North American Construction Group Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 10 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to the North American Construction Group Conference Call regarding the Q3 ended September 30, 2023. At this time, all participants are in listen only mode. Following the 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.

Operator

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 where 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 in Federer and EDGAR, as well as on the company's website at nacg. Ca.

Operator

I will now turn the conference over to Joe Lambert, President and CEO. Please proceed.

Speaker 1

Thanks, Alan. Good morning, everyone, and thanks for joining our call today. I'm going to start with our Q3 2023 operational performance before handing it over to Jason for the financial overview. And then I'll conclude with the operational priorities, bid pipeline, outlook for 2023 and our first look at 2024 before taking your questions. On slide 3, our Q3 trailing 12 month total recordable rate of 0.30 is less than half of what it was at this time last year and remains below our industry leading target frequency of 0.5.

Speaker 1

We will continue to focus our efforts on further advancing our training programs, communicating and promoting safe behaviors, all health campaign on flu shots and audiometric testing and our winter hazard awareness programs as we enter our busy winter season and continue to add to our workforce. On slide 4, we highlight some of the major achievements of Q3. I'll discuss McKellar later, but wanted to highlight the ramp up of our Fargo Moorhead flood diversion project, which had its most active earthworks summer that will be followed by its busiest winter as this major infrastructure project progresses into the core of its multiyear construction schedule. Our telematics program is exceeding expectations and we continue to expand our capabilities and support to the operations and maintenance teams. Our Mikasue joint venture is progressing nicely and continues to add low cost second life rebuilds to its fleet of heavy haul trucks.

Speaker 1

We see strong long term demand for the Mikasou fleet and are actively looking for additional core assets to rebuild and continue to grow the joint venture assets. In Northern Ontario, we successfully completed our gold mine construction project joint venture with Nuna and had several active bids in the Ontario and Quebec regions. We also completed a major overburden fleet relocation in oil sands to support changes in customer demand and mine plans during the quarter. We believe the current fleet allocations will fit well with future overburden demand and contract awards such as no meaningful fleet moves will be required over the winter. Moving on to slide 5, you can see that the aforementioned Q3 Fleet mobilizations negatively impacted our fleet utilizations.

Speaker 1

And although a better than average Q3, it was below expectation. However, we remain on trend and confident in our ability to hit our target range of 75% to 85% by the end of next year. Moving on to slide 6. We highlight some of the key attributes of the McKellar transaction. 1st and foremost, We have cultural alignment, share core values and maintain a focus on operational excellence, especially in the area of heavy equipment maintenance.

Speaker 1

We believe these common characteristics in a well planned transition, which is already underway, will make for a smooth integration into the overall business over the coming year. Financial highlights include a purchase price below book value of assets and a favorable purchasing structure. Additionally, our strong underlying business has allowed us to finance acquisition with debt rather than equity resulting in an exceptional accretion. The vendor provided financing and earn outs aligned management teams and mutually incentivized performance. Although fully debt financed, leverage is expected to be less than 1.4 times by the end of 2024, which is about where we were immediately prior to the transaction closing.

Speaker 1

Last but certainly not least, McKellar adds $2,000,000,000 in incremental backlog, providing predictability and sustainability for the business that allows for longer term investments for future efficiency and growth. Measured on all metrics, this deal was a rare opportunity and we're eager to execute the transition plan and set up McKellar for long term sustainable success. Slide 7 lists both our currently wholly owned operating entities as well as our strategic partnerships. These acquisitions and partnerships have all been formed over the last 5 years and are the main drivers of our success in growth, diversification, profitability lowering our costs. These acquisitions and partnerships have made us stronger and more stable and have meaningfully changed our business for the better.

Speaker 1

I think one of our major shareholders said it best while touring our Atchison facilities when he stated, this is not your father's NOA. With that, I'll hand it over to Jason for the Q3 financials.

Speaker 2

Thanks, Joe, and good morning, everyone. To start, I will provide brief context regarding the McKellar transaction, which closed effective October 1. As disclosed in the Q3 report, A final purchase price for The McKellar Group will be based on audited financial statements as at September 30, 2023. And as such, we continue to disclose the estimated full consideration of $395,000,000 We look forward to providing full purchase price allocation details in the year end financials and are encouraged to see strong operating results leading up to and continuing through the close date. Similar to the other equipment related transactions we've completed over the past few years, There was zero interruption to McKellar's operations upon close and we anticipate a strong Q4 from their fleet.

