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Good morning, ladies and gentlemen. Welcome to the North American Construction Group Earnings Call for the fourth quarter and year ended December 31, 2020. [Operator Instructions] Following management's prepared remarks, there will be an opportunity for analysts, shareholders and bondholders to ask questions. The media may monitor best for call in 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. The company wishes to confirm that today's comments contain forward-looking information and that actual results could differ materially from a conclusion, forecast or projection contained in that forward-looking information. Certain material factors or assumptions were applied in drawing conclusions or in making forecasts or projections that are reflected in the forward-looking information. Additional information about those material factors is contained in the company's most recent management's discussion and analysis, which is available on SEDAR and EDGAR as well as the company's website at nacg.ca.I will now turn the conference over to Martin Ferron, Executive Chairman.
Thanks, Kenzie, and good morning to everyone. Well, after almost 25 years of doing quarterly and annual earnings calls, this will be my last one. I could not be happier that our great team of employees marked my final quarter as CEO with solid performance. In particular, they impressively met or exceeded all of our important goals in relation to safety, free cash flow and diversification. 2020 was a really challenging year, and I'm very proud that we were one of very few companies so in control of our business to reset and beat financial guidance in an operating environment dominated by the COVID-19 pandemic. With that brief introduction, I will hand these quarterly calls over to Joe, but will remain on today to answer any questions directed at me. Beyond that, I will be actively supporting the executive team for the balance of the year.Jason will start us off here today with financials, and then Joe will provide his outlook for the future.
Thanks for those comments, Martin, and good morning, everyone. Given the unique call here today, I'll start us on the safety content on Slide 5. As I've often stated here at North American, no financial outcome is worth celebrating if our safety culture or safety performance has been compromised. Although yet again, we did achieve the industry benchmarks for safety excellence for the sixth year in a row. We did see an uptick in incident frequency in 2020 and are refocusing our efforts as the macro environment and operating protocols stabilize. As Joe will touch on later with our 2021 priorities, we will be doing everything in our power to make sure everyone gets home safe.Slide 6 to 11, provide a summarized view of 2020. But as with past protocol, these prepared remarks will focus on the quarter to avoid repeating commentary from previous quarters. And as such, we'll begin the financial review on Slide 12.Revenue for the quarter of $137 million was $53 million below last year's Q4 as we continue to recover from the widespread impacts of COVID-19. The majority of the $53 million variance relate to the strong quarter we had in 2019 at the Fort Hills mine prior to their decision to temporarily reduce the operating capacity at that mine. The year-over-year variance represents a 28% decline in revenue, but is trending positively when compared to the negative 60% and negative 43% posted in Q2 and Q3 of this year.The quarter enjoyed fairly standard fall and winter weather conditions and the revenue achieved was largely as expected. The resiliency of the oil sands mines remain strong and as access restrictions and safety protocols become more routine and predictable, we will continue to see our productive operating hours and utilization increase.As Joe will explain later, the 58% operating utilization achieved in Q4 is trending in the right direction from the low of 24% in Q2. While of course, critical to our results, reported revenue inherently lends itself to the programs where we directly provide our own heavy equipment and where we provide the labor force.Equity accounted interest being primarily Nuna as well as our external maintenance and mine management contracts do not factor prevalently into the reported revenue figure, but are strong contributors to EBITDA and particularly drives the 35% of adjusted EBIT that we generated from outside the Fort McMurray region in 2020.Furthermore, our strategic contribution of heavy equipment to these joint ventures is also increasingly becoming an important part of our business. Therefore, we expect our reporting to adapt slightly in Q1 2020 as our diversification efforts continue, and we look to accurately represent this to the readers of our financial statements.Moving back to reported results. Gross profit margin of 17% reflected a solid operational quarter, as