Q4 2022 North American Construction Group Ltd Earnings Call
Good morning, ladies and gentlemen, welcome to the North American construction group L. T D <unk> for quarter and year ended results conference call and webcast on Thursday February 16th 2023.
At this time all participants are in a listen only mode.
During managements prepared remarks, there will be an opportunity for analysts shareholders and bondholders to ask questions.
This call in listen only mode.
To quote any member of management, but they are asked not to quote remarks from any other participant without that participants permission.
The company wishes to confirm that today's comments contain forward looking information and that actual results could differ materially from a conclusion forecast or projection contained in that forward looking information.
Certain material factors or assumptions applied in drawing conclusions are making forecast or predictions.
Afflicted 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 in the company's website at <unk>.
And that's.
I will now turn the conference over to Joe Lambert, President and CEO .
Thanks Julie.
Morning, everyone and thanks for joining our call today.
Similar to previous calls I'm going to start with our operational performance before handing it over to Jason for the financial overview.
And then I will conclude with the operational priorities bid pipeline outlook for 2023, and our capital allocation before taking your questions.
On slide three.
Our trailing 12 month total recordable rate of 0.53 represents a significant improvement from the start of the year and the Q4 rate of 0.30, what is the best quarter of the year.
0.53 cheese is slightly above our industry, leading target frequency of 0.5 and.
And we will be focusing our efforts in 2023 on prevention of high potential injury events in.
Implementing our active safety program.
Auditing critical tasks and further advancing our use of developing technology in areas such as collision avoidance fatigue management and drone used for remote safety monitoring.
Yeah.
On slide four.
We highlight some of the major achievements of 2022.
I'm not going to go through this list individually, but I would simply summarize that we resolved our first half issues executed well on our winter works programs safely and efficiently closed out the year and are focused on carrying our momentum forward into 2023 and looking to take advantage of the opportunities presented in this.
Continuing strong demand market.
Slide five shows the cumulative financial results for the year and I am proud to say all four of the noted metrics of revenue EBITDA EPS and free cash flow are company records.
As you can see on the following slide six the trend for continuing improvements is consistent.
More than doubling both EBITDA and EPS in just four years is an impressive pace that we are eager to maintain.
The next two slides represent two areas of our business that are key to continuing those positive trends.
On slide seven.
You will see we achieved our highest Q4 utilization on record after just having posted our highest Q3 on record and the demand for our fleet remains high.
The Q4 utilization of 75% was directly correlated to increased maintenance manpower and improved fleet mechanical availability.
We expect the high demand to remain throughout 2023, and continuing into 2024 and beyond.
We likewise expect our progress on increasing maintenance labor workforce will directly correlate to continued improvements in fleet utilization.
Lastly on this slide I would just like to point out that other than the obvious pandemic impacts in 2020.
Our diversification efforts over the last several years have delivered into expectation and demonstrated higher Q2 and Q3.
Fleet utilization.
We have moved the smaller underutilized portions of our heavy equipment fleet out of oil sands and the into other geographies and commodities, where they are to achieve more operating hours.
The diversification now built into the business has removed much of the seasonality and cyclicality seen in previous years.
Slide eight describes our advances in technology and represents another area of our business that is key to continuing the positive financial trends.
I spoke earlier about the technology being used to improve safety and we'd like to expand here on our telematics system.
Our telematics system is now installed on about half of our fleet and its on the biggest heaviest half of our fleets.
We will continue adding to remaining portion of our fleet and might be subsequently looking into our support equipment as well.
In 2022, the telematics system directly save over $2 million of machine components through proactive interventions and saved an additional 200 hours of maintenance labor.
We expect these costs and labor savings to about double in 2023 with full year monitoring and additional assets brought online.
The telematics system also contributes to improved operations through alerts and mapping that identify operator behaviors and provide locations complete with heat maps for alert events in frequency.
The telematics program is really just hitting stride and the more machines, we get monitored and the more knowledge, we buildup from our analysis the better we will get an improving maintenance and operations efficiency.
With that I'll hand over to Jason for the Q4 financials.
Thanks, Joe.
This quarter's financial review begins on slide 10, with a few of our key performance indicators.
Combined revenue of $320 million represented the highest level of revenue. This company has ever had in a quarter and as a step change for a variety of reasons that we will briefly touch on.
This revenue culminated with trailing 12.
Revenue exceeding $1 billion and conveniently occurred in the last quarter of our fiscal year.
The $1.054 billion Mark exceeded our previous company record of $1 billion $16 million, but under a much different margin profile.
From this gross margin perspective, we realized 17, 8%.
