North American Construction Group Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2024

There are 10 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to the North American Construction Group Conference Call regarding the First Quarter Ended March 31, 2024. At this time, all participants are in a listen only mode. Following management's prepared remarks, analysts, shareholders and bondholders to ask questions. The media may monitor this call in a 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 the participant's permission. The company wishes to confirm that today's comments contain forward looking information and that actual results could differ materially from 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 on the company's website at nacg. Ca.

Operator

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

Speaker 1

Thanks, Enrico. Good morning, everyone, and thanks for joining our call today.

Speaker 2

I'm going to start with

Speaker 1

a few slides showing our Q1 operational performance before handing it over to Jason for the financial overview. And then I will conclude with our 2024 operational priorities, bid pipeline, backlog, outlook for 2024 and finish up with our capital allocation plans before taking your questions. On Slide 3, our Q1 safety performance remains well below our industry leading target frequency of 0.5 and we have reduced our life saving rules violations by 50% from Q1 last year. These digits and work hours. We currently are focusing our safety efforts on frontline leadership training, improving our peer to peer recognition program and increasing leadership visibility in the field.

Speaker 1

On Slide 4, we highlight some of the major achievements of Q1. Our recently acquired Australian business continues to deliver strong and consistent results even after some heavy rain impacted summer months and the backlog down under increased significantly with the award of a $500,000,000 5 year contract extension with our long term metallurgical coal producing client. With our integration team now resident and our Australian bid pipeline showing continued strong demand, we remain confident that the Australian market will play a dominant role in maximizing our fleet utilization and return on assets. The first equipment transfers to Australia have reached their shore and we're excited about the long term opportunities we see in the Australian market. Our Fargo Moorhead flood diversion project smoothly ramped up in Q1 in advance of its first big summer construction season and we remain confident in our overall project plan.

Speaker 1

Our telematics system continues to provide maintenance savings, achieving a record quarterly saving of almost $2,000,000 in Q1 and we're evaluating some Australian assets for an initial rollout of telematics in Q2. At lease, we were awarded a 3 year contract in oil sands, which generated about $225,000,000 in 20.24 backlog. On Slide 5, we show fleet utilization by region. Australian utilization remains strong with Q1 ending on a March high note after a few high rainfall impacted summer months. In Canada, our utilization suffered from mobilization of fleets between oil sand sites in February and lower volumes of winter reclamation work.

Speaker 1

We remain on trend and confident in our ability to hit our Canadian target range of over 75% by the end of this year, and we'll also be looking to similarly increase our Australian fleet to over 85% during the same period. I'm sure some may believe our Canadian utilization targets are stretched after coming off that February low. However, if you consider the units we expect to transfer and some sales of smaller assets combined with improving mechanical availability and no further anticipated fleet mobilizations, our math still suggests we are capable of exceeding our target before year end. With that, I'll hand over to Jason for the Q1 financials.

Speaker 2

Thanks, Joe. Good morning, everyone. Getting right into it and starting on Slide 7, the headline EBITDA number of $93,000,000 and a correlated 27% margin were driven by successful second quarter from Australia since the change of control on October 1, 2023. Our margin in particular, along with the combined gross profit margin of 18% illustrates a strong operational quarter. All business units contributed to this margin with the exception of Nuna, which posted EBITDA margin of less than 10% in the quarter when factoring out the one time costs that were incurred as part of the restructuring during the quarter.

Speaker 2

The EBITDA margin illustrates project execution risk in the joint venture and is a metric indicative of why a change was needed. Restructuring efforts were completed during the quarter and the projects in Northern BC and the Northwest Territories were finalized. Restructuring expenses incurred and added back for adjusted earnings purposes relate to severance costs and one time expenses required to complete legacy projects. Moving to Slide 8 and our combined revenue and gross profit. As we will have for 2 more quarters, McKellar provided a step change in the quarter over quarter variance.

Speaker 2

On a total basis, we were up $53,000,000 quarter over quarter. McKellar and DGI, which we combined in our results were up $128,000,000 almost identical to the Q4 variance, which could have been higher if the rainfall in January February had been less severe. This rainfall impact can be seen in Australia's equipment utilization, which got back to 80% in March after being in the mid-70s for the 1st 2 months of the year. This positive variance was offset by the lower equipment utilization in the oil sands region. Our share of revenue generated in the quarter by joint ventures was a net $29,000,000 lower than Q1 2023.

