North American Construction Group (NYSE:NOA) (NACG) has reported a strong second-quarter performance with a focus on safety, debt reduction, and operational efficiency. The company, which operates in the heavy construction and mining industries, has seen growth in its Australian business and is working towards integrating its ERP system in the upcoming quarter. NACG has also made significant progress on the Fargo-Moorhead flood diversion project and has returned its Nuna partnership to profitability. The financial overview revealed strong EBITDA numbers and a steady revenue increase. Looking ahead, the company is poised for continued growth into 2024 and 2025, with a robust bid pipeline and plans for major project wins.
Key Takeaways
- NACG highlighted a recordable injury rate below industry standards and received a safety award.
- The Australian business grew by 10%, and ERP system integration is planned for Q3.
- The Fargo-Moorhead project is 40% complete, and the Nuna partnership is profitable again.
- Strategies for optimizing the 100-ton truck fleet were discussed.
- The company showed strong EBITDA, increasing revenue, and a focus on reducing debt.
- NACG's priorities include integrating MacKellar, winning large projects, and improving systems.
- A robust bid pipeline exists, with opportunities in oil sands and Australian markets.
- The outlook for 2024 is steady, with growth expected to continue into 2025.
Company Outlook
- The company maintains its unchanged outlook for 2024 with continued growth anticipated in 2025.
- Plans to win large-scale projects and qualify for major infrastructure work are underway.
- Equipment utilization targets in Australia are expected to be met earlier than planned, and by Q1 2025 in Canada.
- NACG aims to secure major contracts outside of oil sands this year, backed by a CAD 2.8 billion backlog.
Bearish Highlights
- May presented challenges with fires and heavy rainfall impacting operations.
- Overburden removal at Fort Hills and Syncrude saw scope reductions, although similar volumes and dollars are expected for the heavy civil regional services contract.
Bullish Highlights
- Unique year-round mining opportunities in boreal forest muskeg provide stability and potential growth.
- The sale of 12 trucks will contribute to Q2 financials, with free cash flow of CAD 8 million expected in Q3.
- An increase in oil sands fleet utilization is anticipated for Q3.
Misses
- The impact of a wildfire near the Kearl mine affected one site for about a week, which accounts for 10-15% of overall revenues, but no significant impact on Q3 earnings is expected.
Q&A Highlights
- The company discussed the EBITDA contribution from trucks sent to Australia, estimated at CAD 5 million for Q4.
- NACG is pre-qualifying for a major infrastructure project in Northern California, which could replace the Fargo-Moorhead project.
- Initial discussions for infrastructure projects in Australia related to EV and transitional projects are in progress.
In summary, NACG (ticker not provided) has demonstrated resilience and strategic planning in its Q2 earnings call, with a clear focus on safety, growth, and operational efficiency. The company's commitment to reducing debt and optimizing asset utilization sets a positive tone for its future performance. With several potential projects on the horizon and a strong bid pipeline, NACG appears well-positioned for the coming years. The next update from the company will be provided following the close of Q3 2024 results.
InvestingPro Insights
North American Construction Group (NACG) has illustrated a strong commitment to growth and efficiency in its second-quarter performance. To further understand the company's financial health and investment potential, let's consider insights from InvestingPro.
InvestingPro Data indicates that NACG has a market capitalization of $483.9 million, signaling its mid-tier status in the industry. The company's Price/Earnings (P/E) ratio stands at 13.69, which aligns with the industry average, suggesting that the stock is fairly valued in terms of its earnings. However, looking at the adjusted P/E ratio for the last twelve months as of Q2 2024, we see a lower figure of 9.15, possibly indicating an undervaluation of the company's earnings potential. Moreover, the company has achieved a robust revenue growth of 26.23% over the last twelve months, reflecting the strong operational performance highlighted in the article.
An InvestingPro Tip worth noting is that NACG has maintained dividend payments for 11 consecutive years, demonstrating a reliable return to shareholders even amidst fluctuating market conditions. Additionally, the company is trading near its 52-week low, which might present an attractive entry point for long-term investors considering the company's growth outlook and its solid track record of profitability.
For readers interested in a deeper analysis, there are more InvestingPro Tips available at https://www.investing.com/pro/NACG, which can provide further guidance on the company's financials and projections. With these insights, investors can gain a comprehensive understanding of NACG's potential and make informed decisions.