mentioned by Martin, in his opening comments. The key drivers of the margin were effective utilization of our fleet as well as disciplined cost constraints that remain in place.The Canada Emergency Wage Subsidy Program continue to support margins, and I'll touch on that later. With regards to cost constraints, Q4 was particularly impacted in a positive way by lower third-party costs, which has been a focus of ours.Lastly, margin was positively impacted by the mine management contracts, which provides strong returns. These positives in the quarter were offset by continued cost impacts at the Millennium mine as we continue to stabilize the equipment and labor performance of the complex operating conditions and the increasingly large heavy equipment fleet we have at that mine.Included in gross profit margin was depreciation, which was 19% of revenue for the quarter. The depreciation percentage in Q4 was higher than our expected rate, given the continued higher proportion of larger equipment operated when compared to a typical 3-month period over the past few years.When stepping back and looking at the full very unique year of 2020, depreciation of 18% of revenue was higher than our historical run rate, primarily due to this higher proportion of larger or ultra-class equipment operated when compared to a typical fleet, which includes smaller support equipment.Straight-line depreciation on fixed assets during the low revenue quarters of Q2 and Q3 also contributed to the percentage increase.And lastly, the inefficiencies caused by poor haul road conditions, particularly in Q3, resulted in higher than usual operating equipment hours, which, of course, drives depreciation.General and administrative expenses in the quarter were $6.3 million, equivalent to 4.6% of revenue. This spending percentage was consistent with the trend in 2019 and was achieved through continued cost discipline and the complete halt, in late Q1, of all discretionary and nonessential spending that has remained in place.Adjusted EBITDA of $46.2 million was consistent with Q4 2019 under, as we all know, a very different macro environment. Adjusted earnings for the quarter of $0.36 was consistent to Q4 2019, which generated $0.38.Interest specifically continues to trend nicely as the 3.7% rate and the $4.2 million cash expense in the quarter compares favorably to the 4.8% and the $5 million incurred last year. We continue to benefit from both reductions in posted rates as well as competitive equipment financing.We provide Slide 13, one more time for clarity to close out 2020. And as disclosed in detail in our financial statements, net income for the quarter includes $6.6 million of wage and salary subsidies received under the Canada emergency wage subsidy program. Consistent with past practice, these subsidies are presented with their correlated employee expenses in project and equipment costs and G&A expenses. These subsidies reimbursed us for a portion of the wages we paid and greatly aided our efforts in retaining workforce.As noted in the slide, the program reimbursed us for approximately 20% of the all-in employee costs, which in turn allowed us to maintain 20% of the headcount level, we may have otherwise had to reduce either temporarily or permanently. From our perspective, the program has worked effectively and positions us well as we move forward here into 2021.Moving to Slide 14, I'll summarize our cash flow. Net cash provided by operations of $63 million was produced by the business and includes a positive impact of $18 million of working capital changes that bolstered free cash flow. Similar to 2019, cash from our joint ventures was collected in Q4 and was a primary driver in this working capital change.Sustaining capital of $26.7 million was dedicated to major component replacement in the heavy equipment fleet required for the stronger-than-expected recovery. As indicated, this spending level was required earlier than anticipated as we prepare not only for the strong finish to Q4, but also in preparation for the full year of 2021.Moving to our balance sheet, on Slide 15. Liquidity of $148 million reflects our upsized credit facility that was extended on October 8. EBITDA generation and positive changes in working capital had the correlated and desired effect of reducing our debt levels.On a trailing 12-month basis, our senior leverage ratio, as calculated by our credit facility agreement, was 2.0x, which is well below our covenant of 3.0 and reflects our intentional capital allocation in Q4.To close out the financial review, on Slide 16, I'll briefly touch on our current debt structure. The [ cruiser ] extension in October of our $325 million credit facility provides the stability and low-cost financing that we require over the next 3 years. As the slide highlights, we don't have a required financing decision to make until 2023.With those financial comments, I'll pass the call over to Joe.
