North American Construction Group Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 2, 2023

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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Operator

Good morning, ladies and gentlemen. Welcome to the North American Construction Group conference call regarding the third quarter ended September 30 of 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. 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.

Operator

Additional information about those material factors is contained in the company's most recent management discussion and analysis, which is available in SEDAR 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. Please proceed.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Thanks, Ellen. 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. We will continue to focus our efforts on further advancing our training programs, communicating and promoting safe behaviors, fall 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.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

On slide four, we highlight some of the major achievements of Q3. I'll discuss MacKellar later, but wanted to highlight the wrap-up of our Fargo-Moorhead Flood Diversion project, which had its most active earthwork summer. That will be followed by its busiest winter as this major infrastructure project progresses into the core of its multi-year construction schedule. Our telematics program is exceeding expectations, and we continue to expand our capabilities and support to the operations and maintenance teams. Our Mikisew joint venture is progressing nicely and continues to add low-cost, second-life rebuilds to its fleet of heavy haul trucks. We see strong long-term demand for the Mikisew fleet and are actively looking for additional core assets to rebuild and continue to grow the joint venture assets.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

In Northern Ontario, we successfully completed our gold mine construction project joint venture with Nuna and have 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 that 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, and although a better-than-average Q3, it was below expectations. However, we remain on trend and confident in our ability to hit our target range of 75%-85% by the end of next year. Moving on to slide 6, we highlight some of the key attributes of the MacKellar transaction.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

First and foremost, we have cultural alignment, share core values, and maintain a focus on operational excellence, especially in the area of heavy equipment maintenance. 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 the 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.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Last, but certainly not least, MacKellar adds CAD 2 billion 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 are eager to execute the transition plan and set up MacKellar for long-term sustainable success. Slide seven 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 five years and are the main drivers of our success in growth, diversification, profitability, and lowering our costs. These acquisitions and partnerships have made us stronger and more stable and have meaningfully changed our business for the better....

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

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

Jason Veenstra
Jason Veenstra
EVP and CFO at North American Construction Group

Thanks, Joe, and good morning, everyone. To start out, I'll provide brief context regarding the MacKellar transaction, which closed effective October 1. As disclosed in the Q3 report, a final purchase price for the MacKellar Group will be based on audited financial statements as at September 30, 2023. As such, we continue to disclose the estimated full consideration of CAD 395 million. 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 MacKellar's operations upon close, and we anticipate a strong fourth quarter from their fleet.

Jason Veenstra
Jason Veenstra
EVP and CFO at North American Construction Group

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 step change 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 CAD 59 million, which essentially matches the record-setting Q3 we achieved last year.

Jason Veenstra
Jason Veenstra
EVP and CFO at North American Construction Group

Return on invested capital of 14.7% remains stable at the company goal we had set for ourselves of 15%, as trailing-twelve EBIT of CAD 137 million was generated by the invested capital, which now sits at CAD 735 million, just prior to the MacKellar acquisition, which will add, as mentioned, CAD 395 million 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.

Jason Veenstra
Jason Veenstra
EVP and CFO at North American Construction Group

Our share of revenue generated in Q3 by joint ventures was CAD 78 million, which was the same as Q3 2022. The Fargo-Moorhead project had an excellent operational quarter and achieved 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 Mikisew. 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 out their assigned scopes.

Jason Veenstra
Jason Veenstra
EVP and CFO at North American Construction Group

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. 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 CAD 6.9 million in the quarter, equivalent to 3.5% 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.

Jason Veenstra
Jason Veenstra
EVP and CFO at North American Construction Group

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 CAD 0.54 was CAD 0.11 down from Q3 2022, as the impacts of higher depreciation and interest rates are factored in with EPS. 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 MacKellar acquisition on Q4 results, the gross interest expense of CAD 8.1 million is expected to be the high watermark as free cash flow is generated in Q4, allowing for the paydown of debt with the expectation of stable rates moving forward.