In the quarter, which is more and more in the range of what we expect and is based on the improved context that Joe touched on and as much discussed throughout this quarter's materials.
Yeah.
Moving to slide 11.
On a combined basis revenue was 36% ahead of Q4 2022.
Revenue generated primarily by our core heavy equipment fleet was up 30% quarter over quarter with the drivers of this increase being equitable contributions from adjusted equipment in unit rates as well as improved equipment utilization.
In Q4, we had a full quarter of revised equipment and unit rates, which were updated in late Q3 to reflect the inflationary cost pressures experienced in the Fort Mcmurray region.
Equipment operating hours were up over 15% in the quarter and stable operational and maintenance head count yielded utilization of 75%, which was significantly higher than Q3 2021 utilization of 64%.
Vacancy rates related to the heavy equipment technician roles were steady in the quarter and combined with increases in third party vendors were the primary factors in the overall equipment utilization achieved.
Only one business lines, primarily being dji trading and the external sales of equipment of rebuild haul trucks each.
Each posted strong revenue in the quarter consistent with Q4 of last year.
M L. Northern acquired on October one 2022 provided a full quarter of operations after a seamless integration.
Our share of revenue generated in Q4 by joint ventures, and affiliates was $87 million.
Compared to $54 million in Q4 2021.
<unk> group of companies had another solid quarter of activity at the gold mine in northern Ontario, and the core businesses and their core businesses operated.
At better than historic levels.
Of note, though the primary drivers of the increase in combined revenue included the continued growth of top line revenue from rebuild haul trucks now owned by our joint venture with the <unk> and the increasingly important impact of the joint ventures dedicated to the Fargo Moorhead flood diversion project.
We had our first full quarter of construction work at the Fargo project and the ramp up of activities remains underway with a project on budget and schedule in this very early stage of the project.
As mentioned earlier combined gross profit margin of 17, 8% was a quarterly improvement from the 14, 7%. We posted last quarter Q3, 2022 and reflected strong operational performances in the quarter as our primary operations in Fort Mcmurray, Northern Canada.
In northern Ontario experienced predictable and productive cold weather conditions for the majority of the quarter.
Our joint ventures continue their strong consistent operating margins.
And the updated equipment in unit rates were key factors for the former <unk> operations returning to historical margin levels.
Operating margin benefited from the ml northern acquisition from both lower internal cost as well as strong margin from services provided to external customers.
The second life rebuild program commissioned and sold another 240 ton haul truck during the quarter to close out what was a very successful 2022.
Moving to slide 12.
Adjusted EBITDA of $86 million was easily a company record, beating the previous record by over 40%.
As a step change in revenue translated to a step change in EBITDA strong margins previously mentioned.
Included in EBITDA is direct.
General and administrative expenses, which were $6 6 million in the quarter predictably identical to Q3.
And equivalent to two 8% of the strong revenue quarter.
As always we pride ourselves on G&A discipline in Q4 was again no different in that regard.
Going from EBITDA to EBIT, we expense depreciation equivalent to 12, 5% of combined revenue, which reflected the depreciation rate of our entire business.
When looking at just the wholly owned entities and art and primarily our heavy equipment. The depreciation percentage for the quarter was 15, 5% of revenue and reflected an effective use of our fleet during the quarter, which incurred a higher degree of idle time due to the colder temperatures.
Adjusted earnings per share for the quarter of $1 10 was 51 cents up from Q4 2021 as the revenue improvements translated all the way down to net income.
EPS was driven by 45 7 million of adjusted EBIT net of interest and taxes.
The interest rate for Q4 was seven 1% as we trended up from the Q4 2021 rate of four 7% from the well known interest rate increases.
The gross interest expense of $7 8 million should be a high watermark for us as we pay down debt late in Q4 and expect rates to be fairly stable moving forward.
Moving to slide 13, I'll summarize our cash flow net cash provided by operations of $64 million was produced by the business with the difference between this figure and the $86 million of EBITDA being cash interest paid in the quarter and the timing of joint venture cash distributions in relation to the EBITDA.
We generate.
Sustaining maintenance capital of $26 million was dedicated to maintenance of the existing fleet as we invest in the fleet that drives our core business.
Working capital changes generated cash in the quarter as expected.
For the year and given the fairly straightforward nature of the year from a cash perspective, the use of our $70 million of free cash flow that was generated can be easily broken down into three categories.
$44 million related to shareholder activity, primarily share purchases and dividends.
$13 million on growth acquisitions being ml northern.
And $13 million on net debt reduction.
Yeah.
Moving to slide 14, total liquidity is back above $200 million and reflects the impact of free cash flow generation in the quarter.
