Q3 2023 North American Construction Group Ltd Earnings Call
Good morning, ladies and gentlemen.
Welcome to the North American Construction Group conference call regarding the third quarter ended September 30th 2023.
It's time, all participants are in listen only mode.
Following managements prepared remarks, there will be an opportunity for analysts shareholders and bondholders to ask questions.
The media me 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.
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 were applied in drawing conclusions or in making forecast 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 in theater and Edgar as well as on the company's website at N E. C. G dossier.
I will now turn the conference over to Joe Lambert.
And didn't and CEO. Please proceed.
Thanks Alan.
Good morning, everyone and thanks for joining our call today I'm going to start with our Q3 2023 operational performance before handing it over to Jason for the financial overview, and then I'll conclude with the operational priorities bid pipeline outlook for 2023, and our first look at 2024 before taking your questions.
On slide three.
Our Q3 trailing 12 month total recordable rate of 0.30 is less than half of what it was at this time last year and remains below our industry, leading target frequency 0.5.
We will continue to focus our efforts on further advancing our training programs communicating them promoting safe behaviors.
Paul Health campaign on flu shots and audio metric testing and our winter and hazard awareness programs as we enter our busy winter season, and continue to add to our workforce.
On slide four.
We highlight some of the major achievements of Q3.
I'll discuss mckellar later, but wanted to highlight the ramp up of our Fargo Moorhead flood diversion project, which had its most active earthworks summer that will be followed by its busiest winter at this major infrastructure project progresses into the core of its multiyear construction schedule.
Our telematics program is exceeding expectations, and we continue to expand our capabilities and support to the operations and maintenance teams.
Our <unk> joint venture is progressing nicely and continues to add low cost second like rebuilds to its fleet of heavy haul trucks.
We see strong long term demand for the <unk> fleet and are actively looking for additional poor assets to rebuild and continue to grow the joint venture assets.
In Northern Ontario, We successfully completed our gold mine construction project joint venture with Nona and.
And have several active bids in the Ontario, and Quebec regions.
We also completed a major overbay burden fleet relocation in oil sands to support changes in customer demand and mine plants during the quarter.
We believe the current fleet allocations will fit well with future overburden demand and contract awards, such as no meaningful fleet moves will be required over the winter.
Moving on to slide five you can see that the aforementioned Q3 fleet mobilization negatively impacted our fleet utilizations and although a better than average Q3 it was below expectation.
However, we remain on trend and confident in our ability to hit our target range of 75% to 85% by the end of next year.
Moving on to slide six.
We highlight some of the key attributes of the Mckellar transaction.
First and foremost we are a cultural alignment share core values and maintain a focus on operational excellence, especially in the area of heavy equipment maintenance.
We believe these common characteristics in a well planned transition transition, which is already underway will.
We will make very smooth integration into the overall business over the coming year.
Financial highlights include a purchase price below book value of assets and a favorable purchasing structure.
Additionally, our strong underlying business has allowed us to finance the acquisition with debt rather than equity, resulting in these exceptional accretion.
The vendor provided financing an earn out aligned management teams and mutually incentivize performance.
Although fully debt financed leverage is expected to be less than 1.4 times by the end of 2024, which is about where we were immediately prior to the transaction closing.
Last but certainly not least mckellar adds $2 billion in incremental backlog, providing predictability and sustainability for the business that allows for longer term investments for future efficiency and growth.
On all metrics. This deal was a rare opportunity and we're eager to execute the transition plan and set up mckellar for long term sustainable success.
Slide seven let's both both are currently wholly owned operating entities as well as our strategic partnerships. These acquisitions and partnerships have all been formed over the last five years and are the main drivers of our success and growth diversification profitability and lowering our costs.
These acquisitions and partnerships have made us stronger and more stable and have meaningfully change our business for the better.
I think one of our major shareholder set of basketball Tournier Atchison facilities. When he stated this is not your father's anyway.
With that I'll hand, it over to Jason for the Q3 financials.
Thanks, Joe and good morning, everyone to start I will provide brief context regarding the mckellar transaction, which closed effective October one.
As disclosed in the Q3 report a final purchase price for the Mckellar group will be based on audited financial statements as at September 32023, and as such we continue to disclose the estimated full consideration of $395 million.
We look forward to providing full purchase price allocation details in the year end financials and are encouraged to see strong operating results, leading up to and continuing through the close date.
