North American Construction Group Q2 2023 Earnings Call Transcript

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Provided by Quartr
July 27, 2023

There are 7 speakers on the call.

Operator

Morning, 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.

Operator

They are free to quote any member of management, but they are asked not to quote remarks from any other participant without that participant's 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 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 discussion and analysis, which is available on SEDAR and EDGAR as well as the company's website at nacg. Ca.

Operator

I will now turn the conference over to Joel Lambert, President and CEO.

Speaker 1

Thanks, Joelle. 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 discussion involve the transformational acquisition of the McKellar Group. Therefore, we'll do things a bit different this morning. I've asked Jason to summarize our Q2 performance and then I'll jump right into the commentary and context on McKellar.

Speaker 1

At the end of the prepared remarks, we are happy to address Q and A on either Q2 or McKellar. With that, I'll hand it over to Jason.

Speaker 2

Thanks, Joe, and good morning, everyone. As mentioned, the focus on McKellar, The quarterly comments this morning will be brief. On Slide 3, 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.

Speaker 2

On Slide 4, you will see 2 things. 1, 61% was the highest utilization we've ever had in a second quarter, but 2 and probably more noticeable, the month of June was well below expectation. April May benefited from the strong momentum carried from Q1 and averaged 70%, which was very encouraging. However, The surprisingly wet weather in June and required mobilization of equipment into Fort Hills drove utilization in that month to below 50%, a level we haven't seen since mid-twenty 20. High demand remains for our heavy equipment, and we expect this throughout 2023 and into 20 We likewise expect our maintenance teams to continue their strong work and correlated improvements in the mechanical availability of our fleet.

Speaker 2

We remain on track with our utilization goals to be in the targeted range of 75% to 85% on an annual basis, with the trailing 12 month average now at 70% compared to the 65% we posted in 2022. Moving to the financials, Slide 6. Combined revenue of $277,000,000 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 of 15% as trailing 12 EBIT of $143,000,000 outpaced increases in invested capital, which now sits at 731,000,000 Slide 7. On a combined basis, revenue of 21% revenue was 21% ahead of Q2 2022.

Speaker 2

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 and unit rates, which were applied in Q3 2022. ML Northern acquired on October 1, provide another full quarter of operations of fuel and lube delivery and as we approach the 1 year anniversary of welcoming them To NACG, we are happy to consistently report the strong performance of that critically important support fleet. Our share of revenue generated by joint ventures and affiliates was $83,000,000 compared to $60,000,000 In Q2 2022, but notably up from Q1 2023 revenue of $78,000,000 as their projects are not as The Newnan Group of Companies had another busy quarter of activity at the gold mine in Northern Ontario. Of 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 the Mikasoo and the increasingly important impact of Joint ventures 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.

Speaker 2

Combined gross profit margin of 13.1 was a quarterly improvement from the 9.6% 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 margins benefited from the NL Northern acquisition from lower Internal costs as well as strong margin from services provided to external customers. The 2nd Life rebuild program commissioned and The best Q2 we've ever posted and reflective of the commentary thus far. Included in EBITDA is general and administrative expenses, which were $7,200,000 in the quarter, equivalent to 3.7% of revenue and remained under the 4% threshold we set for ourselves. Going from EBITDA to EBIT, we expensed depreciation equivalent to 10.4% of combined revenue, which reflected the Depreciation rate of our entire business.

Speaker 2

Diversification efforts into less capital intensive services continues to have a noticeable impact on the depreciation When looking at just the wholly owned entities and 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. Adjusted earnings per share for the quarter of $0.47 was $0.30 up from Q2 2022 as revenue increases translated down to net income. EPS was driven by $23,100,000 from adjusted EBIT net of interest and taxes. The average rate for Q2 was 6.9% as we trended up slightly from Q1 the Q1 rate of 6.7% from continued interest rate increases. Excluding the acquisition, Joe will discuss The gross interest expense of $7,500,000 should be a high watermark for the year as free cash flow is generated in the second half and we pay down debt.