Net debt level decreased $52 million just in the quarter at $67 million of free cash flow was primarily dedicated to deleverage with the remainder invested in MLR there.
Net debt leverage is now at one five times and ended the year consistent with expectation.
Due to the timing of cash receipts in the last couple of days of 2022, we ended the year with $69 million of cash on hand, which is higher than our targeted balance of between 15% and $20 million.
On a trailing 12 month basis, our senior leverage ratio as calculated by our credit facility dropped to one five times, but did not benefit from this high cash balance and coincidentally is at the same level as net debt leverage.
I'll briefly and on slide 15, which includes ROIC and return on equity.
In particular, we are proud of the ROIC metric of 13.0%, which card quantitatively showcases our objected to prudently and profitably leverage both our equipment fleet and our expertise.
And with those summarized financial comments I'll pass the call back to Joe.
Thanks, Jason.
Looking at slide 17.
This slide summarizes our priorities for 2023.
I have previously previously discussed our leveraging of technology has shown an item too.
But wanted to highlight the other three areas that we will be particularly important to progress in 2023.
The first area of focus and core to our culture and values is our ongoing efforts to ensure each and every one of our employees return home safely at the end of every workday.
I mentioned earlier, how we're using technology to improve safety through implementation of collision avoidance systems fatigue monitoring and using drones for assessing monitoring and monitoring remote work areas.
With that said, we are likewise, focusing on the workforce.
We feel our growing workforce, requiring increased new hires and an industry supplied low and experience will be best served with an increased focus on further developing our frontline supervision and expanding our green hand training programs.
Jumping over item three item four we continue to prioritize increasing our skilled trades workforce.
<unk> has an extensive and comprehensive program to expand both our Atchison and field base maintenance workforce, we have likewise used our procurement team to bring additional vendors from other provinces and countries to support our maintenance needs as the existing vendors and Oems have struggled to support the increased industry demand.
There's a slide in the appendix on page 31, which we have expanded to show both an ACG and vendor maintenance workforce numbers for those interested in seeing how we have built up the skilled trades workforce over time.
The ongoing priority will be to continue adding to both internal and vendor capacity until we have maximized, our mechanical availability and fleet utilization.
And then continuing hiring and training internally to replace higher cost vendors.
As stated previously we expect our progress on increasing the maintenance labor workforce will directly correlate to continued improvements in fleet utilization and see opportunity to consistently achieve 75% to 85% utilization.
Last but not least item three describes our prioritizing a winning bids and.
And achieving our target of greater than 2 billion in backlog by the end of the year.
Which is a great transition to our next slide 18.
Slide 18 highlights the continuing strong demand and active project tenders in Q4, we were awarded a couple of projects for our new <unk> partnership totaling just over $40 million for work on a gold mine in BC and some roadblocks in the northwest territories.
We are likewise, starting to see increased bidding activity in oil sands.
Two projects of note in oil Sands are first our expectation that the large regional oil sands <unk>.
Five years ago will be re tendered in late Q1 for likely award in Q3.
We continue to expect to win our fair share of the large red Dot regional oil sands tender and look forward to seeing the updated tender packaging work scopes.
Second tender known in oil Sands is an approximate $75 million scope for fueling and servicing and oil sands customers equipment fleet over the next five years and represents our first major tender of our newly acquired <unk> northern equipment servicing business working under our <unk> partnership.
We believe we have a good chance of winning this work in continuing to expand our northern business.
While simultaneously utilizing our skills internally to lower our equipment servicing costs and improve efficiency.
Last item of note is that we have what we believe are four grade opportunities outside oil sands, which are the four upper left blue dots.
Which we believe would fit the timing for our fleet transitioning from our Northern Ontario Gold mine partnership with Nona.
We look forward to having another blue dot win outside of oil sands over the next quarter, which will continue our diversification success and potentially offer some upside to our forecast that smaller fleet utilization.
On slide 19.
Our backlog sits at $1 3 billion and we continue to replenish and win our fair share of work across all resource sectors.
When I continue to believe is a key takeaway on this slide is that our backlog is roughly proportionate to our diversification target demonstrating both confidence and sustainability of our diversification efforts.
Lastly on backlog, we continue to have expectation of exceeding 2 billion before the year is out.
On slide 20.
We have provided our enhanced outlook for 2023.
With our strong Q4 results progress on priorities and carrying some of that momentum into the new year, we have been able to modestly increase the midpoint for a couple of our key financial metrics.
We have had a great winter where season, so far and are definitely looking to continue to build on our success and be even this enhanced outlook, but it is early days and our middle two quarter generally carry the highest risk on fleet utilization.