Thanks, Jason. On Slide '18, you'll find our operational priorities for 2021. This slide summarizes our 2021 objectives, and I will walk through the objectives at a high level, get in some brief detail on the slides to follow and finish up with our outlook, which as a spoiler alert, remains unchanged from what was presented back in October. Our #1 priority, as always, is the health and safety of our workforce. We continue to maintain rigor in our COVID protocols and have made these a part of our standard safe work procedures, including social distancing, masks and other personal protective equipment.Likewise, we're always looking to target zero harm in all areas of the business. And as outlined in our recently released sustainability report, we'll prioritize the progress and achievements of our ESG goals.Our equipment utilization priority links closely to our diversification objective as we seek gains in utilization of the smaller end of the fleet, which is uncommitted and underutilized in oil sands. The diversification objective is reflected in item 4, where we expect to continue the momentum of synergies of our Nuna group of companies, as evidenced by the recent contract win at the Ontario gold mine.With this diversification focus, we expect to continue to meet our oil sands customer needs with high utilization of our large fleet, while at the same time, improving the utilization of smaller fleet outside of oil sands and reduce the consolidation risks by having more customers and more commodity markets and geographic regions.We will also continue to pursue diversification in low capital intensity growth areas, such as the U.S. mine management contracts and major earthworks infrastructure projects. These contracts generally have fleets provided and as such, don't affect our utilization calculations, but they do offer low to no capital entry and diversification into other commodities and regions.The operational priority items 3 and 5 relate to our continued push to vertically integrate equipment maintenance and expand on our external maintenance services. We will be expanding our Acheson maintenance facility with construction starting in late March and will complete the expansion in early Q4. The expansion includes 4 new shop bays, a new cold storage building and a full rooftop solar array, which we estimate will supply about 15% of electrical demand. This expansion will also reduce our demand on maintenance labor in the field and provide more external maintenance service capacity.Last but not least on this slide is item 6, where we will continue to keep tight controls on our SG&A spend and ensure our administrative costs are necessary, effective and efficient.Moving on to Slide '19. This is a new slide in our deck and shows our quarterly fleet utilization going back to 2015. A couple of items I'd like to point out here. In the Q1 2015 to Q4 2018 period, you will notice the high variance between quarters with consistent high usage in Q1, generally followed by Q4 then Q3 and lastly by Q2, which is most impacted by spring breakup. And was quite exaggerated, to say the least, in 2016 with the wildfires.As we progressed our strategy, made the competitor fleet purchase and acquired the Nuna interest in late 2018, followed by the used ultra-class fleet purchase, we've been able to continue to post operating utilization above the positive trend line for all of 2019 and into Q1 2020.In 2019, we still had a bit of a Q2/Q3 trough, but not nearly as exaggerated as previous years. Obviously, the 2020 COVID impacts totally blew us off course, but you will see that we began to get back to normal in Q4, and we expect to get back to the 2019 pattern going forward with high utilization in Q1 and the more consistent utilization throughout the year.We also believe our increasing diversification and countercyclical summer work, such as the recent award of the Ontario gold mine will continue to lessen the Q2 and Q3 troughs and provide more consistent and overall improved fleet utilization. Simply put, our goal is to keep that trend line sloping up and keep putting quarterly dots near or above that line.Flipping to Slide '20. This is also a new slide in our deck and one that showcases why we push so hard for vertical integration in our maintenance business. As you can see, the component remanufacturing vendor partnerships we have developed over the last several years have enabled us to significantly lower component costs.A couple of items of note that you can't see in this simple quantitative price comparison. One is that the partnerships we have today actually have better warranty and lower risk than our previous suppliers. Secondly, these lower costs, lower risk components from our partnerships, combined with our highly skilled and cost-effective shop labor are the main ingredients in how we can do whole machine second life rebuilds for about half the new replacement costs.The economics are pretty simple to figure out, which is why we continue to add maintenance capacity, such as component remanufacturing we completed last year and the expansion to the main shop we will do this year. With these facilities and a strong resource industry, we are confident our external maintenance business will rebound back to the level we are at in 2019 and continue building.These next 2 slides, 21 and '22, highlight the 2 main areas that drive our confidence in our diversification success and have led to the recent increase in EBIT target from 40% to 50% by the end of 2022.The bid pipeline, Slide 22, shows the increasing demand and the expanding opportunities in other resources in geographic regions, where commodity prices are as strong as we've seen in many years. The contractor demand we are seeing isn't just for new mines, but we are also seeing several mine sites looking to contract mine satellite deposits to fill excess processing capacity.What's exciting about these types of projects is that they generally have a high success rate and that the economics for incremental production are usually compelling and the barriers to expand existing sites are lower than establishing new mines.So in summarizing my long-winded story, demand in other resource areas is high, and we expect that demand to remain high. The second part of the story highlighted on Slide 21 is what drives our confidence that we will win our expected share of this work.Obviously, the recent award to our JV Nuna is the most tangible confidence builder. Similarly, we have a major earthworks project that both Nuna and NACG had individually expressed interest in bidding, and the client recently suggested our combined team would be seen as a stronger submittal. So although less tangible, that feedback from clients likewise reinforces our confidence.Lastly, but probably most importantly, we simply believe in our strategy and that a safe, low-cost experienced contractor with strong indigenous partnerships, an extensive and well maintained fleet and a commitment to sustainability will have significant competitive advantage to win these tenders.Moving on to the next slide, which is also a new slide in the deck. This slide highlights our recently released inaugural Sustainability Report. This slide includes our 3 key focus areas and provides a new update on our shop expansion solar usage, but I would recommend reading the full Sustainability Report to all of our stakeholders. In future quarter's decks, we'll use this slide to show the progress we have made towards our sustainability goals.I also kind of like the idea where we highlight safety in our first slide and end on sustainability before giving the outlook which I will now do on Slide 24.As briefly mentioned earlier, our outlook remains as presented in October. I won't revisit the details, but I'd highlight that the $70 million midpoint for this year's expected free cash flow is equal to about 20% of our net debt of $386 million and is a similar percentage of our current market cap of $360 million.Therefore, debt reduction and share buybacks are likely to be high on the list of capital allocation priorities, with growth capital being allocated to the highly accretive shop expansion.I'll now hand the call back to Kenzie for the Q&A session.