Full transcript - North American Energy Partners Inc (NOA) Q2 2024:
Operator: Good morning, ladies and gentlemen. Welcome to the North American Construction Group Conference Call regarding the Second Quarter ended June 30, 2024. At this time, all participants are in a listen-only mode. Following management's prepared remarks, there will be an opportunity for analysts, shareholders and bondholders to ask questions. The media may monitor this call in a 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 conclusions, forecasts or projections contained in the forward-looking information. Certain material factors or assumptions were applied in drawing conclusions or in making forecasts or projections that are reflected in the forward-looking information. Additional information about those material factors is contained in the company's most recent management's discussion and analysis which is available on 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.
Joe Lambert: Thanks Ray. Good morning, everyone, and thanks for joining our call today. I'm going to start with a few slides showing our Q2 operational performance before handing it over to Jason for the financial overview. And then I'll conclude with our 2024 operational priorities, bid pipeline, backlog and finish up with our updated outlook for this year before taking your questions. On slide 3, our Q2 trailing 12-month recordable injury rate remains below our industry leading target frequency of 0.5 and we continue to advance our safety programs, including timely training on wildfires and air quality, and advancements in increasing training access and coverage in regards to mental health. It's easy to gloss over this quickly, but this consistency below a target that few in our industry could hit, even for one year, is one of our most meaningful and proudest achievements. Our workforce hours have grown 340% since the wildfire lows of 2016 and are up 60% from the 2020 pandemic lows. And as we approach the 6 million annual man hour mark, we continue to maintain our focus to get everyone home safe. Although as a company we see this as simply our core value and an inherent moral obligation to our workforce, it's nice to have the hard work and efforts of our employees recognized, and on the following slide you can see we were recently awarded the John T. Ryan National Safety Award, which was presented at this year's CIM in Vancouver. This is the second time we have won this award and I'm tremendously proud of our workforce and their continued focus on keeping themselves and their coworkers safe. On slide 5, we highlight some of the major achievements of our Q2. Our Australian business continues to deliver strong and consistent results, including MacKellar's best monthly result in company history achieved in May and an impressive 10% growth in the quarter from the first quarter of 2024. Our overall integration is progressing smoothly with the ERP system planned to go live here in Q3. I visited our Australian operations a few weeks ago and had a chance to see and talk to our employees and leadership teams across Australia, including our MacKellar business in Queensland, our Western Plant Hire team in Western Australia and our DGI team in New South Wales. I also got to meet with some of our key clients. And while our operations integration teams focus and efforts were impressive, the positive feedback from our clients was even more impressive and gives me confidence that we have the solid relationships and clear client contractor alignment that is key to continued growth and profitability. On the JV business side, our Fargo-Moorhead flood diversion project is in the midst of its biggest summer construction season and the overall project has hit 40% completion, remains on plan. After almost a year of poor performance, our Nuna partnership returned to profitability in Q2 and, in particular, returned to historical monthly margins in June that had not been achieved for almost three years. There is plenty of work still to be done, but we are pleased with the progress and plans the new leadership team at Nuna has made. Our telematics system achieved two milestones in the quarter, establishing initial mobile data infrastructure and testing in Australia and advancing the system functionality across equipment brands. On slide 6, we show fleet utilization by region. Australian utilization remains strong with consistent high demand and mechanical availability already exceeding our end-of-year utilization target two of the last four months. In Canada, our utilization suffered in Q1 from fleet mobilization between oil sand sites and lower winter reclamation work and Q2 brought extensive lost days due to wildfire protocols and abnormal rainfall. While our target of exceeding 85% utilization in Australia is on track, our target range for Canada of over 75% is now planned for early 2025. Some of the improvements to come in Canada will be addition by subtraction. For example, we had 90 units in the 100 ton truck fleet, of which 50 have been parked for a while. These 50 trucks make up about 3% of our entire fleet, but constitute 40% of our parked assets. We reallocated 13 of these units to Australia and are actively bidding and expect to win work for about 25 in late Q4 or early Q1. That left 12 trucks. We contacted our main reseller, which is a well-known public company and the largest auction house for big equipment, and they actually had a buyer that was looking for 12 trucks and were able to make a deal within two weeks. There were other trucks on the market and our reseller had loads of recent sales data to confirm our pricing was fair and correct. The units sent to Australia have arrived and we expect them to start working in late Q3, early Q4, and when the other 25 park units are engaged in newly won work in Q4 or Q1, then we will have matched our 100 ton truck fleet to our expected demand and nothing will be parked. With that. I will hand the call over to Jason for the Q2 financials.