Similar to the other equipment related transactions, we've completed over the past few years, there was zero interruption to mckellar operations upon close and we anticipate a strong fourth quarter from their fleet.
The senior secured equipment debt assumed that close along with the Upsized credit facility, both transacted at levels disclosed in the July announcement, which gives us overall confidence in the estimate provided.
Integrating and reporting on this transformative step change is front and center for a variety of our corporate groups and remains on track for full inclusion in our year end reporting.
Our teams have been in constant dialogue with their Australian counterparts, with weekly and monthly routines taking shape.
Moving to the historical financials and some brief commentary on.
On slide five Youll see effective performance in the oil sands.
And progress on the Fargo Moorhead project drove adjusted EBITDA of $59 million.
Which essentially matches our record set in Q3, we achieved last year.
Return on invested capital of 14, 7% remains stable at the company.
At the company goal, we had set for ourselves of 15% as trailing 12 EBIT of $137 million was.
<unk> by the invested capital, which now sits at $735 million just prior to the Mckellar acquisition, which will add as mentioned $395 million to invested capital.
On a total combined basis on slide 10 revenue was slightly up from Q3 2022.
Reported revenue increase from ml Northern acquired on October one 2022, providing another full quarter of operations and a strong quarter from dji trading.
These increases were offset by lower equipment utilization achieved in the quarter as we moved equipment into Fort Hills as mentioned by Joe.
Our share of revenue generated in Q3 by joint ventures was $78 million, which was the same as Q3 2022.
The Fargo Moorhead project had an excellent operational quarter and achieve the progress metrics and project milestones they were targeting.
In addition, we had positive contributions from the continued growth of top line revenue from rebuilt ultra class haul trucks and excavators directly owned by our joint venture with <unk>.
Offsetting these positives the <unk> group of companies did not have the typical busy Q3, they are accustomed to.
Permitting delays and the impacts of wildfires in northern Canada, and particularly the evacuation of Yellowknife had significant impacts on newness ability to carry out their assigned scopes.
Combined gross profit margin of 13, 9% was a quarterly improvement from the 13, 1% we posted last quarter. Despite the challenges experienced by noon and again reflects the strength of a diversified business.
Margins benefited from the MLP Northern acquisition from both lower internal cost as well as strong margins from services provided to external customers.
Moving to slide 11, adjusted EBITDA was consistent and reflective of the revenue commentary.
<unk> and EBITDA.
His direct general and administrative expenses, which were $6 9 million in the quarter equivalent to three 5% of revenue and remained under the 4% threshold, we set for ourselves.
Going from EBITDA to EBIT, we expense depreciation equivalent to 12, 8% of combined revenue, which reflected the depreciation rate of our entire business.
Including the very active equipment fleet at the Fargo Moorhead project.
When looking at just the wholly owned entities in our heavy equipment the depreciation.
Percentage for the quarter was 14, 7% of revenue and reflected the challenging utilization quarter.
Adjusted earnings per share for the quarter of 54.
Was 11 down from Q3 2022, as the impacts of higher depreciation and interest rates are factored in with EPS.
The average interest rate for Q3 was seven 1% as were up from the Q3 2022 effective rate of five 8% from well known interest rate increases.
Excluding the upcoming impact of the Mckellar acquisition on Q4 results.
The gross interest expense of $8 1 million is expected to be the high watermark as free cash flow is generated in Q4, allowing for the paydown of debt with the expectation of stable rates moving forward.
Moving to slide 12, I'll summarize our cash flow net cash provided by operations of $42 million was generated by the business, reflecting EBITDA performance net of cash interest paid.
Free cash flow was $10 million.
Our sustaining maintenance capital of $42 million was.
It was invested in the fleet.
Moving to the final financial Slide 13, net debt levels remained stable at $395 million in the quarter.
As the $10 million of free cash flow was used for growth asset purchases dividend payments and trust purchases.
The correlated net debt and senior debt leverage remained steady at one four times and one three times respectively.
And with that I'll pass the call back to Joe.
Thanks, Jason.
Looking at slide 15.
This slide summarizes our priorities moving forward.
Mckellar integration is obvious and I'll touch on that in the next slide or so and I will rightfully start with safety.
This area of focus being 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.
As I've stated before although we have an extensive health and safety management system and multiple initiatives for improvement we continue to feel our growing workforce, requiring increased new hires and an industry supplied lowering and experience.
