Q1 2022 North American Construction Group Ltd Earnings Call
At risk, while maintaining margins and improving utilization of the smaller end of our fleet.
As such we are looking to grow in all areas and expect to maintain this diversification for many years to come.
Our backlog has a similar split which supports our plan going forward.
Moving on to the Q1 operational performance shown on slide seven through 10.
In summary, while Q1 was slightly below our own expectations due to the previously mentioned market issues.
We see recovery around the corner in several areas of results and training, which we believe signal a positive future.
To demonstrate these positive trends I would like to speak to four specific points highlighted across these four slides.
Number one is with the exception of the first two quarters of the pandemic. Our business has shown consistent profit growth by almost every measure.
Our year on year, and even quarter on quarter results are becoming far more consistent and reliable profitable.
We expect this trend to remain while continuing to post consistent and improving quarterly results moving forward.
Secondly, as highlighted many of these graphs and associated descriptions, we have ample opportunity capacity and ability to improve upon these results.
Third and probably the least obvious in the slides is the growing and stabilizing effect of our equity accounted partnerships.
From our digital partnerships with neuner, the mix of group and Dene North to our component Remanufacturing partnership with break supply and a Red River Valley Alliance working on the Fargo Moorhead project, our partnerships continue to grow smooth out our seasonality and provide profitable diversifications in ACG.
The fourth and last on the list.
And consistent results in high single digit positive CAGR trends it doesn't really make from front headline front page headlines and some would even call us boring.
While my ego may take a bit of a hit our shareholders and balance sheet will certainly benefit with continued stable profitable growth.
With that overview of Q1 operations I will hand over to Jason for the financial summary.
Yeah.
Thanks, Joe.
This quarter's brief financial review begins on slide 12.
Total combined.
Revenue for the quarter of $237 million.
Was $45 million ahead of Q1 2021.
The $237 million set another record for our company as it very narrowly beat the Q4 2021 mark of $235 million.
Less than a 1% difference.
Across a wide variety of financial metrics Q1, 2022 was incredibly consistent to Q4 2021, albeit under much different circumstances.
Joe will touch on later the primary driver for what otherwise could have been a notably higher revenue achievement for our wholly owned businesses.
Is the ongoing heavy equipment technician shortage in the oil Sands region.
Although difficult to gauge exactly we estimate that this factor alone reduced our topline potential by approximately $15 million.
The revenue that was achieved in the quarter was driven by a broad listing of mine sites and business lines, which are all showing strong demand for our services.
The re mobilize fleet at the Fort Hills mine again had another full quarter of operations and we remain very excited to be operating on that site, especially when comparing to those time periods of not being there.
As everyone is aware the outlook in the oil Sands region is robust and we experienced this firsthand this quarter as the focus on production means our equipment is critical to our customers' success.
Revenue from our joint ventures of $60 million was the key driver of the record as it beat Q4 2021 by 11% as the continued volumes at the goldmine contract in Northern Ontario, where coupled with the increasing prominence of our <unk> joint venture.
And initial progress made on the Fargo Moorhead flood diversion project.
The combined gross profit margin of 13, 7% is exactly is actually exactly the same as Q4 2021.
But it was influenced by a different range of factors and most notably and as mentioned by this short workforce shortage in the skilled trades.
Several secondary drivers impacted this quarter's margin, including the timing impact of rate Escalations, which lag based on published index values.
Workforce availability in January due to high COVID-19 Omicron cases.
And the early onset of spring breakup in late March.
Moving to slide 13.
Adjusted EBITDA of $58 million was slightly down from last year on the factors just mentioned.
The margin of 24, 4%.
Reflecting total combined revenue is again, a solid achievement across many business lines, but with realistic improvements within our grasp.
Included in EBITDA.
His direct general and administrative expenses, which were $5 million in the quarter equivalent to two 8% of revenue.
As always G&A spending remained disciplined in the quarter, but.
And again similar to Q4 2021 benefited from a specific receipt received from our Fargo Moorhead joint venture.
Excluding this recovery G&A was four 6% of revenue, which is indicative of the level, we see moving forward with dji is part of the mix.
Going from EBITDA to EBIT, we expense depreciation equivalent to 14% of revenue.