Jason Veenstra: Thanks, Joe. And good morning, everyone. Starting with slide 8, the headline EBITDA numbers of CAD 87 million and a 26% margin were driven by a third consecutive successful quarter from Australia since the change of control on October 1, 2023. Our overall margin of 26% correlates to the combined gross profit margin of over 18% and illustrates strong operational performance. We included a comment on this slide about our oil sands business, which, although it did not post the top line revenue we had expected, did experience more consistency from Q1 to Q2 than we've historically had. This is due to the nature of the contracts in the oil sands, which are now less seasonal and focused on more steady time of material and rental arrangements. Moving to slide 9 and our combined revenue and gross profit. As we will have for one more quarter, MacKellar provided a step change in quarter-over-quarter variances. On a total combined basis, we were up CAD 52 million quarter-over-quarter, a very similar mark to Q1 which was up CAD 53 million over 2023. MacKellar and DGI, which we combine as Australia in our results, were up CAD 138 million on a steady, consistent quarter, during which MacKellar posted an impressive 82% equipment utilization peaking in May at 88%. This encouraging top line positive variance was offset by lower equipment utilization in the oil sands region, which was hampered by poor weather conditions in both May and June. Our share of revenue generated in Q2 by joint ventures and affiliates was a net CAD 30 million lower than Q2 2023. The Fargo-Moorhead project had a strong operational quarter, was up CAD 15 million quarter-over-quarter, and achieved the progress metrics and milestones required of the project schedule. More than offsetting this positive was the variance impact of the completion of the construction project at the gold mine in Northern Ontario in Q3, which led to much lower quarter-over-quarter revenues within the Nuna group of companies. Combined gross profit margin of 18.3% includes a one-time loss on equipment disposal and was 19.6% when adjusting for that transaction. Gross profit margins benefited both from the operations in Australia, which were higher than 20% in the quarter and from ML Northern whose fleet lowers our internal costs as well as generates strong margins from services provided to external customers. Despite lower-than-expected revenue, the Canadian fleet posted solid margins while managing costs during the operationally difficult months of May and June. Moving to slide 10, Q2 EBITDA beat the previous record by 70% as a result of the MacKellar acquisition. As mentioned, the 26% margin we achieved reflects an effective operating quarter and is indicative of where we see our business operating following two quarters where we posted 25% and 27% margins. Included in EBITDA is general and administrative expenses, which were CAD 12.8 million in the quarter, an equivalent of 4.6% of revenue, which is slightly over the 4% threshold we've set for ourselves. The percentage overage is due in equal parts to lower revenue, as well as some higher accounting and legal costs associated with the MacKellar acquisition. Going from EBITDA to EBIT, we expensed depreciation equivalent to 12.2% of combined revenue, which reflected the depreciation rate of our entire business, including the equipment fleet at the Fargo-Moorhead Project. When looking at just the wholly owned entities and our heavy equipment in Canada and Australia, the depreciation percentage for the quarter was 14.3% of revenue and generally consistent with the Q1 2024 rate of 14.8%. Adjusted earnings per share for the quarter of CAD 0.78, identical to Q1, was CAD 0.31 up from Q2 2023, given all the positive factors previously mentioned, but offset by the impact of higher acquisition-related interest. The average interest rate for Q2 was 7% and remains a compelling indicator for us as we look to pay down debt in the back half of 2024. Moving to slide 11, net cash provided by operations prior to working capital of CAD 69 million was generated by the business, reflecting EBITDA performance net of cash interest paid. Free cash flow usage of CAD 2 million was driven by another CAD 10 million draw on working capital accounts and CAD 18 million spent on capital work in progress. Moving to slide 12, net debt levels ended the quarter at CAD 833 million, an increase of CAD 52 million in the quarter due to growth assets purchased as well as the change in the Australian exchange rate. Of the CAD 833 million, CAD 419 million, or roughly half, is denominated in Australian dollars, but is naturally hedged with the heavy equipment assets we own in Australia. Net debt and senior secured debt leverage ended at 2.2 times and 1.7 times, respectively, and remain reasonable levels nine months after a transformative debt-funded acquisition and halfway through a year for which free cash flow generation is expected in the second half. With that, I'll pass the call back to Joe.
