Q2 2020 North American Construction Group Ltd Earnings Call

Good morning, ladies and gentlemen, welcome to the North American Construction Group earnings call for the second quarter ended June 30th 2020 at this time. All participants are in a listen-only mode following Management's prepared remarks. There will be an opportunity for analysts shareholder and bondholders last question the media monitor this call in a listen-only mode. They are free to quote a member of management of their astrological remarks from any other participant with a participant permission company's wishes to confirm that today's comments contain forward-looking information and I actually thought we talked to differ materially from a conclusion forecasts or projections contained in that forward-looking information certain material factors or assumptions were applied in drawing conclusions or in the office forecasts or projections that are reflected in the forward-looking information additional information about these material factors is contained in the company's most recent management discussion and Analysis log.

Available on sadar and Edgar as well as the company's website at the conference over to Martins Ferry and chairman and CEO, please go ahead.

Thanks, and they're very good morning to everyone was one of the very few companies that provided any sort of outlook for a second quarter. We were determined to both named the impact of the covid-19 pandemic on the health and safety of our employees are mitigated subtract on our business performance. Therefore. I am pleased that good Headway wage both objectives as we also helped our customers manage the virus risk on their websites.

Especially probably done in typical fashion. We apply the fast and firm restraint to our costs eliminating all discretionary spending a very closely monitoring all third-party support expenses.

This close stewardship of costs rather than the government federal wage subsidies rewarded us with a nicely profitable quarter despite a greater than 60% sequential full and our revenues in the toughest operating environment. We have ever experienced. We also get our free cash flow Target which along with a call a little tube and she allowed us to reduce net debt by over 10% without introduction. I will now hand over the call to land at our president and she took it off soon to take us through the safety and other operational highlights shown on slides to the full Jason Winston our CFO the financial highlights and slides off tonight before I talk about our Outlook using slide ten. So, what would you do? Thanks Martin looking at slide too and please report that are dead.

And promptly responded to pandemic.

And put in place safeguards to ensure workplace hygiene physical distance distancing and isolation and contact protocols while maintaining our industry-leading safety rep when you consider our operating environment and the use of camps busing and transportation needs sanitizing the equipment and offices and adjusting to communicate with over nine hundred families, while maintaining social distance the speed efficiency and effectiveness of our team responded was simply stated. Excellent.

We will continue our diligence in both workplace hygiene and safety to ensure everyone gets home safe.

Moving on to the business update on slide three faced with a previously unimaginable scenario production cutbacks negative oil prices and a worldwide pandemic our operations maintenance and support teams demonstrated the resilience of our company by rolling up their sleeves and getting to work.

Ensuring the health of our workers was critical to us and then we immediately turned to addressing our rapidly changing customer needs are strong oil sands customer alliances combined with our safe a low-cost operations allowed us to identify opportunities to increase Fleet usage and efficiency on one site while demobilizing completely off another allowing for the mutual benefit of improved Fleet utilization and reduce customer costs.

Similarly in our start-up of a cold management contract in Texas. We were not only able to achieve a smooth and orderly transition were able to complete on time at significant cost savings.

On time and under budget are always good ways to start a project but achievement during pandemic across borders is a true Testament to the strength of this team.

While we rapidly adjusted to our changing environment our corporate strategy remains intact our focus on strong long-term relationships and oil sands showed that the mutual benefits we expect from home improve customer lines.

We continue to have tender opportunities in our optimistic on potential Awards before the end of the year that will provide increased Geographic and commodity diversity. We continue to increase vertical integration external sales potential of our equipment maintenance business lastly. We react properly with our Capital spending cost restraints to ensure we live within our means. I'm moving on from the bottom slide 3 and then just like 4, you'll see the operational plan for 2020 remains unchanged from what was presented at the end of last quarter.

We expect our customer first mentality safe, low-cost provider reputation and client Alliance relationships will put us at the front of the client callback as we begin to ramp up the queue to business trough the need for lower costs and improved efficiency only further enforces the value of both our internal external maintenance services are new component rebuild Iraq. He got up and running in q1 and proved cost and efficiency during to 2 and we'll continue ramping up through year-end to provide low-cost high-quality components initially supporting internal needs and growing into next year with capacity for additional external Revenue along with the lower cost component rebuilds. We continue to perform Second Life whole Machinery builds off and have completed our second older class truck which is being commissioned this week.