Which is reflective of the depreciation rate of our entire business.
When looking at just the wholly owned entities in our heavy equipment fleet. The depreciation percentage for the quarter was 17, 3% of revenue and reflected an effective and very active use of our fleet during at times, a very cold quarter.
Both of these measures compare fairly consistently to the Q4 2021 measures of <unk>.
12, 3% and 16% as we establish run rates for our diversified businesses as well as our important ultra class fleet.
Adjusted earnings per share for the quarter of 51.
Was driven by 24 seven.
$7 million from.
Adjusted EBIT net of interest and taxes.
Our overall interest rate was four 5% in the quarter and we incurred a $4 $5 million cash expense.
Additionally, and of note, we booked approximately $750000 of interest through our equity earnings primarily in our Fargo Joint ventures, which will have interest expense as they incur debt leading up to initial milestone payments from the authority.
Moving to slide 14, I'll briefly summarize our cash flow.
Net cash provided by operations of $45 million was produced by the business with the difference between this figure and the $58 million of EBIT being cash interest paid of course in the quarter and cash being managed by our joint ventures.
Sustaining maintenance capital of $34 million was primarily dedicated to the maintenance of the existing fleet as we made our way through another very busy winter season.
Working capital drew cash of $28 million and had a material impact on free cash flow in the quarter.
Pausing for a moment on free cash flow I'd like to point out again that operationally. This quarter was very similar to Q4, 2021, which was a quarter, where we posted positive free cash flow of $48 million.
The difference in free cash flow of these two quarters of nearly 60 million highlights the impact of working capital and our joint ventures.
Our understanding of the temporary nature of these timing impacts is why we remain confident in the full year range of $95 million to $115 million.
Okay.
I'll end with slide 15.
Total capital liquidity.
Of $225 million reflects our strong position as we continue to benefit from the legacy of disciplined investment in the years past.
On a trailing 12 month basis, our senior leverage ratio as calculated by our credit facility remains at one five times.
Net debt levels increased $13 million in the quarter due to the aforementioned free cash flow performance.
And with those comments I'll pass the call back to Joe.
Thanks, Jason.
Looking at slide 18.
This slide summarizes our priorities for 2008 2022 <unk>.
I discussed most of these items separately on the following slides, but wanted to highlight three areas that will be particularly important to progress in Q2.
First and foremost we are and will continue to be laser focused on contract administration in regards to the application and accuracy of contract escalation clauses and in particular, the impact of OEM and vendor equipment parts price increases on our equipment costs.
Although this process is transparent and that our clients have the same or similar Oems and vendors. The current parts price increases are the most volatile we have seen in decades and will require attention to preserve the intended objectives of matching incurred costs to the impact on our equipment and labor rates.
Secondly, we need to continue to develop attract and retain our skilled maintenance tradespeople to continued improved fleet utilization.
As I explained in detail on the last call and ACG has an extensive and comprehensive program to continue to expand both our Atchison and field base maintenance workforce.
As example of this progress since our last call just over a couple of months ago, we have added approximately 20% more employees into our apprentice programs.
Our shop expansion with additional re manufacturing capacity and services and a central telematics control room will be completed in the next few weeks and will allow for growth in our bench and program and machine health monitoring for our current around 200 real time connected assets.
The third area of focus detailed on the following slide 19.
Is our ongoing efforts to ensure a well planned and smooth startup of our Red River Valley lines Fargo Moorhead project.
The project is progressing well and we expect to commence earthworks this summer.
The equipment fleet has been procured design work and planning are approaching construction ready status and hiring a field staff and workers will commence around quarter end for Q3 start for Earth works.
I really look forward to the latter half of the year. When we can start providing progress reports on the actual construction activity.
Moving on to Slide 20, you will see our bid pipeline remains strong and we expect to continue to have success in all commodity areas.
My focus here is on the top two rows as these are the tenders most likely to proceed whereas projects into pre tender phase can at times be budgetary pricing.
In comparison to the last time, we presented in February we added two new projects to the preferred opportunities in extensions, including a massive multi site regional tender in oil sands and a new reclamation project for an existing Diamond mine client.
On the second row, we removed two projects the estimated $125 million oil sands tender we won.