Our focus on further developing our frontline supervision and expanding our green and training programs will be key as we expand.
Item three described are prioritizing a winning bid to continue to build our backlog, which provides consistency and stability in our operations and financial projections and continue to drive our diversification into commodities and geographies that reduce our risk profile, while improving return on assets or lowering capital intensity.
The final area Prioritizes continued expansion of our operational and maintenance expertise, we will prioritize new technologies, such as our telematics system and continued in <unk> and vertically integrate our maintenance services and supply, including a near term focus on identifying and sharing best practices between our Canadian and us.
<unk> businesses.
We believe this prioritization and focus will continue to lower costs and improve equipment utilization, resulting in increased competitiveness and likelihood of winning the tenders mentioned in the previous item.
Slide 16 shows some key milestones in our Mckellar integration plans much of which I have discussed previously.
But I would like to highlight is just like any project in North American we know a project well planned at start strong tends to run smoothly.
As such we have had our transition to ERP teams, including our internal systems experts experts consultants, which we have had prior experience and success.
Mckellar executives and senior management, developing our execution plan far before the deal closed.
Within the first week after close we had mckellar executives in Canada, reviewing providing input on those plans and before the end of October we have boots on the ground in Australia executing the plan as we speak.
We believe strongly that this instability and increased management information that our transition to ERP teams can bring to support the mckellar team will provide a robust well tested foundation for the future growth and increased profitability of the business.
Slide 17 highlights a net increase of around $1 5 billion to our already strong bid pipeline with large increases that is the big blue dots on the topline from long term non oil sands contract tenders.
One change of note to the bid pipeline has been our regional oil sands tender.
Unlike the original submission, which was for a five year term with committed overburden volumes for all five years. The client has told US they are pivoting to a three year term with committed overburden volumes for one year.
The change to a master services type agreement with annual commitments isn't new and as it returned to the same structure of agreement we operated for many years prior to this current agreement.
Although no formal reason was provided for the change in term of commitment. We believe the client is looking to optimize their longer term mine plans and focus on operational opportunities as communicated by their leadership team.
We believe oil sands demand for heavy equipment, especially for the larger ultra class size equipment will remain strong for the foreseeable future and our fleet will be fully engaged for 2024 and beyond.
The shorter term commitment has some positives as pricing is only firm for one year and we have low risk for cost inflation that can occur outside of contract escalation indices, such as we had in the last couple of years.
Lastly, although we truly believe our oil sands demand remained strong for many years to come we also see those big Blue diversified dots and continued strong heavy equipment demand in Australia as opportunities to further diversify reduce consolidation risks.
Lastly on backlog in Q3, we are awarded wind projects and oil sands following about $30 million and <unk> was awarded a $30 million mine remediation project.
On slide 18, our pro forma backlog sits at a record $2 8 billion with our addition of mckellar, adding about $2 billion and our expectations for year end are to have backlog in excess of $3 billion with the award of the regional oil sands tender offset by our normal quarterly drawdown from executed work.
On slide 19, we have provided a revised outlook for 2023.
With Mckellar closed Q3 in the books and a focus on a safe and efficient close of the year, we've been able to increase the midpoint and tightened the range for EBITDA with an encouraging uplift for EPS as well.
Sustaining capital increased due to some remanufactured component quality issues, which we have isolated resolved and a slight increase from mckellar free.
Free cash flow was also reduced due to the previously mentioned sustaining capital increase combined with joint venture distributions deferred into the new year and slightly offset by the increased EBIT projections.
On slide 20, we have provided our initial outlook from what is projected to be a record setting year. This is a slide I've been eager to get to.
Outpacing, our 50% accretive acquisition, adjusted EBITDA, and EPS mid points or more than 80% increases over any previous year end results.
Free cash flow is more than double any previous year and result in a directed to debt repayment. Our net debt leverage at the end of next year will be less than one four times, which is a level lower than any previous year end.
This slide more than any other shows what this business and this team can produce and I'm. So excited to close out this year strong and achieved the 'twenty 'twenty four targets, while continuing to challenge our team to advance this business beyond expectations for years to come and my 15 year tenure with anyway. These are by far the strongest projections we have issued.
Lastly regarding capital allocation as always we continue to assess our options in light of market and other macro conditions outside of our control and we will provide our expected allocation to more detail on our next call.
With that I'll open up for any questions you may have.
Yes.
Thank you.
To ask a question. Please press star one on your Touchtone phone.