I know I'll get the question on an hour.
Excuse me, how our quarters break out in the Q&A.
So I will use our EBITDA as an example here.
Our EBITDA is roughly equal between the first half and second half of the year with Q1, being our largest and roughly 30% of annual EBITDA and Q4, usually second largest but just slightly higher than Q3.
As I stated in my letter to shareholders capital allocation is always a key priority for <unk> and ACG and our fleet free cash flow range of $85 million to $105 million.
It provides us with the flexibility to assess all four options.
Deleverage share repurchases dividends and acquisitions.
Our first step, which we announced yesterday was to increase our dividend by 25%.
De Leverages the current obvious next focus with our capital with our cost of capital increasing with interest rate hikes.
As I've said many times our capital allocation decisions are continuously analyze and we will of course redirect cash flow to share purchases or growth opportunities. If they provide superior returns to our shareholders.
On slides 21, and 'twenty, two we provide a bit of capital allocation of history in trends, which we trust you will agree has been disciplined shareholder friendly and prudent.
Over the past few years, we've been fairly consistent whether NCI programs as the earnings outlooks, we've communicated have generally not correlated to the value of our shares.
And finally on slide 23, I'd like to highlight and provide link versus stained ability report, which was also released yesterday.
I really like the direction of our sustainability work has taken with a focus on tangible measurable progress and look forward to reporting back next year on our continued progress.
In closing I'd, just like to thank the great team I have here at <unk> for all your efforts and support in helping US achieve these record annual financial results in a challenging economic environment.
With that I'll open it 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 you can press star two once you have completed your question and would like to return to the queue. Please press star one after a brief pause we will begin the Q&A section.
Your first question comes from Yuri Lynk from Canaccord. Please go ahead.
Good morning, guys great quarter.
Thanks Jerry.
Just on the on the utilization.
I think you said, you're targeting 75% to 85%.
So should we think about that as you know the.
The seasonally weaker quarters are at the lower end of that range and.
Quarters like Q4 could be.
Towards that mid <unk> level.
Way to think about it for this year.
It's certainly getting to that point, where we're consistently in that range I would expect the Q4 as in Q1 to be in the higher end in the Q2s and Q3s on the lower end of that range.
And that's really what we need to demonstrate this Q2 and Q3 is that we can get into the lower ranges that.
Okay.
And that's.
The main driver there is that small.
Our fleet of construction equipment, but that's exited the oil sands.
Is that right and where have you put that to work like is it misses on kind of small and medium size jobs or is it on.
Larger it's I.
I'd split it into a few things here, it's there still.
100, <unk> hundred 50 ton trucks in the oil sands it stay very busy during the winter.
If not you know in the past half a dozen years.
Had high utilization during summer civil construction, so during the winter there usually very well engaged in reclamation activities.
But historically it has slowed down in summer.
And then in addition to that.
Our progress on utilization outside of oil sands, which really is.
We are forecasting the completion of the northern Ontario of old job and with that we've got that fleet transitioning and I'd say conservatively.
We have it coming out of that mining going into oil sands, and having lower utilization and obviously a period of non use watts demo being in being transported so there is upside opportunity on those assets as well.
Okay.
Hum.
Suncor is out there talking about looking to trim their their contractor head count or our use of contractors.
For a variety of reasons, but.
Is that the opportunity for you guys or a threat or how do you think about that.
We haven't seen that coming in the earthworks side so.
And I guess, our impression Gary is that it's mostly happening on plant site site.
And they are consolidating vendors.
Which makes a lot of sense.
We've got a lot of work consolidated in the earthworks site already so I don't think this is an area that they're looking to reduce contractors.
From what we see in the demand and the volume requirement side.
We don't see any reduction in that demand for it for a long time.
Okay I'll leave it there guys. Thank you.
You bet.
Your next question comes from Heron Mcneil from TD Securities. Please go ahead.
Hey, guys. Thanks for taking my questions Joe Martin here.
Okay.
If I compare your Q4 slide deck with the Q3, one it looks like that large loyal fans that got pushed out a couple of quarters.
Am I right in interpreting that correctly and.
Hum.
But it was actually it's supposed to be put on the commencement dot and we put it on the tender dot and the previous one so it's.
These contracts run through the end of 2023. So the dot is was always supposed to be on January one 2024.
So the dots are supposed to be wanting to work commences and so it hasnt.
That side of it Hasnt changed we just made a mistake, where we can put it in Q3, Yeah No branch.
The tender process has pushed out from last year to this year, but obviously, there's plenty of time to avid awarded before next year.
