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Good morning, ladies and gentlemen. Welcome to the North American Construction Group Earnings call for the third quarter ended September 30, 2021. [Operator Instructions]The company wishes to confirm that today's comments contain forward-looking information, and actual results could differ materially from a conclusion, forecast or projection contained in the 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's discussion and analysis, which is available on SEDAR and EDGAR as well as on the company's website at nacg.ca.I will now turn the conference over to Jason Veenstra, CFO.
Thanks, Peter. Good morning, everyone. Joe Lambert, our President and CEO, is on the call here with us, but unfortunately, he is dealing with a rib injury, and therefore, will be saving his energy for the Q&A session. He has asked that I deliver these prepared remarks, which we have shortened up a bit this quarter given the one speaker approach. I'll start out with safety and give a brief overview of the quarter and then close out with our expectations for Q4 and a few subject areas for 2022, before Joe and I take any questions you may have.Slide 4 is our safety performance. Our recordable injury rate remains flat as we are again generally at our pre-pandemic workforce level, but need to continue to work in finding ways to engage our management and workforce to improve processes and practices and consequently lower the rate. We have put in additional training and effort into our green hand program as our headcount growth generally comes with less experienced operators. This is nothing new to us, but reinforces our need for training teams and ingraining our safety culture into all facets of the business.Our one word overview of the quarter would be transitional. Operational performance at all our states was particularly strong and conditions were fairly steady throughout the 3 months. The macro factors outside of our control remain present and continue to hamper our top line potential, but we will uphold all safety and risk mitigation protocols for as long as it takes. Our oil sands work transition between different mine sites as Q3 experienced major fleet remobilization to commence recent project wins. Although, we suffer a bit of utilization loss during these transitions, these fleets are now set up for, at a minimum, a couple of years of 24/7 work.Speaking of transition and regarding these recent wins, it can be noted that we transitioned the majority of this work to our Mikisew joint venture, which is a win-win. For us, the producers in the region and, of course, the Mikisew Cree First Nation. Our infrastructure, external maintenance and work in other resource areas are also transitioning. The Fargo-Moorhead project reached financial close and is transitioning to project commencement and a more operational focus. The team at the Northern Ontario gold mine has transitioned to peak levels and our external maintenance program is transitioning to much higher capacities with the main shop expansion being completed on time and on budget. And now moving directly into a further expansion of our component rebuild facility.The financial review begins on Slide 10. We have changed things up slightly this quarter, and moving forward, we'll be disclosing what we have termed as total combined revenue. For those of you that have followed us over the past few years, you'll know that the impact of our joint ventures has grown from 0 in Q3 2018, only 3 short years ago to what we see today where in Q3 2021, approximately 35% of combined gross profit came from our share of the various joint ventures.Given the number of stakeholders involved, these joint ventures are incredibly complex in nature. But as we state in our Q3 financial report, our goal is to simplify our disclosure for the readers of these financials. Our intention is for reported revenue to reflect our wholly owned entities with all other revenue and gross profit flowing through equity earnings. For clarity, we have restated our results to ensure all comparables are accurate. So with all that said, total combined revenue for the quarter of $209 million, was $90 million, or 72%, ahead of last year's Q3, which again is proving to be a difficult quarter to compare against, for the pandemic reasons we are all aware of.The $209 million is actually a quarterly record for us, as it slightly beat out the pre-pandemic quarter of Q1 2020. That said, revenue came in generally as expected as the quarter enjoyed consistent operating conditions. Revenue achieved in the quarter was not driven by one specific factor, but by the broad listing of mine sites and business lines, which all continue to trend in the right direction. The Millennium, Kearl and Syncrude mines have maintained their demand recovery trends. And we continue to witness firsthand the long-term resiliency of the oil sands region. The remobilized fleet at the Ford Hills mine had a full quarter of operations, and we remain very excited to be back on that site as they ramp up to full production.Traditionally, utilization of our fleet in the summer months is lower than Q1 and Q4. But the 52% operating utilization achieved in Q3 was impacted by the real world difficulties of workforce shortages, which we continue to experience. Revenue from our joint ventures of $43 million was an obvious