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Good morning, ladies and gentlemen. Welcome to the North American Construction Group Earnings Call for the Fourth Quarter and Year-ending December 31, 2018. [Operator Instructions] The media may monitor this call in a listen-only mode. They are free to quote any member of management, but they are asked not to quote remarks from any other participant without that participant's permission. I would now like to turn the conference over to David Brunetta, Director of Investor Relations.
Good morning, and good morning to everyone, and thank you for joining us. Welcome to the North American Construction Group's 2018 Fourth Quarter and Year-end 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 December 31, 2018 management's discussion and analysis, which is available on SEDAR and EDGAR. On today's call, Jason Veenstra, Executive Vice President and CFO will begin by reviewing our fourth quarter results. Martin Ferron, Chairman and CEO will then provide us comments on our outlook and strategy. Also with us on the call today are: Joe Lambert, President and Chief Operating Officer; Barry Palmer, Senior Vice President of Operations; and Rob Butler, Vice President Finance. After management's prepared remarks, there will be a question-and-answer session. I now turn the call over to Jason.
Thanks, David, and good morning everyone. As mentioned, I'll provide a summarized financial view -- overview of Q4, along with some brief commentary on our overall 2018 cash flow and will close with the status of our Nuna acquisition and our purchase of the heavy equipment fleet in the middle of Q4. Starting with our financials. Top line revenue for the quarter was $131 million, $49 million higher than 2017. This 60% year-over-year increase is indicative of the strong activity in the oil sands and was driven by the site work at the Millennium, Mildred Lake and Kearl mines. Consistent with the producers' public comments, this performance illustrates their persistent focus on throughput at their operating mines, despite the outside noise and market volatility.The $131 million of revenue includes $24 million from the M&A transactions we completed in mid Q4, which I'll touch on later. The comparable Q4 revenue of $107 million, represents a substantial increase in revenue of over 30% and reflects the demand we are experiencing in the oil sands. In addition to the consistent production we're witnessing firsthand from our customers, several factors contribute to the strong volumes in Q4 when comparing to last year.Number 1 and most importantly, the contract stability related to term contracts we announced during 2018 has had a positive and incremental impact on overall work generated. On our contracted sites, the customer visibility and access to our equipment is providing higher utilization as work is completed outside of the core contracted volumes. Secondly, when compared to 2017, we had an earlier ramp up of our winter works program at the Millennium and Mildred Lake mines. And third, an early staged heavy civil construction project at the Kearl mine has had a material impact on 2018 results. Outside the oil sands, civil construction work at the Highland Valley Coppermine continue to generate steady revenue and was slightly higher on a quarter-over-quarter basis, as the contract was signed in September 2017.External maintenance, revenue was also slightly up quarter-over-quarter, the move into our new maintenance and rebuild facility here in mid-November was seamless from a revenue perspective, and we remain on a positive trend on whether it is important diversification stream for us.Moving to the expense side, where we always start with capital depreciation because it is such an important expense for us as a heavy equipment operator. Depreciation was $18.2 million for the quarter, or 13.9% of revenue and was down from the 2017 level of 14.4%. This depreciation level reflects the benefits of higher utilization in operating hours as well as our maintenance initiatives, which are extending the useful eyes of the fleet and their major components.With these positive trends in both revenue and depreciation, gross profit achieved in the quarter was $18.3 million, a 14% margin. This dollar level compares very favorably to the $12 million posted in the prior year, a 50% year-over-year increase. The 14% margin we posted was slightly unfavorable to the 14.6% margin we posted in 2017. The decrease in margin is explained by the cost we incurred as part of the unavoidable impact of onboarding 181 heavy equipment assets and the related personnel, right in the middle of our winter season ramp up.In addition, the 2 months of Nuna results had an impact on margin, given this is their seasonally slower time. Excluding the one-time onboarding impact and Nuna seasonality, gross profit margin was over 16% for the quarter and on a like-for-like basis, significantly exceeded 2017 performance.The low gross profit, G&A expense, excluding stock-based compensation was $8 million for the quarter, higher by $2.3 million from 2017. This increase was driven by a higher short-term incentive costs associated with our strong 2018 results, as well as the one-time legal and consulting expenses required for acquisition activities.When excluding M&A activity, our G&A run rate of 5% of revenue is indicative of the level we expect moving