Q2 2023 North American Construction Group Ltd Earnings Call
Good morning, ladies ladies and gentlemen, welcome to the North American Construction group earnings call. At this time all participants are in listen only mode. Following management's prepared remarks, there will be an opportunity for analysts shareholders and bondholders to ask questions. The media may monitor.
This call in listen only mode.
They are free to quote any member of management, but they are asked not to quote remarks from any other participant without that participants permission to.
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 projections contained in that forward looking information.
Certain material factors or assumptions were applied in drawing conclusions or making forecasts or projections that are reflected in the forward looking information additional information about those material factors is contained in the company's most recent management's discussion and analysis, which is available on SEDAR and Edgar.
As well as the company's website at N E C G dossier.
Now I'll turn the conference over to Joe Lambert, President and CEO .
Thanks, Joe and good morning, everyone and thanks for joining our call today today's call is clearly different than ones in the past given the share purchase agreement, we signed yesterday and we fully expect the majority of the discussions involve transformational acquisition of the Casper.
Therefore, we will do things a bit different this morning have asked Jason to summarize our Q2 performance and then I'll jump right into the commentary in context on the counter.
At the end of the prepared remarks, we are happy to address Q&A on either Q2 order Keller with that I'll hand, it over to Jason.
Thanks, Joe and good morning, everyone.
As mentioned the focus on Mckellar quarterly comments this morning will be brief.
On slide three as a standard practice here, we start with safety and our everyone gets home safe commitment our trailing 12 month recordable rate is now at 0.27 and represents a significant improvement from last year, which ended above our company target.
We are primarily focused on leading indicator initiatives with several outlined on the slide but are encouraged by the lagging indicator trend.
On slide four you'll see two things, 161% was the highest utilization we've ever had in our second quarter, but two and probably more noticeable the month of June was well below expectation.
April and May benefited from a strong momentum carried from Q1 and averaged 70%, which was very encouraging however, the surprisingly wet weather in June and a required mobilization of equipment in the Fort Hills drove utilization in that month to below 50% a level, we havent seen since mid 2020.
High demand remains for our heavy equipment and we expect this throughout 2023 and in 2024.
We likewise expect our maintenance teams to continue their strong work and correlated improvements in the mechanical availability of our fleet.
We remain on track with our utilization goals to be in the targeted range of 75% to 85% on an annual basis with a trailing 12 month average now at 70% compared to the 65% we posted in 2022.
Moving to the financials.
Slide six combined revenue of $277 million represented the highest level of revenue. This company has ever had in Q2 and correlated to the typical impacts that the spring season has on equipment utilization in the oil sands.
Return on invested capital of 15, 3% is the highest we've ever achieved and surpassed the company goal. We had set up 15% as trailing 12 EBIT of $143 million outpaced increases in invested capital, which now sits at $731 million.
Slide seven on a combined basis revenue up 21%.
Revenue was 21% ahead of Q2 2022 reported revenue generated primarily by our core heavy equipment fleet was up 15% quarter over quarter with the drivers of this increase being slightly improved utilization and the adjusted equipment in unit rates, which were applied in Q3 2022.
Ml Northern acquired on October one provided another full quarter of operations of fuel and lube delivery and as we approach the one year anniversary of wealth and welcoming them to <unk>. We are happy to happy to consistently report the strong performance of that critically important support fleet.
Our share of revenue generated by joint ventures, and affiliates was $83 million compared to $60 million in Q2, 2022, but notably up from Q1 2023 revenue of $78 million as their projects are not as significantly impacted by the spring season.
The <unk> group of companies had another busy quarter of activity at the goldmine.
In Northern Ontario.
Particular note, though the primary drivers of the increase in combined revenue included the continued growth of top line revenue from rebuilt ultra class haul trucks and excavators now being owned by our joint venture with <unk>.
And the increasingly important impact of the joint venture is dedicated to the Fargo Moorhead flood diversion project.
We had another full quarter of construction work at the Fargo project with the project passing the 10% completion Mark.
And hitting its stride.
Combined gross profit margin of 13, 1% with a quarterly improvement from the nine 6% we posted last year as our operations in the Fort Mcmurray region experienced the challenges of Q2 weather our joint ventures continued their trend of strong consistent operating margins and.