Speaker 2

Moving to Slide 9, I'll summarize our free cash flow. Net cash provided by operations of $40,000,000 was generated by the business, reflecting the strong EBITDA performance. Free cash flow was a use $4,000,000 as sustaining maintenance capital of $38,000,000 was invested in the fleet. Moving to Slide 10, net debt levels increased $10,000,000 in the quarter as $4,000,000 of free cash flow used was financed with debt in addition to the growth assets purchased, growth assets purchased and dividend payments. Despite the modest increase, net debt and senior debt leverage remained fairly steady at 1.41.3 times respectively.

Speaker 2

Slide 11 provides our bid pipeline, which according to our estimating team is the fullest it's ever been and highlights strong demand and active project tenders. Similar to last quarter, we added another $300,000,000 in new tenders, about half of which is outside the oil sands and roughly matches our diversification. 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. Our contractual backlog now sits at $920,000,000 as we complete the scopes awarded to us and we continue to have expectations of exceeding $2,000,000,000 before the year is out.

Speaker 2

And with those comments on the quarter, I'll pass the call back to Joe.

Speaker 1

Thanks, Jason. As a company, NACG has always been very selective in how we use our capital. And when it comes to our M and A, we have been determined but patient in selecting the right businesses, people, geography and markets to enter. That is why today, I'm extremely excited to announce our largest acquisition to date, The McKellar Group. This transformative transaction is a combination of thorough operational and cultural diligence over the course of multiple years, The deal that makes clear strategic sense.

Speaker 1

We believe this transaction is financially compelling and more accretive to our shareholders than any other use of capital. I hope at the end of this presentation, all participants will agree that this transaction fulfills our stated objectives and provides a meaningful step change in our project execution capabilities and growth profile. In this slide deck, I'll present and discuss a high level review of McKellar and 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 2024 before taking any questions you may have. On Slide 4, founded in 1966 by Alastair McKellar, a heavy equipment mechanic or fitter In Australian terminology, the McKellar Group has grown to over 4 50 pieces of heavy equipment, operating on more than 15 projects With more than 1,000 employees, of which over 375 are highly skilled maintenance personnel operating in a system focused on safety In innovative ways to lower equipment costs and extend asset lives. As a leading provider of heavy earthwork solutions to mining and civil sectors, McKellar provides a meaningful entry into Australia at a time where heavy equipment is in peak demand.

Speaker 1

Moving on to Slide 5. We highlight 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 has allowed us to finance acquisition with our own balance sheet resulting in exceptional accretion. Our fully underwritten financing supported by our lead lender shows the confidence in our business and the vendor provided financing aligns management teams and mutually incentivizes exceeding performance targets. Although fully debt financed using the strength of our combined balance sheets, The leverage is expected to be 1.8 times at year end and below 1.5 times by the end of 2024.

Speaker 1

Last but certainly not least, McKellar adds over $2,000,000,000 in incremental backlog, providing a 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 6, we provide a bit of a timeline and approach we took to the transaction, starting with an introduction through our team at DGI, who we acquired back in 2021. McKellar is a long time customer of DGI and the founders of each company I've had both the business relationship and personal friendship for several decades. Seeing the similarities between NACG's and McKellar's Operating philosophies and corporate culture, DJI facilitated the introductions.

Speaker 1

After several initial conversations, It was clear that our 2 companies share common values and culture and can make a great combination. We likewise each And confirm the words were matched with what we saw in the business execution. Once the fit and potential combination have been mutually established, We've progressed with the utmost diligence through continuous and transparent dialogue for over 2 years, resulting in agreement achieving both companies' transaction criteria. This disciplined approach provides us, our Board and the McKellar team with significant confidence of the ability to successfully integrate and execute our strategic plan moving forward. On Slide 7, we provide a bit more detail into the transaction rationale.