We wish to withdraw your question. Please press the pound sign.
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 of Canaccord Genuity. Your line is already open.
Good morning, guys.
Ordinary.
Good morning, Joe just wondering how your 2020 for expectations for Mackellar.
<unk> since you announced the deal back in July.
Okay.
I think we probably have a bit more information in there.
Really a bit more optimistic on what we put out as the <unk>.
Annual contributions.
Probably slightly more than what we had in that July 27th Dec and.
So we brought them up and I think we have more confidence in those numbers.
Yeah.
Okay.
<unk>.
And does that imply the the legacy business.
Uh huh.
Flat to modestly up on an EBITDA in 2024.
I think it's fairly significant I think we're up probably 10 or 15% on a year on year basis I've to ask Jason to do the math for me, but yes. That's correct. We are expecting a really strong year from Fargo and then.
Strong probably 10% up on the legacy business from an EBITDA perspective.
Okay.
And Jason just while I have you on.
The guidance.
A pretty significant increase at the low end of EPS guidance.
Yeah.
For 2024.
Based on what I from what I was expecting anyway.
Was there anything in DNA or.
Interest expense.
That played into the EPS beyond what the EBITDA would have implied.
No its all in the EBITDA.
Right.
Depreciation taxes and interest all are at run rates that would have been in previous guidance. So yes, the uptick youre seeing would be.
Stronger than expected run rate at Mckellar as Joe alluded to.
Clarity with Fargo.
And then a strong utilization from from oil sands assets.
Okay.
That's it from me guys.
Yes.
Thank you.
Your next question comes from Aaron Macneil of TD Cowen Your line is already open.
Good morning, and thanks for taking my questions I think I'll stick with the guidance as well.
If I look at the mid point.
Of the revised 2023 guidance I think sustaining capital shakes out to about.
12, 8% of revenue.
Next year that bumps up to 14.
<unk> 14, 5%.
I'm just asking the question because you highlight the relatively newer fleet isn't the Keller.
All other things being equal.
You would expect that.
Introducing newer equipment in our fleet would bring that ratio down and so I'm. Just wondering is that increase a function of your conservatism or are there other factors at play that we should be thinking about.
There is some conservatism in that because we haven't done the detail of the components scheduling and the color that we do here.
We're in the process of doing that so there's there is more of an assumption of sustaining capital being at the depreciation levels.
No.
Yeah, our expectation would be that we could actually improve upon that with the mckellar site, but theres always risk to it.
Got it so in terms of the.
The legacy business, there's no major changes.
<unk>.
Is that the right way to think about the sustaining capital.
Yes, I think Thats fair adjacent near from the financial side, I think as Joe alluded to the component issues in 2023 here have would be a factor in that percentage as well.
And.
It will just take a look.
As we go through 2024.
Makes sense.
I know you spoke to this a bit but can you walk us through next steps with that regional oil sands contract that you're chasing and specifically I'm wondering how much of that contract.
Is extending existing work scopes versus new work scopes.
How might that how many things work if your contract expires, but you haven't signed a new one yet.
And just kind of like what do you expect the timeline to me.
We expect it to be.
Finalize before the end of this month.
We're in communication with them.
Practically every everyday or every couple of days.
We are going through some terms and conditions with them yesterday.
Sure.
These kind of changes arent.
Aaron I think you've probably been around with us.
Last time, when we the last oil sands contract, we renewed I think we announced it in March of 2022.
That contract was actually.
We were told we were going to be awarded in September of the previous year and the contract expired on December 31, and we had to have a bridging contract between December 31 March 17th when we.
Finally signed off on it so it when you have these big complex.
Contracts they can take some time and.
It's not unusual for them the execution of them to take it a little bit of time. So we fully expect this to be done by the end of November we believe we will we will receive.
A level commensurate with what we're doing this year to fully utilize our fleet.
We believe the demand is there.
I think more than anything else that I know, there's probably some anxiety because.
We said, we're going to get this contract last year and then it got deferred to this year and now we're saying it's October 31, and now it's going to be the end of November and yes, we are.
Its frustrating, but thats not unusual with this size of the contract and the fact that our client went through this thing.
If you could change at their senior leadership level.
Our budgeting and our forecasting is based on first principles here. We just look at where we are what we expected supply demand competition and price and we fully fully expect to be awarded.
Work, that's going to keep our oil sands fleet busy for next year and into the future. The change in structure just goes back to an old format, and we believe that's being driven because of.