And margins benefited from the email northern acquisition from lower internal cost as well as strong margin from services provided to external customers.
The second life rebuild program commissioned and sold another ultra class haul truck during the quarter.
Moving to slide eight adjusted EBITDA of $52 million is the best Q2, we've ever posted and reflective of the commentary. Thus far included in EBITDA as general and administrative expenses, which were $7 $2 million in the quarter equivalent to three 7% of revenue and remained under.
The 4% threshold, we set for ourselves.
Going from EBITDA to EBIT, we expect depreciation equivalent to 10, 4% of combined revenue, which reflect depreciation rate of our entire business.
Diversification efforts into less capital intensive services continues to have a noticeable impact on the depreciation percentage when looking at just the wholly owned entities in our heavy equipment fleet. The depreciation percentage for the quarter was 12, 6% of revenue and reflected an effective use of our fleet during a challenging quarter.
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Adjusted earnings per share for the quarter up 47 was 30 <unk> up from Q2 2022 as revenue increases translated down to net income.
EPS was driven by $23 $1 million from adjusted EBIT net of interest and taxes.
The average rate for Q2 was six 9% as we trended up slightly from Q1, the Q1 rate of six 7% from continued interest rate increases.
Excluding the acquisition Joe will discuss the gross interest expense of $7 $5 million that should be a high watermark for the year as free cash flow is generated in the second half and we pay down debt.
Moving to slide nine I will summarize our free cash flow net.
Net cash provided by operations of $40 million was generated by the business, reflecting the strong EBITDA performance.
Free cash flow was a use of $4 million of sustaining that maintenance capital of $38 million was invested in the fleet.
Moving to slide 10, net debt level increased $10 million in the quarter as $4 million of free cash flow used was financed with debt. In addition to the growth asset purchased growth assets purchased and dividend payments. Despite.
Despite the modest increase.
Net debt and senior debt leverage remained fairly steady at $1, four and $1 three times respectively.
Slide 11 provides our bid pipeline, which according to our estimating team is the fullest it's ever been and highlight strong demand and active project tenders similar to last quarter. We added another $300 million in new tenders about half of which is outside the oil sands and roughly matches are diverse.
Suffocation.
The process for the regional contract in the oil Sands is going as expected and we estimate that process to wrap up in early Q4.
We have close to 50 average active projects and remain encouraged by the activity we see across various commodities are contractual backlog now sits at $920 million as.
As we complete the scopes awarded to US and we continue to have expectations of exceeding $2 billion before the year is out.
And with those comments on the quarter I'll pass the call back to Joe.
Yeah.
Thanks, Jason.
As a company energy and ACG has always been very selective in how we use our capital and when it comes to our M&A, we have been determined but patient in selecting the right businesses people geography and market Center.
That is why today I am extremely excited to announce our largest acquisition to date and the Keller group.
This transformative transaction is a combination of thorough operational and cultural diligence over the course of multiple years in a deal that makes clear strategic sense.
We believe this transaction is financially compelling and more accretive to our shareholders and any other use of capital.
I hope at the end of this presentation. All participants will agree that this transaction Fulfils. Our stated objectives and provides a meaningful step change in our project execution capabilities and growth profile.
In this slide deck.
Present, and discuss the high level review on the color on the financial highlights of this transaction followed by a review of how this acquisition fits our corporate strategy for growth and diversification and ending with a few slides on our next steps and outlook for 2023 and 2020 for beef.
Before taking any questions you may have.
Yeah.
On slide four.
Founded in 1966 by Alastair Mckellar heavy equipment mechanic or theater in Australia terminology.
The Keller group has grown to over 450 pieces of heavy equipment operating in more than 15 projects with more than 1000 employees of which over 375, our highly skilled maintenance personnel operating in a system focused on safety and innovative ways to lower equipment costs and extend asset lives.
As a leading provider of heavier toward solutions to mining and civil sectors Mckellar provides a meaningful entry into Australia at a time or heavy equipment and peak demand.
Moving on to slide five.
We outlined some of the key financial attributes of the transaction.
Starting with the purchase price below book value of assets and a favorable purchasing structure. Our strong underlying business outlook has allowed us to finance the acquisition with their own balance sheet, resulting in exceptional accretion.