forward.Of specific note in the quarter, the stock-based compensation expense of $2.5 million was less severe than in Q3, but nonetheless was incurred due to our continued stronger share price and its impact on the caring value of the liability award plans. Interest expense of $3.4 million for the quarter was consistent with expectations, given the debt financings, we have put in place. We remain very happy with the credit facility and equipment financing we have arranged, and continue to operate with an overall cost of debt under 5%. Before we look at net income and EPS, I'll touch on the adjusted EBITDA margin of 21.7%.As mentioned, Q4 was impacted by the November onboarding of the heavy equipment fleet, excluding these onboarding impacts, Q4 EBITDA margin was over 24%, again, a full 2 percentage points ahead of 2017, which is consistent with the operational excellence trend line we are on. The full synergies in the oil sands from our recent fleet acquisition are on schedule for 2019, but are not fully reflected in the short period of operations in 2018.In spite of this, full-year 2018 EBITDA of 24.8%, establishes another profitability watermark, gained over the past 5 years of improvements, and reflects the continuous drive for productivity and efficiency.EBITDA of $28.4 million results in a full-year EBITDA of $101.8 million and compares to the 2017 equivalence of $63.1 million and 21.6%.In particular, and for emphasis, this outstanding increase in margin of over 2 full percentage points is a testament to the incredible job done by operations over the past 12 months, and do not reflect the full-year impact of Nuna and the operation of our increased operating fleet, which is now a fleet of over 625 heavy equipment assets.Regarding net income, we recorded $2.7 million of earnings compared to a similar $2.5 million last year. The $6.1 million improvement in gross profit was offset by $3.1 million of one-time G&A acquisition type cost and the stock-based compensation. The remaining $3 million is increased interest and deferred taxes, both incurred as a result of higher gross profit levels. The positive net income equals basic earnings of $0.11 per share over the quarterly average of 25 million shares. When factoring in the one-time expenses, previously mentioned, this is a quarterly EPS level of over $0.20 per share. To close out the financial review, I'll briefly summarize our free cash flow performance. For 2018, we generated $102 million in adjusted EBITDA. As provided in the MD&A, sustaining capital expenditures totaled $53 million for the year, and when factoring in positive working capital of $14 million and other smaller cash impacts, this netted the business $60.7 million of free cash flow. This cash flow generation was primarily used for 2 purposes; approximately $20 million of cash was used on a net basis to fund growth capital and $50 million was used to purchase back our shares.The remaining cash was used to pay down debt throughout the year or what was left on the balance sheet at year-end, as we ended the year with over $19 million of cash on hand.To close out, I'll provide a quick status of our acquisitions, both of which were fully financed using our credit facility. Consistent with the time needed to fully close transactions, the Nuna acquisition, which was executed on November 1, formally closed last week and the purchase price of $42.8 million, as reflected in the financials did not change noticeably from the $42.5 million price that was announced back in September.The fleet purchased on November 23, remains on target to fully close in Q1, as it goes through normal closing conditions.These 2 transactions did not have a noticeable impact on Q4 EPS, we are looking forward to recording a full quarter in Q1. The fleet purchase will become part of standard reporting, but the Nuna acquisition will provide some complexity as a few of the entities did not qualify of proportionate consolidation, and their profits will be reported through equity earnings. Once we have a full standalone quarter to report, this will be much easier to walk stakeholders through. The other complicating factor that we will need to address in our results is the seasonal rebalancing that will occur as a result of our ownership interest in Nuna. As Martin will highlight, year-over-year comparisons moving forward will need to be completed with this in mind as the majority of Nuna's profits come in Q2 and Q3 during the busy season in Northern Canada.As has been mentioned, these acquisitions were financed through our $300 million credit facility and we appreciated the commercial support from all the members of the syndicate during a very busy Q4.We closed out the year with $100 million of liquidity available under our facility and over $50 million of room for additional capital leases.Based strictly on our bank definition of debt to trailing EBITDA, the leverage ratio of 2.9 compares favorably to our allowable limit of 4.0.On the next 12-month basis, our total debt leverage ratio, net of cash is 2.2 and the senior leverage ratio, which governs our credit facility and excludes both the convertible debentures and the mortgage is at 2.0. As we mentioned in the disclosures yesterday, we plan to use free cash flow to delever and fully expect our senior leverage to trend back below 2 in 2019.And with those comments, I'll turn the call over to Martin.
