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Good morning, ladies and gentlemen. Welcome to the North American Construction Group Earnings Call for the Quarter ended June 30, 2018. [Operator Instructions] I advise participants that this call is also being webcast concurrently on the company's website at nacg.ca. I will now turn the conference over to David Brunetta, Director of Investor Relations.
Thanks, Casey. Good morning, everyone, and thank you for joining us. Welcome to the North American Construction Group 2018 Second Quarter Conference Call. I would like to remind everyone that today's comments contain forward-looking information. Additionally, our actual results may differ materially from expected results because of various risk factors and assumptions. For more information about our results, please refer to our June 30, 2018 management's discussion and analysis, which is available on SEDAR and EDGAR. On today's call, Rob Butler, Vice President of Finance, will begin by reviewing our second quarter results. Martin Ferron, Chairman and CEO, will then provide his comments on our outlook and strategy. Also with us, on the call today, are Joe Lambert, President and Chief Operating Officer; and Barry Palmer, Vice President of Operations. After management's prepared remarks, there will be a question-and-answer session. I now turn the call over to Rob.
Thank you, David, and good morning, everyone. Let's now review our consolidated results for the second quarter ended June 30, 2018, compared to the quarter ended June 30, 2017. Revenue this quarter was $79.5 million, up $31.8 million from the same period last year. Current year revenue was driven by an increase in mine support services revenue along with overburden removal and earthworks activity at each of the Mildred Lake and Millennium mines. Higher levels of heavy civil construction activity at the Kearl mine more than offset the drop in mine service activity at the same mine. We're continuing to generate civil construction revenue from our 3-year mine support contract at the Highland Valley Copper mine in British Columbia, which began in the third quarter of 2017, and from mine support services, realized from our Dene North Site Services partnership and multiple oil sands operations. While still not at significant levels yet, we continue to see increased activity generated from our new external maintenance service offering as interest continues to grow in our ability to be a cost effective and reliable alternative to established service providers. As a reminder, some of last year's events -- revenue in the comparable period this period was negatively affected by the cancellation of a significant earthworks contract as a result of a plant fire. We're able to secure replacement work for the majority of the fleet committed to the canceled project but lost the early startup advantage as we had to relocate the equipment to other sites. Additionally, the previous period also included mine support services revenue from the mobilization of the -- to the Fording River coal mine in British Columbia late in the quarter. This project was completed in the first quarter this year. Gross profit in the second quarter was $9.7 million or at 12.1% gross profit margin, up from a $1.2 million gross loss in the same period last year. The strong improvement in current quarter gross profit was a result of more consistent activity levels throughout the quarter compared to the previous period, which was impacted by the aforementioned cancellation of a significant earthworks contract and subsequent equipment repositioning delays and startup of spring activities. Equipment cost as a percentage of revenue in the current quarter improved over the prior period as the stronger and more consistent second quarter revenues supported the scheduled drawdown of maintenance backlog generated from our very strong first quarter winter works program. In comparison, the previous period scheduled drawdown in maintenance backlog was at a disproportionate rate to our volumes in that period. For the quarter, depreciation was $11 million or 13.9% of revenue, up from $8.1 million or 17% of revenue in the same period last year. Lower depreciation as a percent of revenue reflects the benefits realized from the purchase of lease equipment at below market pricing combined with the benefits from our maintenance initiatives designed to extend the useful life of our equipment fleet beyond historical levels. Operating income for the quarter was $1.7 million, an increase of -- from $6.6 million operating loss for the same period last year. General and administrative expense excluding stock-based compensation cost was $5.5 million for the quarter, slightly higher than the $4.9 million for the same period last year, driven primarily by higher short-term incentive cost and a one-time cost in consolidating our office space in Edmonton. Stock-based compensation expense increased $2.4 million compared to the prior year, primarily as a result of the effect of a stronger share price on the carrying value of our liability classified award plans. For the quarter, we reported net income of $33,000, basic and diluted income per share of 0, compared to $6.2 million net loss, basic and diluted loss per share of $0.23 recorded in the same period last year. Interest expense was $1.6 million for the quarter, down slightly from $1.8 million for the same period last year, primarily due to lower pricing secured under our credit facility executed in the third quarter of last year. We recorded $8,000 of deferred income tax expense in the current period compared to $2.2 million of deferred income tax benefit recorded in the similar period last year, driven by our improved results. Of note, adjusted EBITDA for the quarter was $15.2 million compared to $2 million adjusted EBITDA for the prior year. Adjusted EBITDA margin was 19.1% compared to 4.1% for the same period last year. In June, we announced 2 new term commitment contracts bringing our anticipated backlog to $328.5 million, of which $54.9 million is expected to be performed over the balance of the year. I'll now turn the call over to Martin.