Our fully underwritten financing supported by our lead lender show the confidence in our business and the vendor provided financing aligns management teams and mutual incentivize is exceeding performance targets.
Although fully debt financed using the strength of our combined balance sheets. The leverages is expected to be one eight times at year end and below one five times by the end of 2024.
Last but certainly not least mckellar adds over $2 billion in incremental backlog, providing good predictability and sustainability for the business that allows for longer term investments for future efficiency and growth.
Measured on all metrics. This deal was a rare opportunity and I'm thrilled to be announcing it today.
On slide six we provide a bit of a timeline and approach. We took this transaction starting with an introduction through our team at Dji, who we acquired back in 2021.
<unk> is a longtime customer dji and the founders of each company have had both a business relationship and personal friendship for several decades.
Seeing the similarities between <unk> and <unk> operating philosophies and corporate culture.
<unk> facilitated the introductions.
After several initial conversations it was clear that our two companies share common values and culture and can make a great combination.
We likewise each toward the others field operations and confirmed the words were matched with what we saw in the business execution.
Once the fifth potential combination had been mutually establish we progressed with the utmost diligence through continuous and transparent dialogue for over two years, resulting in agreement in achieving both companies transaction criteria.
This disciplined approach provides us our board mckellar team with significant confidence of the ability to successfully integrate and execute our strategic plan moving forward.
On slide seven we provide a bit more detail into the transaction rationale.
First and foremost mckellar shares our same core values of safety and focus on operational and maintenance excellence to be the low cost provider and contractor of choice.
My opinion this cultural fit cannot be overstated as it is key to integration success and a Max it is so similar that I would expect anyone knowing and ACG and speaking to them Mckellar employee to feel like the only difference was the accident.
I'll move on to the other points, we will discuss this further on subsequent slides, but this cultural match is definitely a unique and favorable signs providing confidence in our future together.
Along with the transaction that has minimal integration and financing risk.
We're acquiring a large newer and well maintained fleet at below book value with significant room for growth and diversification and the various commodities research rich areas of a mining friendly country.
With new equipment lead times, ranging from one to two years acquiring a fleet of this size provides immediate scale during peak demand.
I would also note the relatively young age of the fleet with just over 40% of the fleet being purchased in the last five years and just under 30% in the last two years with these most recent purchases still having a couple of years before requiring any meaning major any meaningful major components sustaining capital.
With significant contract awards expected in any six core business before year end, we expect the combined backlog of greater than 4 billion, providing consistency that allows for planning and efficiency of our workforce in our fleet.
Moving on to slide eight.
<unk> committed to the health and wellbeing of our employees and minimizing our environmental impact through individual commitment and proactive participation at every level of organization.
Combined we will continue our commitment to achieving industry, leading results and relentless pursuit of zero harm and getting everyone know what I'm, saying.
You can likewise expect to see more details of an integrated ESG plan in our next annual sustainability report, which demonstrates further commitment to key items, such as reducing our carbon footprint expanding our digital relationships, increasing diversity in our workforce and improving the communities we work yet.
On slide nine.
We highlight some of the key skills and characteristics of the Keller and note how well they match ours.
Whether it's an indigenous customer or vendor partnership mckellen values of mall and treat them all with respect honesty and a genuine desire to be mutual mutually beneficial.
<unk> continued to innovate and build their skills through in housing of equipment maintenance.
Our remanufacturing and equipment rebuilds.
They have successfully and continually demonstrated these skills through lowering costs and extending component and asset lives.
The hands on solution that focus extends from an executive team to the frontline with demonstrated commitment to safety ethics communication people and performance.
And our next section on diversification.
Quickly go through these slides to show what we will what will be achieved pro forma with this transaction.
What the opportunities are to further grow and diversify the business going forward.
It seems a long history of working with quality glue chip customers, while reducing the contribution of our largest and market from 94% to 35%.
We also have a strong history over that time frame of not only achieving diversification targets, but improving margins, while achieving them, which is an accomplishment we are particularly proud of and which we expect to continue as we expand.
Slides 14, and 15 illustrate the wide spectrum of mccullers quality customers and long standing relationships with.
Keller strong reputation as earned at various major projects and and now has operations on numerous sites are fewer which are highlighted here and slide 15.
And our closing section on slide 17.
We have provided a brief overview of the transaction timeline.