record, beating last quarter's record by 20%, and was primarily driven by achieving full capacity at the gold mine in northern Ontario. Combined gross profit of 15.6% is a noticeable improvement from the Q2 equivalent margin of 12.4%, despite a decrease in support from the wage subsidy program. We are encouraged by the margins achieved in Q3 and they are trending in the right direction. Even as we continue to face pressure from additional costs, we need to incur related isolation and quarantine protocols. We estimate that these factors decreased gross margin around $3 million, primarily due to workforce vacancies, but also the additional direct costs we incur.Moving to Slide 11. Adjusted EBITDA of $47.5 million was up 28% for Q3 on the revenue factors mentioned already. The margin of 22.7%, which reflects total combined revenue is a strong achievement across many business lines, and indicative of where we see ourselves as trending in the right direction, but with improvements still possible. Included in EBITDA is direct, general and administrative expenses in the quarter of $7.1 million, equivalent to 4.3% of revenue. This spending percentage is consistent with expectation and the slight uptick in expense relates to the G&A spending in Australia of DGI Trading.Our low G&A rate continues to be achieved through cost discipline and strict attention paid to discretionary and nonessential spending. Going from EBITDA to EBIT, we expensed depreciation equivalent to 11.2% of revenue, which reflected the depreciation rate of our entire business. When looking at just the wholly owned entities and our heavy equipment fleet, which many of you are used to us talking about, the depreciation percentage for the quarter was 13% and reflected an effective use of our fleet this quarter.Adjusted earnings per share for the quarter of $0.5 was driven by $24.1 million from adjusted EBIT, net of interest and taxes. Interest specifically continues to hold, posting a 4.3% rate and a $4.5 million cash expense in the quarter. We continue to benefit from both posted bank rates as well as competitive rates and equipment financing.Moving to Slide 12, I'll summarize our cash flow. Net cash provided by operations of $32 million was produced by the business and includes the impact of noncash balances that aren't immediately apparent. Given the neutral working capital result in the quarter, the difference between this figure and EBITDA besides of course interest is the accumulation of cash in our joint ventures, which typically declare dividends in Q4. Sustaining maintenance capital of $19.8 million was dedicated to the maintenance of the existing fleet in anticipation of what we see as being a very busy winter season.Moving to our balance sheet on Slide 13. Liquidity of $190 million reflects our strong liquidity position this year as we benefit from the issuance of $75 million of convertible debentures early in June. On a trailing 12-month basis, our senior leverage ratio, as calculated by our credit facility is now at 1.6x. Net debt levels remain consistent over the 3 months as the free cash flow generated in the quarter was used for the initial cash acquisition cost to purchase DGI Trading.On slide 14 we have provided our current debt composition, which is conveniently split into 3 primary buckets being our credit facility, equipment financing and convertible debentures. With the extension now out to October 2024 and the strength of our current leverage ratios, we have no near-term financing decisions on our plate at the moment. Moving along to Slide 16, you will see our Q4 priorities. This slide provides insight into the immediate objectives that we are currently focused on, and you will see them coming up again as they relate to our 2022 outlook.On Slide 17, we have provided our guidance for 2021. Of note, and, of course, is increases to EBITDA and EPS, which are primarily driven by our expectations of the Fargo-Moorhead project now that it has officially reached financial close. The initial quarter of this complex project is challenging to forecast, and this is reflected in the ranges we have provided. Furthermore, given the cash distribution profile of the 2 joint ventures managing that project, we have left the free cash flow range constant. We couldn't be more excited about the prospects for this project, but it is difficult to estimate the exact cash timing of how the joint ventures will distribute cash.Looking out to 2022. On Slide 19, we have started with our equipment utilization chart. This is such a critical KPI for us and one that we'll track closely for 2022. As was mentioned earlier, we had strong demand, but fleet mobilization and some opportune pre-winter maintenance items made the Q2 to Q3 gains quite modest. We fully expect pre-pandemic levels going forward and being more closely following our longer-term trend line.Slide 20 highlights the major milestone win of the infrastructure project in our Red River Alliance with Acciona and Shikun and Binui. As the largest infrastructure project in company history, we have, of course, identified the success of this project as critical to our longer-term goals. We have prioritized demanding, planning, fleet management and procurement work with the goal of a smooth project start when we commence earthworks in the spring. We have mentioned previously that we can leverage projects