Speaker 2

The senior secured equipment debt assumed at close along with the upsized credit facility both transacted at levels disclosed in the July announcement, which gives us overall confidence in the estimate provided. Integrating and reporting on this transformative StepChange is front and center for a variety of our corporate groups and remains on track for full inclusion in our year end reporting. Our teams have been in constant dialogue with their Australian counterparts with weekly and monthly routines taking shape. Moving to the historical financials and some brief commentary. On slide 5, you'll see effective performance in the oil sands and progress on the Fargo Moorhead project drove adjusted EBITDA of $59,000,000 which essentially matches the record set in Q3 we achieved last year.

Speaker 2

Return on invested capital of 14.7% Remains stable at the company goal, we had set for ourselves of 15% as Trailing 12 EBIT of $137,000,000 was generated by the invested capital, which now sits at $735,000,000 just prior to the McKellar acquisition, which will add as mentioned $395,000,000 to invested capital. On a total combined basis on slide 10, revenue was slightly up from Q3, 2022. Reported revenue increased from ML Northern acquired on October 1, 2022 providing another full quarter of operations and a strong quarter from DGI Trading. These increases were offset by lower equipment utilization achieved in the quarter as we moved equipment into Fort Hills as mentioned by Joe. Our share of revenue generated in Q3 by joint ventures was $78,000,000 which was the same as Q3 2022.

Speaker 2

The Fargo Moorhead project had an excellent operational quarter and achieve the progress metrics and project milestones they were targeting. In addition, we had positive contributions from the continued growth of top line revenue from rebuilt ultra class haul trucks and excavators directly owned by our joint venture with the Mikasue. Offsetting these positives, the Nuna Group of Companies did not have the typical busy Q3 they are accustomed to. Permitting delays and the impacts of wildfires in Northern Canada and particularly the evacuation of Yellowknife had significant impacts on Nuna's ability to carry Combined gross profit margin of 13.9% was a quarterly improvement from the 13.1% we posted last quarter despite the challenges experienced by Nuna and again reflects the strength of a diversified business. Margins benefited from the ML Northern acquisition from both lower internal costs as well as strong margins from services provided to external customers.

Speaker 2

Moving to slide 11, adjusted EBITDA was consistent and reflective of The revenue commentary. Included in EBITDA is direct, general and administrative expenses, which were $6,900,000 in the quarter, Equivalent to 3.5 percent of revenue and remained under the 4% threshold we set for ourselves. Going from EBITDA to EBIT, we expensed depreciation equivalent to 12.8% of combined revenue, which reflected the depreciation rate of our entire business, including the very active equipment fleet at the Fargo Moorhead project. When looking at just the wholly owned entities and our heavy equipment, the depreciation percentage for the quarter was 14.7% of revenue and reflected the challenging utilization quarter. Adjusted earnings per share for the quarter of $0.54 was $0.11 down from Q3 2022 as the impacts of higher depreciation and interest rates are factored in with EPS.

Speaker 2

The average interest rate for Q3 was 7.1% as we're up from the Q3, 2022 effective rate of 5.8% from well known interest rate increases. Excluding the upcoming impact of the McKellar acquisition on Q4 results, The gross interest expense of $8,100,000 is expected to be the high watermark as free cash flow is generated in Q4 allowing for the pay down of debt with the expectation of stable rates moving forward. Moving to slide 12, I'll summarize our cash flow. Net cash provided by operations of $42,000,000 was generated by the business, reflecting EBITDA performance net of cash interest paid. Free cash flow was $10,000,000 as sustaining maintenance capital of $42,000,000 was invested in the fleet.

Speaker 2

Moving to the final financial slide 13. Net debt levels remained stable at $395,000,000 in the quarter as the $10,000,000 of free cash flow was used for growth asset purchases, dividend payments and trust purchases. The correlated net debt and senior debt leverage remains steady at 1.4 times and 1.3 times respectively. And With that, I'll pass the call back to Joe.

Speaker 1

Thanks, Jason. Looking at slide 15, This slide summarizes our priorities moving forward. McKellar integration is obvious and I'll touch on that in the next slide or so and I'll rightfully start with safety. This area of focus being 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. As I've stated before, although we have an extensive health and safety management system and multiple initiatives for improvement, We continue to feel our growing workforce requiring increased new hires and an industry supply lowering experience.

Speaker 1

Our focus on further developing our frontline supervision and expanding our Greenhand training programs will be key as we expand. Item 3 describes our prioritizing winning bids continue to build our backlog, which provides consistency and stability in our operations and financial projections And continue to drive our diversification into commodities and geographies that reduce our risk profile while improving return on assets for lowering capital intensity. The final area prioritizes continued expansion of our operational and maintenance expertise. We will prioritize new technologies such as our telematics system and continue to in house and vertically integrate our maintenance services and supply, including a near term focus on identifying and sharing best practices between our Canadian and Australian businesses. We believe this prioritization focus will continue to lower costs and improve equipment utilization resulting in increased competitiveness and likelihood of winning the tenders mentioned in the previous item.