Speaker 2

The Fargo Moorhead project had a steady operational quarter, was up $10,000,000 and achieved project metrics and milestones required of the project schedule. More than offsetting this positive though was the variance impact of the completion of the construction project at the gold mine in Northern Ontario in Q3 2023, which led to lower quarter over quarter revenues within the Nuna Group of Companies. Combined gross profit margin of 18% despite another challenging quarter posted by Nuna reflects the strength of a diversified business. Gross profit margins benefited both from the operations in Australia, which were higher than 20% in the quarter and is normal course and from ML Northern, whose fleet lowers our internal costs as well as generate strong margins from services provided to external customers. Moving to Slide 9, record Q1 adjusted EBITDA was consistent with Enrothalmentary.

Speaker 2

The 27% margin we achieved reflects an effective operating quarter and with the positive 2023 trend from the Q4 and Q3 margins of 25% and 22% respectively is indicative of where we see our business trending and operating at. Included in EBITDA, general and administrative expenses were $11,100,000 in the quarter, equivalent to 3.8% of revenue, which remain under the 4% threshold we've set for ourselves. Going from EBITDA to EBIT, we expensed depreciation equivalent to 14% of combined revenue, which reflected the depreciation rate of our entire business, including the equipment fleet at the Fargo Moorhead project. When looking at just the wholly owned entities and our heavy equipment in Canada and Australia, the depreciation percentage for the quarter was 14.8% of revenue and reflected the addition of the Australian fleet as well as 1st quarter operations in the oil sands, which require higher idle time due to the cold weather. Adjusted earnings per share for the quarter of $0.78 was $0.18 down from Q1 2023 as the impacts of higher interest are factored in.

Speaker 2

The average interest rate for Q1 was over 9% in the quarter, the highest rate we've paid in a long time and remains a compelling indicator for us as we look to pay down debt in the back half of twenty twenty four. Moving to Slide 10, net cash provided by operations prior to working capital was $74,000,000 and generated by the business reflecting EBITDA performance, net of cash interest paid. Free cash flow usage of $36,000,000 was driven by the $62,000,000 draw on working capital accounts and $60,000,000 spent on our front loaded sustaining capital maintenance and replacement programs. Moving to Slide 11, our PPE of $1,200,000,000 is up $470,000,000 from the pre McKellar September 30, 2023 balance on the $430,000,000 worth of assets we purchased in 2023 $20,000,000 of growth assets purchased this quarter in Queensland and Western Australia. Net debt levels ended the quarter at $781,000,000 an increase of $58,000,000 in the quarter due to the $36,000,000 of free cash flow usage as well as the investment in growth assets.

Speaker 2

Net debt and senior secured debt leverage ended at 2.0x and 1.6x respectively and are considered reasonable levels 6 months after a transformative fully debt funded acquisition. With that, I'll pass the call back to Joe.

Speaker 1

Thanks, Jason. Looking at Slide 13, this slide summarizes our priorities for the year. Let's hit the high points. The McKellar integration continues to progress smoothly. As I mentioned in my letter to shareholders, we are thrilled with the Australian market in general and see great opportunities for growth and continued efficiency improvements with our stronger systems and processes in place.

Speaker 1

Under the second point, we highlight our ongoing efforts to win strategic projects for our business. As we look to sustain and grow our infrastructure business, we will need to win infrastructure work and with a strong fit potential U. S. Infrastructure in the bid pipeline, we have initiated a partnership with a known international construction company and set this year's priority to qualify on 1 major infrastructure project. The second part of this priority is to win a meaningful project that uses our smaller mining assets that are currently underutilized in our oil sands business.

Speaker 1

We have several active tenders that would utilize these smaller hutsets and we expect to win one of these projects this year. Item 3 prioritizes continued expansion of our operational and maintenance expertise. We will prioritize new technologies such as our telematics system and continued in house and vertically integrate our maintenance services and supply, including near term focus on identifying and sharing best practices between our Canadian and Australian businesses. We believe this prioritization and focus will continue to lower costs and improve equipment utilization, result in likelihood of winning the tenders mentioned in the previous item too. The final area prioritizes returning Nuna backed operational excellence and setting it up for growth and consistent performance.

Speaker 1

This work commenced earlier this year and I'm confident in the changes made that Nuna will be back on its feet in time for their big summer projects and growing off a much stronger and stable foundation before the end of the year. Moving on to Slide 14, Our bid pipeline has grown significantly with over $500,000,000 in additional projects under tender. While we anticipate strong demand in the oil sands to continue for many years, the diversified opportunities in Australia and the strong demand for heavy equipment also present avenues for further diversification and improved return on assets. There's a handful of these bids that are integral to our business. Two projects in oil sands consisting of 1 consisting of typical summer civil works that should be awarded imminently and a big stream diversion project, which we expect to submit in Q2 with award in late Q3 are important projects for improving near term utilization on our smaller mining assets.