Needs to have flexibility with their plans to adjust operations. So.
I don't see this as anything.
<unk> unusual it is frustrating but.
We don't expect it to have any significant impact on our business.
The bridging and contract it was exactly what I was trying to get at.
So let's say.
Gets delayed further.
Contract doesn't get signed until the spring.
And your next phase.
You'd have a similar type of arrangement.
We would have some amendment with the existing contract that bridges that through to whenever there. That's what we did with the last one yeah.
That just amendment that extended the term of the previous agreement until we had all the terms and conditions signed out on the previous one.
I appreciate the color I'll turn it over yes, no worries.
Your next question comes from Maxime Hi, Chad.
National Bank financial your line is already open.
Hi, good morning, gentlemen.
Good morning Max.
John I was wondering if you don't mind, maybe commenting.
In a bit more sort of granular detail around some of Australian business, because I think some of the local peers are sort of calling out.
<unk>.
2024, and maybe if you don't mind upon and kind of how.
Met coal is different from Cardinal and maybe some of the puts and takes that youre seeing kind of like on the ground as you get more comfortable with the assets.
Yes, Matt I would say, we continue to see what I'd say across all commodities as is stronger for longer.
This goes from oil.
Oil sands business through met coal thermal coal or any of the commodities. We think there is an extremely strong marketplace out there that continues we see it in our bid pipeline that you would see here in <unk>.
In our Canadian business and.
Though we don't have it on those graphs, we see the same thing in Australia.
We've had a lot of inquiries that we actually have.
There's like six different infrastructure projects that we're going to be digging in down there that we're now aware of.
Which mckellar hasn't pursued in the past so.
I don't think there has been a negative surprise in any of the work.
We've done so far.
Or expectations going forward.
Between.
Our forecasted 2024, which which is bit of an uplift from if he had just taken the pro forma from our July 27th to.
Now we've increased.
And I think we've.
We've been.
First principle based and that is not an overly optimistic viewpoint, we fully expect to meet or exceed those targets.
And.
I think I've used the term that we see opportunities to grow at 5% to 15% annual pace in in our business and I think that holds true whether were talking Canadian resources or Australia.
Or even the infrastructure side, which comes a bit lumpier, but.
No if anything I'd say, Max we're just reconfirming our confidence in this market going forward.
No for sure.
Thank you for that and I guess on the interest side of things Joe.
So are you at the point right now evaluating Sotheby's opportunities and would you have hypothetically the ability to participate in those some of them sort of come to.
Fruition and <unk> talked about.
Yes.
We're really early stages and as in expressing interest to receive tender packages and then talking to potential partners like.
Like our partners that were using in Fargo.
But theres a significant amount of <unk>.
Work that are already that were already aware of that has to give we're just looking at ones that have.
Meaningful earthworks to them.
And I think we've already identified.
Five five different jobs their solar farms wind farms Theres, a desalination plant.
Harbor bypass and an inland rail that we're looking at down there that we'd just be expressing interest on and then looking at partner so.
These things don't move real fast.
They tend to be years in the process, but.
We do see great opportunity down there to expand our mckellar business into that and R. R.
<unk> COO bearing down there right now talking to them.
Okay. That's good to hear thank you and.
Good morning, maybe just kind of.
You guys had mentioned Fargo.
Maybe kind of discussing sort of the critical task of this project and.
What it will stand in terms of the.
The execution dynamic and partners and so forth just maybe any incremental color. Thanks.
Yeah, I think we we had a really good summer and.
And we're looking to finish it up with a strong winter there.
Last winter, we werent real busy but this winter is going to be much busier and then next summer not only in New York, where it's high but we start into the roads and bridges side of things. So we really get into the teeth of this project over the next four years I think we had a six year construction schedule, all together or something like that and there is really the meat of it that way.
Getting into and.
From the earthworks side.
We're pretty much meeting and beating our plans at least we did this year and will hopefully continue to do that so are our expectations are.
<unk> for that project.
Alright, and I guess and western are fully over the hump in terms of getting.
Supply chain and.
Some of the material side.
And I presume labor in a small to a certain degree in terms of that project specifically.
Yeah, I mean are we.
Doing mostly the earthworks are certainly our equipment and our labor supply in our maintenance supply.
Has gone well.
We had some anxiety at the start but it's really we delivered into the plan well and we've exceeded some of our production forecast so.