Speaker 1

Slide 16 shows some key milestones in our McKellar integration plans, much of which I have discussed previously. What I would like to highlight is just like any project in North American, we know a project well planned that starts strong tends to run smoothly. As such, we have had our transition ERP teams including our internal systems experts, Experts consultants which we have had prior experience and success and McKellar executives and senior management developing our execution plan far before the deal closed. Within the 1st week after close, we had McKellar executives in Canada reviewing and providing input on those plans. And before the end of October, we have boots on the ground in Australia executing the plan as we speak.

Speaker 1

We believe strongly that System stability and increased management information that our transition ERP teams can bring to support the McKellar team will provide a robust well That's the foundation for the future growth and increased profitability of the business. Slide 17 highlights a net increase of around $1,500,000,000 to our already strong bid pipeline with large increases that is the big blue dots on the top line from long term non oil sands contract tenders. One change of note to the bid pipeline has been our regional oil sands tender. Unlike the original submission, which was for a 5 year term with committed overburden volumes for all 5 years, The client has told us they are pivoting to a 3 year term with committed overburdened volumes for 1 year. The change to a master services type agreement with annual commitments isn't new and is a return to the same structure of agreement we operated for many years prior to this current agreement.

Speaker 1

Although no formal reason was provided for the change in term commitment, we believe the client is looking to optimize their longer term mine plans and focus on operational opportunities as communicated by their leadership team. We believe oil sands demand for heavy equipment, especially The larger ultra class size equipment will remain strong for the foreseeable future and our fleet will be fully engaged for 2024 and beyond. The shorter term commitment has some positives as pricing is only firm for 1 year and we have low risk for cost inflation that can occur outside of contract escalation indices such as we had in the last couple of years. Lastly, although we truly believe our oil sands We also see those big blue diversified dots and continued strong heavy equipment demand in Australia as opportunities to further diversify and reduce consolidation risk. Lastly on backlog in Q3, we are awarded winter projects in oil sands totaling about $30,000,000 and Nuna was awarded a $30,000,000 mine remediation project.

Speaker 1

On slide 18, our pro form a backlog It's at a record $2,800,000,000 with our addition of McKellar adding about $2,000,000,000 and our expectations for year end are to have backlog in excess of $3,000,000,000 with the award of the regional oil sands tender offset by our normal quarterly drawdown from executed work. On slide 19, we have provided a revised outlook for 2023. With McKellar closed Q3 in the books and a focus on a safe and efficient close of the year, We've been able to increase the midpoint and tighten the range for EBITDA with an encouraging uplift for EPS as well. Sustained capital increased due to some remanufactured component quality issues, which we have isolated and resolved and a slight increase from McKellar. Free cash flow was also reduced due to the previously mentioned sustained capital increase combined with joint venture distributions deferred into the New Year and slightly offset by the increased EBITDA projections.

Speaker 1

On slide 20, we have provided our initial outlook for what is projected to be a record setting year. This is a slide I've been eager to get to. Outpacing our 50% accretive acquisition, adjusted EBITDA and EPS midpoints are more than 80% increases over any previous year end result. Free cash flow is more than double any previous year end result. And if directed to debt repayment, our net debt leverage at the end of next year will be less than 1.4 times, which is a level lower than any previous year end.

Speaker 1

This slide more than any other shows what this business and this team can produce. I'm so excited to close out this year strong and achieve these 2024 targets while continuing to challenge our team to advance this business beyond expectations for years to come. In my 15 year tenure with NOA, these are by far the strongest projections we have issued. Lastly, regarding capital As always, we continue to assess our options in light of market and other macro conditions outside of our control and we'll provide our expected

Operator

Thank After a brief pause, we will begin the Q and A section. Your first question comes from Yuri Lynk of Canaccord Genuity. Your line is already open.

Speaker 3

Good morning, guys.

Speaker 1

Good morning, Harry.

Speaker 3

Good morning. Joe, just wondering how your 20 Stations for McKellar have evolved since you announced the deal back in July.

Speaker 1

I think we probably have a bit more information and then we're probably a bit more optimistic on what we put out as the Annual contributions, it's probably slightly more than what we had in that July 27 deck. And So we brought them up and I think we have more confidence in those numbers.

Speaker 3

Okay. And does that imply the legacy business is kind of flat to modestly We're up on EBITDA in 2024.