After today's announcement will be working towards a targeted closed data Q for once completed mckellar will be business as usual with an already in place high quality management team, but with the full support of any C. G now behind it.
We plan to share best practices and systems drive to continually drive down costs and improve operational performance.
On slide 18, we.
We provide a bit more detail on our focus over the next 12 to 18 months.
One key area I would like to delve into the focus of the small NAC transition team and implementation of ERP systems and procedures.
With Mckellar strong growth continue internal maintenance focus their existing systems are beginning get stretched and limiting management's ability to get good data.
This is almost exactly the position we were in around five or so years ago and our transition team in corporate support will be absolutely focused on helping to design and implement these systems and procedures at mackellar using all of our past learning to get the gains of what we did right without and during the pains of what we got it wrong.
Although I can sit or both companies top notch and maintenance skills and innovation.
The skills aren't identical and there is much to be gained by cross training and sharing of best practices.
We both have in house maintenance work that was once being performed by vendors and where the task are the same we will review each step in the process compare and pick what works best when combined to create an improved process.
And where the announced after different will evaluate the opportunity and see if that cat task can be announced we're not currently performed.
Ultimately, we expect to sharing and systems improvements will support the company as a whole into continuing the lower cost improve margins and increased utilization all while focusing on continued growth and diversification opportunities.
Finishing on slide 19, we're reaffirming our outlook for this year, while increasing it for the combined impact of the fourth quarter pickup.
We are providing a meaningful step changed our financial profile with increased ranges across the board.
We expect to provide updated 2024 guidance later this year, but I would like to highlight incremental impacts mckellar as there are material.
We anticipate of 2024 increased EBITDA in EPS of over 50%.
Have enhanced our backlog and see a clear path to deleveraging to net debt of less than 1.5 times by the end of 2024.
I've never been more bullish on Acg's future and I'm thrilled to welcome Mckellar to the <unk> family with that I'll open up for any questions you may have.
[noise]. Thank you to ask a question. Please press star one on your Touchtone phone if you wish to withdraw your question you compress star too. Once you have completed your questions I would like to return to the queue.
Please press star one after a brief causes will begin the Q&A session.
Your first question comes from Eric Aaron Mcneil with T. D. Cowan. Please go ahead.
Hey morning, all thanks for taking my questions.
As it relates to mckellar.
If you look across the 15 projects can you give us a sense of what the remaining mine lives are and if there's any history of re contracting.
[noise] mm.
Trying to like think about it in the same way that you talk about your oil contracts.
And maybe you could also differentiate between <unk> thermal coal if that's possible.
Yeah, I would say, it's extremely similar Aaron that that their long live resources, so in Western Australia.
Nominally Golden Iron ore gold fluctuate highly in the mine life and Iron ore is January extremely long mine light and then their their major operations in in Queensland are split between.
Thermal metallurgical coal and those mines, some I've already been around similar to oil sands for 50 years, but they all have very extensive mine lives.
I'd say in the 10 to 40 year range.
And in terms of re contracting it they've been around since 1966 Sir.
They had this one.
Contracts that have been yeah. Many many many of their customers, especially in Queensland have been customers continuously for multiple decades.
Yeah, we can certainly highlight this a lot more in the future deck.
Yeah, No I understand.
Yeah, I think you've made it pretty clear that debt reduction will be the priority. It reached in the near term, but how are you thinking about capital allocation more holistically like will the focus be to reduce further.
Mckellar open up opportunities took further consolidate in Australia and is that something you're interested in like how does that rank against the M. C I b and the dividend <unk>.
Maybe give us a sense of where your headset with this acquisition capital a location that real quick.
Yeah, I think and we were always evaluating at any point in time with.
With share price M&A opportunities.
[noise] debt repayment, I mean that certainly becomes more tractable more attractive as as interest rates keep going up and and certainly it has the the lowest risk of any we're always comparing in evaluating risk versus reward.
Even after this we have a significant amount of liquidity, even after this deal and and and certainly by the end of 2024 at 1.5 times, we have a significant liquidity to do other things if they if they're there.
Got it thank us we'll turn it over.
Sir.
Your next question comes from Kevin Gagne with Thompson Davis. Please go ahead.
Hey, you guys congrats on the corner and thanks for taking my question.