I think as we get into the bridge and the road work and I think we're at roughly we'll end the year around 25% complete on the earthworks.
But but not that far into the bridge and road works. So next year will be kind of the end of next year. When everything is kind of at that 25% of further market I think it will be a good milestone for us to really predict how the overall project is going to go.
Okay excellent that's all for me thanks very much thank.
Thank you Max.
Your next question comes from Jacob bout of CIBC.
Your line is high.
Hi, Good morning, Joe and Jason.
Robert on for Jacob.
Well good morning good.
Good morning, good morning.
I had a couple of questions on guidance as well.
I believe this slide deck mentions that 2020 for revenue guidance assumes no calories current run rate operation. So so not much growth being baked in there if I'm reading that right would you would you say there is a degree of conservatism being built in here given integrations that started in the broader macro.
Diamond.
I think thats reasonable.
We're going with what we have in hand. This is still first principles budgeting, but there.
We're not assuming any any big growth opportunities or expansions.
Okay, Okay, Yeah, and I think I can elaborate on that at the current run rate is the Q4 run rate.
<unk> at a tick above even their Q3.
Prior to our acquisition. So the comment is really meant to say the range from our Keller is consistent with where they are running here in Q4. So.
You know obviously, the upper end would be a bit of an increase for them in the lower is kind of where they're at right now.
Great Great. That's helpful. And then in regards to the 2023 EBITDA and EPS guidance swing just wanted to clarify is that just a factor of the timing of the mckellar acquisition closed or expectations for better performance in the legacy business as well.
Yes of course, its both but the primary is mckellar, we had mckellar closing in mid November here.
As far as the July 2007 guidance and the ability to close it effective October one gave us some upside there, but we have we have a slightly improved.
Outlook for our base business as well so that's what gets the midpoint of $2 90 for EPS.
Okay.
Very helpful. Thank you very much I'll pass it over.
Thank you.
Your next question comes from Adam Thalheimer of Thompson Davis Your line is already open.
Hey, good morning, guys nice quarter. Thanks.
Thanks.
The revenue you lost within Neuner in Q3 does that come back in Q4 is that just a deferral.
Okay.
We're trying but it's all weather dependent so a lot of the places they are working we will get no doubt.
<unk>.
Pretty quick here, if they haven't already so unfortunately, sometimes those deferrals can't be pushed past past that level because they work in some high snow areas at some of these projects and they actually get pushed into next year.
So some of them when you get deferrals with none in Q3, you can't always recover in the same year so Bob.
I'm guessing, Adam I'd say half and half.
Okay and your.
I also wanted to ask about the bid pipeline. So your bid pipeline went from $5 billion to $6 5 billion is the jump there the inclusion of mackellar.
No.
No actually there is.
There are several.
Major mining projects that we have that are multiyear mining project that are non oil sands.
That have come up in the last quarter I think we've we've added.
And over $2 billion of pre tender phase projects in that.
And we continue to see.
You had heard it in my comments, we continue to see good opportunities for long term mining contracts in the resource industry in Canada, and I think we're going to see the same thing in Australia, but these ones are only our core business right now known and known goodness.
Good news and then.
The your largest oil sands customer the change in terms and commitments.
If you were in our shoes would that at all change the way that we should be modeling.
Your oil sands business.
No.
We can change it at all.
It's unfortunate that we have to revise our timing of things, but it's not unusual as I said the exact same thing happened on our last contract with our other oil sands producer.
Unfortunately this was.
Even bigger than that one was so.
I can understand how it may create some anxiety.
But it wouldn't change our our basis of prediction of.
How are we going to perform and our our budgeting and forecasting.
Done purely on first principles and.
Hopefully with a little bit of conservativism in them and so now we fully expect that we will replace that work and hopefully do more through an increase in utilization, which is what our plans are.
Great and just lastly, Jason do you have the.
Depreciation numbers for Q4 and for 2024.
Not right in front of me I think were running right around 15%.
Combined revenue for those years.
And it's all reflected in EPS. So we're not we're giving ourselves a little cushion with our Mckellar Carman came with with their capital for next year, So a little difficult to predict mckellar depreciation rate.
At this point, but we're right around that percentage.
Okay. Thanks, guys.
Okay.
Your next question comes from Jim Monarch, Hello of APB capital markets. Your line is already open.
Hey, guys.
Tim's brother.
Yes.
As evil twin.
[laughter].