Thanks, Jason. And a very good morning to everyone.As we look back, I will always remember 2018 as a transformational year for us, in which we invested in significant growth by M&A activity to complement an already robust organic growth plan.Of the 2 M&A deals we announced during the year, did not close until very late in the period, but they did not contribute much in the way of EBITDA to what was another stellar year of financial improvement. For the full year, we grew revenue and EBITDA by 40% and 61%, respectively, against stated targets of 15% for both, the follow-on from 37% and 18% growth in these measures during 2017.Therefore, the exciting benefits of the 2 acquisitions will be realized starting in 2019, which we believe will allow us to continue our hopefully impressive record of maintaining strong growth, but we will return to the scene, the first one to highlight are the notable achievements of 2018.Firstly and most importantly, we preserved our top-tier record of safety performance, with our total recordable injury rate, again, coming in at well below 0.5. As the management of safety hazards is a crucial aspect of achieving overall operational excellence, I'm very pleased with our performance. Second, we further improved our profitability with basic earnings per share coming in at 61% -- sorry, $0.61 a share. This number was much nearer $1 a share before the mark-to-market accounting for our liability based deferred stock-based compensation on the one-off M&A related expenses that Jason took us through. Third, the construction of our new heavy equipment, maintenance and office facility here in Edmonton was completed ahead of time and on budget. Thus then we moved in during November. Fourth, we build our backlog of contracted work to over $1.2 billion from less than $0.1 billion at the start of last year. We expect this trend to continue in 2019.Fifth, we bought back nearly 1.3 million shares at an average price of $7.44. And our latest NCIB taking total repurchases totaled 10.7 million shares at a dividend adjusted average price of about $4.70, since we initiated the buyback in 2013.Sixth, we closed the acquisition of an ownership stake in Nuna logistics in November, providing us with excellent revenue diversification outside our core oilsands markets. The majority ownership position in Nuna is held by Kitikmeot Corporation, who've already really impressed us with their business acumen. Last, but not least, we closed the second acquisition involving over 180 heavy equipment assets on November 23, and onboarded more than 450 personnel, assuming 3 significant contracts and were fully operational by November 26. As part of this transaction, we ended a new and exciting exclusive partnership with Mikisew Group of Companies, which is directly owned by the Mikisew Cree First Nation, who are the largest of the 5 Athabasca Tribal Council nations. So now, turning back to our growth prospects of 2019. We currently anticipate the improvement to be around 75% for revenue and about 60% for EBITDA, which we trust, you will consider to be impressive numbers.These expected increases could then propel our basic earnings per share to over $1.60 for the year, which will be quite an achievement for a company that was making steep losses not so long ago. Due to the magnitude of these improvements, we believe, it's prudent to provide an estimate of EBITDA proportionality by quarter during the year, which we presently assess as 30%, 20%, 22%, and 28%.The main variables impacting this assessment for the first half of the year are the timing of spring break up and the pace that we can schedule maintenance and repairs for some of the acquired mine support assets. Also, the busiest quarters for the work linked to our ownership stake in Nuna in Q2 and Q3 and so this is completely counter seasonal to oil sands operations.Additionally, for this assessment, it is important to note that the term contracts we have in hand allow more even scheduling of work throughout the year for cost optimization purposes.Of the anticipated level of profitability for 2019, we expect to print EBIT margins needed to construction industry-leading levels as well as returns on both capital and equity. A lot it could be over 20%, which is a subject by covering more detail in my annual letter to shareholders, which should be available this afternoon. We have tremendous operating leverage in our business such that our SG&A expense would likely trend towards 5% and then perhaps 4%, before liability-related stock-based compensation, as we continue to grow. As far as capital expend and allocation is concerned for 2019, we expect to fund up to $90 million on sustaining capital, using the previously announced one-time spend -- sorry including a previously announced one-time spend of $20 million on the recently acquired heavy equipment assets. This one-off expenditure will enable us to improve uptime and utilization of the board assets later in 2019 and beyond.The rest of our considerable operating cash flow after interest and dividend payments will be allocated between debt reduction and