like this. The Flood Diversion project here in Alberta, the Springbank reservoir project in Calgary to be more specific, is an example of this. We are pleased to say our partnership with the same Quebec company, we were bidding the Quebec mining projects with has qualified to bid on Springbank, and we are looking forward to submitting a competitive bid early next year.On Slide 21, we reiterate and show the progress of our diversification strategy. As we've consistently messaged, we expect to grow diversification while growing and supporting our long-term oil sands clients with high utilization of our large fleet, while at the same time, improving the utilization of smaller fleet outside the oil sands region.Slide 22 is self-explanatory, and we would note that the increasing awards are coming with longer terms and create a multiplying effect on backlog. Slide 23 highlights our robust bid pipeline, 2 tenders we would highlight are again the Springbank reservoir project, which after many years of starts and stops is now moving forward with RFP for submittal. And the other is a return of one of the Quebec mining contracts, which we originally thought we had lost. We have retendered this project with our same Quebec partners and are looking forward to seeing the outcome.Slide 24 highlight some of our operational ESG initiatives. As you can see, we are putting a major focus on the emissions side of our business. Solar power, idle reduction, machine monitoring are all areas we can get quick tangible emission reductions with existing technology. Longer-term, we are looking at alternative fuels, electric vehicles and hybrids for emission reduction. We established fleet fuel measurement processes here in 2021 and will set baselines and targets for our 2022 program.On Slide 25, we highlight our continued push for a more diversified workforce. We have great training and development programs and compete safety and proficiency in all areas of our business. Slide 26 highlights the growth in our indigenous partnerships. This structure continues to grow in the mining industry as it's a win-win for all parties. There is a direct correlation between our partnership's top line growth and the benefits received by the indigenous communities they represent.Lastly, but certainly not least, is our quantitative 2022 outlook contained on Slide 27. We believe this slide, again, albeit quantitatively illustrates the success we have achieved by sticking with our strategy and our commitment to be the safe, low cost, sustainable contractor. The outlook is predicated on operational excellence, and we couldn't be more excited heading into what we consider to be a landmark year for NACG. As Joe mentioned in his letter to shareholders, and while we all knew we were part of building something very impressive, the ability for us to project out earnings in the range of $2.15 to $2.55 is the result of a decade's worth of steady momentum. We fully understand the need to execute, but feel confident that we have the people, the projects, the contracts and the equipment in place to do so.I will now hand the call back to Peter for the Q&A session.
[Operator Instructions] And your first question will come from Tim Monachello with ATB Capital Markets.
Just wondering if you could elaborate a little bit on the guidance range for 2022. What type of scenarios do you contemplate when you think about the lower end and also the higher end?
I'd say more than anything else, it's utilization on the smaller end of our fleet, where we have less commitment. Almost all of our plus 150 tonne trucks are committed. So it's really that stuff and summer works, that may or may not have more materials. And lastly, I'd say our joint ventures and our partnerships and there are opportunities to grow.
Okay. Do you need to gain any new work to get to that higher end? Or is it just all about sort of efficiencies then?
It's newer work, but it's more work that doesn't get committed to until spring, typically for the lower utilized end of our fleet, which sits in summer, more so than winter. So I think from now through March or April, we're I think 90-plus percent booked on what we planned versus what we have in that outlook. And the opportunity is getting more and better utilization than historical in summer or other works. So for achieving what we have, we certainly don't need any more. But if there's other opportunities that come, we'll certainly assess them as they come to.
Okay. Guidance for 2021 is up, it looks like you guys are expecting a pretty strong Q4. I imagine some of that has to do with revenue being earned on the Fargo-Moorhead project. Is there anything else going into Q4 that's this -- making it look super strong?
The mob and demob we saw impacting us in Q3 has set us up well on the jobs for winter, such -- there's no significant mob or demob happening in Q4. So often, we would have mobs and demobs happening in November between jobs, between summer and winter jobs. And so I think that's the primary driver.
Okay. Got it. And last one for me here. You mentioned in the MD&A, just some impacts from COVID-related, I guess, isolations, I would assume, which impacted your labor availability in Q3. Is that mitigating in Q4? To what extent? And could you speak just a little bit about the labor market that you're looking at currently and what you're expecting in 2022?
