Q2 2021 North American Construction Group Ltd Earnings Call
In fact, a replacement for diesel.
We have much to develop on learned about hydrogen supply and distribution systems. We have seen enough positive potential debt. We believe a feasibility study for dual fuel diesel hydrogen blend high horsepower combustion engine is both warranted and a solid investment.
Initial research.
Suggest hydrogen replacement of diesel where reduce emissions near proportionate to the blend achieved.
That is to say our fuel mix of high 40% hydrogen and 60% diesel would be expected to reduce greenhouse gas emissions by about 40%.
Hydrogen diesel systems have been commercially produced and lower.
Sure horsepower applications. So we feel the potential for success at higher horsepower applications is reasonable and worth investing in.
We expect to know the outcomes of our hydrogen feasibility study in the next 6 to 9 months and if positive we would expect to advance into a prototype vehicle and the subsequent 12 months to 18 months.
On the lower half on the slide I'd, just like to highlight the activities to improve inclusivity and diversity within our workforce.
We havent continued to develop and implement policies practices and training to better attract retain cross train develop and advance more female equipment operators and field supervision.
We continue to solicit feedback and input from our management and workforce on how we can further improve.
We will be rolling out women's mentoring program and.
And site committees here shortly in support of these objectives.
We believe our efforts here will not only provide the benefits of a more diverse and inclusive workforce, but also.
So grow and strengthen our access to skill and qualified labor.
We likewise continue to expand our digital awareness training recognition and promotion of indigenous leaders in cultures and as <unk> grown our work and backlog associated with our long standing and digital partnerships.
We are very proud of the work we have.
And recognition received from our indigenous partners and building long term fiscal unemployment benefits from indigenous communities and we fully plan and expect to build up that success.
As example, I mentioned in my last quarter presentation on our <unk> partnership had purchase and put to work our first rebuilt 4.
100 ton ultra class truck.
I am pleased to say that the performance of this asset had let has led to our planning between 3 to 5 more assets rebuilds before the end of this year.
And our outlook on slide 23.
And as mentioned in my letter to shareholders our achievements over the past few.
Dunn will primarily impact 2022, and therefore, our outlook for the remainder of 2021 remains largely consistent with what was disclosed in April.
We have tightened the ranges, while still allowing for inherent risk of schedule changes in weather.
In closing, we believe our opportunities both inside.
2 months in.
Outside of oil sands have never been better and we will continue to improve we continue to believe our shares are undervalued and our continued positive progress on our strategy.
We will create increased value and like the marathon runner analogy I used in letter to shareholders, we will pace ourselves for the long haul and maintain our cap.
Syed allocation flexibility for share purchases and our potential dividend increases, while still providing the ability for meaningful debt reduction.
Naturally we will likewise per.
<unk> accretive M&A opportunities as they present themselves.
I will now hand, the call back to Rebecca for the Q&A session.
Thank you to ask a question. Please press star 1 on your Touchtone phone if you wish to withdraw your question you can price per pound sign.
Once you have completed your question I would like to return to the queue from these crestar 1.
We will take a brief pause to begin the Q&A section.
Our first question comes from.
Mcneil with TD Securities.
Hey, good morning, guys. Thanks for taking my questions primarily touched on on your.
You touched on on your prepared remarks, but I'm just curious to know.
Whats your batting average on the diversified projects and I'm also.
Aaron or as soon on higher identifying projects.
You've put on your bid pipeline slides. So are you only bidding on stuff you can do you have a high probability of winning or are you pursuing a whole bunch of stuff and see what sticks.
Trying to get a sense of.
Okay.
That.
Okay.
Also I'd start with we have a pretty extensive business development tracking system, where we.
We track projects in the resource industry from.
Initial concepts or whether on exploration to where they go through feasibility and development and permitting.
And then you know in the expectations.
They look.
I guess that our fleet and our our usage that we're going to see a pre.