growth capital, with the former getting priority. We are committed to lowering our debt by $150 million over the 2019 to 2021 period, which is a task made slightly easier by the recent federal government announced accelerated depreciation schedules for capital assets.Due to the situation, we now do not expect to pay cash taxes until 2021.Beyond 2019, we firmly believe that we have the cash flow on growth prospects to keep maintaining a double-digit compound annual growth rate in both revenue and EBITDA, while also achieving our debt reduction targets. This belief is supported by the fact that much of our core work for the next 3 to 5 years is contracted. And linked to strong and unwavering production from several oil sands mines.This is a significant change from the mainly spot contract in the world of prior years.Having this large backlog of work allows us to more effectively plan our activities, especially equipment maintenance and should lead to margin expansion, even without price escalation. To close, I would like to commend my extremely talented and committed team of personnel. Basic principle of my leadership philosophy is that our chief executive should publicly take 100% of the blame when things go wrong in a company, and always share most of the credit when things are going according to plan. While my confidence level for the future remains extremely high, mostly because I can totally trust my amazing team to maintain our strong performance and growth.I could not be prouder of them, especially of the professional and friendly way, they welcome 100 of new employees into our fold in November, and quickly introduced them to our unique culture. We are now firing on all operational cylinders. And I am super excited about what 2019 and beyond will bring. With that, I would like to turn the call back to Denise, the operator, for the Q&A session.
[Operator Instructions] Your first question comes Yuri Lynk from Canaccord Genuity.
Martin, how's the acquired Aecon gear been relative to your initial expectations in terms of how it's performed productivity, and maintenance -- or I guess, the maintenance CapEx is unchanged, but I guess, it's been pretty well as expected?
We knew we'd have to spend a significant sum of $20 million catching up on maintenance and repair. I think, it's fair to say that the equipment was in worse condition than we expected.But we still think the $20 million will cover the situation.
And does that impact the -- I think, you were targeted previously, correct me if I'm wrong, about $30 million of external maintenance revenue at the new facility, does that have any bearing on that number?
Yes, the $30 million is one that will take us a couple of years, maybe 3 years to achieve. And we are in the middle of trying to balance our internal need for maintenance right now with external work. There's a lot of external work opportunity, but also plenty of internal needs. So the balance is quite tricky, but we're managing it well. So that's the status there, Yuri.
Okay. Shifting years, interest press release at the end of last year on the option to acquire some ultra-class trucks, which you've never used before. What's the thinking behind that and what would you be using those trucks for?
Well, they're very useful for certain earth moving activities, especially overburden removal. So when we got the opportunity to exercise that right, we looked at our need for fleet given the tremendous workload that we see, and now we believe that there was need for more assets beyond what we picked up from the earlier acquisition. So we were glad to take them at what turns out to be a reasonable price, we believe.
Your next question comes from Maxim Sytchev with National Bank Financial.
Martin, I was wondering, if you don't mind, just quantifying what was the EBITDA contribution from the acquired assets in Q4, if it's possible?
Jason?
Because, I think, you said it was de minimis, right?
Yes, I was -- it was de minimis is the right word, less than $1 million.
Okay, okay, okay. So it was all organic, excellent. And then, do you mind maybe because, I think, it's right about now where you're getting visibility on summer construction work, Martin, do you mind maybe just commenting on how that's shaping up?
Oh, really well, especially we bank on the 4 hills, mine sites and there's plenty of activity scheduled there. Also, Syncrude have got a major expansion project, Max, which we'll be bidding on. So it's shaping up really well, even here in late February.
Okay. And then, I think in the past, we talked a little bit about the LNG optionality for you guys. Just trying to think, how is the bidding environment for that particular project going right now?
We don't believe, we'll be participating in that, Max, for a couple of reasons. One is that we're too busy doing the other things that make us good margin. Second, we don't think we have much of a chance that we did bid it. So we'll save our ammunition for other things that we believe will serve us better.
Okay. And I guess, is it a question of just how competitive the environment is in that marketplace?