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The component rebuilds have an immediate impact and reduce the standing Capital spend, but the income statements benefits will show more as they depreciate over the whole of the acid life and those further benefit wage increase the more units we built to date. We have completed whole Machinery building on a couple of dozen or so of our larger machines and have current capacity to meet about 10% of our internal components chairman. So we're just getting started to close out my brief comments. I'd like to take this opportunity to personally thank all of our employees clients shareholders partners and other stakeholders that continue to support your confidence in our business. I believe our results continue to prove the naysayers wrong and demonstrate the resilience and adaptability of our business.

In response to those student days theorists we heard from in March and April Mark. Twain said it best when he said report of my death was an exaggeration without altering the call Jason for details on our Financial Health. Thanks Joe. Hey, good morning. Everyone. I'll start with our talk line on Slide Five revenues. The quarter of $71 million dollars was a hundred million dollars below last year's Q2 as we suffered the full impact of covid-19 in the quarter. Our quarter was dominated by sight access issues. And as Joe mentioned the correlated demobilization and mobilization that comes with that.

Demobilization and subsequent mobilization are usually down in a schedule manner, but the pandemic required quick execution and much of a quarter was spent responding to changing situations that the Mind side all said Revenue decreased by 60% from Q2 2019. When just looking at twenty twenty. We were down 64% from the first quarter and then looking at specific month's we are more than 70% down in early Q2 from revenue levels in January and February month.

While the resiliency of the oil sands mines was on full display during as production was not halted the access restrictions did have a serious Revenue impact for our quarter a.m. Pacific note bitumen throughput at the Foothills. Mine was reduced in Q2 twenty-twenty which resulted in lower demand and our equipment being transitioned to the Millennium mind the time required for the transition less Revenue in the quarter. The noon a group of companies was less impacted by the pandemic but did experience General delays Insight access as long as they're busy season in June.

Lastly on Revenue external maintenance and our my management contracts were not noticeably impacted and partially offset the year-over-year decreases as these business lines continue to age.

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Good margin of 30% reflected an efficient operational quarter albeit on a much smaller scale than originally anticipated and under unprecedented circumstances on-site operations Personnel reacted swiftly to the realities facing our customers and costs incurred were exclusively reserved for specifically requested support and service rep.

Required heavy equipment was operated effectively with minimal idle time and immediate discretionary cost constraints were put in place to minimize employee layoffs while maintaining positive profit levels be included in the gross margin gross profit margin was depreciation of 16.3% of revenue for the quarter while still generally comparable to the expected run rate of 14% The depreciation percentage was slightly higher due to the exaggerated impact of straight-line depreciation on fixed assets during such a low Revenue Court.

Direct General and administrative expenses in the quarter worth 3.5 million dollars equivalent to 4.9% of Revenue. This spending was lower than 220,000 spending of six million, but higher than the previous 3.4% of Revenue the 4.9% illustrates the low Revenue in the quarter, but was aided by austerity measures put in place in late q1, the primary initiatives of the G&A reduction were mandated reduced work hours and the complete halt of all discretionary and non-essential spending.

Adjusted ebitda of 31.9 million was a five point two million dollar decrease from Q2 2019 and reflects the wide-reaching impact of the covid-19 pandemic offset by our strict discipline to limit indirect project cost and GNA spending two essential costs only.

Adjusted earnings per share for the quarter of $0.45 was comparable to the prior year based on the provided commentary plus the temporary wage subsidy program. I'll touch on in a moment as well as lower interest costs cash related interest expense for the quarter was three point seven million dollars representing an average interest rate of 3.6% as we continue to benefit from both reductions and posted rates as well as competitive rates and Equipment financing. We were able to secure in the quarter.

Lastly I've note adjusted EPS was impacted for the full quarter by the April 6th issuance of four point six million common shares as part of the Redemption of a 5.5% debentures.

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was offset by share purchases of 1.2 million shares these transactions resulted in our weighted average number of common shares for the quarter being twenty eight point eight million shares versus the q1 average of 25.6 million shares.

Will touch briefly on the Canada emergency wage subsidy provided with a with a summary provided on slide six wage has disclosed in detail in our financial statements. Net income includes approximately eleven million dollars of salary and wage subsidies received under the program. These subsidies are presented with their correlated employee expenses in both project and Equipment costs as well as general and administrative expenses.

These subsidies reimbursed us for a portion of the wages. We paid and greatly helped in our efforts in retaining our Workforce.

As noted in the simplified Slide the program essentially reimbursed us for twenty 520% of the all-in employee cost which in turn allowed us to maintain twenty per-cent of the headcount level. We may have otherwise had to reduce either temporarily or permanently.