Speaker 1

Longer term opportunities to fully utilize these smaller mining assets have been tendered in multiyear projects in the Quebec iron ore mine and a South Australian magnetite mine. Our larger mining assets, which remain in high demand and utilization, but are in general uncommitted beyond 2024 have been tendered into opportunities for 5 year commitments in New South Wales and Queensland Coal operations. We are excited about these opportunities and a couple of wins would provide meaningful insight and stability into our projections for 2024 and beyond. On Slide 15, our backlog stands at $3,000,000,000 This includes the recent award of a major metallurgical coal mine in Queensland and the regional oil sands contract balanced by our typical quarterly drawdown from executed work. This backlog enhances our confidence and predictability, particularly in our Australian operations.

Speaker 1

Slide 16 reiterates our outlook for 2024 and is unchanged from our last presentation in March. Lastly, Slide 17 focuses on capital allocation. With continued high interest rate, we expect to use our projected free cash flow of $160,000,000 to $185,000,000 for deleveraging while maintaining an open mind for more favorable risk return opportunities that may arise. We continually analyze all options to ensure that our capital allocation decisions are both opportunistic and aligned with our long term strategic goals. With that, I'll open up for any questions you may have.

Operator

Thank Your first question comes from the line of Tim Monachero from TD Capital Markets. Your line is now open.

Speaker 3

Hey, good morning everyone.

Speaker 2

Good morning, Tim. Good morning, Tim.

Speaker 3

I just wanted to touch on the commentary around transferring assets and essentially selling some of the underutilized ones. Can you say how many assets you would view as structurally underutilized in the Canadian market that might be up for transfer or sale?

Speaker 1

We'd be looking about 100 of them, Tim. Some of them that aren't committed into next year and some of them that aren't being used right now. So, there's some smaller ones we expect to get engaged in this summer work like I mentioned and we see opportunities next year in a few different areas. So those kind of 5 major projects that are under tender now we think would get the utilization of that fleet if we want a couple of those into the high ranges we expect to be in. But it's about 100 units.

Speaker 1

I'd say more weighted towards the smaller end of the fleet. So there's it's disproportionate to where the smaller units are bigger chunk of that 100.

Speaker 4

Okay.

Speaker 3

And would that that wouldn't include the 20 that you already transferred or currently transferring?

Speaker 1

Yes, that would be part of it.

Speaker 4

Okay. So 80s are the additional

Speaker 3

units that you're looking at?

Speaker 1

Yes, we expect the ones we sent will actually get some utilization in late Q3.

Speaker 4

Yes.

Speaker 3

I was encouraged yes, great. I was encouraged to see that those were going to work with contract volumes. Are those going to existing sites or new sites in Australia?

Speaker 1

They're pretty much supporting existing sites. Okay.

Speaker 4

So

Speaker 1

there were just opportunities. They're not all going one spot. There are 3 here, 4 there where there was opportunities where we didn't have fleet either at Western Plant Hire or McKellar.

Speaker 3

Okay. And could you, I mean, put some bookends around like what the net asset value of those definitely would be, like the stuff that you view as underutilized?

Speaker 1

I don't have that off hand, Tim. I can probably get that for you later. The net asset value just depends on which units we pick and it can vary dramatically between 2 different units of the same fleet based on what value is left in the component life of those assets. So 200 ton trucks can vary by can differ by twice as much and what the net asset value is based on what components are in it.

Speaker 3

Right. Okay. That makes sense. And then in Canada, obviously, some weak utilization in Q1, but some optimism around growing utilization through the rest of the year. Curious if you could comment on how utilization for the Canadian fleet exited Q1 and is trending in Q2?

Speaker 1

Well, it was definitely at a low in February when we're moving fleet around and then started picking up in March. And yes, we expect that to continue through Q2 and we expect to achieve that 75% by the end of the year.

Speaker 3

Okay. And then a big working capital build in the quarter, Jason, curious, can you talk a little bit about what the drivers of that were and how you see that playing up for the rest of the year should that unwind?

