation and confirms the less than 2.75 multiple we disclosed last July. The transaction and growth spending were fully funded with debt with approximately 70% of this debt being senior secured and 30% being vendor provided. At the time of announcement in July, we had targeted net debt leverage of 1.8 times by the end of 2023 and are very happy to have slightly beat that target. We've had an excellent first few months with McKellar and are looking forward to further integration and reporting progress in the months to come. Our teams are in daily dialogue between Canada and their Australian counterparts with weekly and monthly processes starting to become routine. Moving to the financials and some brief commentary. On slide nine, the headline EBITDA number that exceeded $100 million for the first time in our company's history was driven by a full quarter of McKellar results. It exceeds our previous record by about 20% and exceeded Q3 by 70%. All business units contributed to this result, with the exception of NUNA, which we will discuss later, and is a metric among many that our diversification efforts make us stronger and more consistent. Moving to slide 10. and our combined revenue and gross profit. As we will have now for four quarters, McKellar will provide step changes in quarter over quarter variances. On a total combined basis, we are up $83 million quarter over quarter. McKellar and DGI, which we combine as Australia in our results, we're up $128 million, which could have been higher if the rainfall in November and December had been less severe. This rainfall impact can be seen in Australia's equipment utilization, which almost hit 85% in October, but fell to the mid-70s in November and December. This positive variance was offset primarily by lower equipment utilization in the oil sands region. Our share of revenue generated by joint ventures and affiliates was a net $10 million lower than Q4 2022. The Fargo-Moorhead project had an excellent operational quarter and achieved the progress metrics and milestones required of the project's schedule. In addition, we had positive contributions from the continued growth of top-line revenue from rebuilt ultra-class haul trucks and excavators owned by our joint venture with the MICASU. More than offsetting these positives, the completion of the construction project at the Gold Mine in Northern Ontario led to lower quarter-over-quarter revenues within the NUNA group of companies. Combined gross profit margin was 18.4%, despite the challenges experienced by NUNA, and again, reflects the strength of a diversified business. As both Joe and I have alluded to, losses at three specific mining projects within the NUNA group of companies had a direct impact on margin. Joe will expand in his comments for NUNA moving forward, but from a financial perspective, excluding these project losses would have yielded an overall margin of approximately 20%, given the impact of $7.5 million. Gross profit margins benefited both from the operations in Australia, higher than 20% in the quarter, which is normal course, and from ML Northern, whose fleet lowers our internal costs as well as generate strong margins from services provided to external customers. Moving to slide 11, record adjusted EBITDA was consistent and reflective of the revenue commentary. The 25% margin reflects an effective operating quarter with a positive trend from the Q3 margin of 22%, indicative of where we see our business operating at. Included in EBITDA is direct and general administrative expenses, which, when excluding one-time acquisition costs, were $12.8 million in the quarter, equivalent to 3.9% of revenue and remained under the 4% threshold we've set for ourselves. McKellar runs a similar G&A profile and is not expected to change our G&A burden as a percentage of revenue. Going from EBITDA to EBIT, we expensed depreciation equivalent to 11.8% of combined revenue, which reflected the depreciation rate of our entire business, including the equipment fleet at the Fargo Moorhead project. When looking at just the wholly owned entities and our heavy equipment in Canada and Australia, the depreciation percentage for the quarter was 12.8% of revenue and reflected the addition of the Australian fleet and an overall efficient productive use of equipment in the quarter. Adjusted earnings per share for the quarter of 87 cents was 23 cents down from Q4 2022, as the impacts of higher interest are factored in with EPS, with the project losses at NUNA being particularly impactful to EPS at approximately 20 cents. The average interest rate for Q4 was over 8.5% as we're up from the Q3 rate of 7%. This effective interest rate, the highest we've paid in a long time, is a compelling indicator for us to look to pay down debt in 2024. Moving to slide 12, I'll briefly summarize our cash flow. Net cash provided by operations of $161 million was generated by the business reflecting EBITDA performance and working capital collection net of cash interest paid. Free cash flow was $111 million as sustaining capital of $41 million was invested in the fleet in both Canada and Australia. Moving to slide 13, our PP&E of $1.1 billion is up $450 million from September 30th on the $430 million million worth of McKellar assets we purchased. Net debt levels ended the year at $721 million, an increase of $326 million in the quarter as the $405 million of net debt incurred related to McKellar was offset by free cash flow generation. Net debt leverage and senior secured debt leverage ended at 1.7 and 1.4 times respectively. and are considered reasonable levels three months after a transformative debt-funded acquisition. And with that, I'll pass the call back to Joe.