Jason Veenstra
Jason Veenstra
EVP and CFO at North American Construction Group

Moving to slide 12, I'll summarize our cash flow. Net cash provided by operations of CAD 42 million was generated by the business, reflecting EBITDA performance net of cash interest paid. Free cash flow was CAD 10 million, as sustaining maintenance capital of CAD 42 million was invested in the fleet. Moving to the final financial slide 13, net debt levels remained stable at CAD 395 million in the quarter, as the CAD 10 million 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. With that, I'll pass the call back to Joe.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Thanks, Jason. Looking at slide 15, this slide summarizes our priorities moving forward. MacKellar 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 lower in experience. Our focus on further developing our frontline supervision and expanding our green hand training programs will be key as we expand.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Item three describes our prioritizing winning bids to continue to build our backlog, which provides consistency and stability in our operations and financial projections, and continuing to drive our diversification into commodities and geographies that reduce our risk profile while improving return on assets or 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. Slide 16 shows some key milestones in our MacKellar integration plans, much of which I have discussed previously.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

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 MacKellar executives and senior management, developing our execution plan far before the deal closed. Within the first week after close, we had MacKellar 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. We believe strongly that the system stability and increased management information that our transition to ERP teams can bring to support the MacKellar team will provide a robust, well-tested foundation for the future growth and increased profitability of the business.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Slide 17 highlights a net increase of around CAD 1.5 billion 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 five-year term with committed overburden volumes for all five years, the client has told us they are pivoting to a three-year term with committed overburden volumes for one 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.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Although no formal reason was provided for the change in term and 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 for 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 been positive, as pricing is only firm for one year, and we have low risk for cost inflation that it can occur outside the contract escalation indices, such as we had in the last couple of years.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Lastly, although we truly believe our oil sands demand will remain strong for many years to come, 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 were awarded winter projects in oil sands totaling about CAD 30 million, and Nuna was awarded a CAD 30 million mine remediation project. On slide 18, our pro forma backlog sits at a record CAD 2.8 billion, with our addition to MacKellar adding about CAD 2 billion, and our expectations for year-end are to have backlog in excess of CAD 3 billion, 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.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

With MacKellar 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. Sustaining capital increased due to some remanufactured component quality issues, which we have isolated and resolved, and a slight increase from MacKellar. Free cash flow was also reduced due to the previously mentioned sustaining capital increase, combined with joint venture distributions deferred into the new year and slightly offset by the increased EBITDA projections. 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.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

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. This slide, more than any other, shows what this business and this team can produce, and 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 allocation, 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 allocation in more detail on our next call.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

With that, I'll open up for any questions you may have.

Operator

Thank you. To ask question, please press star one in your touchtone phone. If you wish to withdraw your question, please press the pound sign. Once you have completed your question and would like to return to the queue, please press star one. After a brief pause, we will begin the Q&A section. Your first question comes from Yuri Lynk of Canaccord Genuity. Your line is already open.

Yuri Lynk
Yuri Lynk
Managing Director and Equity Research Analyst at Canaccord Genuity

Good morning, guys.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Morning, Yuri.

Yuri Lynk
Yuri Lynk
Managing Director and Equity Research Analyst at Canaccord Genuity

Morning, Joe. Just wondering how your 2024 expectations for MacKellar have evolved since you announced the deal back in July.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

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 27th deck. And so we've brought them up, and I think we have more confidence in those numbers.

Yuri Lynk
Yuri Lynk
Managing Director and Equity Research Analyst at Canaccord Genuity

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

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

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

Jason Veenstra
Jason Veenstra
EVP and CFO at North American Construction Group

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

Yuri Lynk
Yuri Lynk
Managing Director and Equity Research Analyst at Canaccord Genuity

Okay. And Jason, just while I have you on the guidance, a pretty significant increase at 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&A or interest expense that played into the EPS beyond what the EBITDA would have implied?

Jason Veenstra
Jason Veenstra
EVP and CFO at North American Construction Group

No, it's all in the EBITDA rate. Yeah, depreciation, taxes, and interest, all are at run rates that would have been in previous guidance. So yeah, the uptick you're seeing would be, you know, stronger than expected run rate at MacKellar, as Joe alluded to. Clarity with Fargo, and then, you know, strong utilization from Oil Sands assets.

Yuri Lynk
Yuri Lynk
Managing Director and Equity Research Analyst at Canaccord Genuity

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

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Thank you.

Operator

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

Aaron MacNeil
Aaron MacNeil
Director of Institutional Equity Research at TD Cowen

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 year, that bumps up to 14.5%. I'm just asking the question because you highlight the relatively newer fleet of MacKellar. All other things being equal, you expect that introducing newer equipment in the fleet would bring that ratio down. So I'm just wondering, does that increase the function of your conservatism, or are there other factors at play that we should be thinking about?