Speaker 2

Yes, we do expect it to unwind. It was primarily in Canada with a really busy March. We booked some pretty sizable accounts receivable in the month and collected that in April. So we expect that to work itself out. McKellar had the same thing, although not as big working on accounts receivable build in March, but they had a bigger March than January February and built accounts receivable as well.

Speaker 2

So yes, expect it to unwind and hope for 2023 working capital full year was kind of neutral and we kind of expect that for 2024 as well. It won't all unwind in Q2, but expect it to unwind over the 9 months.

Operator

Your next question comes from the line of Aaron MacNeil of TD Cowen. Your line is now open.

Speaker 4

Joe, I know you mentioned the bid opportunities for smaller mining assets, but it looks like some of the bigger bid opportunities in your pipeline don't occur until 2025. I know it's early, but as we think about 2025, what you see is the big puts and takes year over year? Like does it look a lot like 2024 with maybe the benefit of some fleet reallocation or are there other major factors that we should be thinking about?

Speaker 1

I think those opportunities in fleet allocations are not just to improve utilization, but it's just inherent that you get more opportunities, put more hours on equipment in Australia just because of the weather and the way the projects are set up. So we do think there's upside in not just getting Park assets moving, but getting long term commitments for stuff that was uncommitted in 2025 that may be highly utilized now. I haven't looked at what the net impact of that would be top line. I think we've always expected kind of a 5% annual kind of improvement rate. I have embedded that with these actual numbers.

Speaker 1

There are some big projects. The coal ones I was talking about in Australia were in the magnitude, they're $300,000,000 $400,000,000 jobs and we would look at those say 30 or so of our 100 assets going to any one of those projects for opportunities where we can put that used underutilized equipment to work. I mean, it won't be the entire fleet and there'll probably be some adds in here and there for growth capital for matching shovels or things like that. But we see it as a great opportunity to meet that growth curve.

Speaker 4

So the $30,000,000 you just mentioned, would that be incremental over and above the $20,000,000 that you've already sent over there? Yes. Got it. And then for the balance, I guess, 20 plus 30 minuteus 100, 50 remainder, like where do you think the most likely end markets for those sort of remaining 50 end up if you had to guess?

Speaker 1

I would say we place half of them into summer works in oil sands this year and possibly into iron ore or Australian magnetite next year. And I think the remaining say 20 odd units are likely ones that we would look at selling as is or rebuilding and selling. I do think there's some opportunities for our maintenance team to value add to those and rebuild and we're evaluating those markets right now. It wouldn't be a huge dollar amount. I'd say I think I said something like $20,000,000 or

Speaker 4

Got it. That's Joe. That's very helpful. Thanks. I'll turn it over.

Speaker 1

No worries. Thanks, Aaron.

Operator

Your next question comes from the line of Jacob Bout of CIBC. Your line is now open.

Speaker 5

Good morning, Joe and Jason. This is Rahul on for Jacob.

Speaker 1

Jason. Good morning,

Speaker 5

so looking at Slide 5 targets of fleet utilization of about 85% in Australia and 75% in Canada. So you touched a bit about this on in the prepared remarks, but what would you say are the biggest factors that would help you list those targets?

Speaker 1

I think the biggest factor is within our own control and it's maintaining our high level of maintenance support for the fleet. So keeping that fleet operational when the demand is there. And then secondary, it's getting these underutilized fleets put to work and winning those couple of bids I said. But you got to it's maintaining the fleet and even if demand there, if you can't have mechanical availability to keep them running, you won't get the utilization. So the biggest part of this is always within our control and it's why we continue to push our maintenance team to continue improving and to continue their strong performance.

Speaker 1

And then the rest of it is about getting these assets placed where we think they've got long term opportunities to continue to improve on utilization.

Speaker 5

Great. That's helpful. And then maybe just a question on Nuna. So you mentioned that restructuring was effectively done in Q1 and you brought in new leadership. Would

Speaker 3

appreciate if

Speaker 5

you could talk a bit more about the steps that have been taken there at Nuna? And do you still see margins at Nuna getting back to normalized levels by the summer?

Speaker 1

Starting from the end, yes. And there's definitely taken really to be bringing a lot more of the stronger project controls and processes, especially around contract administration and change management and just tune up those processes and get them up to North American standards. And I believe we've been able to we've got guys in there who are extremely strong performers in these areas, and I'm very confident in that. And then I think there's some upside in continuing to look at how we can build synergies in the bench strength between our two offices because we're both right here in Edmonton. Okay.

Speaker 5

All right. Appreciate it. Thank you very much.

Speaker 6

Thank you.