And I guess, just as a quick follow up on that.
How much of that work would be.
Like.
Where do you currently have.
Versus you know incremental work.
And I would say.
Probably half of it is work. We're currently doing the difference being that obviously right now our backlog reflects one year left of it and this would be five years or so.
We're gonna peak in every cycle of five years and backlog with those oil Sands Awards, and then theyre going to work their way down over the five years and then get awarded again, so we're kind of at the low level of our backlog right now and that award of that work and I'd say probably.
Half of it is what we're currently doing.
Got it.
The other but not work that we have five years of scope on work we're doing this year I'd say.
Is that clear here, yeah, that's perfect.
Joe You mentioned in your prepared remarks that Q2, and three of the most uncertainty around utilization and you're guiding to relatively flat year next year on a year over year basis, Theres, obviously, some puts and takes so.
I thought it might be a good opportunity for us to kind of just get a bit more context around the various moving parts like from what I can think of I'm sure. There's other ones too, but you know you had the negative impact of inflation in 2022 versus 2023, you've got a full year of Fargo Moorhead in 2023, and then offsetting that.
You've got the maybe the negative impact of the <unk> project in 2023, So I guess could you frame how materially all.
All three of those impacts are and then you know.
I think you've almost finished answering your own question. There actually is yeah. That's exactly exactly what I already said is that you know where we place that kotte fleet, there's actually opportunity even on the same site and in the same regions that could have great improvement on utilization from forecast.
The Fargo Moorhead ramp up but it is lower risk lower margin work at Fargo with the big infrastructure work, which I think we've always said.
And then you know theres some areas in projecting.
Projecting the improvements in utilization and projecting the benefits that we're achieving in telematics, where I'd say, we're cautious to project trends that are going very have very up very quickly without a lot of data points.
And we certainly want to get.
A few more dots on the map are data before we.
Constantly projecting higher than where we currently are.
So I think those are all opportunities that we will see.
How the Q1 and what we've seen happening in Q2 and get a little closer to it.
Maybe I'll ask the question a bit differently I'm wondering on materiality like if you take those three <unk>.
Factors and forget everything else like net net.
Are those three factors positive or negative year over year.
They would all be positive.
Okay.
There's potential for upside revisions to your guidance to the extent that yeah.
I E.
Yes.
I'd say were.
You've heard me use the term stronger for longer than the commodity marketplace.
You know I've been in mining business for 40 years now.
This is the strongest across all commodities from a demand side and and one that looks like it's going to run a long cycle because of the EV metals.
Certainly that I've seen.
We're talking about.
Energy coal met coal and thermal coal base metals precious metals.
Lithium graphite.
Yeah.
This is an extremely high demand market it looks like it's going to stay this way for for a good long time.
To me at the generational kind of demand cycle, we're seeing in commodities.
Certainly for my generation Anyways, I've never seen it.
And I think Thats, an overall driver and it gives us confidence that enough demand there. Its getting that then we cannot go they'll better utilization out of our fleet and executing.
Okay and that's that's.
That's what we do.
Thanks, Joe I'll turn it over.
You bet.
Your next question comes from Jacob bout from CIBC. Please go ahead.
Hi, Good morning, It says Rahul on for Jacob.
Okay.
Good morning, Joe.
Good morning.
So I just had a question on 2023 guidance and the current backlog.
So some guidance if we look at your EBITDA guidance. It implies an improvement of R 22, but our backlog levels are lower both quarter on quarter year on year.
Is this really just a factor of not winning that five year project, yet and maybe if you could just talk about the backlog.
Backlog duration, and whether you expect to use more from backlog this year compared to last year.
No as I just.
As stated a couple of times in the presentation, we expect our backlog to be over $2 billion by the engineer. It. It's just the cyclical nature, where we've got a regional contract which is in line.
For four main producing sites and they are on a five year cycle. So youre going to Youre going to peak every time, they're awarded and over the next five years those are going to draw down. So I'm just talking about half the business. It's in the oil sands right now so the decline quarter to.
Quarter would be expected because these contracts are only awarded every five years.
<unk>.
As soon as we thought it might it originally came out and it looked like it was going to be awarded last year, but because of all the inflationary pressures and because they can they pushed it off until this year and so we expect them.
To be five years of our.
About 75% of our work in oil sands is going to get committed to a five year contract.
And so.
So you know.
The quarter to quarter decline in backlog from three to four really didn't matter.
And every time after these awards occur that's going to happen in oil sands and we've had.
Significant wins outside even like the big infrastructure project in the states.
That's got a six and a half year.
Operating construction and 29 years of operations and maintenance.