Thanks, Rob, and a very good morning to everyone. This was a quarter with a number of highlights. Firstly, and most importantly, as we regard excellent safety performance as the main symptom of overall operational excellence, we were delighted to receive our second recent Alberta Mine Safety Association Award. This time, the award was secured for limiting our total injury frequency rate to 0.91 with over 1.3 million hours worked by our employees on active mine sites during 2017. Next, it was great to achieve profitability in a quarter when historically, we've always lost money due to acute seasonality, that is spring breakup. As I mentioned last time, we, at NACG, now will always confront the status quo head on, and one of our biggest challenges is seasonality due to the large size of our equipment. A few years ago, we decided not to accept that losing money in Q2 was usual or normal and developed a plan to gradually achieve profitability. Unfortunately, the regional wildfire in 2016 and the localized plant fire at a busy mine site in 2017 blunted our progress, but we made it this year. It is also noteworthy that the quarterly profit would have been considerably higher in a flat stock price environment, but of course, I'm not complaining about that. We achieved the profitability through a number of means: firstly, by securing some less weather-sensitive work that we had complete planning control over; secondly, we won some work outside the oil sand less prone to seasonality; and thirdly, we accumulated a sufficient quantity of work to cover our indirect costs. Next year, we will have our new maintenance facility in operation, which will make a truly counterseasonal contribution with peak maintenance and repair demand occurring in Q2. As mentioned in my press release quote, I see this as a watershed moment for us as we've now demonstrated that we can now be profitable in any quarter. Therefore, for the first half of the year, we have basic EPS of over $0.50 before the one-time onerous lease charge we took in quarter 1. This compares with $0.12 at this time last year. Another very important highlight of this quarter too was a rapid switch from purely spot contracting to term arrangements by one of our key customers. We secured around $280 million of overburden stripping and mine reclamation services over a 3-year term, largely starting this coming winter. This makes a huge difference for us, but these awards set a foundation for our budgets, for those years, allowing us to make capital allocation decisions with more certainty, plan our maintenance work more cost effectively and to plan the timing of this work to maximize profitability. The fact that we were able to negotiate these awards rather than have to bid for them, is evidence of both the tightening of the heavy equipment availability and the quality of our customer service. Looking forward, the heavy equipment supply continues to tighten, and we would not be surprised to see other customers locking access to resources via term deals. So our market environment continues to improve with our mine operating customers seeking to maximize ore production while minimizing CapEx and operating cost. In the immediate quarter, we've had a wetter-than-usual delay but have sufficient work to improve on the Q3 of last year, although not significantly. I think Q4 should bring a similar outcome to slightly better on our performance last year. Overall, then, we're on track to achieve at least 30% growth in full year adjusted EBITDA compared with our starting objective of 15%. Obviously, based on my prior comments to growth in our full year EPS would be significant. Lending credence to my claim last time for the dollar of share of earnings is in our clear line of sight. Next year, we're on course to achieve another 15% step-up in revenue and EBITDA despite blowing away our growth targets for this year. I'd now like to conclude my prepared remarks with an update on our current normal course issuer bid, NCIB. We've just about completed it with around 80,000 shares left to purchase. Therefore, since we initiated our NCIB activity in 2013, we have bought and canceled almost 10.7 million shares meeting about 30% of the starting share count at a dividend-adjusted price of around $4.68 per share. At the start of the activity, we had around $130 million of net debt, a research analyst was expecting us to produce about $64 million of EBITDA for 2014, with the stock price duly running up to $8.75 in mid-2014. Currently, we have much fewer shares outstanding, 30%, and almost identical level of net debt and EBITDA expectation for 2019 is nearly $90 million, and the brightest outlook in many years. Yet we closed yesterday with a stock price of $8.57. I think that makes for an interesting comparison of circumstances. Well that's it for now. So I just like to hand the call back to Casey, the operator, for the questions segment.