Operator

Your next question comes from the line of Maxim Sytchev of National Bank Financial. Your line is now open.

Speaker 6

Hi, good morning gentlemen.

Speaker 2

Good morning, Mac.

Speaker 6

Joe, I was wondering if you don't mind maybe expanding a little bit on McKellar. Obviously, very strong contribution from those assets in the 1st two quarters. But curious to see around sort of the integration, how that's been going, ERP thoughts and more importantly, how that will impact potential profitability, some asset utilization going forward basis? And maybe anything that you can mention in terms of the infrastructure opportunities in Australia. So yes, it was sort of if you don't mind talking about this, it would be helpful.

Speaker 6

Thanks.

Speaker 1

Yes. I guess I'll start with the infrastructure. I mean, we're still early days there. I don't have a lot of projects by name. We're really just in that research and setting up teams, I guess.

Speaker 1

And so it's pretty early days on that and I expect more towards the end of Q2, Q3, we'd have better information on that. The ERP system rollout has gone smoothly. We're expecting Q3 rollout of that. I do think there's I think there's huge opportunities for us to gain on efficiencies. It's very hard to put a number to that, but I know that when you get stronger inventory control systems and stronger work order systems in your maintenance, there's an inherent improvement in your efficiency just because you just know a lot more about your equipment, you know a lot more about your parts.

Speaker 1

And I think we're going to see gains there. I just I doubt we'll be able to measure them because you're measuring against something that you don't know exists right now. But we've done this before. We've done it here. We've done it at Nuna.

Speaker 1

And we always identify things after the fact that we there were improvements that we didn't even know were there. And there are continued opportunities and for growth, extremely strong across really all commodity markets, I'd say, except for maybe nickel, and possibly lithium. That's really been the only downside in Australian markets. The iron ore, the gold, all the coal from PCI metallurgical thermal, extremely strong market and blue chip clients that are willing to look at 5 year terms, which is great when we're dealing with the assets of these size. So anything I didn't cover up there, Max?

Speaker 6

No. And actually just maybe building a little bit on sort of the opportunity on the commodity side of things, because you have extended one of your major contracts in Australia. I'm just wondering if there is any other ones that are on sort of rolling forward basis that need to be renewed? Thanks.

Speaker 1

I don't think there's anything coming up within this year. I don't know if that slide in the back. I don't have it memorized, but I don't think there's any near term items that need renewal. I think there's next year and after that there's some. And most of these mines, McKellar has been on for decades.

Speaker 1

So I think the risk of renewal is very low, especially in the major ones around where they're the only supplier of equipment and the 2 major coal mines, the 1 thermal and the met. So I'm and everything I've heard and I've seen is we've had extremely positive client relationships. And I think with improved systems and performance down there, that's just going to get better.

Speaker 6

Right. Absolutely. Okay. Thank you. And then maybe just one follow-up for Jason, if I may.

Speaker 6

So again, like there's a lot of things on McKellar side of things are being tightened up right now. How should we think maybe around, I don't know, sort of EBITDA or free cash flow conversion from those assets kind of like before and after talking directionally, how should we be thinking about this? Thanks.

Speaker 2

Yes. We've been talking in kind of on the margin side with the new ERP and tightening things up in the kind of 1% to 2% to 3% range max, we're not looking for step change in their margin profile. They're well over 30% as an EBITDA margin and very strong in their kind of cost culture and operational excellence. So, we don't expect a step change there as far as margin. And yes, you'll see their sustaining capital in the quarter came in kind of in the $15,000,000 range.

Speaker 2

And so yes, their free cash flow conversion is probably 10% to 15% higher than ours on a full year basis. We have a front loaded capital program as opposed to them. But the run rate they've established here in the 1st 6 months, we see as being indicative. We're not expecting step changes with the ERP or even with the growth assets. They're running at a pretty optimal level.

Speaker 2

Where we got to get them is their utilization up to and staying in the 80s and cresting 85.

Speaker 6

Yes, makes sense. Okay, that's great. Thank you so much. That's it for me.

Speaker 4

Thank you, Max.

Operator

Your next question comes from the line of Frederic Bastien of Raymond James. Your line is now open.

Speaker 7

Good morning.

Speaker 8

Good morning, Frederic. Guys, I know a priority of yours is to delever and bring down your debt to EBITDA ratio to within 1.5 times by year end. But do share buybacks reenter the picture with your stock price trading below $30 right now?