Joe Lambert: Thanks, Jason. Turning to slide 14, our priorities for this year are unchanged. We continue to progress the overall MacKellar integration as planned, with ERP go-live scheduled for the end of Q3. Several projects to improve operational reporting and management systems are being implemented in the second half of the year with those requiring ERP systems data scheduled later in Q4. The timing of these systems improvements plans coincides with further growth and additional assets coming from Canada, and we remain confident that MacKellar will be fully integrated heading into what we believe will be its best year ever with continued opportunities to grow the business in 2025. The second half of the year continues to include plans to win a large-scale mining or civil construction project to provide work for our remaining underutilized assets and also to qualify with our partners on a major infrastructure project, which we believe could provide a smooth transition as our current major infrastructure project in Fargo, North Dakota ramps down in a few years. We have already submitted tenders and have additional active tenders soon to be submitted that give us confidence in winning and qualifying for this work. We continue to advance our maintenance systems and processes to increase our uptime and achieve utilization targets. As mentioned earlier, our Australian business looks to achieve equipment utilization targets earlier than planned, with Canadian targets planned for Q1 2025. We may still achieve the 75% Canadian target in the month of December if successful in of reclamation work than last winter, and the potential to do that has improved, as this year's reclamation volume is being tendered and increased significantly year-over-year. The final priority of returning Nuna to profitability and operational excellence advanced meaningfully with Q2 demonstrating a return to profitability and June, in particular, demonstrating a return to historical EBITDA markets. The second half of the year at Nuna will be focused on driving consistency across the business and winning work for 2025. Moving to slide 15, our bid pipeline remains robust, and we more than replenished the bidding opportunities lost or deferred. Our oil sands opportunities include our annual oil sands heavy civil regional services contract for 2025, which on initial review appears to be about the same level of demand with slightly lower unit rate work being offset with increased large truck and shovel rentals. We also received several reclamation tenders in oil sands in Q2 that we will bid this quarter that show a meaningful increase in volume as mentioned previously, and also some year-round projects for this work that is typically only done in winter conditions. We have several active bids in the oil sands regions, including one which we submitted in Q2, but have not closed yet. These bids include the large stream diversion construction project that I mentioned on the Q1 call. This project is a large civil construction project for an existing client, and is expected to be awarded in Q3. Outside of oil sands, we continue to see improved demand from the resource market, including a good-sized tender for an expansion of a British Columbia copper mine. The Australian opportunities and strong demand for heavy equipment continue to grow. We continue to see new and expanding operations seeking contractor equipment in Queensland and New South Wales metallurgical and thermal coal markets, and are now regularly receiving contract mining and equipment rental opportunities in copper, gold, silver, and iron ore. We continue to expect to win one or more major contracts outside of oil sands this year, which we expect will provide a clear path for reallocating our remaining underutilized fleet in 2025. On slide 16, our backlog stands at CAD 2.8 billion. We expect our backlog build in late Q3 or early Q4 off contract awards in Canadian oil sands, Australian coal, and other resource markets in both countries. Slide 17 details our updated outlook for 2024 and represents an essentially unchanged outlook for EBITDA and EPS in the second half of the year combined with actuals for the first half. We expect Q4 to be better than Q3 in 2025 to continue the upward trend as we get full year contributions from our 2024 growth capital. Although I'm disappointed we could not offset the operational interruptions incurred in the first half of the year, I can assure you the NACG team is focused and motivated on delivering strong results. And when you look at the implied Q4 financial estimates and add onto that the 2024 growth capital full year impacts to 2025, it should be fairly straightforward to see what generates my optimism moving forward and my eagerness to execute the work we have in front of us. With that, I'll open up for any questions you may have.
Operator: [Operator Instructions]. The first question comes from Yuri Lynk from Canaccord Genuity (TSX:CF).