Yes, I think, that project is one a lot of companies want to get their name on. We'd like to take our name on it too, but at a decent margin. And I don't think the 2 things are probably achievable.
Okay, that make sense. And then, do you mind maybe commenting on Nuna now that you have it under your belt in terms of initial impressions. And the ability to obviously, capitalize that business potentially better and how much of an opportunity that could down the line for you guys?
We're really impressed. We closed the deal. It was a quiet time for them. So we've got the opportunity to spend some time visiting them, and we'd began to totally understand the business, I think, we got some really super bidding opportunities, which we can help them with. There's one, in particular, that we're bidding together. So in the past, they did not have access to heavy fleets, but now that they do, and I think, that's going to open up some great opportunities for them that they couldn't pursue previously.
Okay, that's helpful. And maybe last question from me. I mean, obviously, we're pleased to see the share price, kind of, aligning with the prospects. And now that you have a bit of a better multiple, how does that add to your thinking around incremental M&A, whether it's tuck-in or something bigger. I mean, I understand that obviously, your priority is to deliver, but if how do you square the better multiple environment right now for you?
Yes. I mean, Max I'm never shy about talking with the stock price. So when the annual letter comes out, letter to shareholders this afternoon, I have some commentary in there on it. So while the EBITDA multiple has risen a little bit, it's still well below peers. Plus the earnings multiple is around 9, right? To me, that seems more like an EBITDA multiple and earnings multiple. So we still think we can get a bit more love in the stock price. If that doesn't occur, we'd always be looking at allocation of capital, as we've done in the past. We've committed to delever, but it wouldn't hurt my feelings that if we spend a bit more money buying some more shares if we get the opportunity. So it will always be a balance that we'll address carefully.
Your next question comes from with Devin Schilling with PI Financial.
Question here on the integration and just, kind of, maybe a bit of a timeline on how long you think it will be to have everything fully integrated? And should we kind of be expecting higher equipment cost over this period?
Yes. So in my prepared remarks, with the acquisition of heavy fleet, I mentioned that we closed the deal, we funded the deal on November 23, onboarded 450 people, and took possession of 180-odd assets, and we had them operational in 3 days, right. So that's just staggering performance by our operating team. Obviously, we've got to spend a bit of money bringing the fleet up to our operational standards. So that will take a bit of time, several months. It'll contribute to incremental EBITDA in 2020. So that integration, went extremely well because it was mainly an asset deal, but with a lot of operating personnel in the few. Then the Nuna acquisition, the integration is ongoing, the biggest task in front of us is to bring them onto our enterprise system, which will ease our reporting and we don't schedule to get that done within 2, 3 months here. So that's the commentary I have on that. Does that answer your question, Devin?
No, that's helpful and I guess, when you look at your guys' planned debt reduction here, are you guys kind of looking at $50 million straight line? Or is this going to be more front or back-end weighted, you guys have some color there?
Yes, we'd like to keep some flexibility there, right? So we've said $150 million over 3 years. So going back to Max's question, it could be that we might spend a little bit of money this year on share buyback for example, right? So $150 million is over the 3 years.
Your next question comes from Ben Cherniavsky with Raymond James.
Most of my questions have been answered. I just thought may be, like you can give just a little more clarity on the SG&A line. How much in dollars was the -- were the, sort of, the headwinds that you noted, because I think, as you recognize that was never seemed a little higher than we would've expected, just given the leverage in revenue? But can you just walk through that a little more -- in a little more detail?
Yes. Ben, it's Jason here. A little over $1 million was in that in that G&A and that's what gets us back to that 5% run rate outside of the stock based. And really that was around some of the overheads required and that quick transition with Aecon as well as legal and consulting fees. So that's, sort of, the order of magnitude for Q4.
So it was mostly the Aecon transaction? Or I was taking your remarks, you said something about Nuna as well coming onboarding with Nuna that had an impact that you...
No, the cost -- there is no onboarding cost for Nuna, but there was just legal and accounting fees associated with that transaction, so that's in the $1 million.
Okay. So the $1 million is sort of an all-in number for transactional cost in M&A?
That's right.
[Operator Instructions] Your next question comes from [ Richard Dearnley with Longport Partners ].
Could you -- the Aecon assets, when they transfer to you, what was their utilization as you all would measure it?