Speaker 1

It's certainly always a conversation point, Frederic. It's how you measure the return on it's a risk return discussion with the Board all the time. I would say that the return on the debt is high with us hitting our highest rates. And obviously the risk when you pay down debt is nil. So we're comparing that against risk versus return on where you think your share price should be fairly valued.

Speaker 1

And then even looking at our growth, we'll still look at bolt ons and smaller stuff this year. If there was a bigger project, M and A opportunity, we'll still have the discussion, but it likely would never not have an effect on this year because they're usually like McKellar was 2.5 years. But we'll still look at any opportunities for vertical integration, even growth capital in winning some of these bids where we might have to add some fleet and balancing those risk versus returns with our base case of deleveraging and our share price. And yes, there is a share price. I like to get these things to a solid metric and it will be something we'll work with the Board in our Board meeting next month to say at what price do you switch be it share price or what return on a growth opportunity, would we switch those deleverage dollars into growth capital or share buybacks.

Speaker 1

And we expect to set those with firm numbers and have a clear understanding of that.

Speaker 8

Okay. Thanks, Joe. I appreciate

Speaker 7

that color. That's all I have.

Speaker 1

No worries. Thanks.

Operator

Your next question comes from the line of Adam Thalhimer of Thompson Davis. Your line is now open.

Speaker 8

Hey, good morning guys. Congrats on the record Q1.

Speaker 1

Good morning, Andrew.

Speaker 8

Is it too early to give high level thoughts for the oil sands demand in the next peak season? I'm thinking about this Q4 and the next year's Q1.

Speaker 1

Yes. I mean, we generally don't see our winter reclamation scopes until September or so, October. And so it's hard for us to gauge the winter programs. And they've varied our winter work. If you go back over the last 4 or 5 years, our winter work has been in our small truck like reclamation work has been as high as $80,000,000 in a winter with small truck works to as low as 20.

Speaker 1

And we've seen that kind of volatility in the winter scope works. As far as the bulk work and the base overburden, we see that being steady or growing. This year's reductions were a bit of a surprise in scope. But generally, we think that's more of a deferral than an elimination. And I expect volumes and demand in big earthworks in oil sands to increase next year.

Speaker 1

But I don't have that scope. And again, we reported in 1 year terms and I would expect to see next year's volumes, I'm guessing sometime between July September of this year for us to tender on for next year.

Speaker 7

Okay. That's perfect. I know

Speaker 8

that's a hard question to answer, but there were so many moving parts last year.

Speaker 3

So and then in Australia,

Speaker 8

so you called out weather for Mack Keller for a couple of quarters even though the results have been really strong. I'm just curious as I think about the year over year comp for Mack Keller, how much was weather an impact in Q4, Q1?

Speaker 1

In compared to the previous year or No.

Speaker 8

Sorry, I'm thinking so.

Speaker 1

They had significant cyclone activity in Queensland in both Q4 and Q1, especially January February. So they incurred a pretty wet year. And when you get a lot of rain there, roads actually start getting shut down and you can't get supplies into mine sites. It's generally not the mine sites ability to operate as far as operators getting truck, it's getting supplies and people to the site because massive rains have cut off road access and that can last for a week at a time kind of thing.

Speaker 8

Yes. I guess I'm just thinking because of the weather, Matt Keller, even though the results were good, they actually have easy comps because of the weather Q4, Q1, is that fair?

Speaker 1

We would typically expect less weather related disruptions than what we had this year. Usually it would be more December, January centric and we actually had November, February kind of impacts as well.

Speaker 8

Okay. And then the high end of the revenue guide, what would have to happen for you to trend more towards the high end?

Speaker 2

I'd say

Speaker 1

getting a lot of summer work in oil sands in the next few months and getting a big winter program that starts early and picking up something like that iron ore mine in Quebec work. Okay. Well, good luck with that. We'll talk to you

Speaker 7

in a few months. Yes.

Speaker 1

There's a lot of moving parts right now and that's for sure.

Speaker 8

Okay.

Speaker 1

No worries.

Speaker 7

Perfect. Thanks guys.

Speaker 1

Thanks, Tom.

Operator

Your next question comes from the line of Prem Kumar, an individual investor. Your line is now open.

Speaker 7

Good morning, Joe. Good morning, Jason.

Speaker 1

Good morning,

Speaker 6

Brent. I had a couple

Speaker 7

of questions on capital allocation. One of the previous gentlemen asked about buying back shares. My questions are along the same line, especially considering where the shares are trading and how reasonable the price is. So free cash flow is expected range for the year is around $160,000,000 to $185,000,000 After I'm assuming even after we hit the leverage target of $1,500,000 and paying the dividend, there'll be still quite a bit of money left in the table. How high are buybacks on the list for this incremental capital, I guess?