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

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

Aaron MacNeil
Aaron MacNeil
Director of Institutional Equity Research at TD Cowen

Got it. So in terms of the, the legacy business, there's no major changes, is that the right way to think about the Sustaining Capital?

Jason Veenstra
Jason Veenstra
EVP and CFO at North American Construction Group

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

Aaron MacNeil
Aaron MacNeil
Director of Institutional Equity Research at TD Cowen

Makes sense. I know you, 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, you know, how much of that contract is extending existing work scopes versus new work scopes? Like that, how might things work if your contract expires but you haven't signed a new one yet? And just kind of like, what you expect the timeline to be.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

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-

Aaron MacNeil
Aaron MacNeil
Director of Institutional Equity Research at TD Cowen

Yeah.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

with us. The last time when we—the last oil sands contract we renewed, I think we announced it in March 2022. That contract was actually, we were told we were gonna be awarded in September of the previous year, and the contract expired on December 31. And we had to have a bridging contract between December 31 and March 17, when we finally signed off on it. So it—you know, when you have these big, complex contracts, they can take some time. And it's not unusual for them... the execution of them to take a little bit of time. So we fully expect this to be done by the end of November. We believe we'll—we will receive a level of commencement with what we're doing this year to fully utilize our fleet.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

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 gonna 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 gonna be the end of November. And yeah, 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, you know, our budgeting and our forecasting is based on first principles here. You know, we just look at where we are, what we expect. It's supply, demand, competition, and price.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

And, you know, we fully, fully expect to be awarded work that's gonna 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 need to have flexibility with their plans to adjust operations. So, you know, I don't see this as anything tremendously unusual. It is frustrating, but we, we don't expect it to have any significant impact on our business.

Aaron MacNeil
Aaron MacNeil
Director of Institutional Equity Research at TD Cowen

The bridging contract was exactly what I was trying to get at. So let's say this gets delayed further, contract doesn't get signed until the spring. In your-

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Yeah.

Aaron MacNeil
Aaron MacNeil
Director of Institutional Equity Research at TD Cowen

expectation that you'd have a, a similar type of arrangement.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

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

Aaron MacNeil
Aaron MacNeil
Director of Institutional Equity Research at TD Cowen

Yep.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

So, just amendment that extended the term of the previous agreement until we had all the terms and conditions signed out on the previous one.

Aaron MacNeil
Aaron MacNeil
Director of Institutional Equity Research at TD Cowen

Appreciate the color. Turn it over.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Yep, no worries.

Operator

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

Maxim Sytchev
Maxim Sytchev
Managing Director and Senior Equity Analyst at National Bank Financial

Hi, good morning, gentlemen.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Morning, Max.

Maxim Sytchev
Maxim Sytchev
Managing Director and Senior Equity Analyst at National Bank Financial

Joe, 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 upon any kind of how you know met coal is different from thermal and maybe some of the puts and takes that you're seeing kind of like on the ground as you get more comfortable with the assets. Thanks.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Yeah. Max, I'd say, you know, we continue to see what I'd say across all commodities is a stronger for longer. And this goes from our oil sands business through met coal, thermal coal, 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. We've had a lot of inquiries. We actually have... like, six different infrastructure projects that we're going to be digging in down there that we're now aware of, which MacKellar hasn't pursued in the past.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

So, you know, I don't think there's been a negative surprise in any of the work we've done so far or our expectations going forward. Between our forecast to 2024, which is a bit of an uplift from if you had just taken the pro formas from our July 27th deck to now, we've increased, and I think we've been first principle based in that. That's not an overly optimistic viewpoint. We fully expect to meet or exceed those targets. You know, I think I've used the term that we see opportunities to grow at 5%-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.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

No, if anything, I'd say, Max, we're just reconfirming our confidence in, in this market going forward.

Maxim Sytchev
Maxim Sytchev
Managing Director and Senior Equity Analyst at National Bank Financial

Yeah, yeah. No, for sure. Thank you for that. And I guess on, on the info side of things, Joe, so are you at the point right now of evaluating sort of these opportunities? And would you have, hypothetically, the ability to participate in those if, if some of them sort of come to bear fruition in, in Australia, I'm talking about?

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Yeah, 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 we're already aware of. We're just looking at ones that have meaningful earthworks to them. And I think we've already identified five different jobs. There are solar farms, wind farms, there's a desalination plant, you know, a 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, you know, these things don't move real fast.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

They tend to be years in the process, but we do see great opportunity down there to expand our MacKellar business into that. And our—

Maxim Sytchev
Maxim Sytchev
Managing Director and Senior Equity Analyst at National Bank Financial

Okay.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Our COO, Barry, is down there right now talking to them.