From our perspective the program has worked effectively and better positions us moving forward as we look to ramp up activity levels.

Moving to slide seven, I'll summarize our cash flow stated simply free cash flow in the quarter of 11 million dollars was the compilation of the adjusted ebitda wage of $32 million dollars offset by sustaining capital of 14 cash interest expense cash interest paid of four million and the timing impact of changes in off-balance-sheet items sustaining maintenance Capital was heavily constrained in the quarter based on the much-discussed macro-environment and consistent with cost of sales validates variable nature of our Capital spending program.

As referenced on the slide free cash flow was heavily impacted in the quarter by the build in both Capital inventory and capital work in process as we continue to advance our internal component rebuilding processes.

Moving to our balance sheet on slide eight liquidity of $135 million dollars is the mid-year Watermark based on steady free-cash-flow wage plus the impact of approximately twenty-five million dollars of additional equipment financing in Q2. This equipment financing was secured at low interest rates. Am allowed us to increase liquidity as funding was directed to the credit facility on a trailing 12-month basis our senior leverage which includes the equipment financing was 2.1 times well below our covenant of 3.0.

And the close out on Friday to slide 9. I'll briefly touch on the capital returns as that. June return on invested Capital was 10.2% off impressively. This is actually slightly up from the 9.9% posted in q1 as adjusted ebit for the quarter of nineteen point five million dollars was up year-over-year.

And those financial comments. I'll pass the call back to Martin.

Thanks Jason. And now turning to slide tend to talk about Outlook which covers the balance of the year was that explained last time or customers either limited access to some of our core all signs mindsight starting around mid-march?

This allowed them to monitor phosphorus more effectively by either operating with the fewest people possible for bringing forward maintenance turnaround activity. Also for the first time you said production cut back and all signs mine as physical storage for the product became a real issue where the virus also create a sharp decline in all the man. Well that may not need to just one production train. We need for our Services Limited. However, our contract structure contemplated these types of occurrences and the customer have the ability to move the committed volume between operations this occurred during the quarter but there was a two month time lag as we needed to negotiate a contract Amendment and transfer the equipment fee from the first name is a second there for as we predicted most of the disruption to our business development Q2 and we still anticipate that are all signs operations are normal birth.

Just give you a progress Luna was less impacted where there are active seasonal work. Just going to start in leaving the quarter.

Also is Joe mentioned where you come in the operation of a second call Mine by the middle of the year is now $140 270 million month.

And we expect to produce another twenty to forty million of free cash flow in a second off from you. But most of that likely to occur in Q4 there for free cash flow more than thirty million higher than last year and adjusted EPS about flat. It should be quite an achievement in the sixth or an hourly tough year.

We're also making good progress in our quest to diversify our business since that. We still expect to have around 40% of our rebate come from outside. The earth science is the earliest 2092. We hope to have positive news on that front in this third quarter.

I went in with a comment on our stock price being that we had produced a dollar forty never just stood burnings to share in the first six months of the year with all the half of time being ravaged by the virus pandemic replete. He demonstrated the resilience of our business model and our ability to cut spending to protect profit margins and free cash flow in the faith extreme adversity, you know stock price of $700, and I will know how to call back to the operator Denise for the Q&A session. Thanks boss. Ladies and gentlemen to ask a question, please press star and the number one on your telephone keypad will pause for just a moment and a roster off.

your first

Question comes from the Erie linked with canaccord genuity or wine. Is that then?

Good morning, guys, Gary Martin or Joe. Just can you can you give us some sense of of the revenue recovery Cadence as we work through the quarter and in any early observations on on July?

So you want to take that? Yeah, I think we're you know, we we see our our sides coming back other than the one where the where the one trying to shut down. So where where the train was shut down at the Ford Hillside. The public information has said that it was going to be shut down through twenty Twenty-One and birth announcements from the owners suggest. It could be earlier. We're we're still anticipating that being the public date of twenty twenty one month, but we do see other sites that have brought turnarounds forward starting to ramp up just just starting this month and we think can be back to I'd say close to full by Q4.

And so we we kind of expect that ramp up to occur over all across the business from really right now through October and then I think our winter season is going to be as busy as all our winter seasons. We're we're pretty fully engaged. Is that cover what you're looking for? You know, that's that's good. And then, I guess on the on the guidance that you've that you've issued does does the ebitda guidance include further wage wage subsidy benefits of above and beyond the 11 million received in the quarter.