Speaker 1

Like I said, right now, our default is to pay down debt because of the higher rates. But we're going to evaluate at whatever point in time and where the share price is. I'd also say, we have more opportunity as we get later in the year just because we're so we're very back weighted in our free cash flow. So the bulk of that free cash flow comes in Q3 and Q4. And so that's really when we have more flexibility.

Speaker 1

And at this point in time, we're looking at we consider all those options. We consider M and A, growth opportunities. We'll look at increasing dividends. We'll look at share buybacks. And everything is going to play on a balanced playing field of risk versus reward.

Speaker 1

And those are discussions we have at every Board meeting.

Speaker 7

Okay. Thanks, Joe. And can you maybe talk a little bit about the acquisition landscape, like M and A in terms of, is there a pipeline of companies that you kind of keep a look on? And how are the valuations and just the landscape in general? And the geography maybe are you working mostly in Australia, Canada, other geographies or can you give a bit more color on that, George, Jason?

Speaker 7

Thank you.

Speaker 1

Yes. I think there's always opportunities. Again, with low share price and things like in these positions, it's very hard to find accretive deals. But certainly, if there is another McKellar deal like available, we would certainly pursue it. We are predominantly focused in North America and Australia now, but we've also considered South America as a potential, in particular, Chile.

Speaker 1

So if there was an opportunity there, we do see that market is having become more stable and having some growth opportunities going forward, especially with their strong copper and gold markets down there. So we keep an eye out for those and if the opportunity comes, it's another deal that's highly accretive like that, we will certainly pursue it. It likely, like I said earlier, they don't develop overnight. They're usually year and a half to 2.5 year kind of processes. So we really wouldn't have expected anything even if it was on our desk today to affect anything this year.

Speaker 7

Okay. Thanks, Joe. That's all I had.

Speaker 1

Thank you.

Operator

Your next question comes from the line of Karchi Tradesharawan. He's a private investor. Your line is now open. Hi,

Speaker 5

Joe. Hi, team. Thank you so much for this conference call. It's been a fantastic run with you folks so far. Just had a question.

Speaker 5

When I look at Joe's letter, he's mentioning about the contracts becoming more about time and material. So just wanted to understand what is the implication on your EBITDA margin or any of those margin metrics that you want to talk of when you move towards contracts which are more of time and material as a nature?

Speaker 1

Yes. I was in particular, I think I went into even more detail on the year end stuff that the work in the oil sands that was typically more weighted towards unit rate work. In unit rate work, we got paid a fixed price per VCM of material or set unit of material we move, productivity and weather risk. We have a lot more equipment rentals, maintained rentals, maintained and operated rentals and time and material work than historical. I'd say just rough numbers historically, we were probably 75% unit rate work.

Speaker 1

Now we're probably more like 25% to give you a scale of things. And when you go into the rental side and it actually we don't have the longer term commitments and we don't have the upside potential, but we also don't have the downside potential. So typically what you're going to see is higher EBITDA margins and lower risk. The net margins would be the same, but because you don't have operators, labor in some of the stuff and you're not wearing some of the operating costs, your EBITDA as a percentage of the overall rate is higher. Does that make sense to you?

Speaker 5

Sure. Thanks for this. Very helpful. Thank you.

Speaker 1

No worries.

Operator

Your next question comes from the line of Tim Monachero of TD Capital Markets. Your line is now open.

Speaker 3

Hey, guys. Just a follow-up here. I'm wondering if you can help us contextualize the guidance range relative to your utilization targets? Like what's embedded in your guidance on the top and bottom?

Speaker 1

Well, we're expecting to get when we talk about 75% and 85%, we're expecting to be above those marks at the end of the year. So if you wanted to how it ramps up, I would just follow how we've put the EBITDA split in there and follow that on utilization and with it ending at 75 or 85 in Q4. So I expect we're ramping up to probably a peak or Q3 peak and then it fairly levels off in Q4 or slight dip in Q4, but we expect to be right there in that range. Okay.

Speaker 3

So like the midpoint of your guidance would include you achieving those utilization targets. Is that the right way to think of it?

Speaker 1

By the end of the year, yes. Okay. So it's not we're not going to be at 75% in Q2.

Speaker 3

Like you won't do 75% on average in Canada in 2024?