Yuri Lynk: Joe, just to clarify, does the guidance for the back half of the year require you to win one of the ex oil sands awards that you're targeting or that's more going to bolster 2025?
Joe Lambert: More 2025. We don't have them forecasted in there. There's some potential that we get some early reclamation work in Q4, but that's not what's in the forecast.
Yuri Lynk: And how has the bid funnel kind of shifted around the last few months? I see there's a large oil sands extension in there that's included in early 2025. I know you were chasing some work in Ontario. Just maybe a quick update on what's new and what's kind of dropped out of the bid funnel.
Joe Lambert: There were three projects in Ontario we were bidding and we're actively bidding. One really big one and two smaller ones. One of the smaller ones, we were unsuccessful on. That's one that came off of that. We've received some increased interest in a couple of other opportunities. I think what I would say is, outside of oil sands, we've pretty much added to the bid pipeline from what was either lost, awarded, or deferred. And inside of oil sands, we have a lot of active tenders with the regional contract and then winter reclamation. During the quarter Q2, I'd say we saw – we'd originally anticipated a bit more summer civil construction for smaller equipment. And it was really slow on that front. There was very little work that was done this summer in oil sands for civil construction.
Yuri Lynk: Last one for me, just on the write down of the assets held for sale, are those the 12 trucks that were auctioned off? And can you just confirm that that CAD 4 million is in your adjusted EBITDA, i.e., if we were to add that back, it would be more around CAD 91 million?
Jason Veenstra: Yeah, we confirm those are the trucks, but no, it is already added back as part of the – from reported to adjusted earnings. So it's already in the CAD 87 million.
Joe Lambert: And those were the 100 ton trucks I was talking about, Yuri. So, unfortunately, that particular asset class is just an oversaturated market with very small demand. It is the only rigid frame truck class we have that's like that. And as such, even when we went to sell them, there was lots of trucks on the market. So the pricing was very much established already. So we got what the market was giving. And if we didn't sell them for that, somebody else would have.
Operator: Our next question comes from Aaron MacNeil from TD (TSX:TD) Cowen.
Aaron MacNeil: Joe, just to follow up to Yuri's question. You mentioned Canada hitting the utilization target by early 2025. I know you walked through the equipment transfers, the sales, the bids, but do you expect to hit that target just seasonally or on an annual basis? And do you need to win that additional work to hit the goal?
Joe Lambert: We expect to hit it annually starting in 2025. We originally thought we'd get there by the end of this year, pretty much Q4. Because we do start – as you saw in Jason's comments, we're starting to get a bit more normalized in oil sands. The seasonality of oil sands was the smaller assets, and those are the underutilized ones that we're moving out. So a lot of that goes away as those assets go away. I'll give you an example. Several of the 100 ton trucks we moved to Australia were in water truck configurations, so they had a big water tank on the back of them. Those trucks only get used for six months in Canada, but they get used year round in Australia. So those are some of the things that – although there's a bit of timing in getting stuff over, it will start to normalize the quarters. And you'll see more consistency in both utilization and revenue between quarters.
Aaron MacNeil: And do you need that additional work to get there, or do you think you can get there with the work you have?
Joe Lambert: Whether it's in oil sands or somewhere else, we need work for those smaller assets. Or, worst case scenario, we need to get rid of some more.
Aaron MacNeil: Jason, obviously, some debt maturities in 2026. I can appreciate most of it's the credit facility, but you've got the converts in there too. You've got the exit leverage guidance with the quarter, you did the MacKellar transactions. So, I guess, what's sort of the capital allocation priority into 2025 and what sort of in your job jar over the next 6 to 12 months as you think about planning the capital structure?
Jason Veenstra: Obviously, free cash flow is paramount. We've communicated that free cash flow is coming in the second half and that that will increase liquidity. We clearly have the liquidity available to us already as far as dealing with the convertible debentures if required. And yeah, we're in the routine of extending our credit facility every year, so keeping it three years out in the future. So those are kind of the key focuses, but we'll continue to look at alternatives. But the base plan is – move the credit facility ahead one more year, in this calendar year, and then keep tracking the debentures.
Operator: Our next question comes from Adam Thalhimer from Thompson Davis.