Speaker 1

1st 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 match that is so similar I would expect anyone knowing NACG and speaking to a McKellar employee to feel like the only difference was the accent. I'll move on to the other points as we will discuss this further on subsequent slides, but this cultural match is definitely A unique and favorable sign 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 In the various commodities and resource rich areas of a mining friendly country. With new equipment lead times ranging from 1 to 2 years, Acquiring a fleet of this size provides immediate scale during peak demand.

Speaker 1

I would also note the relatively young age of this fleet With just over 40% of the fleet being purchased in the last 5 years and just under 30% in the last 2 years, With these most recent purchases still having a couple of years before requiring any meaningful major components sustaining capital. With significant contract awards expected in NHG's core business before year end, we expect a combined backlog of greater than $4,000,000,000 providing consistency that allows for planning and efficiency of our workforce and our fleet. Moving on to Slide 8, Both NHCG and McKellar are committed to the health and well-being of our employees and minimizing our environmental impacts through individual commitment and proactive participation at every level of the organization. Combined, we will continue our commitment to achieving industry leading results and relentless pursuit of 0 harm and getting everyone home safe. 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 indigenous relationships, increasing diversity in our workforce and improving the communities we work in.

Speaker 1

On Slide 9, we highlight some of the key skills and characteristics of McKellar and note how well they match ours. Whether it's an indigenous customer or vendor partnership, McKellar values them all and treats them all with respect, honesty and a genuine desire to be mutually beneficial. McKellar has continued to innovate and build their skills through in housing of equipment maintenance, component 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 to focus extends from an executive team to the frontline We've demonstrated commitment to safety, ethics, communication, people and performance.

Speaker 1

In our next section on diversification, I'll quickly go through these slides to show what we will what will be achieved pro form a with this transaction and what Our opportunities are to further grow and diversify the business going forward. On Slide 11, we show our geographic diversification in Australia and highlight all the key characteristics that make it such a great resource market. With its concentration of resources in Western Australia and Queensland, The country provides a great growth engine as we look to expand further into these mining friendly regions. On Slide 12, we highlight on the left, our significant geographic diversification progress and fleet expansion since 2018. And on the right, the tremendous resource richness of Australia, including many transition metals, which we believe provide strong potential for future Further growth and diversification.

Speaker 1

Australia has had some of the largest and most actively mined resources in the world, and we are confident that the region presents a massive Slide 13 shows the diversification projects progress since 2018 in EBIT and the expansion of customers from 5 to 35. The pro form a business maintains a long history of working with quality blue chip customers, while reducing the contribution of our largest end market from 94% to 35%. We also have a strong history over that timeframe 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 Continue as we expand. Slides 1415 illustrate the wide spectrum of McKellar's Quality customers and long standing relationships. McKellar's strong reputation has earned its various major projects and it now has operations on numerous sites, a few of which are highlighted here on Slide 15.

Speaker 1

In our closing section on Slide 17, We have provided a brief overview of the transaction timeline. After today's announcement, we'll be working towards a targeted close date of Q4. Once completed, McKellar will be business as usual with an already in place high quality management team, but with the full support of NACG now behind it. We plan to share best practices and systems, drive to continually drive down cost and improve operational performance. On Slide 18, we provide a bit more detail on our focus over the next 12 to 18 months.

Speaker 1

One key area I would like to delve into is the focus of the small NAC transition team in implementation of ERP systems and procedures. With McKellar's strong growth and continued internal maintenance focus, their existing systems are beginning to get stretched and limiting management's ability to get good data. This is almost exactly the position we were in around 5 or so years ago And our transition team and corporate support will be absolutely focused on helping to design and implement these systems and procedures at McKellar using all of our past learnings to get the gains of what we did right without enduring the pains of what we got wrong. Although I can Consider both companies top notch in maintenance skills and innovation. The skills aren't identical and there is much to be gained by cross training and sharing of best practices.