Pre qual or an RFP when they come out.
As far as when we pursue them, we really look at the project itself on how it fits our strategy our fleet availability our access to other fleet.
Both of them.
Size duration.
Like what size fleet, they're using versus what size fleet, we might have more capacity in and you know as far as our win percentage I you know I don't know if that's something you could.
You can really put a finger on because.
It can be quite a changing marketplace you can have bids that actually never get awarded.
On projects you track for 10 years that never get permitted.
Once our bids there and we've put an RFP and we usually have a pretty good idea who our competitors are at.
And where we might have advantage or not.
As an example on these 2.
You go back jobs.
That we did lose.
I think our risk there and it was a risk.
We took clearly was that we made an assumption that would need to be a.
Our remote workforce with cap and fly in fly out because we didn't see axis and.
And our partners are extremely experienced in this area and.
That was there they were 100% on that and when we reviewed we agreed with them. So that could have been something unrelated to fleet that could give somebody a commercial advantage if they thought they could get people, but you know in reviewing that risk.
Good ones, so that you know that.
That's something where we weigh that into our ability that if there were a local guy there and he could get people then.
Might have a better advantage on is commercial land on some of that work so.
Anytime we look at the bid pipeline, putting AI think there'll be 10 or 40% accurate in winning these.
It's pretty difficult.
On a per project basis, I can tell you, but I'll give you my estimate I can't really tell you, but so it kind of bounces around a bit like that so I don't know that cover off what you are looking for are yeah. That's great maybe a more specific question then relate.
Related to.
On the gold project.
I assume the answer is yes from the first 1 but do you see it as a reference for bids on future work and then if the answer is yes is there enough work in that area that it could become a second.
Core area for you and somewhere where you you know you.
Constantly have a.
Yeah.
Our level of activity.
When we won the Ontario Gold mine project in our new joint venture we highlighted what we thought was on.
Our advantage there both with new net and our experience there.
They're very strong in digital partnerships that <unk> has in regions. In addition to being an.
You had owned them.
And felt we could bring that other areas in <unk>.
I believe in the last quarter or 2 I've also highlighted that we felt there is job in Saskatchewan to be coming up where the procurement team had actually asked us to bid under that same joint venture arrangement, because they felt that it would be stronger for us.
We've actually.
<unk> received our first RFP from that project.
We will be submitting a bid at the same joint venture structures, we have in Ontario gold mines. So.
I do believe it's probable we will see is as far as winning this job.
That would be a pretty good success ratio.
And 2 bids with our new JV, we win on both so that would.
That would bode well for it but I I think that structure of our experience known as experienced the combined fleet efficiency, the manpower efficiency and the indigenous relationships.
A pretty powerful.
Along with being.
Safe low cost provider.
It's a pretty compelling RFP, we're going to put together.
Fair enough and final question for me, just bringing it back to the core business I mean, this the scope and volume increase of that.
That announcement with the legacy partnership last week was pretty large.
Large in the context of the original agreement. So I guess I'm, just wondering at a higher level across here.
And on its customers when you talk to them are you getting a sense that there is sort of playing catch up right now given the reduction last year and if that's the case how long do you think this sort of a surge in activity might last before things start.
To normalize or maybe you'd characterize it completely differently. So just trying to get your sense on how you're seeing me on oilsands outlook in general.
Yeah, I think it's pretty easy to state that the demand is far higher than last year, just because of the downturn from the pandemic, but.
Longevity I think what we're saying is there's a.
I, certainly perceive a stronger demand longer term and I think.
With this I.
We're getting clients that see the value of tying us up a longer term so as demand increases.
Do you want.
To confirm that you have somebody there.
You trust and value to do it.
That I think we're going to see more longer term commitments from our clients because.
Increasing demand and they want to lock down their guidance.
So that's all from me I'll turn it over thanks guys.
Thank you Sir.
Your next question comes from the line of Yuri Lynk with Canaccord Genuity.