That number is just going to draw down over that six and a half years of construction more than anything else.
That does that.
Cover off what you're looking for Yep Yep. That's helpful. Thank you.
And maybe just on the Fargo Moorhead project. So so how's that project been fully ramped up or would you say theres still more runway.
From a quarterly contribution perspective over over the next couple of quarters.
No.
We just opened it up in roughly September of last year, we just.
Started earthworks and the arts, we're excited that we'll get pretty close to peak. This year. So we'll get full year operating.
And we had roughly a quarter last year well before your full year contributions this year and really this year and next year are getting to where we were up peak.
Peak production peak workforce on those sites.
And generally it will happen during the summer, but they run all year long so they've been operating they're operating today, they're operating last week and they'll operate continuously now for the next six years.
Right right and maybe just last one for me so.
So when we look at your guidance range is.
I guess the question is what determines the low and high end and and does it assume a relatively quick transition of the coke equaled 19.
And we've got a pretty conservative estimate of that fleet coming out of kotte, taking a reasonable amount of time for transportation and then going into a lower utilization.
Aspect, but.
If we had a very quick transition and got it into 'twenty four seven high utilization, which is what we'd like to do and when I talked about is those four at blue dots on the upper left of that chart.
It may be as a $25 million top line impact. So it's not a huge amount, it's not going to change that range, but there's a lot of other contributing factors, but nominally our utilization and whether our fleet mechanical availability.
Told people before about every point of utilization is worth about $1 million a month in top line. So.
<unk> to add and if you look at last year's averages versus this year.
You know if we can continue to continually add and get better and get into that range of 75 to 85.
It will have positive impacts going forward.
Yeah.
Okay. Thank.
Thank you I will pass it over.
Thanks.
Your next question comes from Tim <unk>.
Hello from ATB capital markets. Please go ahead.
Hey, good morning, guys.
Good morning, Jim.
Congrats on blow the roof off on this quarter, it's been a long time coming.
I don't think I'd say, you're going to be quick on the trigger thing going to get a questionable excuse me the analysts I don't think I could with a dual.
Some of these guys all the time.
A lot of my questions have been covered off one of them though.
The maintenance head count slide.
That's interesting detail that you provided here between third party vendors and Andrew and ACG head count it looks like the gap between that is widening out a little bit but it seems to be within your historical range. You made some comments in your prepared remarks that you were hoping to ramp both of those.
Two lines higher.
And then try to close the gap basically and convert or or just sort of rich.
To reduce the amount of third party vendors, where would you like to see that ratio of ACG head count to third party vendors and what could that mean to your margin profile. If you were to close that gap.
I don't know if I've calculated that one Tim I can take a stab at it but.
You know, we'd probably want.
You know a good 90% of that workforce to be our own internally.
We've always got some around January you want for any kind of warranty work as well as some technical support if you need it.
And you know.
Yeah, I'd have to get to sit down with Jason and calculate that number but.
External guys are probably roughly twice as much as internal guys and the expense side youre carrying obviously a lot of another company's cost overheads in not just the direct labor.
And they're not doing it for free also so you know we've been good we've dropped them out when we've needed to obviously, you'll see during the pandemic.
You know last year, it dropped because they couldnt give us guys.
That drop is and we had to build up more vendor support just to get to where we needed to.
But as we increase our own an and.
And an approach that high utilization them they'll start pulling vendors out.
Okay.
And.
You know obviously it doesn't seem like it as much of an issue anymore.
I think you know.
China's staff and.
<unk>.
So maybe you can just put in context like what does the market look like now for heavy equipment mechanics compared to what it looked like.
You know in the middle of 2022 and is there any I E. You Werent able to complete in Q4 just given.
You know mechanical equipment availability.
We could've done more AD said.
We weren't anywhere near the top end of our mechanical availability of our fleet.
Even even with that utilization and we had demand that would have kept every piece of gear running that we could have got running.
And we can put operators if it's not over time and this is.
This is not going to be an issue that even goes away in years time because.
This is going to be an ongoing issue of skilled trades in Canada.
And.
That's the way we're looking at this this isn't a season all of this is in the year. This isn't a cycle, we're changing the way we do this business and looking at how we do our premises looking into how we bring in vendors.
How do we bring more equipment down here and do more work and regional shops that we can get more people at it.
Continuing to expand our facilities.
This is going to be something that is.
Long time that we're talking about a 10 years from now because it's not going to get easier and we definitely want to beat on the leading edge of this.
Because it's it's as you've seen it at.
It drives utilization and utilization is key to our business.
Okay.
That's great.