Speaker 1

We both have in house maintenance work that was once being performed by vendors. And where the tasks are the same, we will review each step in the process, Compare and pick what works best and combine to create an improved process. And where the in house tasks are different, we'll evaluate the opportunity and see if that task can be in house or not currently performed. Ultimately, we expect the sharing and systems improvements will support The company as a whole into continuing to lower costs, improve margins and increase utilization, all while focusing on continued growth and diversification opportunities. Finishing on Slide 19, we are reaffirming our outlook for this year while increasing it for the combined impact of the 4th quarter pickup.

Speaker 1

We're providing a meaningful step change to our financial profile with increased ranges across the board. We expect to provide updated 2020 guidance later this year, but I would like to highlight the incremental impacts of McKellar as they are material. We anticipate a 20 24 increased EBITDA and EPS of over 50 percent 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 NACG's future and I'm Drilled to welcome McKellar to the NACG family. With that, I'll open up for any questions you may have.

Operator

Once we have completed your questions and would like to return to the queue, please press star 1. After a brief pause, we will begin the Q and A session. Your first question comes from Aaron MacNeil with TD Cowen. Please go ahead.

Speaker 3

Hey, good 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? I guess I'm Trying to like think about it in the same way that you talk about your oil sands contracts and maybe you could also differentiate between met coal and thermal coal, if that's possible.

Speaker 1

Yes. I would say, it's extremely similar, Aaron, that they're long live resources. So Western Australia is predominantly gold and iron ore. Gold fluctuates highly in the mine life, but iron ore is generally extremely long mine life. And then their major operations in Queensland are split between thermal and metallurgical coal.

Speaker 1

And those mines, some have 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.

Speaker 3

And in terms of re contracting, they've been around since 1966, Like

Speaker 4

have they had the

Speaker 1

same contracts that have been Yes, many of their customers, especially in Queensland, Have been customers continuously for multiple decades. We can certainly highlight this a lot more in future decks.

Speaker 3

Yes, yes. No, I understand. I think you've made it pretty clear that debt reduction will be the priority at least in the near term, but How are you thinking about capital allocation more holistically? Like, will the focus be to reduce debt further? Does McKellar open up opportunities to further consolidate in Australia.

Speaker 3

And is that something you were interested in? Like how does that rank against The NCIB and the dividend, just maybe give us a sense of where you're headed at with this acquisition and what capital allocation may look like?

Speaker 1

Yes. I think, Aaron, we're always evaluating at any point in time with share price, M and A opportunities, Debt repayment, I mean, debt certainly becomes more attractive as interest rates keep going up And certainly, it has the lowest risk of any. But we're always comparing and evaluating risk versus reward. Even after this, we have a significant amount of liquidity even after this deal and certainly by the end of 2024 At 1.5 times, we have a significant liquidity to do other things if they're there.

Speaker 3

Got it. Thanks, guys. I'll turn it over.

Speaker 2

Thanks, Aaron.

Operator

Your next question comes from Kevin Gainey with Thompson Davis. Please go ahead.

Speaker 5

Hey, guys. Congrats on the quarter and thanks for taking my questions.

Speaker 3

I I

Speaker 5

think I have one for you first, Joe. You kind of talked about it a little in the prepared, the mechanical capabilities of McKellar. Maybe if you could go in some of the similarities or differences?

Speaker 1

Yes. I guess the biggest similarity is they're extremely focused on maintenance efficient innovation, which is very much what we do. I'd say We do a lot of our component remanufacturing in house or with partnerships. They do the same. When I talk about sharing a best practice is what I really mean is that there's a lot of those things we do and they do that are the same, but there's a lot of it a little different.

Speaker 1

I'll use A dozer track frame is an example. We rebuild the track frame, which is kind of the middle piece of it and they rebuild tracks, Which is obviously what think of it as the rim of the wheel and the tire of the wheel. And But we don't do each other's activities and we'll be able to evaluate those remanufacturing options and see if we can bring them in house at each other's place And continue to drive those costs down. So they are very maintenance focused. The founder was a mechanic and very maintenance focused group as we are and we understand As they do that the biggest driver of our cost is equipment and as much as that as we can control and drive down is going to increase our competitiveness or our margins.