Speaker 1

I think it's fairly significant. Think we're at probably 10% or 15% on a year on year basis. I'll have to ask Jason to do the math for me, but

Speaker 2

Yes, that's correct. We're expecting a really Strong year from Fargo and then strong probably 10% up on the legacy business from an EBITDA perspective.

Speaker 3

Okay. And Jason just while I have you on the guidance, a pretty significant increase You said the low end of EPS guidance for 2024 or I mean it's your based what I from what I was expecting anyway, Was there anything in D and A or interest expense that That played into the EPS beyond what the EBITDA would have implied?

Speaker 2

No. It's all in the EBITDA Great. Yes, depreciation taxes and interest all are at run rates that would have been in previous guidance. So Yes. The uptick you're seeing would be stronger than expected run rate at McKellar as Joe alluded to clarity with Fargo And then strong utilization from Oil Sands assets.

Speaker 3

Okay. That's it for me guys. Thanks.

Speaker 1

Thank you.

Operator

Your next question comes from Aaron MacNeil of TD Cowen. Your line is already open.

Speaker 4

Hey, morning and thanks for taking my questions. I think I'll stick with the guidance as well. If I look at the midpoint of the revised 2023 guidance. I think sustaining capital shakes out to about 12.8% of revenue. Next Steer that bumps up to 14.5%.

Speaker 4

And I'm just asking the question because you highlight the relatively newer fleet of McKellar. All other things being equal, you expect that introducing newer equipment in the fleet would bring that ratio down. And so I'm just wondering is that increase A function of your conservatism or are there other factors that play that we should be thinking about?

Speaker 1

There is some conservatism in that because we haven't done the detail of the component scheduling at McKellar that we do here. We're in the process of doing that. So there's more of an assumption of sustaining capital being at the depreciation levels. So, yes, our expectation would be that we could actually improve upon that with the McKellar side, but there's always risk too, right?

Speaker 4

Got it. So in terms of the legacy business, there's no major changes.

Speaker 1

Is that the right way

Speaker 4

to think about the sustaining capital?

Speaker 2

Yes. I think that's fair, Jason here. From the financial side, I think as Joe alluded to, the component issues in 2023 here have would be a factor in that percentage as well. And we'll just take a look as we go through 2024.

Speaker 4

Makes sense. I know you already spoke to this a bit, but can you walk us through next steps with that regional oil sands contract that you're chasing? And specifically, I'm wondering how much of that contract is extending existing work scopes versus new work scopes? How might that how might things work if your contract expires, but you haven't signed a new one yet? And just kind of like

Speaker 1

We expect it to be finalized before the end of this month. We're in communication with them practically every day or every couple of days. We're going through some terms and conditions with them yesterday. These kind of changes aren't new Aaron. I think you've probably been around with us.

Speaker 1

The last time when we The last oil sands contract we renewed, I think we announced it in March of 2022. That contract was actually We were told we were going to be awarded in September of the previous year and the contract expired on December 31st And we had to have a bridging contract between December 31 March 17th when we finally signed off on it. So when you have these big complex contracts, they can take some time. And it's not unusual for Then the execution of them they take a little bit of time. So we fully expect this to be done by the end of November.

Speaker 1

We believe we will receive A level of commensurate what we're doing this year to fully utilize our fleet. We believe the demand is there. I think more than anything else that I know there's probably some anxiety because we said we were going to get this contract Last year and then it got deferred to this year and now we're saying it's October 31st and now it's going to be the end of November. And yes, we're It's frustrating, but that's not unusual with this size of a contract and the fact that our client went through a significant change at their senior leadership level. But our budgeting and our forecasting is based on first principles here.

Speaker 1

We just look at Where we are, what we expect, it's supply demand, competition price. And we fully expect to be awarded Work that's going to keep our oil sands fleet busy for next year and into the future. The change in structure just goes back to an old format and We believe that's being driven because of needs to have flexibility with their plans to adjust operations. So, I don't see this as anything Tremendously unusual. It is frustrating, but we don't expect it to have any significant impact on our business.

Speaker 4

The bridging in contract was exactly what I was trying to get at. So let's say this gets delayed further contract

Speaker 5

doesn't get signed until the spring.

Speaker 4

In your I would expect that you'd have a similar type of arrangement?

Speaker 1

We would have some amendment with the existing Contracted bridges that through to whenever they were that's what we did with the last one. Yes. That's just an amendment that

Speaker 5

Appreciate the color. I'll turn it over.

Speaker 1

Yes. No worries.

Operator

Your next question comes from Maxim Sytchev of National Bank Financial. Your line is already open.

Speaker 6

Hi. Good morning, gentlemen.

Speaker 1

Good morning, Max.