I think I have one for you first show you kind of talk to about it a little in the prepared the mechanical capabilities Mckellar maybe.
Maybe if you could go on some of the similarities or differences.
Yeah, I guess the biggest similarity they're extremely focused on.
Maintenance sufficient innovation, which is very.
Very much what we do I'd say, we do a lot of our component remanufacturing announced or with partnerships. They do the same when.
When I talk about sharing best practices, what I really mean is that there's a lot of those things we do.
And they do the same but there is a lot of it a little different I use the Ah dozer track frame as an example, we rebuild the track frame, which is kind of the middle piece of it and they rebuild tracks, which is obviously what you don't think of it as the rim of the of the of the wheel tire of the wheel and but we don't do each other's activities and we'll be able to.
<unk> those.
Remanufacturing options and and see if we can bring him in the house at each other's place and continues to drive those costs down. So you know there are very maintenance focus the founder was a mechanic and.
Maintenance focus group as we are and we understand as they do that the biggest driver of our causes equipment and as much as as we can control and drive down is is going to increase our competitiveness or our margins.
That sounds good and maybe for Jason if he could maybe talk about the seasonality mckellar from a rather new standpoint and then.
Also more modeling days, maybe the interest expense run right now you're thinking posts transaction.
Yeah, Thankfully Mckellar is actually very flat from a seasonal perspective. So you know our mid point for next year that kind of the 145 EBITDAR run right in and when we look at that even for how they're performing this year, it's very consistent quarter over quarter. They are a little bit of whether issue.
Susan in December and January , but nothing like we experienced and.
And oil sands so.
That should really help for a quarter over quarter volatility in our results. So that's that's kind of an easy question to answer and as far as the run rate you know our 125 mid point for EPS in our range is assumes.
7.5% interest rate.
Which is a combination of you know.
The vendor take back financing the.
Equipment leases, we hope to have in place as well as the revolver, which is currently tracking and kind of the high sevens.
From an interest rate perspective, but 7.5% is a good.
A base case, and we hope we hope to beat that with with primarily with equipment financing, which is quite competitive.
Perfect I hope I can keep.
Thank you.
Your next question comes from Kim.
Shallow with ATB capital markets. Please go ahead.
Hey, good morning, everyone.
Kim.
A few questions on the acquisition and so starting with.
Yeah sure and can tell your last week and I know, Joe you've worked in Australia before I'm wondering if you can.
Maybe parallel the competitive advantages that mckellar might have in the Australian market versus how you guys are positioned in.
The Canadian market obviously.
You have a very strong competitive positioning and and what else and I think that the Australian market's a little bit more fragmented and perhaps more competitive but is it looks like mckellar. So I was pretty strong profitability in March and so I'm. Just wondering if you can lay that out for me.
Yeah, I I'd say it extremely similar to ours I'm in Australia and contract mining in earthworks marketplaces as big it's a much more prevalent for mine sites to contract than in North America, but with that there's more.
More competitors, both public and private.
But you know the the focus their similar to US is the way you maintain consistency in that marketplace is to be the low cost provider in and focused on safety and they're in housing a maintenance speed the component remanufacturing or or second like rebuilds of equipment, which they have likewise been doing for many years.
Years now it is.
Very very much wherever we focus because that's the biggest driver of course and.
It was certainly look for other areas of operational efficiency.
But that that's what drives their competitiveness and and it's but we'll use similar to what we've done in our.
Pour oil sands business diversifying get into other areas is we'll look to do the same thing with mckellar and using that low cost such a you can go out and diversify without losing margin.
Is there evidence that mckellar is the low cost provider at least one of the lowest cost of letters in the market in Australia.
I don't I don't think we haven't definitive evidence as we've had in oil sands wherever you've had clear clear timeframe such as during Covid and when we were the only ones operating and and during the standards that were done kind of reverse auctions.
So we we don't have that kind of clarity I would say, but just looking at what they do and how they do it and the cost savings versus external vendors. Yeah. We we certainly believe there there are very close.
Okay.
And then I know that in future iterations of your presentation, you're rapping mckellar, but there's a couple things I'm curious about one is the is the bad pipeline that mckellar might have in Australia, how does that look compared to.
You know the any stupid book.
It it.
And there there's quite a few projects isn't there I I don't know how it compares historically.