I guess we continue to expect the COVID protocols to loosen. Our impacts in Q3 were more related to direct cases as there's more vaccinated people. So vaccinated people didn't have to -- if they were not symptomatic, they weren't quarantining for 14 days like you would have seen in Q2 or before. And we fully expect there's more vaccinations going forward. We're going to see less impact on the COVID protocols. And what was the second question again, Tim?
Just around labor markets, talks about a lot...
I think we're still feeling some impact. We've always had issues with the heavy equipment technicians. We are seeing difficulties ramping up. I again think it's mostly because of the travel restrictions, and this isn't anything unusual for us in oil sands. Given the booms of previous times, this is areas where our training and recruiting is set up for. So we do expect some impact in Q4, but it's nothing we're not used to mitigating.
Okay. Do you think there's any risk to Q1 activity levels around just being able to staff equipment?
No. Whatever we get rolling here in Q4 will continue going through the Q1 site. So whatever impacts we have on the recruiting side, we'll know pretty soon. And I think, generally, we've been able to mitigate those in the past, and I think they'll -- once you get them there, they're there, right.
And our next question will come from Bryan Fast with Raymond James.
I just wanted to get your sense on how the structure of, I guess, the multiple use and multiple service agreements have changed over time, specifically whether you're seeing the desire for those contracts to be longer-term commitments than you've seen in the past?
Well, what I'd say is, Bryan, the base contract are exactly the same. It's the awards within them. This is going back about 4 or 5 years ago where we really got the first long-term overburdened commitment awarded under an MSA and we're -- I believe that clients seeing the value in that, and we're seeing that expand. So what used to be a 5-year MSA that might get a 6-month or 1 year overburden award underneath it now gets a 2-year overburden award or longer because they want that fleet committed.
Okay. That's good color. And then maybe just on...
A big driver in our backlog, too, Bryan, that's -- in my notes here, I was talking about the multiplying effect, it's not just getting the award it's getting longer-term ones.
Right. Okay. Yes, that makes sense. And then just on telematics, some of the strategy going forward there and really how could this impact the margin profile longer term?
Yes. I mean we've got about, I think, 70 units of 150 planned for year-end. And then ultimately, upwards of potentially 800 of our fleets in. And from ESG to operating costs, telematics is a pretty exciting area. It's just early days. I'd like to be able to get some reporting out and show you what the real-life impact of these are. But being able to monitor your idle, being able to trigger machine -- automatic machine actions instead of operator or mechanic actions, being able to monitor the components and the characteristics of a failure before it happens and identify those things are all areas that help extend component life, improve operations. There's also many areas of the reporting side of telematics, be it just the GPS or the tonnage reports or the cycle times from an operating perspective that are advantageous. So ESG, operating efficiency, maintenance component costs, it's got a lot of different areas that can drive opportunity for us in.
Your next question will come from Maxim Sytchev with National Bank Financial.
Joe, hope you feel better. So a couple of questions from me. In terms of -- when we think about the winter work visibility in the oil sands, do you mind maybe just comparing how that outlook right now is stacking versus 2019, so like a pre-pandemic, are we back to basically to normal? Or how should we think about that bucket?
I would -- as far as this winter, yes, I would absolutely say we're back to pre-pandemic normals and normals being that 2019, which was a significant area of growth and opportunity for us. It's definitely a fully booked order for winter, I'd say.
Okay. That's good to hear. And then overall, in terms of the bid pipeline, and maybe do you mind maybe talking outside of oil sands, how that pipeline compares to maybe now versus 9 months ago, if it's possible?
Yes. I -- it's -- we're seeing a bit more infrastructure. Certainly, the Springbank dam one. We don't see a tight frequency of the infrastructure jobs. So it's great to see it. If we have 1 or 2 at a time, it's great. I'd say we're still seeing a lot of different commodity areas. Recently, I've heard areas of U.S. mining that are inquiring, early stages. But it's an extremely strong commodity market. So from gold to iron ore to coal to whatever. I think we'll continue to see bid opportunities. I'd say the pipeline is probably at or slightly higher than what it was 9 months ago just because of that. And we report kind of a combined ask for Nuna because we actually bid things together in that pipeline. And so I think it's extremely strong and not just from a size standpoint, but from a diversification standpoint, I think it will give us great opportunities. This is typically a slow time now coming now between now and early spring, other than possibly the Springbank dam one. There's not a lot of awards that happen there, but we still -- do still expect a significant bidding activity during that time frame.
