North American Construction Group Ltd

Welcome to the North American Construction Group conference call regarding the second quarter ended June 30, 2025. 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 participants without the 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 CEDAR and EDGAR, as well as on the company's website at nacg.ca. I'll now turn the conference over to Mr. Jason Winstra. Thank you. Please go ahead.

Thanks, Ina, and good morning, everyone. A bit of a change today as I'll start off right away with the financials and pass the call to Joe for the operational and outlook commentary. Starting on slide four, the headline EBITDA number of $80 million and the correlated 21.6% margin were impacted primarily by three distinct challenges in the quarter. First, based on the strong growth in Australia, we were required to incur higher than expected maintenance costs on subcontractor labor. The ramp-up curve in Australia has resulted in a lag in recruitment of our critical heavy equipment technician personnel and the resulting contractor costs resulted in higher expenses in the quarter. Second, an abrupt stop to work in April in the oil sands region resulted in higher operational and overhead costs due to the inefficiencies associated with unplanned outages. NACG has been working in the oil sands for decades, and we understand the need to be agile, but the inconsistency experienced this quarter was abnormal and resulted in us incurring costs we normally could avoid through routine mine planning and resourcing. And thirdly, although the project team and workforce at Fargo progressed the project extremely well, they had an eventful corporate quarter as a settlement with the authority and the finalization of an updated detailed plan to completion led to a significant margin adjustment in the quarter. For those familiar with project management, adjusting margins even slightly for a project that is 70% complete, can be material. Excluding these items, EBITDA would have been well above $100 million and at our typical margin profile of around 27 to 28%. These three challenges drove the financial results for the quarter, but have been mitigated and addressed, as Joe will describe in his prepared remarks. We included a comment here about our steady revenue growth as we posted $371 million of combined revenue, which is a 12% increase from last Q2. Australia in particular continues to impress with its consistent growth trajectory being up 7% from the first quarter of 2025 and 14% from last Q2. When we look back on Australia, the revenue of $168 million that we generated this quarter is more than double since the second quarter of 2022, three short years ago, which was $81 million on a pro forma basis. The McKellar Group generated almost $60 million in June alone and set another company record for monthly revenue. June's strong top line bodes well heading into a second half of 2025, and this growth rate is indicative of the demand we see in Australia. Moving to slide five and our combined revenue and gross profit. Australia was up $21 million on a strong quarter which benefited from growth capital being commissioned and fairly stable operating conditions. Equipment utilization in that region of 76% was strong, but was slightly held back from rainy conditions in April that carried over from Q1. This top line positive variance was further bolstered by higher revenue quarter over quarter in the oil sands region, which compares favorably to last year's Q2, but was significantly impacted by inconsistent demand, primarily in April. Our share of revenue generated in the first quarter by joint ventures was down $4 million from last year, primarily due to lower scopes being completed within the NUNA group of companies. Fargo was consistent quarter over quarter, but that consistency factored in an approximate $8 million reduction in recognized revenue based on the updated project plan. Excluding that one-time entry, Fargo scopes completed in the quarter were approximately 30% higher than that of Q2 2024. Combined gross profit margin of 10.7% was impacted approximately 8% by the three factors previously mentioned, subcontractor costs in Australia, operational and overhead costs in Canada from unplanned stoppages, and the Fargo settlement and updated project plan. Less prominent impacts included the continuation from Q1 into April of the rainy weather in Australia and early failures of certain components in our heavy equipment fleet in Canada. Moving to slide six, Q2 EBITDA and EBIT were down from their 2024 comparables as discussed. The 21.6% margin we achieved is not indicative of where we see our business operating at and well below the 28% run rate we've been on since the acquisition of the McKellar Group. Included in EBITDA is direct general administrative expenses of $12 million and equivalent to 3.6% of reported revenue, which is below the 4% target we've set for ourselves. Going from EBITDA to EBIT, we again expense depreciation equivalent to approximately 16% of combined revenue, which is higher than the 13% posted in 2024 Q2 and reflects the component issues we are experiencing in Canada. Again, the 16% is higher than our expected run rate moving forward given historically we've been between 13 and 14%. Adjusted earnings per share for the quarter of two cents reflects the significant bottom line impact of the challenges we've faced with interest expense identical to last year and tax rates consistent as well. The average cash interest rate for Q2 was 6.4%. Moving to slide seven, I'll briefly summarize our cash flow. Net cash provided by operations prior to working capital of $64 million was generated by the business, reflecting EBITDA performance net of cash interest paid. Free cash flow was neutral for the quarter based on the sustained capital spending. Moving to slide eight, net debt level ended the quarter at $897 million, an increase of $29 million in the quarter as growth spending required debt financing. Net debt and senior secure debt leverage ended at 2.2 times and 1.5 times respectively. With those brief comments, I'll pass the call to Joe.