Speaker 6

John, I was wondering if you don't mind maybe commenting in a bit more sort of granular detail around sort of the Australian business, because I think some of the local peers are sort of calling out a flattish 2024 and maybe if you don't mind opining kind of how net coal is different from thermal and maybe some of the puts and takes that Kind of like on the ground as you get more comfortable with the asset. Thanks.

Speaker 1

Yes. Max, I'd say We continue to see what I'd say across all commodities is it stronger for longer. And this goes from Our oil sands business through met coal, thermocol or any of the commodities, we think there's an extremely strong marketplace out there that continues. We see it in our bid pipeline that you would see here in our Canadian business. And although we don't have it on those graphs, we see the same thing in Australia.

Speaker 1

We've had a lot of inquiries. We actually have there's like 6 different infrastructure Projects that we're going to be digging in down there that we're now aware of, which McKellar hasn't pursued in the past. I don't think there's been a negative surprise in any of the work we've done so far Our expectations going forward in between our forecasted 2024, which is a bit of an uplift from if you had just taken the performance from our July 27 deck to now, we've increased. And I think we've been first principle based on that. That's not an overly optimistic viewpoint.

Speaker 1

We fully expect to meet or exceed those targets. And I think I've used the term that we see opportunities to grow at 5% to 15% annual pace in our business and I think that holds true whether we're talking Canadian Resources or Australian or even the infrastructure side, Which comes a bit lumpier, but no, if anything, I'd say Max, we're just reconfirming our confidence in this market going forward.

Speaker 6

Yes, yes. No, for sure. Thank you for that. And I guess on the infra side of things, Joe. So are you at the point right now of evaluating sort of these opportunities?

Speaker 6

And would you have hypothetically the ability to participate in those if some of them sort of come to a bit fruition in Australia I'm talking about?

Speaker 1

Yes. I mean, we're really early stage as in expressing interest to receive tender packages and then talking to potential partners Like our partners that we're using in Fargo. But there's a significant amount of work that are already That we're already aware of that has to give we're just looking at ones that have meaningful earthworks to them. And I think we've already identified 5 different jobs. There were solar farms, wind farms.

Speaker 1

There's a desalination plant, Harbor bypass and an inland rail that we're looking at down there that we'd just be expressing interest on And then looking at partners. So these things don't move real fast. They tend to be years in the process, but We do see great opportunity down there to expand our McKellar business into that. And our COO Barry is down there right now talking to him. Okay.

Speaker 1

That's

Speaker 6

great to hear. Thank you. And then do you mind maybe just kind of because you mentioned Fargo, maybe kind of discussing sort of the critical path of this project and where we stand in terms of the execution dynamic and partners and so forth? Just maybe any incremental color on that. Thanks.

Speaker 1

Yes. I think we had a really good summer and we're looking to finish it up with a strong winter there. Last winter we weren't real busy, but this winter is going to be much busier. And then next summer not only is New York works high, but we start into the roads and bridges side of things. So we really get into the teeth of this project over the next 4 years.

Speaker 1

I think we have a 6 year construction schedule altogether or something like that. And there's really the meat of it that we're just getting into. And from the earthworks side, we're pretty much meeting and beating our plans At least we did this year and we'll hopefully continue to do that. So our expectations are remain high for that project. Right.

Speaker 6

And I guess and we're sort of fully over the hump in terms of getting supply chain and some of the materials And I presume labor as well to start to put it right in terms of that project specifically?

Speaker 1

Yes. I mean our We've been doing most of the earthworks. Certainly our equipment and our labor supply and our maintenance supply has gone well. We had some anxiety at the start, but it's really we delivered into the plan well. And we've exceeded some of our production forecast.

Speaker 1

I think as we get into the bridge and the roadwork and I think we're roughly we'll end the year around 25% complete on the earthworks, But not that far into the bridge and roadworks. So next year will be kind of the end of next year When everything's kind of at that 25% or further mark, I think it will be a good milestone for us to really predict how the overall project is going to go.

Speaker 6

Okay. Excellent. That's it for me. Thanks very much.

Speaker 1

Thank you, Matt.

Operator

Your next question comes from Jacob Bout of CIBC. Your line is open.

Speaker 7

Hi. Good morning, Joe and Jason. This is Rahul on for Jacob.

Speaker 5

Good morning. Good morning. I had a couple of questions on guidance as well. I believe the slide deck mentions that 2024 revenue guidance assumes McKellar's current run rate operations. So not much growth being baked in there, if I'm reading that right.

Speaker 5

Would you say there is a degree of conservatism being built in here given Integrations just started and the broader macro environment?

Speaker 1

I think that's reasonable, but we're going What we have in hand, this is still 1st principle budgeting, but there we're not assuming any big growth opportunities or expansions.