One other thing that I wanted to touch on I think a year you asked about it was just around that utilization range that you're alluding to in the 75% to 85% range and thinking that you might be able to get to that the bottom end of that range in Q2, historically your Q T as a sort of Max out at around the 70%.
In terms of you know, let's say, 65% range in terms of utilization.
How did you get that extra 10.
10 points of utilization in Q2.
Oil sands.
Well its availability of our big truck fleet that we know we have demand on.
Is the biggest driver that's the one we can control and then what we're looking for is ink some increased demand on the smaller end of the fleet.
With with increased civil construction works over the summer.
And those are the drivers.
We got to have the demand first and then it's in our hands.
To make the equipment available to put operators in the seat.
So.
We have the demand on the on the big equipment year round, we're looking to see if there are.
Increases further in the small stuff or even moving some of that outside of oil sands again.
Improved utilization.
And then and then it's up to us to execute on the maintenance and the maintenance planning to get mechanical availability.
Over and above what are our needs either so.
That's why I said committing to those kind of numbers and projecting it you know.
We got a few more runs on the board.
You can't draw a line with a single data point, we need to view and you know I'm I'm.
I'm very.
Very pleased with how we've progressed and we've exceeded our expectation so far but.
You know, there's there's a lot of moving parts in this and.
Q2, and Q3 will be great Telltale signs of we can get into that range and even on the low end in those quarters.
I feel a lot more confident projecting it year round.
Well it wouldnt utilization being Q1, so far.
Were in the seventies.
Actually we're in the high salaries.
I mean again you are talking in Q1, and that's a January number.
So it is continuing from where it was in December .
Okay.
That's really helpful. And then what would be the utilization that you're assuming for the year in your guidance range.
I don't have that number off hand, I'd have to get back to you Tim.
Okay.
And then the other question I had was just around the free cash flow guidance I noticed that there's a $25 million.
Earl.
I think that has to do with just sort of distributions from the Fargo Moorhead project.
And then wasn't added back or it seems are flat from in 'twenty three from 22.
So I'm curious like if you were to include the cash.
Being held in Fargo project or any of your JV is not being distributed how much free cash flow.
What would the free cash flow profile look like for the entire business.
Year over year.
Yeah.
Hi.
I can take that one Tim its a bit of a loaded question I don't know if you're asking the normalized 2022, but yeah between 20 and 25 is the impact we've seen between earnings and then cash distributed so whether you want to add that 20.
Our 25 to 2022 or 2023.
It is up to.
The reader.
Would say for 2023 purposes in our range as you noted.
We left the range the same we've modestly.
Modestly increase kind of the core business cash generation and then kept the expectation from our JV is the same.
As we had planned out in October of last year. So we've left it the same we understand the volatility of JV distributions and we are in the kind of $40 million to $45 million of distributions coming from the Jv's that was our expectation last quarter continues to be our expectation.
If we're if the jv's are able to exceed that.
We would we would see upside but clearly.
Clearly with the impact we had in 2022 and.
We didn't want to over promise for 2023, and so 85 to 105 is still a very strong cash flow generation and other staff.
Step change in our capital.
Allocation.
Flexibility.
But there's clearly as volatility with free cash.
No absolutely I mean, I'm just trying to.
Turning to understand better.
The underlying operational free cash generation of the business, rather than and I understand it.
Why you would.
Only talk about the distributions out of the JV, but I think come up.
Just to understand.
You're propositioning or we need to understand the actual.
The cash generating aspect of those Tvs as well so that's just sort of try and catch up anyway I'll turn it back.
Yes.
Thank you.
Your next question comes from Brian <unk> from Raymond James. Please go ahead.
Yeah, Good morning, guys.
Morning, Brian .
Just on the inflation adjustments midway through the year is it safe to say that that was fully reflected in Q4 or is there any way up there.
It was fully reflected in Q3 already Brian . So yeah, there is no lag and no lag or retro in Q4, either so.
Okay. Thanks, Brett.
I appreciate the color on the telematics, but are you able to quantify maybe the returns or payback relative to your investments.
Just on that installation.
Yeah.
I'd say it it's already savings already exceed cost operating even in its first year last year.
And we expect that to continue I think I said, we expect it to double this year and we aren't adding any.
People are cost.
The operating cost per machine hour is less than what we had forecasted.
And the savings are higher so and.
It pays for itself very quickly.
Okay.
Okay. That's it for me I appreciate the color.
Right.
Your next question comes from Maxim <unk>.
From National Bank financial Please go ahead.
Hi, good morning, gentlemen.
Good morning, Matt.
Just a couple of quick ones for me if I may.