Hey, good morning growth.
Gary.
Good morning.
I guess I wanted to just dig in a little bit on the on the D. G I acquisition.
Wondering a few things.
Just from a modeling perspective.
You'd be able to put any.
Revenue expected revenue on that.
Or or EBITDA margin.
Profile of that of that business and any is this a is this a cost synergy.
If if any from for you guys or more on the on the revenue synergy side.
As you look at maybe further moves in Australia related to dji.
I'll, let Jason take the first part and I'll answer the second as far as debt.
Yeah, I'll just pull up the slide.
Hi, Yuri.
So as.
As far as revenue versus cost.
We set about 25 per cent of UGI sells into us so that would be a cost synergy to US you can see from the EBITDA multiple that we disclosed of 3 times.
We're.
$28 million EBITDA impact range, some of that will come through Cogs.
Cost savings as I said about a quarter of that and then the remainder will just hit our revenue and cost.
You know they they should be you know vern.
Virtually zero depreciation any in margins in the <unk>.
30 to 40 range like a parts supplier would would normally enjoy so much different business model than us, but you know, we'll be definitely accretive and and.
I would say is not indicative of our M&A. Our typical target. This is a vertical integration.
Move on.
We're talking to elaborate more on strategy, but those are some of the high level fingers.
I think we're too early to quantify some of these things Yuri but I certainly see.
On synergies and opportunities in the crossover our business both both with some vertical integration, but you know just to give it a bit more color.
D. G is access to huge components worldwide and knowing where these things are is of extremely high value to us and I gave you. An example that if for some reason you fail a component on a piece of equipment.
And an engine transmission and finalized.
Final drive a dip housing and there are occasions. When there is not used cores readily available you can't find somebody that has a huge core to remanufacture.
And you have to actually go out and buy a new 1 a new core our new a new engine completely rebuilt the cost differential is massive.
So having somebody that can find you those used cores.
And knows where to look for men is focused not just on their business of soundbite on our business.
We're going to have some synergy of that both from a component basis and from a whole machine so finding home machines.
Historically D. G. I has been 1 of our largest providers of finding used whole machine for second line rebuilds and as I've stated before those are great value for us and I mentioned in the tax debt.
You know rebuilding.
Whole machines per second line versus new.
And what we've been doing that.
50% to 60% of the cost of new and actually having better warranty on our components on the new unit.
So.
That's like kind of dji for us us for dji would be.
Certainly I think believe it's about 25% on their work is done in Alberta I believe.
Yeah.
We have an opportunity to not only <unk>.
Ross seller or provide some of our clients access to <unk>, but also.
To support them in whether it's finding and tearing down equipment.
In our own facilities or support in the in the field, where we already have maintenance.
Leave our balance so I don't have a lot of quantifiable information, yet, but I'm certain in the quarters going forward, we'll be able to identify those synergies in those opportunities that we've been able to.
Between us and between dji, bringing into us more so than us bringing into dji Marshall.
Person that's helpful.
Second on the last 1 from me, maybe just for Jason on.
We're a fly.
Are you, saying, though that debt.
Depreciation is going to be in the in the in the high teens.
Kind of on a on an annualized basis.
I'm going.
And.
So.
Are you able to help us at all with with revenue guidance on kind of revenue range. So we can better model DNA cause on it's a pretty large net expense items.
Yes, I would I would say it's.
For me that way, obviously, we are going through a step change since really since Diego on purchased in 2018, we've seen study.
The increases in depreciation.
As a percentage so I think high teens is a good modeling inputs and then backing.
<unk>.
And to that growth expense based on revenue.
I think our core business, which is reported revenue.
2019.
Laid out a pretty good roadmap for what our kind of core fleet is able to do so.
I think that's a good.
Revenues.
<unk> to look at what will be interesting, obviously as the equity accounted revenue, which we think for 2022 is going to be.