And announced in mid March and a smaller reclamation project at Northwest Territory Diamond mine net new demand.
We also added to the project has an active tender phase a recently released RFP in oil Sands, we expect.
We continue to receive summer work packages over the next month or so for quick turnaround and award before the end of the quarter.
On slide 21, our backlog sits at $1 6 billion and we continue to replenish and win our fair share of work across all resource sectors.
What I believe are key takeaways on this slide is that our backlog is roughly proportionate to our diversification target demonstrating both confidence and sustainability of our diversification efforts and lastly, but possibly most importantly, we achieved a backlog in excess of $1 billion. Just one short year ago, and you don't have to squint too hard at the.
Our bid pipeline to see opportunity to exceed $2 billion backlog before the year is out.
Slide 22 to 24 highlight some key areas of our progress on sustainability, including emissions reductions inclusivity and diversity and indigenous partnership.
These three slides provide a great summary of the progress we have made in all these areas, but I would point anyone with more interest to our 2022 sustainability report released with our Q1 results and available on our website for a more detailed description of the progress we have made and targets we have set.
On slide 25, we have provided our unchanged outlook for 2020 to.
Performing to plan and generating free cash flow in this range will allow for meaningful capital allocation to debt reduction share purchases and growth via bolt on M&A or fleet additions.
We doubled the dividend last quarter and with opportunity to continue to improve profitability diversification in backlog, we believe our shares continue to be undervalued.
As I stated previously we will continue to explain our business better and pull all the value creation levers we can to address this issue in shareholder friendly ways.
With easing of Covid related travel restrictions, we tend to spend more face time with existing and potential investors to.
Reinforce our compelling business value proposition.
On my final slide 26 the.
The top two charts demonstrate our consistent high performance relative to peers and the lower one shows why we renewed our CIB and continued to see our share repurchases as the most efficient use of capital.
That's all for my slides.
As many of you would know I, usually like to add a bit of theme or some analogy to represent our current business environment.
<unk> is in a situation, where we have great demand across all of our diverse markets and several important areas, we need to execute well on in the next several months.
The response is built into our culture.
That response is head down and let's get to work with.
With that I'll open up for any questions you may have.
Thank you.
To ask a question. Please press star one on your Touchtone phone if you wish to withdraw your question.
Cheng.
You have completed your question and would like to make here into the queue. Please press star one.
Boss, we will begin the Q&A section.
Your first question comes from the Monticello from <unk> capital markets.
Yeah.
Hey, good morning, everyone.
Right.
Yes.
I was just curious if you could elaborate a little bit on sort of $1 billion opportunity independent preferred opportunities in extensions category of.
Slide what was that.
You know one of them.
Talking about.
The big Red button.
Yes, there is that big Red button. Please.
Yes, so that they're combining four different sites and bidding it on a five year program of all their bulk earthworks.
<unk> received a tender.
A few weeks back it's got a bit of work to be done on it but it's really amalgamating a lot of different contracts, we have in and aligning the timing on them.
And setting them all out five years from now.
It's the value is actually bigger than that but we believe there is some overlap with some of our current work.
Okay. So.
It was really nobody else that can bid on this because you already have existing contracts in place that would overlap the scope of this contract.
We believe some of that volume and there is already committed to us for the next two years.
Okay.
So that's helpful. And then second question that I had.
It's just around the heavy equipment technicians.
Obviously, he talked a little bit about how that was under supply in Q1 and that impacted results can you just give us an update on on your progress in hiring heavy equipment technicians and when you think you might see capacity at a level that you can hit.
Hey, your potential.
We've adjusted pay Tim and in April .
And we're starting to gain ground on that already.
Pretty much we've made some moves in.
In February which kind of stopped the bleeding and stop the poaching and now I think we're back in a position.
It wasn't huge numbers like single digits, but.
Everyone really hurts us and and.
And a lot of it isn't in our own head count, but also what we call direct service providers, which are individual contractors.
And with those guys crossing the street because of rates rates and we've just had to match those pricing and get them back so.
I think by the end of this quarter, we're going to be a lot more stable and hopefully growing on the OTT side.
Okay, and then last one for me I was just wondering if you could give an update on how the Fargo Moorhead project going.