I guess just around the suncor.
Contract he is negotiating.
Is that still going to incorporate all of the sites into one.
It'll be one form of contract for all three sites.
I guess technically there's there's five different mine sites in three different locations.
But each one will have their own scope.
And you'll be able to.
Between themselves is that still the idea or has that changed as well.
No I believe are our contract specifically I don't believe that will be in every based contract.
I believe we will have that provision in ours, where we allow movement of committed volumes between sites.
Okay.
And I appreciate all the commentary around sort of your view on how.
It may or may not affect activity.
Over the near term.
Optics of it.
I might suggest that the long term positioning for.
Way that they're thinking about contractor usage has changed and that would align with some of the commentary they've said publicly although I think there's a number of structural reasons why that's difficult.
I'm wondering if you can kind of elaborate on.
Why.
Thank you.
<unk> positioning in the oil sands as defensive over a longer period of time.
To me that.
Three big drivers are.
Our low cost provider status.
<unk>.
So.
Mining equipment.
I guess a lot of people may not know the mining equipment world.
But these aren't like automotive they don't make hundreds of thousands of vehicles.
They literally make dozens.
You look at these big trucks, they make dozens of year for our worldwide 90 market.
So the.
It's just supply and demand like I said these are first principal's basis, we don't.
I'm sure, there's some anxiety about contract timing and things like that and this isn't an emotional based forecast. This is supply and demand and every new truck every new piece of equipment. It comes into Fort Mcmurray.
We know because there's only one road in and one road out and we see every piece of equipment that comes in there. We know what manufacturers capabilities are as far as putting out fleet because we asked for that fleet too and we know the timing.
Are you an example.
Some of the largest shovels hydraulic shovels in the world.
You'd be two years out on some of them some of them aren't even tier four compliant yet so they can't even sell them in Canada.
So I think just understanding that the market and the demand.
We know what the volumes.
Supposedly going to be required because our clients have told us how much contracted volumes or are in the haul distances.
So really this is this isn't.
And this guy think and this is just.
Straight supply and demand calculations off of equipment and availability and how fast it could come in or not and then the fact that we think is a safe low cost provider, we're going to be the last one standing anyway, even if the market did cut back which we don't think is going to happen and we also see a lot of opportunity outside of oil sands.
And in some of the other commodities.
Okay I appreciate it all that.
Yes.
And at worst case scenario.
You did start to see declining demand how early do you think you would start to see signals in the market.
We know customers buying equipment or.
Or.
Contractors being late.
Like is that something that you would see.
With a relatively good time that you could move equipment.
Better opportunities or do you think that could be a sudden shift.
No I think we'd see it I think our I think our customers would announce it frankly.
Especially with the strength of the relationship with <unk>, who have significant.
Investment in our capital assets.
They are also partners with our producers on things like the tank farm.
So I think theres long standing relationship there no one is going to we're not going to pull out of <unk>.
Oil sands overnight leave our customers hanging in I don't think they would do that to us either.
So.
My opinion, Tim I think we'd have years of four warning.
Okay.
Helpful.
Second one question here just to follow up on the bid pipeline question.
Not only did it expand but you have some pretty large.
Circle is probably $3 billion or so.
That has come into that preferred opportunities in extension category.
Wondering if you can speak to those.
And what makes us prefer.
What makes us a preferred as we have existing relationships with the clients.
The two biggest ones are are the regional tender in them.
And they're working back Atlanta.
Which we would look at with Luna.
If youre looking at the preferred opportunities.
Yes, there's like three sort of larger blue circles are 2025.
Area.
Yes, there is a major mining reclamation for for our Diamond mine with the relationship that we've had in the past through Nona.
There is a bathroom then.
Iron stuff through Nona, and then Theres the regional oil sands vendor.
Okay.
And then as it relates to the northern Ontario, Goldmine that just a new contract and just ended from you know do you.
I think youre going to be able to find work for that at.
Easter is that being mobilized backfill sounds now.
Yeah.
I think we will be moving some of the stuff back to lessons I think the excavators and then we had.
With the trucks I think were sitting on right now and we're evaluating.
The tenders that are in it.
In Ontario, and Quebec.
We also one of the things Barry is going on in Australia as we're looking at some of the opportunities whether we should be shipping some of those over to Australia.
In addressing some of the demand in the western Australian marketplace, which fits those smaller trucks more.
Okay. That's.