Speaker 5

Okay.

Speaker 2

Yes. I think I can elaborate on that. The current run rate is the Q4 run rate. McKellar is At a tick above even their Q3 prior to our acquisition. So the comment is really meant to say the range for McKellar It's consistent with where they're running here in Q4.

Speaker 2

So obviously the upper end would be a bit of an increase for them and The lower is kind of where they're at right now.

Speaker 5

Right, right. That's helpful. And then in regards To the 2023 EBITDA and EPS guidance range, just wanted to clarify, is that just a factor of the timing of the McKellar acquisition calls or expectation for better performance in the legacy business as well or both?

Speaker 2

Yes. Of course, it's both, but the primary is McKellar. We had McKellar closing in mid November here As far as the July 27 guidance and the ability to close it effective October 1 Gave us some upside there. But we have a slightly improved outlook for our base business as well. So that's what gets the midpoint of $2.90 for EPS.

Speaker 5

Okay. Very helpful. Thank you very much. I'll pass it over.

Operator

Your next question comes from Adam Thalhimer of Thompson Davis. Your line is already open.

Speaker 5

Hey, good morning guys. Nice quarter.

Speaker 1

Good morning, ma'am. Thanks.

Speaker 5

The revenue you lost within Nuna in Q3, does that come back

Speaker 8

in Q4? Is that just a deferral?

Speaker 1

We're trying, but it's all weather dependent. So a lot of the places they're working will get snowed out Pretty quick here. It happened already. So unfortunately sometimes those deferrals can't be pushed past that level because they work in some High snow areas at some of these projects and they actually get pushed into next year. So some of them when you get deferrals With Nuna in Q3, you can't always recover in the same year.

Speaker 1

So, I'm guessing Adam, I'd say half and half.

Speaker 5

Okay. And your I also wanted to ask about the bid pipeline. So your bid pipeline went from $5,000,000,000 to 6,500,000,000 Is the jump there the inclusion of Matt Keller?

Speaker 1

No. No, actually there's several Major mining projects that we have that are multiyear mining projects that are non oil sands that have come up in the last Quarter. I think we've added over $2,000,000,000 of pre tender phase projects in that. And we continue to see you would have heard it in my comments. We continue to see good opportunities for long term mining contracts in In the resource industry in Canada, I think we're going to see the same thing in Australia.

Speaker 1

But these ones are only our core business right now. All right. Good news.

Speaker 5

Good news. And then your largest Oil Sands customer, the change in terms and commitments, If you were in our shoes, would that at all change the way that we should be modeling your oil sands business?

Speaker 1

No. I wouldn't change it at all. It's unfortunate that we have to revise Our timing of things, but it's not unusual. As I said, the exact same thing happened on our last contract with our other Oil Sands producer. Unfortunately, this one's even bigger than that one was.

Speaker 1

So I can understand how it may create some anxiety, But it wouldn't change our basis of prediction of how we're going to perform in our our budgeting and forecasting is Done purely on 1st principals and hopefully with a little bit of conservatism in them. And so No. We fully expect that we will replace that work and hopefully do more through an increase in utilization, which is what our plans are.

Speaker 5

Great. And just lastly, Jason, do you have the depreciation numbers for Q4 and for 2024?

Speaker 2

Not right in front of me. I think we're running right around 15% Combined revenue for those years and it's all reflected in EPS. So we're not we're giving ourselves a little cushion with McKellar As the comment came with their capital for next year, so a little difficult to predict McKellar's depreciation rate At this point, but we're right around that percentage.

Speaker 1

Okay. Thanks guys. Thank you.

Operator

Your next question comes from Jim Monachello of TB Capital Markets. Your line is already open.

Speaker 1

Hey, guys. This is Jim's brother.

Speaker 8

Yes, this is his evil twin. I guess just around the Suncor contract that you guys are negotiating. Is that Still going to incorporate all of the sites into 1?

Speaker 1

It will be one form of contract For all three sites. I guess technically there's 5 different mine sites in 3 different locations, But each one will have their own scope.

Speaker 8

And you'll be able to move on between themselves. Is that still the idea? Or has that changed as well?

Speaker 1

No. I believe our contract specifically, I don't believe that will be in every base contract. I believe we'll have that provision in ours where we allow movements of committed volumes between sites.