Adam Thalhimer: Joe, you said you were surprised by the amount of winter reclamation work in the oil sands. Can you just expand on that?
Joe Lambert: We usually get the tenders, the RFPs for winter reclamation about this time and we have several of them. We've submitted some actually and there's some that are still to be submitted. And just the volumes, overall volumes we see, because you basically get tenders from everybody. So you know what the whole market volume is and this year looks to be about 25% higher than last year. And there's some unique opportunities. Reclamation is usually – this is boreal forest muskeg that's usually soggy and it's usually only mined in the winter because it's easier to remove when it's frozen. And this year, there's some high ground, which is more sandy soils, which we think could be done year round. So there's some opportunities to get some more month-to-month stability and some of that reclamation work with some of the bids that are out there.
Adam Thalhimer: Did you ever break out an EBITDA contribution anticipated from the trucks that you sent to Australia once they get to work?
Joe Lambert: I don't have it memorized. I don't know if Jason does. We do have that.
Jason Veenstra: Yeah, I would put it at about CAD 5 million in Q4. So meaningful and at good margins, so incremental margins. I don't know if we've broadcast that in the MD&A, but I would put that at about CAD 5 million, Adam.
Adam Thalhimer: Last one for me, the trucks – the 12 trucks you sold, was that in Q2 or Q3, and what were the proceeds?
Jason Veenstra: Yeah, it's a good question. Proceeds came in early July, so it was reflected in Q2 financials, but the free cash flow of that CAD 8 million will come in in Q3.
Operator: Our next question comes from Tim Monachello from ATB Capital Markets.
Tim Monachello: Could you talk a little bit about the utilization of the oil sands fleet so far in Q3? Have you seen a nice uptick there?
Joe Lambert: Well, certainly from the low points of Q2, yes. I think we're projecting somewhere in the low 60s. May in particular, June wasn't great, but May was probably the worst month since the wildfires of 2016. We started the month with a week's worth of fire and evacuations in Fort McMurray, which were remnant of the May fires of 2016, but thankfully only lasted a week in that case because we got some great rain after that. Unfortunately, great for the fires, but unfortunately for the rest of the operations, it rained for the bulk of the remaining part of the month of May. So we had double our rainfall and just some unusual weather events in the particular quarter there.
Tim Monachello: The MD&A mentioned some scope reductions for overburden removal at Fort Hills and Syncrude. Can you elaborate on that? Is that, I guess, an expectation going forward? Is that sort of a Q2 specific impact? Or how should we be thinking about your go-forward role at Fort Hills and Syncrude compared to what it was under the old contract?
Joe Lambert: Yeah, I'm not sure I follow all that. Tim, I didn't catch the first part.
Tim Monachello: Just in the MD&A, it said that one of the reasons for the weakness in Q2 was scaled productions for overburden removal at Fort Hills and Syncrude. So I'm just curious what your expectation for activity at those two sites is compared to what it would have been under your previous contract.
Joe Lambert: I think we mentioned the reallocation fleet during Q1. When we look at the overall overburden agreement, it's called the heavy civil regional services contract now that covers off the five mine sites that are managed by the one client, year-on-year, they look – we just got the RFP in, but the initial volumes look very similar to what was awarded this year. And with a slight change in that, there was a unit rate overburden bid at two different sites last year. And the rest was bid as rental agreements for trucks and shovels. And this RFP only has unit rate work at one site, but it has more rental volumes. So, it looks like they're switching one of the sites from unit rate work to rental hourly, but the overall dollars look about the same. I actually think this gives us an advantage because the one site with remaining unit rate work is the site we're at doing that unit rate work right now.
Tim Monachello: Can you talk a little bit about your consolidated EBITDA expectations in terms of the split between Q3 and Q4?
Joe Lambert: I've just said Q4 is slightly higher than Q3. It's like a slight increase in Q4 from Q3.
Tim Monachello: In terms of free cash flow, Q4 has always been a pretty big free cash flow quarter, but you're expecting pretty substantial uptick in free cash in the second half of the year. Is that the expectation that it's going to be heavily weighted to Q4? Or is Q3 also going to be expected to be a fairly substantial free cash quarter?
Joe Lambert: I believe we have a slight positive in Q3, but almost everything comes in Q4.
Operator: Our next question comes from a private investor. Atin Kumar, your line is open.