Speaker 5

That sounds good. And maybe for Jason, if you could maybe talk about The seasonality of McKellar from a revenue standpoint and then also more modeling base, maybe the interest expense run rate that you're thinking post Transaction?

Speaker 2

Yes. Thankfully, McKellar is actually very flat from a seasonal perspective. Our midpoint for next year is kind of the $145,000,000 EBITDA run rate and when we look at that even for how they're performing this year, It's very consistent quarter over quarter. They have a little bit of weather issues in December January, but nothing like we experienced in Canadian oil sands, so that should really help for quarter over quarter volatility in our results. So that's kind of an easy question to answer.

Speaker 2

And as far as the run rate, our $1.25 midpoint for EPS And our ranges assumes a 7.5% interest rate, which is a combination of The vendor take back financing, the equipment leases we hope to have in place as well as the revolver, which is Currently tracking in kind of the high 7s from an interest rate perspective, but 7.5% is a good Base case and then we hope to beat that with primarily with equipment financing, which is quite competitive.

Speaker 5

Perfect. I'll hop back in queue.

Speaker 2

Thank you.

Operator

Your next question comes from Tim Monachello with ATB Capital Markets. Please go ahead.

Speaker 4

Hey, good morning, everyone.

Speaker 1

Good morning, Kim.

Speaker 4

Just a few questions on the acquisition. So starting with the Australian competitive landscape, and I know, Joe, you've worked in Australia before. I'm wondering if you can Maybe parallel the competitive advantages that Mackellar might have in the Australian market versus how you guys are positioned in The Canadian market, obviously, you have a very strong competitive positioning in oil sands. I think that the Australian market is a little bit more fragmented and perhaps more competitive, but it looks like McKellar still has pretty strong profitability and margin. So, just wondering if you can Lay that out for me.

Speaker 1

Yes. I'd say, it's extremely similar to ours. I mean, the Australian contract Mining in Northworks marketplace is big. It's much more prevalent for mine sites to contract than in North America. But with that, there's more competitors, both public and private.

Speaker 1

But the focus there is similar to us is The way you maintain consistency in that marketplace is to be the low cost provider and focus on safety. And their in housing and maintenance be it the component remanufacturing or second life rebuilds of equipment, which They've likewise been doing for many years now. It is very much where we focus because that's The biggest driver of cost and we'll certainly look for other areas of operational efficiency, but that's what drives their competitiveness And it's but we'll use similar to what we've done in our core oil sands business to diversify and get into other areas is We'll look to do the same thing with McKellar and using that low cost such that you can go out and diversify without losing margin.

Speaker 4

Is there evidence that McKellar is the low cost provider, at least one of the lowest cost providers in the market in Australia?

Speaker 1

I don't think we have any definitive evidence as we've had in oil sands where we've had clear timeframes such as During COVID and when we were the only ones operating and during some tenders that were done kind of reverse auctions. So 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, we certainly believe they're there

Speaker 3

or very close.

Speaker 4

Okay. And then I know that in future iterations of your presentation, you'll wrap in McKellar, but there's a couple Thanks. I'm curious about one is the bid pipeline that McKellar might have in Australia. How does that look compared The NACG bid book?

Speaker 1

There's quite a few projects in there. I don't know how Compares historically, I guess really their biggest issue Tim is their fleets almost fully consumed. So it's more having the assets to do the work than having the work to bid on. So there's Plenty of work and bid pipelines occurring, especially in Western Australia with their Western Play and Hyre Group. And we're going to look to see whether We can utilize some of our underutilized assets from oil sands and give them some support in Extremely strong demand environment that they're in.