[Operator Instructions] And your first question comes from Yuri Lynk with Canaccord Genuity.
Martin, just want to flesh out the guidance a little bit. So the back half of this year sounds more or less kind of flattish EBITDA growth or I think you feel like you could do perhaps a little bit better overall, but let's call it flat, and then, I might have missed it, I got on late, but the 15% for next year, that's on the 2018 full year number, you think you can grow 15% on that?
Yes. Absolutely.
Okay. And just the -- now that we're looking at kind of tougher comps, especially in the first half of '19, just what's the 2 or 3 main drivers to get the higher growth? And is it in any particular quarter that you see growth being weighted towards next year?
Well, we believe there'll be more work volumes next year, and we've been accumulating equipment in order to address that additional work, so that should be incremental to what we achieved in this year, in 2018.
Okay. Any update on the progress of the maintenance in office facility? Are we still on track for later this year? And can you, in conjunction with that, kind of update us with your planned net CapEx for this year? And kind of the breakdown between the facility and additional equipment.
Sure. We made a tour of the new facility with our board yesterday, and we were all super impressed with our progress there. I'm so excited about the opportunity it brings, so it's going to be a game-changer for us, I think. And we've already had several customers in our existing facility, which is extremely limited in capability. So going to this new place is just totally different for us, but it would be so much more effective, and customers are very keen to come and give us equipment to work on. So delighted in our progress. We do expect to be in it by the end of year and operational shortly afterwards. So in terms of your next question on CapEx, with the growth I see, I think, we're probably between sustaining capital and growth capital spend our EBITDA this year. There's so much opportunity out there that -- with good returns associated, I'm willing to invest in that future growth.
And is that net CapEx?
Yes. That's net CapEx.
Your next question comes from Ben Cherniavsky with Raymond James.
Martin, actually I was going to ask about the maintenance facility. So I guess, my question was taken.
I'm glad to answer it again. I am so excited about it. But okay.
Maybe you can just give a little more context to the market opportunity that you're seeing. Who is it out there that's -- would make perhaps without naming names, or what kind of customers are you targeting to do this kind of work? And how do you -- what are you offering as your sort of sales pitch, your competitive advantage to take work to you guys?
Yes. I think, that the main driver in anybody's decision making is cost and quality of service. I think our facility here in Edmonton will get both right off the bat based on our learning in our current facility. We're seeing customers from the oil sands, obviously, but also customers from coal, copper, every other resource that you can think of, plus other regions. We've even had customers from the East looking to potentially send us equipment. So there's been tremendous interest. We're obviously sorting through that at the moment and trying to build a backlog and -- but tempering that with knowing that we have to get into the facility and get it up and running. So we don't want to get ahead of ourselves, but we're so excited about the opportunity here.
That's great. And maybe I'll ask just also as you sort of contemplate the future and your CapEx and your very bullish outlook on the market opportunities, how are you tempering these decisions with the inherent cyclicality of the business and some of the issues you had to dig your way out of -- with the last downturn, just striking that right balance between making sure you're investing in growth and not overinvesting?
Yes. When we got into -- when the company got into difficulty last time, it had a lot of debt and no EBITDA, right? So I think the difference is this time, that we'll have a modest amount of debt and plenty of EBITDA. You'll never see us go over 2x in terms of senior debt to current year EBITDA, as an example, when our covenant is at 3x. So I always manage to that. It's kind of one of my business principles. So as long as we can achieve an EBITDA in the current year, the maximum debt you'll see on a senior basis would be 2x.
Your next question comes from Maxim Sytchev with National Bank Finance.
Martin, I was wondering if it would be possible to quantify the potential negative impact from Syncrude outage. Was there anything in Q2? And how should we think about the Q3?