Speaker 8

Okay. And I appreciate all the commentary around sort of your view of how it may or may not affect activity at least over the near term. The optics of it might suggest that the long term positioning for The way that they're thinking about contractor usage has changed and that would align with some of the commentary they said publicly. Although I think there's a number of structural reasons why that's Difficult. I'm wondering if you can kind of elaborate on why you think your positioning in the oil sands is defensive over

Speaker 1

To me the 3 big drivers are Our low cost provider status. Also mining equipment, I guess a lot of people may not know the mining equipment world, but these aren't like automotive. They don't make hundreds of thousands of vehicles. They literally make dozens. When you look at these big trucks they make dozens a year for a worldwide mining market.

Speaker 1

So the it's just supply and demand. Like I said, these are first principles basis. We don't I'm sure there's some anxiety about contract timing and things like that. And this isn't an emotional base forecast. This is Supply and demand every new truck, every new piece of equipment that comes into Fort McMurray, we know, because there's only one road in and one road out and we see every piece of equipment comes in there.

Speaker 1

We know what manufacturers' capabilities are as far as putting out fleet, because we ask for that fleet too and we know the timing. Let me give you an example. Some of the largest shovels hydraulic shovels in the world, you'd be 2 years out Some of them aren't even Tier 4 compliant yet, so they can't even sell them in Canada. So I think just understanding the market and the demand, We know what the volumes are supposedly going to be required because our clients have told us how much contractor volumes there are in all businesses. So really this isn't I'm trying to think and this is just straight supply and demand calculations off of equipment and availability and how fast It could come in or not.

Speaker 1

And then the fact that we think it's a safe low cost provider. We're going to be the last one standing anyways even if the market did cut back, which we don't think is going to happen. And we also see a lot of opportunity outside of oil sands in some of the other commodities.

Speaker 8

Okay. I appreciate all that. If in a worst case scenario, you did How early do you think you would start to see signals in the market, customers buying equipment Or contractors being laid off. Like is that something that you would see with relatively good lead You could move equipment to better opportunities or do you think that could be a sudden shift?

Speaker 1

No, I think we've seen it. I think our customers would announce it frankly, especially with the strength of the relationship with the Mikasoo, Who have significant investment in our capital assets. They're also partners with our producers on things like the tank farm. So I think there's long standing relationship there. No one's going to we're not going to pull out of oil sands overnight and leave Customers hanging in, I don't think they do that to us either.

Speaker 1

So my opinion, Tim, I think we'd have years of forewarning.

Speaker 8

Okay. That's helpful. Second line question here. Just to follow-up on the bid pipeline question. Not only did it expand, but you have some pretty large blue circles probably $3,000,000,000 or so That have come into that preferred opportunities and extensions category.

Speaker 8

Wondering if you can speak to those and what makes us preferred?

Speaker 1

What makes you preferred is that we have existing relationships with the clients. And the 2 biggest ones are the regional tender and the work in Bethlehem, which we look at with Nuna. If you're looking at the preferred opportunities?

Speaker 8

Yes. There's like 3 sort of larger blue circles in the 2025 area.

Speaker 1

Yes. There's a major mine reclamation for a diamond mine with the relationship that we've had in the past through Nuna. There's a Baffin and Iron Step through Nuna and then there's the regional oil sales center.

Speaker 8

Okay. And then as it relates to the Northern Ontario gold mine that just the contract just ended for Nuna, do you Think you're going to be able to find work for that out east or is that being mobilized back to what it sounds now?

Speaker 1

I think we'll be moving some of the stuff back to us then. I think the excavators and then we have The trucks I think we're sitting on right now and we're evaluating the tenders that are in Ontario and Quebec. We also one of the things Barry is doing in Australia is we're looking at some of the opportunities whether we should be shipping some of those over to Australia And addressing some of the demand in the Western Australian marketplace, which fits those smaller trucks more.

Speaker 6

Okay.

Speaker 8

That's really helpful. I'll turn it back with the first and setting 20 24. Thanks. Thanks, Tim.

Operator

Your next question comes from Sean Jack of Raymond James. Your line is already open.

Speaker 9

Hey, good morning guys. Just really quickly wanted to look back at slide 16. And just to ask how sensitive is the guidance for 2024 to some of the key steps shown here? And would there be a critical step that you would highlight as kind of the most influential to your guys' success in kind of hitting the midpoint?

Speaker 1

I'd say in this integration, I think the key for us Would be an ERP implementation, but I don't think that prevents anything from happening. As Jason said, they're on this burn rate right now in Q4 and obviously we haven't done Anything yet? So we see most of this as being upside opportunities and sharing best practices and that we'll get that's really where we see the synergy of the deal that's And that we'll get that's really where we see the synergy of the deal that's really not shown in it right now.

Speaker 9

Okay. Perfect. And just quickly, I know that you spoke a lot about transmission metals and the market there in Australia when the deal was originally announced. Just for context, when you guys are now kind of looking a bit more closely at the bid pipeline down in Australia, are you seeing Many immediate options in that space right now?