Right. Okay. No, that's very helpful. And then just maybe a couple of cleanup questions for Jason, if I may. Jason, in terms of the Fargo-Moorhead, in relation to -- I know that you're not commenting on sort of cash flow dynamics specifically, but because it's P3 project, how should we think about sort of the investment on working capital on your side and then kind of the milestones? Do you mind maybe just kind of walking through the mechanics there if it's possible?
Yes. So the way it's financed, there will be no working capital required of the joint venture partner. So it won't affect us from a working capital perspective. The -- where you'll see it accumulate is that investment in affiliates and on the balance sheet. But really what that means is as we book earnings, the cash may not come with it. It might be delayed, but that's where the delay would happen. The tricky part for year-end is on December 31, we'll have to determine a percentage of completion, particularly for the C JV, which is the construction JV, and that's where we see some uncertainty, and we're not exactly sure where that will get assessed. And however, whatever percentage of completion is determined, that's how much net income we would report as adjusted EPS.
Okay. That's helpful. And then I wanted to ask you about the rebuild activity that you performed for third parties. I presume, given some of the OEM constraints right now that should be a very robust business. Do you mind me be commenting if you have enough parts to be able to undertake all this work?
Yes. We haven't any issues so far, Max. There is some hints of some shipping and costs going higher, so especially sea transport. And we have seen with certain vendors, certain items that are -- seem to be on back order longer than normal. I don't think we've seen anything systematic. Certainly, we've been doing quite a few second life rebuilds and have a few in the shop right now. We're doing more for our partnership as the first priority in our MNALP partnership. But we're also doing quite a few for customers and clients in the oil sands. And we've got a few for outside oil sands. And we'll get some of those numbers in front of you here pretty quickly because I think it's a really exciting time because that we are approaching -- I don't know if you remember, but when we first built this office and shop, I talked about an ability to generate about $30 million of external maintenance out of there. And then obviously, we've had a few things like COVID interrupt that.And I think we're going to be very close to that level this year, and I think we're going to have opportunity to exceed that next year. And certainly, in the expansion of our remanufacturing side, and looking at bringing some hydraulic components into there. It's because we've got great demand on our own side and increasing demand from external. So we've done a lot more track trains, a lot more rebuilds for external maintenance than we have in quite a while.
Okay. That's helpful. And actually, just one follow-up, if I may. In terms of the shipping cost, will this be impacting DGI's business? Or is that a pass-through on a client basis?
Predominantly a pass-through. I think one thing it will do, it will just drive us to look for sourcing closer to your customers. So if DGI has a Canadian customer, they're going to try and source equipment in Canada, if they're -- it's got an Australian customer, they're going to try and source in Australia because they have -- it's mostly the overseas shipping side that's the most problematic.
Our next question will come from Aaron MacNeil with TD Securities.
In the context of your guidance, you obviously speak to capital allocation priorities in 2021, but you kind of leave it blank in 2022. So I guess I'd just ask how you rank the usual suspects, like organic growth capital acquisitions, debt reduction, NCIB or dividend increases? Any updated thoughts there?
Well, we're going to have those discussions predominantly with our Board in our next Board meeting where we go through our strategy. And part of what we talked about this being a transitional quarter has kind of pushed that off. Typically, we would be having some of those discussions now and be presenting them. And I think we've just pushed it off to the new year. So I really wouldn't want to comment until I've had those conversations. I think you've seen our typical allocations, and we just try and make efficient capital use. So depending upon what share price is and things like that, it can change. So I wouldn't want to comment because I want to be able to have those strategy discussions with our Board.
Sure. That's understandable. And so just on Fargo-Moorhead now that you're sort of getting started. Could you share any context or first impressions on potential operational challenges or maybe not challenges, but differences relative to the core business or things you might have to change operationally?