That's very helpful. I'll turn it back with the <unk> 2021.
Thanks, Tim.
Your next question comes from Sean Jack of Raymond James Your line is already open.
Hey, Good morning, guys, just really quickly wanted to look back at slide 16, and just ask how sensitive is the guidance for 'twenty 'twenty four and some of the key steps shown here.
And would there be a critical step that you would highlight as kind of the most influential to you guys a success and kind of hitting the mid points.
I would say Ed.
In this integration I think the key for us.
Would be in the ERP implementation, but I don't think that prevents.
Anything from happening as Jason said, there on the burn rate right now in Q4, and obviously, we haven't done anything yet.
So we see most of this as being upside opportunities and sharing best practices and that will get that's really where we see the synergy of the deal. That's it's really not shown in right now.
Okay, perfect and just.
Just quickly I know that you had spoke a lot about transmission metals and the market Theyre in Australia. When the deal was originally announced just for context. When you guys are now kind of looking a bit more closely at the bid pipeline down in Australia are you seeing many immediate options in that space right now.
Certainly the lithium marketplace is very active down there because its hard rock, it's not like the bright and stuff you see in South America.
<unk>.
And I think youre seeing an increase in <unk>.
Copper and iron ore side.
Whether you consider that part of transition or not I don't know.
And then.
I'm trying to think there was some zinc I think some zinc opportunities I don't have their bid pipeline memorized, yet there Sean but.
It's been a it's a very active.
Marketplace there in.
Western Australia metals, and even in eastern Australia.
Thermal and metallurgical coal markets.
Yeah, Okay perfect. That's all really helpful. Thanks.
You bet.
Okay.
Your next question comes from Erin Kumar Investor Youre line is already open.
Okay.
Hi team.
Congratulations on closing the acquisition that two questions one is on.
Capital allocation with regard to share repurchases, especially.
As you know what the stock is trading well below 10 times, our estimated future earnings and I understand.
As we look forward are want to pay down the debt, but I'm trying to understand if the shares.
Still trading at low valuations.
How does the team look at capital allocation.
And then I'll come back to the second question now thank you.
Yeah, we look at capital allocation the same all the time, we're always evaluating.
Return opportunities and risks and <unk>.
And I appreciate you highlighting the bargain with bargain that our share price is right now I agree.
Where.
We'll be having those discussions with our board here in the next couple of weeks and looking where we put the significant cash flow, we're going to generate 2024 to work.
So.
No I agree with.
Our current <unk> it starts with the six with today's opening price.
I think you were mentioning less than 10 times and.
And I think there's some opportunities there, but we'll be evaluating that certainly debt repayment.
I think we're over 7% interest rate this last quarter.
And obviously that is zero risk.
So there's going to be competition for capital.
We also have done very well with some bolt on acquisitions in the past.
And vertical analysis, so if those opportunities come up.
It's really just the competition of risk and return.
Thank you.
Hum.
My other questions on more on the longer longer term.
Opportunities in Australia like them.
The acquisition, we made with Mckellar and thoughts on deploying cash at goderich tons over the next.
If the other regions around the world that would be interested in.
Model for a long time, how youre thinking about allocating capital.
Yeah.
Yeah, Hi, Erinn, I think whether it's Australia or here, we're going to look at the return on assets.
Just like I was talking about these trucks that are in northern Ontario.
We're going to put equipment, where it gets the best return if that's in Western Australia will put them in Western Australia, and Canada with Canada I think.
Historically, the marketplaces that we have thought.
We're best for US would be North America, Australia, and South America, and obviously were in North America, and Australia right now.
And most recently South America has had a lot more turbidity and.
And governments and royalty regimes, so it kind of suppressed investment dollars from the mining world.
But obviously that could change and if we're looking longer term, we will certainly be looking back and in South America again.
But but for sure the North American and Australian opportunities in the near.
Term, even five to 10 years, we think we're going to be tremendous.
[noise] I think thats all the questions unless you have any more herein.
No that'll be it thank you.
Thank you Anne.
Yeah.
Thank you.
This concludes the Q&A section of the call I will pass the call over to Joe Lambert, President and CEO for closing comments.
Thanks, John and thanks to everyone for attending today's call I Hope you all have a safe and first of holiday season, and look forward to sharing our year end results and business updates with you in the new year.
Thank you. This concludes North American construction Group conference call on third quarter of 2023, you may now disconnect.
Yeah.
Okay.