Yeah, it it does we hoping or expecting a similar amount in the six months before I'd say in Jason explained it well that you know spending a lot of money retaining people, you know, our business is recovering but we we still have a lot more people than we need for them upload. So it's really a retention tool is working very effectively, but it's costs associated with it. Right? So it's in the mix, but it's certainly not a direct artist to the bottom line.

No, I'm just trying to square the the revenue recovery with the if if you're going to if you expect to get benefits in the back half of the year then moved in your Revenue have to be down 30% or more year-on-year in each quarter. And and is is that in line with which what you're expecting?

Jason yeah, we we still expect to qualify your you know, given given the how far qualified we did in the sixty to seventy percent range. We still will qualify for the 30% and we are still getting through some of the nuances of the new qualification but it seems actually easier to qualify, you know periods 5 and onwards so we expect to qualify and in our estimate like Martin said is about the same as what we got in the first three and half months.

Okay. Okay guys, I'll turn it over then.

Your next question comes from that name is open.

Morning, everyone. Well, I guess maybe just starting off and activity in the back half of the year. Is there anything you can share in how you expect activities Iraq, I guess what I'm trying to get on is it fair to think Q4 will be busier than Q3 from an ebitda perspective excluding any weather impacts?

Joel that you take it down again if you don't mind.

I think it's that that would be our normal. I think that's going to be the same even with the ramp up that will have a it slightly higher Q3 than or Q4 than Q3.

Okay, and then maybe just following up on the same thing, you know, you mentioned two or three free cash flow is going to be closer to break-even. Let's let's drive in that is that largely just you guys reactivating equipment or is it working considerations or anything else?

Excuse me. I'm going to go ahead I have just can't say it's predominated the ramp-up of those sites and then also the preparation on the maintenance side fog for the winter work which in starting to really starts into Q4 But continuing through q1 next year. So there's a there's a big ramp up in June and work out as we go through the year, but there's also a larger ramp-up of having Fleet available to be utilized come to one next year. So

Understood and then I guess maybe one more question for you to Joe just following up on your earlier comments on Ford Hill's. I just to confirm you guys aren't the current guidance is not taking any for sales activity for the back half of the year. And then secondly, if it did resume operations how much of a tell what would that be or is it more of a 2021 story still?

I we don't have anything at Ford Hills projected of any significance through the end of this year. And even if operations started it up late in this year's we don't think the demand for our services would necessarily start up. This year would likely be next year.

Likely be the q1 Q2 next year where we because they have mind in advance having one train down. So they they are a bit buffered from their Contracting needs right back. Okay, that makes sense. That's good, Thank you and then just lost them for me and I'll turn it back in goal post. You can share on one-time cost associated with the mobilization equipment off of Fort Hills.

Yeah order of magnitude. It's you know a few million dollars. Obviously. It was it's part of the noise of Q2 kind of behind us off. We did at the end of March have to make determinations as well. So part of that was in q1, but it's in the single-digit millions of dollars and it's it's not it's not expensive to move this Fleet around

Check that makes sense. That's good, Thank you. I appreciate the call. You guys also in the Callback.

Again to ask a question, please. Press star one on your touchtone phone. Your next question comes from Maximum. Hi. Good morning, New Jersey Mike's for Max was wondering if you have these numbers off the top of your head in terms of you know, the exact percent on your decline in Revenue. How much of that is in relation to restrict access to sites versus production for payments versus whether so we'll just trying to home page better. You know how to think about the forthcoming quarters in terms of Revenue progressions?

I would I would kind of say about 70% of this site access issues, maybe twenty percent due to a production cutback and 10% due to a pretty wet June, So that's kind of the way I look at it.

Okay, start up and then in terms of so the site access right now. Do you mind providing some color in terms of if you're if if that has fully normalized or there's still some options for you guys?

It's not fully normalized. You know, there's one site in particular where there's maintenance turnarounds going on still. So we're discussing with a customer the time frame for us to re-engage about the site. We expect that to gradually occur during Q3 such that we should be back tomorrow normal as as Joe mentioned. So it's a profession. I think we get like to 4

Okay. No, it's not helpful. And then just curious to to to see your your views around, you know client Behavior. Have we seen them pressure for pricing concessions things like that that we would have seen in 2014 just just made me maybe the color.

Yeah, definitely. Obviously the the old price collapsed plus trying to manage the virus made things very tough for our customers. You know, I really sympathize with them off. So we engaged in discussions on pricing she'll and as usual we've done our best to to get back some some concessions on price change that's taken into account in the in the other look.

Okay, thank you. And then your comment around noon and you know potentially some some opportunities in Q3. Do you mind me commenting on faith development? Uh