Yes.
We haven't broke ground yet timber all the planning and design work is progressing.
And like I said, we've got the fleet procured so it's really.
Q2 is the last quarter of prep in Q3, we get into the dirt. So theres a big focus and our guys have spent a lot of time, there and we'll continue to.
We've got a great great team on site to do the work.
Just looking forward to getting that started.
Okay, Great I'll turn it back thanks.
Okay.
Again to ask a question. Please press star one on your Touchtone phone.
Your next question comes from Brian <unk> from Raymond James Your line is open.
Yes, good morning, everyone.
Oren Bryan.
As you get underway on the Fargo Moorhead project could you just talk about the opportunities that you are seeing beyond that projects I guess in the U S.
Hi.
That project kind of stand alone, but certainly with more experience in <unk> infrastructure and I think.
We've got strong relationships with a lot of partners.
We think that as more infrastructure jobs come out and have the larger it's worked component to it we're going to have more opportunities.
<unk>.
Everyone's heard of big spend bills coming up but.
The projects really arent that well known yet and it really takes a bit of time for that design work before those packages come out so I wouldn't expect it to be maybe start seeing more.
P three or two in our in our bid pipeline here in the next.
12 months to 18 months.
Okay. Thanks for that and then could you just quantify the amount that margins were impacted by the lag in rate Escalations and do you expect to catch up in this quarter or is this something that will play out throughout the year.
I don't have the exact number in front of me.
If I was guessing that.
And it is a guess.
Brian It would probably be in the range of.
3% to 5% impact this quarter somewhere in there.
I think we will see that transitioning over Q2 as we have.
<unk> application of our escalation clauses in our discussions.
<unk>.
Hopefully you have that all backed by Q3.
Okay I appreciate that and then one last one.
Is there any update on the spring bank water diversion project around timing or anything or I guess you guys might note just as much as we know here.
We chose the decline on that bid Brian It was divvied up and awarded a lot of work prior to subcontractors and it just didn't fit our risk profile and the amount of earthworks, we are going to be able to self perform was minimal.
Okay I appreciate the color. Thanks.
You bet.
Your next question comes from Maxim <unk> from National Bank Financial Your line is open.
Hi, good morning, gentlemen, good.
Morning, Matt.
Firstly, just wanted to start maybe with the visibility on the summer programs in terms of what are the clients Telegraphing and is the fact that obviously the privilege in production right now if that could negatively impacting potential opportunity for you guys or how should we think about that.
We're still seeing some or packages come out actually I think I highlighted one.
That's in the.
Second column of our bid pipeline.
And they think.
They can often come out matches latest.
At the end of May for starts in June and July .
So I really don't have a sense of the overall summer activity other than we.
We've seen a pretty steady stream of items coming in this major regional bed may have pushed some of those tenders back to because this is taking a lot of focus on.
On those.
Procurement teams that are tendering these four particular sites.
So I.
I really don't have a full on sense of where the summer is other than it looks reasonable and I expect it to be.
A good summer.
Okay. Okay. That's helpful. Thank you and then just wanted to circle back to Fargo and <unk>.
In terms of obviously, given all the inflation concerns and so forth.
Was curious if there are certain preferreds items, where you can hedge and I'm trying to think about.
Steel things like that so if you can maybe just comment in terms of.
Our risk mitigation strategies to make sure that costs don't don't escalate them. Thanks.
Yeah.
The longevity of that project I don't think.
Any near term fluctuations are going to change, but there is a massive risk matrix provided on this project, where escalations are priced in anticipated escalations.
It will have been done with historical averages.
So.
And although this year might look a little different we've already got the equipment. So we know that and I don't think were going to see a lot of our wage escalation in that area necessarily.
But I don't know enough about the bridge side of it and the road construction I just know I have seen the risk matrix and how.
Cost Escalations are put in and it is very reasonable and.
With the longevity of that contract and they use historical averages. If it was just a two year construction of our one year construction I would say there might be risk, but when youre looking at six years of main construction and 29 more years of of O&M.
I think using historical averages is probably appropriate.
Okay Fair enough. Thank you. Thank you for that and my last question just in terms of.
The sub process around.
Capital allocation share buybacks versus M&A.