Unidentified Participant: I had a couple of questions. So, when the MacKellar acquisition was announced last year, you had a slide up with the free cashflow impact, with the 2023 combined outlook, assuming the acquisition was completed in Q4, of a free cash flow of CAD 100 million to CAD 220 million and then there was another one which showed the incremental impact in 2024 with the acquisition of MacKellar, incremental impact of free cash flow of about CAD 55 million to CAD 75 million. So I just wanted to ask, so far, is that estimate holding true with the acquisition in terms of free cash flow generation for Australia?
Joe Lambert: What I would say is that this is the third quarter post-acquisition of MacKellar and they pretty much slightly exceeded all expectations financially every quarter. I don't know of a metric that's down from what we forecasted for MacKellar since we projected those in July when the acquisition was announced.
Unidentified Participant: My name is Prem [ph]. The other question I had is on the equipment utilization. So for the Canadian fleet, it ended Q2 at 42%. The target is 75%. Maybe can you expand on the difference from the target of 75% to 42%? How much of that maybe is due to the weather conditions, the fire, and the rain? And also, the reduction in the overburden scope at Fort Hills or by Suncor (TSX:SU). Maybe can you give a breakdown as to how much of that reduction in overburden scope is affecting utilization?
Joe Lambert: I don't have the exact numbers, but I get a pretty good guess, Prem, in that if you just look at what we're expecting in Q3 and Q4 from Q2, it's about a 20% increase. So I would say the weather and the fires in Q2 were probably around a 20% impact on our utilization. And then when we look at how we're going to get from that 60s, low 60s to 75% by Q1 next year, we think there's some increased demand in winning some work outside of oil sands. And the other side of that is reallocating or even selling some assets like we did this quarter. And that's kind of that addition by subtraction I was talking to in the slides there. So those are the two major parts of it. And that 20% difference in Q2 is all about weather.
Unidentified Participant: My question around the utilization. So if I just look at the slide, slide 6 on utilization, the target for Canada is 75%, and then we haven't hit that utilization target consistently in a while, all the way into 2021. And then even if I look further back into like 2015, there may be a couple of quarters in 2019 that we've maybe hit 70%, but not 75%. So I'm just curious on like, how confident are you in that target of 75% of us hitting that consistently? Or is that target mostly like two quarters in a year if you hit that, that's the 75% target. Kind of similarly, if I look at the Australian utilization too, it's at 85%. I look at the graph, we've hit that maybe twice in the last three years. So how confident is the team on hitting that target consistently and is the target consistent?
Joe Lambert: That's a big question. I'll tell you how it works overall, though, and splitting it into countries. Just starting with Australia versus Canada, this is really two factors that play into this. And obviously, you have to have demand first before you have utilization. So if you have strong demand, then your utilization is basically functioning off of your maintenance and your mechanical availability. So Australia starts with a benefit just in weather, in the fact that they can operate more days of the year unaffected by weather than we can in Canada, as we had exaggerated in Q2. But the big difference in Australia and how they've gotten there and what they're doing is they've had extremely strong, consistent demand from their clients and long-term commitments in five-year contracts, so that everything else is really in their hands, which is the mechanical availability. And that's why we're already able to get up into that range two of the last four months. In Canada, our demand wavered. We saw a change in demand, especially in our smaller assets, starting last year, and probably going back even further than that. So, we need to get the fleet reallocated such that the demand matches the supply and then it's up to us on a mechanical availability side that we can maintain it to achieve that 75%. And we see that opportunity in Q1 of next year. In other words, right now, we continue to have more assets in oil sands than we have demand that needs them, but we're reallocating those and we believe with winter work in oil sands or other potential resource bid wins outside of oil sands or in Australia, we believe that demand is going to match our fleet sizing. Kind of like I used the example of the 100 ton trucks in the presentation earlier, we see that happening in Q1 of next year.
Unidentified Participant: I had a last question. So I was really happy to see the total return swaps that the company has taken, about 213,000 shares, about CAD 6 million worth. Just curious what's stopping the company from going harder at these wonderful prices? Clearly, you've mentioned in your letter as well that it starts below the intrinsic value. Is that more liquidity? I could understand from an NCIB perspective that we need to pay down debt. That's understandable. But for the TRS, I was hoping maybe the company would go a little bit more deeper into the amount of shares that you have the TRS on. Can you maybe comment on that one, why it's at just CAD 6 million?