No, so far, we haven't been impacted at all, Max. So completely different to last year. We're on a term arrangement now, as you know. So no, we've just kept going. We haven't missed a beat. So no impact on Q2 and not expecting anything on Q3.
Okay. That's very helpful. And then thinking about capital allocation, the NCIB is going to run out. What is the thought process on a going-forward basis? Is it looking at returning cash via, I don't know, high dividends, M&A? What do you think about it right now?
I'm thinking of all those things all the time, but current thinking is, some people look at the stock price and say, "It's $8.50. It's up 30% this year, whatever." I always look at a multiple with trading at an extremely low multiple still. So don't be surprised if you see some capital allocated to another NCIB. It's kind of being a modus operandi and until we get some level in the market, we'll just keep doing it, right? So that's the way I look at it. But we're also investing in our business. We have great opportunities that will bring nice returns. So we're fortunate to be able to do both, and I think that will really benefit our shareholders over the next couple of years.
Right. And then, I appreciate the color in relation to CapEx this year, but post the CapEx that you're spending on the maintenance facility, and obviously, I realize that you don't have budgets ready for next year, but how should we think about CapEx on sort of just sustainable basis x growth? I know that you put something in the MD&A but just looking out at 2019, 2020.
Yes, on an average basis, $45 million to $50 million for '19 and '20 would be the right sort of number unless we dramatically increase the size of the fleet. Based on our growth plan, that's still a reasonable number on a net basis.
Okay. That's helpful. And then, last one maybe on -- any commentary on competitive environment? I mean, obviously, it looks like supply of equipment has tightened materially. And any talks or by the language from clients in terms of thinking about price increases for the work that you do? And that's it for me.
Yes. Obviously, with tightening demand for equipment, we're always on the lookout for opportunities to improve our price in the right circumstances and I'm sure, our competitors are doing the same thing. We're obviously monitoring the availability of competitor equipment, what they're doing. And we're actively looking at our pricing almost on a bid-by-bid basis. So be assured that we'll take pricing opportunity as it arises.
Your next question comes from Yuri Lynk with Canaccord Genuity.
Martin, just back to the maintenance facility. Maybe run through an example of an oil sands customer, which would be in Fort McMurray, that's a good 4 to 5 hours away from your maintenance facility. So I mean, I don't understand how it makes sense for them to transport the -- their equipment that distance to get it serviced, unless it's -- they can't get it done in that area due to long wait times. Is that kind of what we're dealing with? Or what am I missing there?
Yes. So I think, what you're missing is we're not just doing servicing, right? We're doing major work, significant work like rebuilding a truck, for example, right? So the cost of labor, the cost of the facilities, other costs in Edmonton are significantly lower than in Fort Mac. So there is a cost advantage that covers the transportation to and from Fort Mac to Edmonton. We have a clear cost advantage, otherwise customers wouldn't be looking our way. You've seen that in our numbers with our internal maintenance, right? So we're offering that to select customers to help them drive their cost lower.
Okay. And what type of warranty and whatnot would come with a rebuild done at your facility?
We'd warrant our labor. The way we're doing it is the customer generally provides the parts. Right? So they do that, and then, we do the rebuild for them. So we're certainly going to warrant our labor.
Your next question comes from Devin Schilling with PI Financial.
Just wondering if you guys could disclose what percent of revenue in the quarter came from outside the oil sands, specifically Highland Valley and anything else you guys were doing outside the oil sands in the quarter.
I don't have that number right at hand, Devin, we can get back to you on it. But I -- off the top of my head, I would say, less than 10% this quarter, but we're making headway on revenue diversification. Expect some news in this quarter or certainly Q4, right? I think, we're making progress.
Your next question comes from [ Glenn Primack ] with [ Promus Holdings ].
I go back to that 2016 annual report where you laid out kind of the 3-year and you're just pecking away at it and keep on buying back stock and your multiple stays where it is. I'm going to take one question at the service business because as I look at other ones that are out there in that due overhaul, that's like a 20% to 30% return on capital business over time as they get utilized. Is that similar to what you're thinking as you fill up Edmonton?