Speaker 1

Certainly, the lithium marketplace is very active down there, Because it's hard rock, it's not like the brine stuff you see in South America. And And I think you're seeing an increase in the copper and iron ore side. Whether you consider that part of transition or not, I don't know. And then I'm trying to think there was some zinc I think some zinc opportunities. I don't have their bid pipeline memorized yet there Sean.

Speaker 1

But it's been it's a very active marketplace there in Western Australian Metals and even in Eastern Australia Thermal and Metallurgical Coal Markets.

Speaker 9

Yes. Okay, perfect. That's all really helpful. Thanks.

Speaker 1

You bet.

Operator

Your next question comes from Arun Kumar, Investor. Your line is already open.

Speaker 7

Hi, team. Congratulations on closing the acquisition. I had two questions. One is on capital allocation with regard to share repurchases, especially As you know, the stock is trading well below 10 times our estimated future earnings. And I understand, As we look forward, we want to pay down the debt first, but I'm trying to understand If the shares are still trading at low valuations, how do the team look at capital allocation?

Speaker 7

And then I'll come back to

Speaker 6

the second question. Thank you.

Speaker 1

Yes. Aaron, we look at capital allocation the same all the time. We're always evaluating Return Opportunities and Risk and appreciate you highlighting the bargain that our share price is right now. I agree. We'll be having those discussions with our Board here in the next couple of weeks and looking where we put The significant cash flow we're going to generate 2024 to work.

Speaker 1

So, I agree with our Our current PE starts with a 6 with today's opening price. That's I think you were mentioning less than 10 times. And I think there's some opportunities there, but we'll be evaluating that. Certainly debt repayment at I think we're over 7% interest rate this last quarter. And obviously that is 0 risk.

Speaker 1

So there's going to be competition for capital. We also have done very well with some bolt on acquisitions in the past and vertically in housing. So if those opportunities come up, It's really just a competition of risk and return.

Speaker 7

Thank you. My other question is on more on the longer term Opportunities in Australia like any like the acquisition you made with McKellar and thoughts on deploying cash at Good returns over the next 5 to 10 years, if there are other regions around the world that you're interested in. This is more of a long term,

Speaker 1

Yes. I think Whether it's Australia or here, we're going to look at the return on assets. Just like I was talking about these trucks here in Northern Ontario, We're going to put equipment where it gets the best return. If that's in Western Australia, we'll put them in Western Australia. If it's in Canada, we'll Canada.

Speaker 1

I think historically The marketplaces that we've thought were best for us would be North America, Australia and South America. And obviously, we're in North America and Australia right now. And Most recently, South America has had a lot more turbidity in governments and royalty regimes. So it's Kind of suppressed investment dollars from the mining world, but obviously that could change. And if we're looking longer term, we would certainly be looking back in South America again.

Speaker 1

But for sure, the North American and Australian opportunities in the near Term even 5 to 10 years, we think are going to be tremendous. I think that's all the questions. Unless you have any more, Aaron?

Speaker 8

No, that would be it. Thank you.

Speaker 1

Thank you, Aaron.

Operator

Thank you. This concludes the Q and A section of the call. I will pass the call over to Joe Lambert, President and CEO for closing comments.

Speaker 1

Thanks, John, and thanks everyone for attending today's call. I hope you all have a safe and festive holiday season.

Operator

Thank you. This concludes North American Construction Group Conference Call on Q3 of 2023. You may now disconnect.

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Key Takeaways

  • Q3 safety performance improved significantly, with a trailing-12-month total recordable incident rate of 0.30, less than half of last year’s rate and comfortably below the 0.5 target.
  • The McKellar acquisition closed October 1 at a purchase price below book value, was fully debt-financed without equity dilution, and adds $2 billion of backlog while keeping leverage under 1.4× by end of 2024.
  • Key operational wins in Q3 include the ramp-up of the Fargo Moorhead flood diversion project’s busiest summer, expansion of the telematics program, growth of the Mikasue rebuild JV fleet, and completion of the Nuna gold mine construction joint venture.
  • Financially, Q3 delivered adjusted EBITDA of $59 million (matching last year’s record), a 14.7% return on invested capital, a 13.9% gross profit margin, EPS of $0.54, $10 million of free cash flow, and stable net debt leverage.
  • Looking ahead, pro forma backlog reached a record $2.8 billion (projected >$3 billion by year-end), and 2024 guidance targets more than 80% increases in both EBITDA and EPS midpoints with free cash flow expected to more than double.
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Earnings Conference Call
North American Construction Group Q3 2023
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