30% to 40% of combined revenue so that's.
And within what equity accounted.
Investments depreciation should be.
In the 5% to 10% range, so we could see depreciation.
Much different between our joint ventures that are in our core fleet. So.
Hope that's helpful for modeling, but that's the trend that we're seeing right now.
Okay.
Okay, I'll turn it over thanks.
Your next question comes from the line of Brian Fast with Raymond James.
Thanks, Good morning, guys.
Going back on Brian.
Just on the Big project win in the U S could you talk about your strategy and expanding in the U S markets.
Do you think that this project win.
<unk> opens up similar P 3 type opportunities.
I, you know I think whether U S Canada debt.
Large infrastructure jobs that have a major component of our Earth works those are the ones we're interested in so.
As they come up there.
They're not a consistent flow, but they do come up like this the wanting.
The flood diversion in Calgary.
I think I've been talking about it for 5 years, but it looks like it's going to be coming forward now.
You know that's that's 1 where there is a bit of road and embedded bridgework, but theres an awful lot of Earth works, and that's where we would see.
Opportunities for us to participate in infrastructure jobs.
So any hydro projects that have earthworks road work that ever flood diversions, but those would be the ones and obviously, we'll continue to look at.
Mine management opportunities.
That we've been successful on in the.
If you'd look at those Oh.
Additionally debt.
Cover off on you're looking for right.
You bet. Thanks, Joe.
And then just further on that so that contract win how much of the contract award is slated for the construction portion.
And then how much is tilted towards the debt.
So on and part of the contract.
60.
65% of.
That headline number you know which was.
Around $2.2 billion was the entire project was 65% of that is the construction project and.
And then the tail is is the remainder.
Okay. Thanks, and then just on labor supply issues.
On the impacts.
What's happening with Covid the Covid.
I mean, it hasn't been difficult to source labor in this market.
You know we've always.
Rather than continue struggling on putting in a lot of practices as far as getting maintenance.
We haven't seen a lot of.
Issues in getting operations and operators I think are probably the the.
The continuing issues besides of the pandemic.
<unk> is the limited travel so when we're bringing people in.
From different areas and doing fly in fly out operations.
On the.
It's there's not really convenient flights in a lot of places anymore, and so people arent willing to come in.
If it's if I'm going to spend 25 hours to get from the East coast.
The northern Alberta, and I get a week off it makes it pretty hard to do so I think as those travel restrictions.
Loosening up here in the next few months I think and we get more flights to more places we'll.
Better access.
Going forward.
Okay. That's good color that's it from me thanks.
Your next question comes from the line of Tim Monticello with a T B capital markets.
Hey, Thanks for taking my question on Smart.
First 1.
First 1 was just.
We will see utilization worn on the slides you showed the utilization progression through the quarter on it looks like it's from turning down.
On April May and June I'm, just wondering around that.
Where with with the commentary on the MD&A, saying that Jim as you know a pretty strong quarter relative to the first 2 months.
On the quarter very strong months relative to the first 2 months of work.
Yeah.
It's on.
I'm not sure what the Saar is April May June, but those exact numbers or do you ever see.
Yeah.
Okay.
I know that you know the 53 that was the average of the quarter as the average of the month.
But.
Yes.
We saw it.
The momentum really carried us through June and did post a you can see it on the graph on slide 21 that.
It was June was a lower utilization than May I think where we saw fishing.
Fishing season was just in our planning around.
Getting getting work force to the equipment that was available. So we saw a nice profitability increases, but we expect the utilization to turning the corner here in July and moving forward.
I wouldn't focus a lot on month.
Accuracy.
Tim is as well.
Well when we pick up on we move on and in this instance into Fort Hills.
You know you you lose several weeks moving equipment from site to site in operations opportunities too. So you know it's not.
And in June you might not.
Per month, the issues of the third wave as we're coming off of that but what we are mobilizing fleet in any 1 month that can have a significant impact.