Oh, absolutely. After the initial investment in the facility, which is also going to be our headquarters, there's no additional CapEx, right? So that's what's attractive to us compared to the rest of our business is that it's less capital-intensive, and we can make a very decent return on our work.
Okay. And then as this drama over Keystone Pipeline continues, is there potential for your major customers that -- would they have to set up more refining operations? Because it seems like in the lower-48, there's the drums beating again on getting that to happen. I don't know if the opportunity would be more like SAGD or just how that works for you, but it seems like it'd be an opportunity.
Yes. The way I look at that -- I'm familiar with the lower-48 because I have a home in Houston, right. So the pipeline issue is generally not only Keystone, Trans Mountain pipeline, et cetera, customers are obviously concerned about takeaway capacity. I think, they're getting most of their mine production either in pipelines or rail to get them market one way or the other. So we see them holding back a little bit on SAGD because until the pipelines are available, they're not going to ramp up that production as the way we look at it. So we certainly think that the mining production will continue, and it will raise some, and that's bring in a lot of work for us. So we're totally delighted to be levered to that aspect of the business.
That's great. And on heavy equipment within your territory, are you like the big dog in town? What you think your market share is today as you look at other pieces of big machinery going into your markets?
I wouldn't say we're the big dog, but we're certainly, lean and mean there and doing well, and I would say, 40%, that would be my guesstimate. It's difficult because our 2 competitors for earthworks, for example, one's public, but they only report part of the information, and the other's private. So it's difficult to make comparisons.
Got you. Okay. And then on the balance sheet again, your true, book is, I'm guessing, well understated based on the stuff that you bought during the downturn. That's -- and that's all been put to work, I'm guessing, right?
Oh, yes. Yes. We did well during the downturn. We were kind of stealth buyers of good equipment and that's paying off now, and it'll pay off in the future.
Are there any other little service businesses that you -- survey opportunities that are out there that you could potentially fix or you've got enough on your plate with Edmonton and just keeping up with the core customer base?
Well, I'm always willing to pile my plate as high as possible. And there's certainly opportunities for us, and again, we're going to deploy our capital in the right way, and so bolt-on M&A is certainly a possibility.
Great. Well, you've done a great job ever since coming in and fixing this thing. I mean, it's a -- I don't see many other companies, large or small, that lay out a 3-year plan back in '16, and then execute on it.
Appreciate it, but it's a real team effort. I've got a fantastic team of people here. And we're doing great right now. Thank you.
[Operator Instructions] Your next question comes from Richard Dearnley with Longport Partners.
What -- the term net CapEx, what is gross? And what is net CapEx?
Well, we just net any disposals. We send end-of-life assets to auction, for example, right?
And what do disposals typically run of CapEx?
It bounces around a little bit. I would say, around 5%.
Okay. And then, how much did you spend in the quarter on the stock buybacks? Or what was the average price you paid, either one?
$4.8 million for the quarter.
Okay. And construction has been running 7% and then 9% of your revenue for the last few years. How do you see that changing as your -- as you flush in the summer months and civil business and whatnot? I would guess it's going higher, but does it go back to where it was 5 years ago? Or -- well, I'll leave it at that.
No, no, that's a really good question. So you're correct. In the downturn, it was the construction work that was deferred, right? It was discretionary on behalf of the customer. And where possible, they pushed it to the right or canceled it. It largely went away. So we see it coming back but not in a hurry. I think, every year it's getting better, but the earthmoving side of the business is just growing at a disproportionate rate. So it's more than compensating for the lower construction work.
And I take it from your comments about visibility that that's -- you're feeling really good about that.
Yes. I think you can tell from my tone and, enthusiasm. Yes, I'm excited. Yes, I admit it. I'm good.
I can hear you. And the $1.7 million for the sublease, that was in the first quarter. That was just a onetime that took care of the whole sublease?
Yes. Correct.
And there are no further questions at this time. I will turn the call back over to Martin Ferron for closing remarks.
Well, thanks, everybody, for joining us today. And we'll speak to you next time. Thanks.
And ladies and gentlemen, this concludes today's conference call. You may now disconnect.