[Operator Instructions] Our first question comes from the line of Aaron MacNeil with TD Securities.
Joe, it looks like you've introduced the 2021 revenue diversification goal and bumped your goal in 2022. So I guess I'm wondering, can you hit these targets with what you have in hand? Or do these targets imply new contract boards? I asked the question because it looks like your bid pipeline only starts to contemplate diversified projects into 2022 and beyond, that would be Slide 22. And your newly introduced 2021 figure is higher than your old 2022 figure, if that makes sense. So I'm just trying to get a sense of what might have changed over the last quarter, given the overall 2021 guidance is essentially the same?
Yes. This -- what you see for 2021 is what we have in our forecasting right now. So there's no anticipation in that $45 million of being awarded anything newer quickly. And the increase to 50% in 2022 is based on our expectation of winning some of those external or other area awards that we have highlighted on that bidding pipeline page.
Maybe you can also walk us through how these diversified projects in the bid pipeline will ultimately be fulfilled. You mentioned the new joint bid in your prepared remarks just a minute ago. But I guess I've got a couple of questions. First, will the majority of these projects flow through Nuna or through a Nuna North American joint venture? And then if that's the case, do the project sizes contemplated on the slide, are they total revenues for the project or just North American share? And then second, my understanding is that you're essentially fully committed on your current owned fleet. So how do you plan to finance or bid or operate these new projects?
I am trying -- there was a lot of questions in there. I'll try and follow-on. As far as the bullets on the bid pipeline, so I'll just -- catch me if I miss any of them. So those are representative of our share or our share of Nuna. I'd say roughly 1/3 of them are what Nuna looks at individually. There's only 1 or 2 of those that have us looking at together with Nuna and the rest of them are by ourselves or with other partners. So we do have other partners, and especially in the larger infrastructure work in that. And then as far as how we fulfill these, most of the infrastructure and mine management work has their own fleets, as I mentioned before. The -- in general, the commodity areas we look at, be it iron ore gold, diamonds, coal in other areas, in other regions, are predominantly our smaller fleet, which kind of 150 ton trucks and smaller. And those have been underutilized. We have roughly 160 of those sized trucks alone. And they've been significantly underutilized in oil sands over the last several years. So there likely would be some add-ons here and there, but we don't expect a significant amount of capital to pursue any of these at this point. The bid pipeline, they don't all even go forward, these jobs. They get deferred. The major infrastructure job we're bidding. We actually started it 4 years ago, and it's pushed back twice. So they have different levels of success in going forward. They may run into permitting hurdles. But one of the things that I spoke to in the presentation that I was excited about is that the satellite mining and resources in other resource areas. Those -- when you have an existing mine site where permitting is already in place, and they want to do an expansion or you have an underground mine that has a surface deposit that they contract mine. Those have great success going forward because they really have very low barriers. The land disturbance is usually in place. So we're confident that the normal amount will flow forward through out of this, but also, there'll be a little extra because of those type of bids that have satellite deposits in there.Did I cover them all off, Aaron? Or did I miss anything?