Okay, I guess more importantly, it would just be are you seeing pretty strong rebound on the third quarter.
Yeah, absolutely and you know, but what does it take to.
To say that I saw that for the second quarter to them and we were talking in April.
And.
We were coming off the second wave or at the trough after the second wave.
And vaccinations were rolling out.
Really didn't anticipate that third wave at all.
And for it to actually not only be a third wave hit us, but they hit us worse than the other 2 of them. They are combined.
So I hesitate to jump out in front and say too much but you know in.
In general, Yes, if things progress as planned with the.
Vaccinations and decrease in cases and in opening up.
Yeah, we would fully.
Expect that to happen to them.
Okay, Great and is that basically the 1 I guess sort of typical pivotal factor, which underpins the range in your EBITDA guidance for the year.
Yeah, I would say so.
Okay got it.
Second question here.
Fully from.
On Fort Hills, Suncor released results day in and they kept the production guidance for Fort Hills.
For the year and I think 1 of the factors that they mentioned was sort of.
The inability to get third party contractors, so that at that point, she was sort of a tightening of the market.
Oh, no I'm sort of dovetails with.
The extension in the contract that you saw on their own sense earlier line or I guess, a subsequent to the quarter. I mean, what are you seeing in pricing dynamics and is that market pretty tight for equipment.
Certainly the large equipment is tight and you know demand, but you.
Really don't know whether clients have opportunities to defer to balance out.
But you know from an RFP perspective, we certainly see increasing demand.
On the opportunities that repricing in there I think.
On 1 of the things we see is and I would highlight is it you know Q2 is usually our lowest.
You don't have margin on the project perspective because R.
Our.
Our escalations both in contracts and negotiated generally pi in the second half of the year and on the other side of that the cost side are our labor because of burdens and these arent huge differentials, but our burden in the first half of the year is higher than the second half.
So those are a bit of an impact too.
So some of the pricing will improve because an escalator applies in June.
And typically that's 1 R R.
Annual Escalations applying contracts is in the second half of the year.
Okay got it.
Lowest SKU across the remainder of your portfolio in the oil Sands you could see some similar.
Expansions to contracts.
Yeah.
But we think theres opportunities to to.
The extended terms.
I think over the next year.
Year on it.
It might have better opportunities to extend on those.
Msas and get and have the associated commitments on them. So yeah.
Okay, Great. That's all the questions I had thanks a lot.
Thanks, Tim.
Do you think on that as a reminder, if you would like to ask a question. Please press star 1 on your telephone keypad.
Your next question comes from the line of Maxim <unk> with National Bank financial.
Hi, good morning.
Max.
Joe I guess operationally.
No.
We've had obviously some strange weather how's that shaping any impact or negative impact on on how you're ramping up through Q3.
I don't think the weather has impacted us as much as the pandemic I mean, whether it's really especially in Alberta.
It's predominantly which month, you're going to get rain in in the summer and sometimes it's June sometimes a July sometimes is August sometimes it's the whole summer but.
But I I don't you know, we arent expecting anything unusual it just may be heavier in June and July or average in July than in August.
So I you know I don't I don't.
On expenses.
Any weather impacts we we we always you know.
Qualify that with you I don't predict the weather either.
Hum.
We haven't seen.
And in a longer period of time looking at quarter over quarter or year over year, that's a significant impact from weather. This.
Yeah.
Okay. That's helpful. Thank you so much and then just wanted to circle back to the Fargo project was wondering if you don't mind, maybe first of all talking about sort of the risk profile of this project and how sort of you're managing debt part and then maybe the second part is.
Question 2 Jason.
In relation to how we should be thinking about revenue progression.
Kind of between zero and for the next couple of years just from a modeling perspective. Thank you.
And on the first part of the Max I think it's no different than any other project other than we want to maintain a very strong focus on.
On the planning.
And planning of getting people in their equipment and they're having a.