Maxim Sytchev
Maxim Sytchev
Managing Director and Senior Equity Analyst at National Bank Financial

Okay. Well, that's great to hear. Thank you. And then, do you mind maybe just kind of, because you mentioned Fargo, maybe kind of discuss the sort of the, the critical path, of, of this project and, you know, where it stands in terms of, you know, the, the execution dynamic and, and, and partners and, and so forth, just maybe any incremental color on that. Thanks.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Yeah, I think we had a really good summer, and we're looking to finish it up with a strong winter there. The last winter we weren't real busy, but this winter's gonna be much busier. And then next summer, not only is the earthworks 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 four years. I think we had a six-year construction schedule altogether, something like that. And there's really the meat of it that we're just getting into. And you know, 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.

Maxim Sytchev
Maxim Sytchev
Managing Director and Senior Equity Analyst at National Bank Financial

Right. And I guess we're sort of fully over the hump in terms of getting supply chain and some of the material side and I presume labor as well, to a certain degree, right? In terms of that project specifically.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Yeah, I mean, our. We've been doing most of the earthworks, so certainly our equipment and our labor supply and our maintenance supply has gone well. You know, 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 forecasts. So, you know, I think as we get into the bridge and the roadwork, and I think we're at 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, you know, kind of the end of next year, when everything's kind of at that 25% or further mark, I think it'll be a good milestone for us to really predict how the overall project is going to go.

Maxim Sytchev
Maxim Sytchev
Managing Director and Senior Equity Analyst at National Bank Financial

Okay. Excellent. That's it for me. Thank you very much.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Thank you, Max..

Operator

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

Rahul Srikant
Rahul Srikant
Equity Research Associate at CIBC

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

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Rahul, good morning.

Rahul Srikant
Rahul Srikant
Equity Research Associate at CIBC

Morning, morning. I had a couple of questions on guidance as well. I believe the slide deck mentions that 2024 revenue guidance assumes MacKellar's current run rate operations, so not much growth being baked in there, if I'm reading that right. Would you say there is a degree of conservatism being built in here, given integration has just started and, you know, the broader macro environment?

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

I think that's reasonable, but, you know, we're going with what we have in hand. This is still first principle budgeting, but there, you know, we're not assuming any big growth opportunities or expansions.

Rahul Srikant
Rahul Srikant
Equity Research Associate at CIBC

Right. Okay.

Jason Veenstra
Jason Veenstra
EVP and CFO at North American Construction Group

Yeah, I think I can elaborate on that. You know, the current run rate is the Q4 run rate. You know, MacKellar is at a tick above even their Q3, prior to our acquisition. So, you know, the comment is really meant to say, you know, the range for MacKellar is consistent with where they're running here in Q4. So, you know, 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.

Rahul Srikant
Rahul Srikant
Equity Research Associate at CIBC

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

Jason Veenstra
Jason Veenstra
EVP and CFO at North American Construction Group

Yeah, of course, it's both, but the primary is MacKellar. We had MacKellar, you know, closing in mid-November here, as far as the July 27 guidance, and you know, 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 CAD 2.90 for EPS.

Rahul Srikant
Rahul Srikant
Equity Research Associate at CIBC

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

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Thank you.

Operator

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

Adam Thalhimer
Director of Research at Thompson Davis

Hey, good morning, guys. Nice quarter.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Yeah. Thanks.

Adam Thalhimer
Director of Research at Thompson Davis

The revenue you lost within Nuna in Q3, does that come back in Q4? Is that just a deferral?

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

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 hasn't 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 the furloughs with Nuna in Q3, you can't always recover in the same year. So I, you know, if I'm guessing, Adam, I'd say half and half.

Adam Thalhimer
Director of Research at Thompson Davis

Okay. I also wanted to ask about the bid pipeline. Your bid pipeline went from CAD 5 billion to CAD 6.5 billion. Is the jump there the inclusion of MacKellar?

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

No. No, actually, there's several major mining projects that we have that are multi-year mining projects that are non-oil sands that have come up in the last quarter. I think we've added, you know, over CAD 2 billion of pre-tender phase projects in that. And we continue to see, you know, you had heard it in my comments, we continue to see good opportunities for long-term mining contracts in the resource industry in Canada, and I think we're going to see the same thing in Australia. But these ones are only our core business right now, Nuna and North American.