No, that's great. That's perfect. So that's all for me. Martin, as you know, I used to cover this company before you took the helm. And the way you've transformed this company is nothing short of incredible. So wishing you all the best in the future. And Joe, congrats again on the new gig.
Our next question comes from the line of Tim Monachello with ATB Capital Markets.
Maybe I'll follow-up on Aaron's question first. I'm just curious on the satellite mine opportunities. What percentage of the bid [indiscernible] would be those types of opportunities and would also be the lower capital intensity mine operating contracts.
I'd say we're somewhere in -- there's probably $400 million, $500 million of that that we have -- that we're looking at right now that our satellite mines of existing operations, and they're more of the nearer-term projects.
And then in past quarters, I guess, through the downturn, it seemed like there was a number of projects in the oil sands that have been deferred out of 2020 and into 2021. Obviously, commodity prices are a lot more constructive today than they were for most of the year. So are you starting to see those opportunities return?
We haven't seen a lot right now, Tim, but that's not unusual. We usually don't see summer construction tenders until late February, even up to into April because with -- there's usually May, June starts. So depending on the scope of that, often we don't hear about much until that kind of time frame end of Q1 beginning of Q2.
I guess, the upper end of your guidance for 2021, would that contemplate that work returning this year?
Not to any significant increase of what we've seen in the past. It's pretty much based on a normalized 2019.
And then just last one for me. You guys talked a little bit about Acheson expansion this year. Is that contemplated within the $5 million to $10 million growth CapEx?
Yes, that's right in the middle of that, I'd say.
If you guys win some of these other awards, do you think there's upside to that CapEx guidance for the year?
Yes. There's certainly -- if there is -- some of these major bids they are required, they might have some kind of some support equipment or maybe a unique piece of equipment that's associated with it. So yes, there could be, but it would also be associated with an increase in revenue.
Our next question comes from the line of Bryan Fast with Raymond James.
Just on the component rebuild facility. The chart in the presentation, I guess, really illustrates well the value adds that you're achieving with that initiative. Are you now operating at full capacity at the facility? And are the savings in average component costs exceeding your expectations?
We are operating at our full capacity, what we expect to. We've ramped up some -- when we started in February last year. It still has -- we have more capacity if we wanted to put through it. But we'd have to get more external requests if we wanted to push more through. And as far as it's -- what it's saving us and what it's doing, I think it's met or exceeded those expectations.
And then I guess now that we hopefully have the worst of the pandemic behind us. Are you starting to see those M&A channels open up? Or is that something that's on the radar right now?
We're seeing some interesting activity. Obviously, it's very hard to do anything when it deals with hard assets like ours and traveling to see things or putting your hands on them is pretty important. So I think we've seen some smaller stuff. And we keep our eyes open. Always looking for something that's accretive and interesting and fits kind of our diversification strategy.
Our next question comes from the line of Maxim Sytchev with National Bank Financial.
I was wondering, going back to the shop expansion. Is it possible to talk a little bit about how you think about payback terms on these investments in terms of -- I don't know if it's like percentages, like [ RYC ] or time horizons. Maybe any color on that front.
That's the compelling economics I was talking about Max, and this is very similar to what we saw in the remanufacturing facility when we built it. The paybacks are like 3 years. So it's pretty fast. And I think because of the -- we've had great success in selling our shop and getting skilled maintenance labor here to increase the hours and the throughput here. So it's -- we have high confidence we'll achieve that 3-year kind of payback in this expansion.
And then can I maybe just commenting around the ramp-up on the gold project, how that's going, your conversations with the client? Any sort of early issues any learnings? Maybe any color on that, please?
As far as the Ontario gold mine, is that what you're talking about, Max?
Yes, exactly, yes. Yes.
Yes, I think typical of most ramp-ups we've seen, and especially given the parameters with COVID in that, there's always a little disruption upfront, getting camps set up, getting lay down areas. There's always a bit of a scheduling, but nothing unusual. We expect -- it wasn't high activity levels upfront. So the real high activity levels start-up in kind of the April, May time frame. So we still fully expect to be hitting those project milestones at the same time as we had originally.
And do you mind maybe just commenting a little bit around how we should be thinking about this winter work program versus maybe last year? Are the clients kind of back to sort of almost the same level of production activity levels? Or are we 10%, 15% below? Maybe just any granular directional color you might provide in that?