Joe Lambert: Prem, I think the best correlation I can give you for that is if you look at our free cash flow, our aggressiveness coincides with our free cash flow. So I don't think we're in a situation where we'd go out and get debt to conduct an NCIB. The total return swap was something we can do without pulling cash out of our pockets. And in the second half of the year, as our cash flow comes in, I believe you'll see us being a lot more aggressive on that front.
Operator: The next question comes from Maxim (NASDAQ:MXIM) Sytchev from National Bank Financial.
Maxim Sytchev: Most questions have been already asked, so I just have two kind of small readouts. In terms of ERP implementation, Jason, do you mind maybe talking about the potential benefits and how should we be thinking about that on a prospective basis?
Jason Veenstra: We see it coming through in both G&A and potentially in operating margins. So we've guided people to kind of a 1% on EBITDA basis improvement in 2025. It's no one single silver bullet that is going to drive that. But we see improvements in back office processes as well as better tracking on sites of inventory, work in the shops. and just overall better tracking of costs and accountability. So it likely doesn't show up in Q4 results. That'd be premature, but we expect it to be in our 2025 outlook.
Maxim Sytchev: The system will apply to the DGI assets as well or is it just MacKellar?
Jason Veenstra: Just MacKellar. It's a good question, but DGI is a different business model and will carry on with its existing ERP. We may look at that in mid-2025, but this ERP is just for the MacKellar acquisition, which is basically like-for-like and we can install our instance there.
Maxim Sytchev: Do you mind maybe commenting a little bit around the visibility on kind of non-commodity related work outlook just to replace Fargo-Moorhead project at some point in the future as you're still have a couple of – I guess, a year or two of work left on that.
Joe Lambert: It's probably got three to four odd years there, Max. We would figure major infrastructure project in the – we haven't bid a huge amount. We've been site C and we were shortlisted, but were unsuccessful. That was about a two, two odd year process. Fargo was about four year process because it got deferred once. Right now, we're working with a partner to pre-qualify on a major infrastructure project in Northern California, which is a big earthworks project. And it's damming up some water that was – it's an area of California which has gone through cycles of flood and drought. And so, they want to retain some of the water during the flooding times to use it during drought. And we believe that prequel is going to occur right at the end of Q4. And that's what we think is our replacement project. It really fits into our wheelhouse and we're very comfortable with our partner on these big infrastructure projects.
Maxim Sytchev: Joe, I guess it's too early to contemplate anything in Australia, right, as you are still kind of focusing on the core business for the time being, right?
Joe Lambert: With the same partner, who's also one of the largest infrastructure contractors in Australia, we've just started initial discussions again on several big earth infrastructure projects. Most of them are kind of EV or transitional kind of related, in that they're big solar farms. There's some pumped hydro where they dam up a mountain valley and pump the water up. So really, really initial. I think we're probably 6 to 12 months from getting more visibility on a reasonable project down there.
Operator: Next question comes from Kevin Schilling (sic) [Devin Schilling] from Ventum Financial.
Devin Schilling: Just real quick here. Just on the wildfire situation near the Kearl mine, are you guys currently impacted? And if so, can you quantify it?
Joe Lambert: We were impacted about a week and a half ago and we went back to site over the last weekend. So it was about five days, but it only affected that one site, which is maybe 10% or 15% of our overall revenues for one week. Devin, that would be like what we would expect in the normal summer, that a regional fire would affect one mine site or so. Like, that one affected one SAGD and then that one oil sands mining site.
Devin Schilling: So, not really expecting much of an impact for Q3.
Joe Lambert: No, none. The other four sites we're on that constitute 80-odd plus percent of our revenue were unaffected by the fire last week.
Operator: There are no further questions. This concludes the Q&A section of our call. And I will pass the call over to Joe Lambert, President and CEO, for closing comments.
Joe Lambert: Thanks, Ray. And thanks again, everyone, for joining us today. We look forward to providing next update upon our closing of our Q3 2024 results.
Operator: Thank you. This concludes the North American Construction Group conference call on second quarter 2024.
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