Adam Thalhimer
Director of Research at Thompson Davis

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?

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

No, I wouldn't change it at all. You know, 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. So, you know, 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... You know, our budgeting and forecasting is done purely on first principles 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.

Adam Thalhimer
Director of Research at Thompson Davis

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

Jason Veenstra
Jason Veenstra
EVP and CFO at North American Construction Group

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 MacKellar, you know, as the comment came with their capital for next year. So a little difficult to predict MacKellar's depreciation rate at this point, but we're right around that percentage.

Adam Thalhimer
Director of Research at Thompson Davis

Okay. Thanks, guys.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Thank you.

Jason Veenstra
Jason Veenstra
EVP and CFO at North American Construction Group

You bet.

Operator

Your next question comes from Tim Monachello of ATB Capital Markets. Your line is already open.

Tim Monachello
Tim Monachello
Managing Director of Institutional Equity Research at ATB Capital Markets

Hey, guys.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Is that Jim's brother?

Tim Monachello
Tim Monachello
Managing Director of Institutional Equity Research at ATB Capital Markets

Yeah, it's his, his evil twin. I guess just around the Suncor contract that you guys are negotiating, is that still going to incorporate all the sites into one?

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

It'll be one form of contract for all three sites. I guess technically, there's five different mine sites in three different locations, but each one will have their own scope.

Tim Monachello
Tim Monachello
Managing Director of Institutional Equity Research at ATB Capital Markets

And you'll be able to move-

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

And, and-

Tim Monachello
Tim Monachello
Managing Director of Institutional Equity Research at ATB Capital Markets

Between themselves. Is that still the idea or has that changed as well?

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

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.

Tim Monachello
Tim Monachello
Managing Director of Institutional Equity Research at ATB Capital Markets

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, you know, 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've 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, you know, your positioning in the oil sands is defensive over a longer period of time.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

To me, the three big drivers are low-cost provider status. Also mining equipment, and, you know, 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. You know, when you look at these big trucks, they make dozens a year for a worldwide mining market. So the... You know, it's just supply and demand. Like I said, these are first principles basis. You know, I'm sure there's some anxiety about contract timing and things like that, and this isn't an emotional based forecast. This is supply and demand.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

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 that comes in there. 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 two years out on some of them. 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 the haul distances.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

So really, this is, you know, this isn't trying to overthink, and this is just straight supply and demand calculations off of equipment and availability and how fast it could come in or not. And then the fact that we think is a safe, low-cost provider, we're gonna be the last one standing anyways, even if the market did cut back, which we don't think is gonna happen. And we also see a lot of opportunity outside of oil sands in some of the other commodities.

Tim Monachello
Tim Monachello
Managing Director of Institutional Equity Research at ATB Capital Markets

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

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

No, I think we'd see it. I think our customers would announce it, frankly. Especially with the strength of the relationship with the Mikisew, who have significant investment in our capital assets. They're also partners with our producers on things like the tank farm. So, you know, I think there's long-standing relationship there. No one's gonna... You know, we're not gonna pull out of oil sands overnight and leave our customers hanging, and I don't think they'd do that to us either. So, you know, my opinion, Tim, I think we'd have years of forewarning.

Tim Monachello
Tim Monachello
Managing Director of Institutional Equity Research at ATB Capital Markets

Okay. That's helpful. Second question here. Just to follow up on the bid pipeline question. You not only did it expand, but you have some pretty large blue circles, probably CAD 3 billion or so, that have come into that preferred opportunities and extensions category. Wondering if you can speak to those, and what makes those preferred?

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

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

Tim Monachello
Tim Monachello
Managing Director of Institutional Equity Research at ATB Capital Markets

Yeah. There's, like, three sort of larger blue circles in the 2025 area.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Yeah. There's a major mining reclamation for a diamond mine, with the relationship that we've had in the past through Nuna. There's a backlog iron stuff through Nuna, and then there's the regional oil sands tender.

Tim Monachello
Tim Monachello
Managing Director of Institutional Equity Research at ATB Capital Markets

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

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

I think we'll be moving some of the stuff back to oil sands. I think the excavators and then we have the trucks. I think we're sitting on right now. We're evaluating the tenders that are in Ontario and Quebec. We also, one of the things Barry's 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.