Joe I guess do you mind, providing a bit of color on.
Your initial perception around Fargo, how that's ramping up.
Sort of any changes I think you made some comments a.
Number of months ago like in terms of you know how inflation could be potentially impacting the economics.
Just wondering if you have some refresh map ads, obviously some of the things have normalized so maybe any color on that please.
Sure.
Ramping up well, we've been hitting our productivity numbers.
We peaked for the year coming up in the summer, but on the earthwork side, which is what is being executed right now.
Yes, it's progressing very well so of equipment and people and everything is working fine we'll start getting into some of the bridge work with our partners and we don't actually execute that side of it but our partners will be coming up this summer and commencing that.
We did our initial.
Kind of forecast reviews, and where we were on.
And as inflation and the impacts on the on our risk assessments and those initial items said that the increases incurred.
Within our risk matrix and we're covered off by that and then our project margins in scheduled remained intact.
And our.
Our next will probably be towards the end of this year beginning of next year, where we do kind of a full on <unk>.
Full blown forecast of the all job for the first time after everything is commenced and that'll be our first.
The real test of our out of the project shipped versus how it's being executed.
And hopefully we have some positive impacts with our what we see in our earthworks side over the summer and we were able to beat our our targets.
And the big ramp up the year this year.
So I guess it's.
It's a stay tuned kind of a message, but the other side of it as we've gone through and modeled that inflationary pressures in and we haven't seen a reduction in our expected project margins.
Okay Super helpful. Thanks, So much and then last question.
Pending warrant to our capital allocation and some of the earlier comments, Joe that you made around sort of the easy.
Battery metals, and how it's such a robust market demand maybe by I mean painting a bit of a picture in terms of how that potentially could fit sort of their preference for M&A.
Or just maybe any color from that perspective. Thanks.
Yeah.
I think to put some color on when you look at that bid bid map in those.
Dots on that map.
The <unk>.
The blue dots and Theres, some significantly large ones.
Oh.
These are areas of of iron ore copper nickel gold.
And opportunities that we see that have.
Well, we tend to call high go win percentage that they are going to go forward and there we have a good opportunity to win them. So.
From a bidding perspective, the work outside of oil sands and the other commodities finish.
<unk> been as strong as we've seen it we continue to look.
At other markets around the world for M&A opportunities.
And.
That's that's when we will look at.
And it just fits in just with the overall capital allocation Max obviously, we addressed our dividend we're looking at the debt because of the high interest rates, but.
But we also see some opportunities in the M&A side, obviously, we've had success in and vertically integrated bolt ons like ammo Northern and D. G I.
Those have been great value and we see them continuing debate, so if opportunities come up like that in there.
Great returns or even a bigger ones do.
We're going to pursue them and we've consistently seen the small ones and we do think there's some opportunities for some bigger ones that have historically struggled to be accretive.
But if you know they have to have the returns we're looking for otherwise, we're going to look at and deleveraging, which theres nothing wrong with that either.
Yeah no absolutely.
Maybe I did wanted maybe providing a bit of sort of a read through on how.
The expectations of sellers changed eighth or maybe not over the last kind of nine months hasn't been static or have you seen sort of a reset of expectations on that side as well.
Yeah, I don't know if I've ever seen anything consistent in that regard to anyways I think and it's.
It's it's opportunistic you find sellers are in the right spot at the right time, when Youre looking at something.
So I just think.
We found great fits in.
And timing with sellers on our D. G INR ml, northern and great fits in those cultures, they've made for extremely smooth.
Integration into our business and.
No.
I wouldn't call those normal.
I think it's just been a great opportunistic setup for us but.
Every salaries, a little different and I don't think there is a consistent trend there, but you know when we see.
Opportunities, where the the integration of the business and the culture, and there's synergy and there's opportunities to learn from one another and grow off each other.
They they tend to be the ones that provide the best.
Financial sides as well so that's what we look for is things that vertically integrated in our business have a good return for us help us lower our costs.
And while giving us opportunity to expand and external services.
Our other businesses similar to US we think we can.
Increase our diversification geographically and in commodity and customers and have good accretion numbers those are the ones that we're looking for them.
Yeah makes sense and I appreciate all the comments I think it's no worries that anytime.
Thanks.
This concludes the Q&A section of the call and I will pass the call over to Joe Lambert, President and CEO for closing remarks.
Yeah.
Thanks, Julian and thanks, everyone.
Really appreciate you joining us today and look forward to talking to you again next quarter.
Ladies and gentlemen. This concludes your conference for today, we thank you for joining and ask that you. Please disconnect your lines. Thank you.
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