Thanks, Jason. Morning, everyone. I'm going to start with a brief overview of our Q2 2025 operational performance, and then I'll conclude with our second half outlook, our growth opportunities in Australia and the infrastructure markets, and our expanding bid pipeline before taking your questions. On slide 10, our Q2 trailing 12-month total recordable rate of 0.42 remains better than our industry-leading target frequency of 0.5. We continue to advance our systems and training with key focus on increased high-risk task awareness and serious action and prevention. A lot of people in our business claim safety is part of their core beliefs and culture, but when you look at their history, their promises don't match the facts. Unlike others, NACG can demonstrate 10 years of industry-leading results from 2016 to now, while showing simultaneously increasing exposure hours by more than four times. Importantly for investors, these facts readily show our customers what a strong safety culture looks like and differentiate us from our competitors. This translates to contract wins, lower downtime, higher revenue, and lower costs. Moving to slide 11, I want to highlight some of the major achievements of Q2. The trailing 12-month revenue set another company record, with Australia leading the way and containing an impressive three-year growth rate of 28%. Just as impressive, if not more so, our business in Australia is growing at that rate and continues to improve on fleet utilization. Our Fargo Flood Diversion Project, a highlight for our diversification efforts, enters the last year of major construction and remains on track for scheduled completion and handover to operations and maintenance teams. Soon, Fargo and the surrounding communities will have flood protection in place to quell those annual spring fears. Our discipline management approach kept administrative costs at 3.6%, showcasing our ability to grow and support top-line revenue without adding to our overheads. Our ability to handle large civil infrastructure projects with the same operational and financial success is the key to our expansion in this segment. On the corporate front, we won the biggest contract in company history last week, shortly after our Q2 closed. which drove record backlog and continued our trend of 100% renewal rate in Australia. Continuing another Australian trend, this contract renewal was achieved more than two years before the previous contract expiration. On the topic of renewals in the U.S., we also renewed our Texas thermal coal mine management contract out to 2028. Lastly, on the financial front, we completed a $225 million offering of senior unsecured notes providing liquidity for our future growth opportunities. We ended Q2 with what I believe are two critical additions to our senior team. We've hired a VP of asset management and a VP of infrastructure growth. Stuart and Melanie are industry tops in their respective fields and will play major roles in leading our growth and diversification strategies. I expect to be sharing their accomplishments with you frequently in the coming quarter. On slide 12, We've combined the Australian and Canadian fleets to form a global utilization rate as measuring our global utilization becomes more and more important to our decision making. A 75-25 Australian to Canada weighting was chosen as it's roughly proportionate to our respective earnings expectations. Despite our Q2 setbacks, our global utilization rate is trending up and our continued prudent fleet management is expected to deliver utilization in the second half of the year in our target range of 75% to 80%. Moving on to our outlook for the remainder of the year, slide A14 highlights the three steps which are mainly cost-related that bridge our Q2 EBITDA margin results to our H2 expectations. To start, the Fargo settlement that is now behind us is one time in nature, and we have high confidence in the forecasted estimate to complete, as we have thoroughly reviewed the forecast, as have our other partners. In Australia, we expect lower costs as we reduce our reliance on subcontracted skilled trades, and importantly, we're ahead of schedule in those reductions through July. And lastly, in our oil sands business, we expect more consistent operations as our customers have no planned plant outages in the second half of the year as historically lower weather exposure. On slide 15, we've provided outlook for the second half of 2025 and highlighted any variances to previous H2 expectations. As I said in my letter to shareholders, we remain confident in delivering second half year results consistent with our original expectations aside from our oil sands business. Although these oil sands changes negatively impact our second half EBITDA and EPS, the unchanged combined revenue and free cash flow expectation reaffirms a strong finish to the year and sets us up to be back on historical growth trends for 2026. On slide 16, we highlight why our long-term growth targets remain intact, with anticipated organic revenue growth of 5% to 10% annually, underpinned by ongoing Australian growth, new infrastructure projects, which I'll detail further on the next slide, and new mining projects and opportunities to displace higher-cost contractors in Australia and Canada that will further enhance fleet utilization and operational diversification. On slide 17, We detail the growing civil infrastructure opportunities in North America. Aging infrastructure, energy transition, climate resiliency, and tariff threats pushing nations to seek more resource independence, all fueled by federal stimulus, are driving what we believe is a vastly growing opportunity in the civil infrastructure markets with spending uptick kicking off in 2026. This infrastructure growth is coming off a major previous uptick in 2023, and positions us well to support major general contractors who are at capacity as either a partner or a subcontractor. We expect to have secured two strong project teams to pursue our top 10 projects before year end and maintain our plans to increase infrastructure to around 25% of our overall business by 2028. As I mentioned earlier, our VP of Infrastructure and Growth is now in place, and although she has only been with us a bit over a month, She has hit the ground running and has already shown the skills and tenacity that fit right in at NACG. This gives me confidence in our ability to achieve our infrastructure goals. Slide 18 highlights a strong bid pipeline, including our top 20 infrastructure projects totaling around $2 billion. The big blue spot in the middle is now gone, as that is the $2 billion contracted win at the Queensland coal mine we announced last week. The remainder of the bid pipeline remains essentially unchanged, as no other significant bids in active procurement have been awarded. Although not a sizable enough project to warrant a press release, it should also be noted that our mine management contract extension at the Texas coal mine never entered the bid pipeline, and we were able to negotiate that extension directly with our customer. Lastly, regarding capital allocation going forward, We have been active in our NCIB, having purchased and canceled around 680,000 shares since inception to quarter end, demonstrating our commitment to shareholder-focused allocation. We have increased liquidity with our high-yield rate and an expected midpoint of $100 million in free cash flow for the second half of the year, which gives us confidence to continue investing in shareholder-friendly ways, provides us funds should we need to settle our remaining convertible debt with cash, which is now a current liability due the end of Q1 2026. and provides additional funding should we need letters of credit for future infrastructure bids or find other high return investment opportunities. In summary, while Q2 was not an easy time for us, we're looking forward to a strong back half of the year and are excited to share more operational updates with you as we move towards the end of the year. With that, I'll open up for any questions you may have.