Tim Monachello
Tim Monachello
Managing Director of Institutional Equity Research at ATB Capital Markets

Okay. That's, that's really helpful. I'll send it back, looking forward to setting 2024.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Thanks. Thanks, Tim.

Operator

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

Sean Jack
Sean Jack
Associate Analyst in Equity Research at Raymond James

Hey, good morning, guys. Just really-

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Thank you.

Sean Jack
Sean Jack
Associate Analyst in Equity Research at Raymond James

Quickly wanted to look back at slide 16 and just 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 midpoints?

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

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 - it's really not shown in it right now.

Sean Jack
Sean Jack
Associate Analyst in Equity Research at Raymond James

Okay, perfect. Just quickly, I know that you spoke a lot about transition 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?

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

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 I think you're seeing an increase in the copper and iron ore side. You know, 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 the bid pipeline memorized yet there, Sean, but it's been a very active marketplace there in Western Australia, metals and even in Eastern Australia, thermal and metallurgical coal markets.

Sean Jack
Sean Jack
Associate Analyst in Equity Research at Raymond James

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

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

You bet.

Operator

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

Arun Kumar
Arun Kumar
Investor at Investor

Hi, team. Congratulations on closing the acquisition. I have two questions. One is on capital allocation with regard to share purchases, especially as we know, the stock is trading well below 10x our estimated future earnings. And I understand, as we look forward, we wanna pay down the debt first, but I'm trying to understand if the shares are still trading at low valuations, how does the team look at capital allocation? And then I'll come back to the second question after. Thank you.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Yeah, 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. You know, we'll be having those discussions with our board here in the next couple of weeks, and looking where we put the significant capital we're gonna generate in 2024 to work. You know, so I agree with our current PE, it starts with a 6 with today's opening price. That's even 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, you know, I think we're over 7% interest rate this last quarter.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Obviously, that has zero risk. So that, you know, there's gonna be competition for capital. You know, we also have done very well with some bolt-on acquisitions in the past and vertical analogy. So if those opportunities come up, it's really just a competition of risk and return.

Arun Kumar
Arun Kumar
Investor at Investor

Thank you. My other question is on more on the longer term, opportunities in Australia, like any, like, like the acquisition you made with MacKellar and thoughts on deploying cash at good returns over the next 5-10 years, if there are other regions around the world that you're interested in. This is more of a long-term, how you're thinking about allocating capital. Thank you.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Yeah, Aaron, I think, you know, whether it's Australia or here, we're gonna look at the return on assets. It's just like I was talking about these trucks that are in Northern Ontario. We're gonna put equipment where it gets the best return. If that's in Western Australia, we'll put them in Western Australia. If it's Canada, we'll Canada. 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, you know, at most recently, South America has had a lot more turbulence in governments and royalty regimes, so it's kind of suppressed investment dollars from the mining world.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

But obviously, that could change, and if we're looking longer term, we, we'd certainly be looking back in South America again. But for sure, the North American and Australian opportunities in the near term, even 5-10 years, we think are gonna be tremendous. I think that's all the questions, unless you have any more, Aaron?

Arun Kumar
Arun Kumar
Investor at Investor

No, that would be it. Thank you.

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Thank you, Arun.

Operator

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

Joe Lambert
Joe Lambert
President and CEO at North American Construction Group

Hey, Sean, and thanks, everyone, for attending today's call. I hope you all have a safe and festive holiday season, and I look forward to sharing our year-end results and business updates with you in the new year.

Operator

Thank you. This concludes North American Construction Group conference call on third quarter of 2023. You may now disconnect.

Executives
    • Jason Veenstra
      Jason Veenstra
      EVP and CFO
    • Joe Lambert
      Joe Lambert
      President and CEO
Analysts
    • Aaron MacNeil
      Director of Institutional Equity Research at TD Cowen
    • Adam Thalhimer
      Director of Research at Thompson Davis
    • Arun Kumar
      Investor at Investor
    • Maxim Sytchev
      Managing Director and Senior Equity Analyst at National Bank Financial
    • Rahul Srikant
      Equity Research Associate at CIBC
    • Sean Jack
      Associate Analyst in Equity Research at Raymond James
    • Tim Monachello
      Managing Director of Institutional Equity Research at ATB Capital Markets
    • Yuri Lynk
      Managing Director and Equity Research Analyst at Canaccord Genuity
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