The fit making sure you're getting the right gear at the right time and qualified operators.
Morning, Hey, I'll, just doing good planning and expecting.
Changes to happen and then having plan BS.
Indeed for when they do.
So for our part it's really putting good guys on the job that have the experience and the skills to perform here and then doing the planning associated with it so.
This is an earthworks job this isn't it might be a big <unk>.
In North Dakota, but it's another dam construction job for us.
And that's with an Amazon and in on the end of it so [laughter] yeah.
We just want to be very focused on doing good planning good scheduling.
On people on assets.
No.
Making sure where we're setting up training programs to bring in skilled operators on mechanics and <unk>.
And anticipating anything that can happen there.
You know weather wise or anything else.
And there was no issue in terms of shifting people around right now despite obviously challenges with the border and things of that sort of just.
Interest.
No no.
We have Oh north.
North American.
Current North American employees on on other sites that we'll be adding to this 1.
And I don't think we'll find an issue.
Recruiting or finding skilled operators or.
Even staff people in those areas.
We've done quite a bit of recruiting with our U S. Coal mine management contract centered around the U S. We've got a pretty good understanding of that marketplace.
Okay. Thanks.
Yeah, I guess just off the top obviously revenue for this project will go through equity accounting Max So you know be careful.
But you know put it as far as.
Our revenue projections are very little revenue, we expect to recognize this year.
Upon financial close in Q4.
The Lions share 75 per cent of the $650 million will be over the 4 years of 2020.
<unk> 2 through 2020.
5.
With the biggest European 2024, so it will continue to escalate.
In 'twenty 2 'twenty 3 'twenty 4 is what's model.
The biggest year and then it comes down in 'twenty 5.
And then.
We're even outside of that there's a couple of years of inspection before substantial completion.
And then the O&M contract so.
Definitely a lot of a lot of activity on those and those critical years 'twenty 2 through 'twenty 5.
Okay. That's helpful. Thank you.
So much though.
Last question.
There was.
A remark in terms of kept on location on potential dividend increase just curious if you don't mind, maybe talking about how you think about that.
We're centered shops.
Net income on free cash flow like what are the parameters that you were using internally.
To drive your decision, making on that side.
Those would be the parameters and May actually every every fall we have our board meeting, where we review our dividend and.
We will be having that discussion coming up and well.
Well share that outcome with you guys.
When it comes.
Okay.
Okay Fair enough that's it from me thanks, so much.
Thanks, Matt.
And your final.
Question comes from the line of Richard Darnley with long Port partners.
Oh, Yeah, I'm intrigued with the Fargo Moorhead contract.
Who in general.
And were you bidding against their it's intriguing that Ah Ah Spanish Israeli and Canadian company, we would win a contract in the U S.
And maybe I just don't understand it contracts.
Talk about that.
Sure.
They started with multiple consortium said generally every team that's putting something together here as is.
A mix of several groups.
Construction people on experienced construction people and and then were shortlisted down to 3 of which our team was 1.
As far as.
I think it's a bit misleading as far as where company's headquarters are you know as an example, actually on a just I think there's just celebrated their 20th year in North America, and saying that she can on bonneau. He had been doing operations across North America.
On these large international construction contractors, they might have a headquarter somewhere but theyre very experienced.
In North America. So I think it comes down to the the technical package execution and the pricing along with our experience in particular areas.
On that we.
We believe the carry this across the finish line on that particular project.
I see great. Thank you.
No worries.
Okay. This concludes the Q&A section of the call on I will pass the call over to Joe Lambert, President and CEO for closing comments.
Thanks, Rebecca and my thanks to all of you for joining us today and for your continued interest in our in our growth and diversification.
I'm very excited about the opportunities to advance the business this year and.
Basically we all hope and expect to be a much healthier and more stable environment going forward. Thanks again.
Thank you. This concludes the North American construction Group Q2, 2021 conference call you may now disconnect.