Speaker 1

Not on average. We will get to 75% by the end of the year and we would expect to be able to hold that through next year.

Speaker 3

Got it. Okay. Appreciate it.

Speaker 1

No worries.

Operator

Your next question comes from the line of Phil Woodridge of Woodridge and Company. Your line is now open.

Speaker 9

Hi. So the tax rate gets seems to move around a fair bit. What could you say just for modeling purposes, a reasonable nominal run rate for taxes would be? And how much would you call that as being cash tax versus deferred?

Speaker 2

Yes, great question. We're at about 30% in Australia, 25% in Canada. So you could use a modeling rate of 27.5% if you wanted to put it blended and about half of that is cash taxable. Australia is cash taxable given their history and they don't carry loss carry forwards and the Australia regime maxes out their tax depreciation. So we do pay cash taxes in Australia, but we don't have any cash taxes in Canada this year.

Speaker 2

We expect to pay some cash taxes in Canada in 2025.

Speaker 9

Okay, thanks. And just review, I know you're a different beast than you were just 6 or 9 months ago. So help me understand the seasonal pattern that we should see play out quarter over the course of the year.

Speaker 1

I guess it's a unique year. We would expect when we get into next year, we're going to be a lot more consistent quarter upon quarter, because of the transition and the way the contract was awarded to equipment movements in oil sands, we're actually at Q1 is our low this year and we ramp up to a Q3 and with a slight drop in Q4. And we provided quite a bit of information around 45% in front half of the year, 55% of our EBITDA in the second half. And then I'd say that going forward in 2025 and I don't have those exact numbers, but my expectation is that it's a lot more consistent quarter from quarter and we're not going to see 10% variances between quarters. We're going to be seeing single digit.

Speaker 9

Great. Yes. Yes, thanks. So paint the picture of long term capability, growth capability for the company going over a number of years. Clearly, you have some vision for this, especially given your large backlog.

Speaker 9

How do you see the company being able to grow organically and whatever tuck ins you have in mind over the next 4 or 5 years?

Speaker 1

I think most of our tuck ins like when we vertically integrate are more about reducing our internal costs by in housing our maintenance. So that really what I would say is our growth opportunity, I've always said that I think there's 5% to 15% annual growth in our marketplaces. And if you look at the first 20% or 30% of that, we can pretty much cover with existing assets by increased utilization of existing assets. Now obviously, those usually come with some growth capital. So I'll give you an example where we're looking at possibly placing some assets in Australia in a long term contract.

Speaker 1

It's not just equipment we have, we have to actually go out and look at a few shovels that would complement the fleet as well. So it's not we don't have everything all the time. We have to add and like Jason said, we added $20,000,000 in growth capital so far to meet the demands in the Australian marketplace. So you would get that kind of growth additions into that just by utilizing the fleet. But certainly that first 20 odd percent of growth, we think we can do with existing assets and some minor help up on growth capital.

Speaker 9

Great. So plenty on your plate now as you continue to work in McKellar. So how long do you feel it takes to digest all of that and the plate is now empty and you're ready for something significant again at one point in the future?

Speaker 1

One thing I'd say is very pleased in that we had to bench strength to place an integration team and change out leadership at Nuna all within the last 6 months. And I don't the business has been able to absorb that and not miss a beat on performance. And so I'm very comfortable with that going forward that we've got the people in place. And we've got a lot of things going on. We're doing a turnaround at Nuna and we're doing the integration in Australia.

Speaker 1

But I think the people that are there are very comfortable with the way they're performing that. I don't see a lot of anxiety of that if something else came up. Our plate isn't empty and nor do I ever expect it to be fully empty. But if something came up and there was a good opportunity, we wouldn't shy away from it because we don't have the resources. We have capability to do that.

Speaker 9

Except for the balance sheet. So I presume that's the principal limiting factor here.

Speaker 1

I guess if we're to look at a debt funded McKellar tomorrow, but they don't happen at that speed. If it happens at the same speed that McKellar did and it's 2 years from now, I'd be very confident we got the balance sheet by the end of this year, frankly, to start looking at bigger things like that.

Speaker 9

Great. Thank you.

Speaker 1

No worries. Thank you.

Operator

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

Speaker 1

Thanks, Enrico. Again everyone for joining us today. We look forward to providing next update upon closing of our Q2 2024 results.

Operator

Thank you. This concludes the North American Construction Group conference call on Q1

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Earnings Conference Call
North American Construction Group Q1 2024
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