I'd say our level of activity is probably almost the same or it's slightly -- maybe slightly lower, but not much. I'd say it's very similar to what we saw last year. I think the overall marketplace, the small truck side is about the same. The big truck marketplace is less, but we have more of it.
So is it -- the way that we should be thinking about this is, greater market share? Is that how you see this?
I think there's probably a little less overall being done, especially on the big dirt side in the overburden, but we're doing more of that. So our numbers are very similar, slightly below, I'd say.
And I mean, obviously, given the fact that the underlying commodity rebounded pretty aggressively. Are you seeing any by the [ language ] changes from the customer perspective, a desire to outsource to a greater extent or maybe not just, again, maybe anything from that perspective.
Yes. I haven't had a lot of tangible feedback from the clients. I think, we'll probably hear and see more of that as we go into the summer because that's usually when you see capital project work. It's starting up in the summer. So like I said before, I think we'll have more insight into that Max here in the next few weeks, couple of months. Overall, there's -- I'd say there's a long-term driver. I think the volumes will -- the overburden volumes will continue to increase. Obviously, the one mine that had closed down has reopened and is producing. So we think that's going to start to create some demand in the future. And overall, I think the [ barrel slowing ] are higher. So it's typically the more barrels they are going to produce the more material you are going to move.
And then just last question in terms of M&A, and maybe that's the question to Joe and Martin. In terms of the type of potentially assets that you're looking at, I mean, obviously, NOA has performed extremely well and in a resilient fashion throughout the crisis. The type of situations you're looking at right now, I mean, is there a bit more of a sort of distress component attached to it? Or how should we think about what's potentially on the horizon, if anything, from an acquisition perspective?
I'll let Martin comment first. And my point of view Max is we're looking for similar businesses that fit our skill set. We're not in different in diverse areas for commodity and geographies. So I think anything that fits that that's accretive, is something we would look at. We're going to be capital conscious too. But those are -- would be the areas that we'd look in. I don't think there's a huge amount of distress out there, that I'd seen anyways. I don't know if you have anything to add, Martin?
Yes. I'll just say that the strong demand for every single [ nut ] for resource right now. So that takes away distressed assets pretty much, because all the assets are needed for projects. So I think our M&A will be focused upon geographic diversification, maybe. I'd likely say that, but that's all I will add at this point.
Our next question comes from the line of Richard Dearnley with Longport Partners.
On Slide 19, the -- I understand how -- the question is with Nuna. How does Nuna change the fourth quarter utilization, prospectively? It would seem like you don't get the same kind of highs. You get higher third -- second and third quarter utilization but lower fourth quarter.
This is all just our own fleet, Richard. So this doesn't have known as fleet utilization. You are correct, and they're typically countercyclical to us. So they -- their fleet, if we had their fleet in here, you would probably see more of highs in Q2 than Q3 for them.
And we will be looking to add Nuna into this, Richard. So -- right.
So the -- and their fleet is the 270 that you mentioned.
Right. That's right.
And then I'm curious on the solar only part of the Acheson expansion. How much does a solar of that size cost these days?
We're doing a full rooftop on the shop side of the facility. I think it's roughly an area of about 0.5 million [ panels ]. The economics of it are pretty good. And I guess it's fairly breakeven or slightly favorable at today's rates. But if you expect future power rates increase, which I think is a pretty safe bet, then it will actually be a positive for us going forward. How long it's obviously, the reduction in emissions by producing your own solar power.
Are you going to own that? Or are you going to lease that?
We'll own it. We did the same thing on our [ Greenland ] facility last year, Richard, and it's performed very well.
And Martin, sorry, I'm going to miss your colorful commentary on stock price and other things, but thank you for the past.
I'll miss your great questions too, Richard. So all of us to you too.
This concludes the Q&A section of the call, and I will pass the call over to Joe Lambert, President and CEO, for closing remarks.
Thanks, Kenzie. Thanks to all of you for joining us today and for your continued interest in our growth and diversification journey. I'm very excited about our opportunities to advance our business in 2021. And what we all hope is a much healthier and more stable environment. Thank you.
Thank you. This concludes the North American Construction group's Q4 2020 conference call.