I guess it really their biggest issue Tim as their their fleets almost fully consumed so.
You know, it's it's more having the assets to do the work than having to work to bid on so there's plenty of work and bid pipelines occurring, especially in western Australia with their western plan higher group and we're going to look to see whether we can.
We can utilize some of our.
Under utilized the assets from oil sands and give them some support in.
Extremely strong demand environment that they're in so.
The the bid by quite a strong I can't give you a comparator cause they don't know and on top of my head.
But.
Hitting factor on a bidding is more of the amount of equipment, they have and the high demand area.
Okay got it.
Can I get since my next question, Sir I'm Gonna ask you about that do.
Do you think that the smaller end of your sleep in the Canadian market is suitable for some of the demand profile in Australia.
Absolutely, especially the western Australia rental market.
So are are 100 150 ton trucks that are underutilized in oil sands, we've been moving into other regions and bidding into other regions are are highly utilized in western Australia rental market.
Okay do you think that there's a high likelihood then that you're gonna have to grow the fleet organically as well in.
In Australia.
I I don't know that offhand, I think there'll be an opportunity and I think we'll evaluate that kind of growth capital with with just like we did the rest of our capital location as far as what's the risk and reward an opportunity within it you know I think that western Australia, and rental market will be able to feed from underutilized sleep, but there are certainly.
Big year in some long term mining contracts that would require growth assets and well we would evaluate those in those opportunities just like we do anywhere else in our capital allocation.
Okay, and then last one for me.
Is there anything in the Mckellar contract book, that's coming up for renewal over the next.
Maybe two years that you know as meaningful that.
You'll have to replace.
At.
Not not significantly I think you can see by that backlog number that you know, they're they're kind of books for 400 years, there's different contracts of course, but they they certainly have long term contracts with good escalation clauses in coverage for inflation, even even in the rental side there long term rentals.
So I you know I don't see there'll be a bit of churn in the in the two years of but but it'll be a small portion of the overall work.
Okay. That's a really helpful. Thanks, a lot guys and congrats on the deal alright. Thanks, Tim.
Ladies and gentlemen, as a reminder, should do you have a question. Please press star followed by the one.
Your next question comes from Maxine.
Site Heck with National Bank. Please go ahead.
Hi, good morning, gentlemen.
One of them actually.
Joseph two questions for me if if I made the first one was wondering if you don't mind may be commenting about sort of essential infrastructure spending opportunity available right now is going to be pretty significant investment cycle.
Yeah, maybe that's that's the first one you can provide me a call back.
Yeah, I I do think like well first of all like right now in the calories and involved in any major infrastructure works, it's all mining contraction and rentals.
I, absolutely see great opportunity there.
Heckler, our our our partner in Fargo Moorhead.
Company, we partner with there is also I believe either the number one or number two contractor and infrastructure in Australia.
And we certainly think there's an opportunity where a strain infrastructure projects that have a significant amount of earthworks, we'd be invited and especially from our partners embargo.
Debate on those work so I I think that's Ah an expansion and diversification opportunities at they will have that for mckellar in the future.
Okay. That's fine. Thank you and my follow up this is Jason if I'm a caution to think about the free capsule conversion given the slightly younger age of equipment.
Yeah, and any Colorado will be helpful. Thank you.
Yeah, it's a direct correlation to a higher conversion ratio. So you know we've.
We've been in that 30% range trying to inch up to 35% mccullers nicely and the 40% free.
Free cash flow conversion range.
Even with pretty heavy interest next year. So yeah I was Joe mentioned in his prepared remarks, you know the sustaining capital range, we gave for Mckellar next year.
It's a pretty wide range as we get to know their equipment will will fine tune that we think there's a little bit of upside there to get even north of 40% conversion ratio. So.
Definitely some good free cashflow potential over the next couple of years with this newer fleet.
Okay excellent that's it for me to a gentleman. Thank you so much and congrats on <unk>.
I think I'm actually.
This concludes the Q&A section of the call and I will pass the call over to Joh Lambert President and CEO for closing comment [noise].
[noise], Thanks, and thanks, everyone for joining a thing we look forward to providing next update or the phone closing of this transaction or a few three results.
Ladies and gentlemen, does conclude your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
[noise] [noise].