Richard, to be honest with you, we didn't even look at that. It was an asset transaction, we just had in mind what we could achieve with the assets. History didn't interest us. So we didn't look at it.
I see. And I take it that you would classify them as heavily used?
Yes. I guess, that's a reasonable description.
Right. And you said the EBITDA contribution was less than $1 million. What was the revenue contribution in the fourth quarter?
Well, we mentioned in the prepared remarks, $24 million from the additional fleet as well as Nuna, vast majority of that was the additional fleet so in the $20 million range and as was mentioned, profitability in those 5 weeks was very low, given just the onboarding impact. We turned it over very quickly, but there, of course, is going to be profitability impacts when you bring on the fleet of that size. So that's why such a low EBITDA margin in those 5 weeks.
And run rate interest create expense, as you stand on the ground now for '19?
Yes. We've indicated in our comments around 5%, a little less than that in our IR deck on our website as well. You'll see it there that does have the benefit of 0% vendor financing in there, but as an enterprise, we're under 5%.
And it sounds like the maintenance facility needs expanding already? If with ...
Well, we're certainly super busy right now. So it wouldn't be out of the question that that will happen at some point. We've got a lot of more assets now than when we decided to build the facility and the demand for external services is much, much higher. So could be. Could be.
Your next question comes from Yuri Lynk with Canaccord Genuity.
Martin, can we just go back on the CapEx for the year. I want to make sure I got written down here $90 million sustaining, which includes $20 million on the Aecon asset is that right?
Yes, I'd classify that as sustaining, but really it will drive EBITDA improvement in 2020, right? As we get more utilization of the assets, but for sake of argument, I still call that it sustained.
Okay. So that would imply sustaining CapEx going forward would be less than $90 million, I guess?
Yes. Yes.
And I know you want to maintain some flexibility especially to buy back shares and whatnot, but I mean, what should I be modeling this year for growth CapEx?
I would say around $20 million, another $20 million.
Okay. And then, there was a quick mention about Nuna potentially having some of its results via an equity pickup. Can we just get some details on that? And how we should be modeling Nuna?
Yes. I can take that one, Yuri. So we picked up an interest in about 20 entities with the Nuna Group of Companies, and from a top line perspective, about 15% of those, we don't have a controlling interest in essentially, and therefore, need to be reported through that equity earnings line. And we feel in Q1, when we have some more substantive results from Nuna and the noise gone that we'd be able to walk people through. But the majority will come through just regularly, proportionally consolidated our ownership stake shown in revenue and all the line items. But a small portion you'll see come through equity earnings.
And do you envision grossing that small portion up to EBITDA? Or you'd still to be decided? I mean, like you didn't -- when you report your adjusted EBITDA, would that be grossing that up?
Yes, we'll be looking to include that in adjusted EBITDA.
Just trying to make my modeling life easier.
Yes, I know.
Your next question comes from Glenn [ Hammack ] with PDG Capital.
I'm looking forward to reading the letter. On that note, do you have a targeted goal for your ROE or return on capital?
As high as possible. We benchmark it. As I mentioned, ROE is going to be over 20%, if we hit on numbers, so that's a pretty stout number right there. I'd like to get a return on capital up to the same level, right. So above 20% for both will be quite an achievement.
Yes. So that should drive your multiple as well. I mean, you guys have done a phenomenal job with your team. Most of my questions have been answered, but on the maintenance side, do you have a cost advantage over the dealer groups that are out in the region?
We believe, we do, especially, with our shops here in Edmonton. The cost of doing business here is a lot less than in Fort McMurray, personnel costs are lower. So, yes, I think, we certainly do have an advantage.
Okay, because the 5-year payback on that slide seems kind of conservative then?
Well, we're always conservative there.
Okay. See if I have another 1, just the slides in general. I mean that's the first time I have seen them in a conference call. That's transformational as well. What was the debt reduction goal, again, by 2021?
$150 million.
Okay. Looking forward to reading the shareholder letter.
And there are no further questions queued up at this time. I'm going to turn the call back over to Mr. Ferron.
Okay, thanks for joining us today. We look forward to talking to you again in the near future. All the best.
This concludes the North American Construction Group conference call. You may now disconnect.