Just.
The comments that sometimes we hear back because given the fact that it's relatively illiquid stock. Obviously, we don't share buybacks constrained constrained and can amplify sort of moves up and down given the liquidity.
Just curious in terms of how do you balance.
And that thought process between share buybacks and M&A and maybe thats more of a later stage question in the year versus like now, but maybe any color there and I guess, that's a joke.
Joe Jason Thanks.
Yes.
From my standpoint.
Max at any point in time, we're looking at our share price.
And our multipliers.
If we can't see accretive deals out there and we're far better buying ourselves and it makes sense to buy our own shares.
We've had good churn on our shares and even with this amount of buyback we have done over the years, our chairs Phil churn pretty good and maintain that.
I'd say, an average kind of a turnover of a share base and.
On M&A, we're looking for accretive acquisitions, which we think we can find some smaller bolt ons and vertically integrated.
Businesses that fit us well and would be very low risk and accretive and thats why its shown in that capital allocation. While we continue to believe that these share prices.
<unk>.
We're the best buy in town often.
Okay Fair enough. Thank you that's it for me.
Your next question comes from Yuri Lynk Canaccord Genuity Your line is open.
Good morning.
In Europe .
Yes.
You mentioned.
A bit of a recovery on the <unk>.
Our goal Moorhead project was not a success fee is that what youre talking about there and any way you can quantify.
Quantify it.
Yes, I can take that one it's called many things Yuri success fee is fine.
We did it in about the $3 million quantum because we.
The difference between two 8% G&A rate and four six I think which we think is our run rate if you back.
Back calculate that it's about a $3 million.
Improvement in our G&A line, so that's order of magnitude and.
It's not a it's not a fee we anticipate seeing moving forward.
And that's just a recovery of what it cost you to bid the project.
Yes, typically when Youre short listed on these jobs Theres a stipend if you're unsuccessful at the end of that short lifting.
And if you are successful like we were.
Were you priced that repayment because it has significant bidding caused by all parties in this and you priced that repayment and in your success fee.
Okay.
Yes.
<unk>.
Okay.
How are discussions with your customers in terms of passing along some of the inflationary.
Inflationary pressures that youre seeing out there.
I think theyre gone well, we've just got into a lot of them but.
We certainly have customers, who want to help us.
Make sure we have the manpower available to operate our fleet and understand the cost.
They have they have HGT issues, just like we do they have the same parts price increasing so it's very well known.
And as a key I think.
Kind of the tier one contractor on every site, we're on and we get a lot of focus from the contracts from procurement and operations team.
And in supporting Us to make sure we can get the people to do the work we need to do there.
And they understand the cost increases because they see it as well.
I would imagine with parts prices rising.
It's it's helpful for dji.
How does that dynamic work there.
Absolutely.
That that side of it is good I'd say on the bad side some of the shipping costs that have gone a little crazy too.
But.
And overall I think the demand on used equipment and cores.
From Dji is we will continue to be high.
Good good okay nice quarter guys.
Ill turn it over there.
Thanks, Gary.
Thank you.
This concludes the Q&A section of the call I will pass the call over to Joe Lambert.
<unk> and CEO for closing.
Excuse me I have a new question.
No.
Alright, we have any question from Richard Downey from language.
Good morning.
Jason you you've mentioned in the comparison quarter to quarter comparison.
Free cash flow the importance.
The JV and working capital we would you go into the color behind the working capital and explain that a little please.
Yes, so working capital obviously, it's very detailed in our financial statement notes.
In the quarter, particularly with the escalation issue and <unk>.
Inflation.
We definitely we're collecting a little less accounts receivable.
And paying out pretty significant costs or accounts payable so youll see accounts receivable and payables, both being impacted there and then of course inventory was $10 million of the $20 million Delta and.
Is fully related to our rebuild program, where we have.
Several haul trucks are being constructed and scheduled for sale here in Q2 so.
The $20 million negative working capital was really those those factors.
Okay. Thank you.
Thanks Richard.
Thank you.
There is no further question. This time you may continue.
Thanks, Brian and thanks again, everyone for joining us today.
Thank you and this concludes the North American construction group Q1, 'twenty 'twenty Conference call you may now disconnect.