We've got guys on site. We're manning up there. Our -- Barry has been down there, our VP of Operations. We've actually tested some equipment in some of the areas just to see how the material behaves. I don't expect from the earthwork side of things anything unusual. This is very similar work to what we do. This is building urban dams in soft underfoot conditions, which we have many years and millions of cubic meters of experience in. It's -- the workforce, and I think we're going to continue to see, especially with increasing demand for people on equipment operators and such. But I think, again, most of that is anticipated. And I think with a long-term job like this, it's going to be a very desirable position to work in.
Understood. Then maybe just in the context of all the global supply chain challenges. Could you give us an update on DGI, presumably, I'd assume that they'd be getting a lot more inbounds now than they typically did in the past.
They've had great demand side. I think there is some challenges coming up on shipping, and it's going to be on cost and availability. And like I said, I think it changes where they try and source equipment. So when you had 2 assets, one in Canada and one in Australia, the one in Canada might have been worth more even with the shipping than the one in Australia, but now it isn't because of the shipping cost. So it's just -- they're very in touch with this marketplace and both the asset value and the transportation and logistics costs. So I fully expect them to adapt. They've been extremely good at adapting and amaze what they've been able to achieve without being able to lead their own state. As I mentioned in our shareholder letter. And they've got worldwide kind -- if they're stuck trying to source things from one area and requiring shipping to another would be an issue, but I don't think that's going to be the issue. And I think between them and us, their own contacts and knowledge of the marketplace, I think we'll be just fine in getting back to normal levels of business, which they're already at, actually.
[Operator Instructions] And your next question will come from John Gibson with BMO Capital Markets.
Sorry if I missed this, but just when you look at the Springbank bid, can you give any sense, like is it similar to the Fargo-Moorhead in terms of size and scope? And if the project does go ahead, do you have much in the -- sense in the way of timing?
It's a much smaller scope, John. It's -- I think it was announced publicly with a #2 that was in the $400 million odd area, but it's a smaller job. We would expect it to be submitted and awarded before summer. And we'll update as we go. So we picked a partner. We -- our partner being the same guys we partnered with in Quebec because they're extremely strong in rolled concrete. And so we think between our skills and theirs, it will be a very strong team. The other thing that's different, I would say is there's not a short listing of bidders. So there's somewhere in the neighborhood of 7 or 8 teams that I believe are prequalified, and they'll go all the way through to the bidding. So it is a lot more competitive, and it's not been shortened down to 3 or 4 teams like we've seen some of those larger jobs. And anything else you want to know about that? I certainly takes...
That's great. Second one, on the Quebec gold line that came back in your business pipeline, I know you referenced $100 million and also a $300 million contract. Can you disclose which one that came back in your bid pipeline?
This was a smaller one.
Okay. And any update on the larger one?
We -- well, we were -- it was not awarded to us. It was awarded, but we still aren't positive. It was awarded at the same scope. It looked like it might have been awarded as a continuation to a local contractor and doing an assessment for self-mining. So I'm just guessing at that, John, but I'm not positive. It was awarded as the full term scope is what we had tendered.
Okay. Fair enough. And last one for me there. I'll ask just, I guess, different than the way Aaron pitched it, I guess. When you look at the dividend, I realize your multiple is probably still not where you want it to be, or we've seen a bit of an expansion along with the stock in late. I guess your guidance, your free cash flow looks -- are very positive. I guess what would you need to see in order to implement a higher dividend?
I don't think we'd have to see much, John. I think really, we need to have that conversation with our Board. I think we need to get out of this transitional time frame and getting to a more predictable environment as far as COVID. And so I don't -- I think we need to have the discussion. And I think it's an area that will have a great amount of consideration and contemplation.
Okay. Great. Appreciate it. Nice to see the stock respond this morning is also. Congrats.
This concludes the Q&A section of the call. I will now pass the call over to Joe Lambert, President and CEO, for closing comments.
Thanks, Peter, and I thank you all for joining us today and for your continued interest in our growth and diversification journey. I am very excited about where we're going and our opportunity to advance our business in 2022. And what we all hope and expect will be a much healthier and more stable environment. Thanks, again.
Thank you, everyone. This concludes the North American Construction Group Q3 2021 Conference Call.