Speaker 1

So the bid pipeline is strong. I can't give you a comparator because I don't know it off the top of my head. But the limiting factor on that bidding is more the amount of equipment they have and the high demand they already have.

Speaker 4

Okay, got it. That kind of gets into my next question, so I was going to ask about that. Do you think that the smaller end of your fleet in the Canadian market is suitable for some of the demand profile in Australia?

Speaker 1

Absolutely, especially the Western Australia rental market. So our 100, 150 ton trucks That are underutilized in oil sands that we've been moving into other regions and bidding into other regions are highly utilized in Western Australian rental market.

Speaker 4

Okay. Do you think that there's a high likelihood then that you're going to have to grow the fleet organically as well In Australia?

Speaker 1

I don't know that off hand. I think there'll be an opportunity and I think we'll evaluate that Kind of growth capital with just like we do the rest of our capital allocation as far as what's the risk and reward and opportunity within it. I think that Western Australian rental market will be able to feed from underutilized fleet, but there's certainly some big gear and some long term mining contracts They would require growth assets and we'll we would evaluate those and those opportunities just like we do anywhere else in our capital allocation.

Speaker 4

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 2 years that is meaningful that You'll have to

Speaker 1

replace. Not significantly. I think you can see by that backlog number that they're kind of booked 4 odd years, there's different contracts of course, but they certainly have long term contracts With good escalation clauses and coverage for inflation, even in the rental side, they're long term rentals. So I don't see there'll be a bit of churn in the 2 years of but it'll be a small portion of the overall work.

Speaker 4

Okay. That's really helpful. Thanks a lot guys and congrats on the deal.

Speaker 1

All right. Thanks,

Operator

Your next question comes from Maxim Sytaj with National Bank. Please go ahead.

Speaker 6

Hi. Good morning, gentlemen.

Speaker 1

Good morning,

Speaker 6

Mac. Joe, two questions for me, if I may. The first one, I was wondering if you don't mind maybe commenting about sort of eventual infrastructure spending opportunity as I believe Australia right now is going through a pretty significant investment cycle. Yes, maybe that's the first one, if you can provide any color there. Thanks.

Speaker 1

Yes. I do think like first of all, like right now, McKellar isn't involved in any major infrastructure works. It's all mining contracts and rentals. I absolutely see great opportunity there. In particular, Our partner in Fargo Moorhead, the company we partner with there is also, I believe either the number 1 or number 2 contractor in infrastructure in Australia.

Speaker 1

And we certainly think there's an opportunity where Australian Infrastructure projects that have significant amount of earthworks that we'd be invited in, especially from our partners in Fargo to bid on those works. So I think that's an expansion and diversification opportunity that we'll have for McKellar in the future.

Speaker 6

Okay. Excellent. Thank you. And my follow-up is for Jason, if I may. How should we think about The free cash flow conversion given the slightly younger age of equipment, any color there would be helpful.

Speaker 6

Thank you.

Speaker 2

Yes, it's a direct correlation to a higher conversion ratio. So, we've been in that 30% range, Trying to inch up to 35%, McKellar is nicely in the 40% Free cash flow conversion range, even with pretty heavy interest next year. So, yes, as Joe mentioned in his prepared remarks, the Sustaining capital range we gave for McKellar next year, is a pretty wide range. As we get to know their equipment, we'll fine tune that. We think there's a little bit of upside there to get even north of 40% conversion ratio.

Speaker 2

So Definitely some good free cash flow potential over the next couple of years with this newer fleet.

Speaker 6

Okay. Excellent. That's it for me, gentlemen. Thank you so much and congrats on the deal.

Speaker 1

Thanks, Matt.

Operator

This concludes the Q and A section of the call. And I will pass the call over to Joe Lambert, President and CEO, for closing comments.

Speaker 1

Thanks and thanks everyone for joining us today. We look forward to providing next update either upon closing of this transaction or our Q3 results.

Operator

This concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

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North American Construction Group Q2 2023
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