Earnings Call Transcript
North American Construction Group Ltd. (NOA)
Earnings Call Transcript - NOA Q1 2023
Operator, Operator
Good morning, ladies and gentlemen. Welcome to the North American Construction Group Earnings Call. At this time, all participants are in a listen-only mode. Following the management's prepared remarks, there will be an opportunity for analysts, shareholders, and bondholders to ask questions. The media may monitor this 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 the participant's permission. The company wishes to confirm that today's comments contain forward-looking information and that actual results could differ materially from 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 Joe Lambert, President and CEO. Please go ahead.
Joe Lambert, President and CEO
Thanks, Joanna. Good morning, everyone, and thanks for joining our call today. I'm going to start with some of our high-level operational performance metrics, do a brief look back as we recently celebrated our 70th year in business, and then delve into our competitive advantages and barriers to entry before handing it over to Jason for a brief financial overview. And then I will conclude with the operational priorities, bid pipeline, updated outlook for 2023 and our capital allocation before taking your questions. On Slide 3, I'll start with a safety update. Our trailing 12-month total recordable rate of 0.36 represents a significant improvement from last year and the Q1 rate of 0.30 matches our Q4 best last year. The 0.36 achieved gets us back below our industry-leading target frequency of 0.5, and we'll be focusing our efforts in 2023 on continuing improvements. I often refer to us as a safe, low-cost contractor, and I'm happy to report that on the safety front, we have made significant improvements, and we will always work towards our model of everyone gets home safe. On Slide 4, in commemoration of our 70th anniversary, I wanted to give a brief overview of how and where the business has changed and grown. We have worked in many sites that operate for decades and perform services throughout their lives, such as initial access and development through the final reclamation. We have continually operated in roads and infrastructure since the 1950s, oil sands since the 1970s, the Canadian resource industry since the '80s, and the northern diamond mines, including building the ice road used for access since the 1990s. With decades of experience behind us, we have grown and diversified our business and now have locations in not only Canada, but also the U.S. and Australia. We are now on 30 project sites with clients producing over eight different commodities and expanded services, including major civil infrastructure construction, mine management and external maintenance services. We have also included a more detailed historic timeline in the appendix for those of you that may be interested. Slide 5 demonstrates that what we have built over the 70 years is extremely difficult to duplicate and creates what we believe are significant barriers to entry, including: new equipment is getting more expensive and lead times are extending out more than a year; a single oil sands overburden fleet on one site purchased new would cost an estimated $100 million to $150 million and estimated to take around two years to get fully delivered; an established and proven safety-focused culture with a commitment to Zero Harm, which takes time and dedication at all levels to engrain into the business. We've also spent many years developing our maintenance skills to in-house and lower costs, while others must rely on increasingly high-cost third-party vendors. We have extensive experience working in the coldest climates and some of the toughest ground conditions from the soft underfoot sand and plays in oil sands to the hard and abrasive rock in the Canadian Shale. These days, not many Canadian project contractors will get a bid package without an established indigenous partnership. There are a limited amount of indigenous partners, many of which are already committed to others, and we believe we have the best indigenous partners out there. And lastly, and as many of you that have been following our business for the last five to ten years know, the proof and the strength of these barriers to entry is demonstrated over that timeframe by the amount of competitors that have retreated or sold up their equipment. History is not only a great teacher but a pretty good gatekeeper as well, and our competitive position is as strong as ever. On Slides 6 through 8, we highlight our primary competitive advantage of being a low-cost operator. Combined with safety, low-cost operations is the advantage that works throughout any commodity cycle, and we do this by being good operators and world-class maintenance providers. All-in equipment costs are more than half of our typical costs in the year, and we continue to drive ours lower. This slide illustrates the savings we have generated by in-housing tasks that have traditionally been done by OEM dealers and third parties. We are now rebuilding our own components at 30% to 40% less than dealers and completing whole machine second-life rebuilds at 30% to 50% less than replacement costs, of which we have done several dozen, including 17 of our largest haul trucks that at replacement value is exceeding $8 million each. By in-sourcing these activities, we have pushed down our ownership costs, protecting both our markets and our margins. Slide 7 really highlights how we have expanded our maintenance capacity. With our focus on vertical integration, we have more than quadrupled the number of shop hours we can do in a year, completing over 90% of maintenance activities internally. While scaling up this capacity, we've been able to keep shop cost per hour stable. Meanwhile, OEMs have been steadily increasing their charge-out rates while generally reducing the amount of mechanics available for contractor support. Next, Slide 8 shows the widening advantage of our low-cost strategy. Our all-in equipment operating costs over the past decade have remained stable against inflationary pressures and rising costs. It's impressive to note that our operating cost of our 100-tonne haul trucks are lower than 10 years ago. You may notice a slight uptick in 2019. This is when we purchased a competitor's equipment fleet and had to invest a bit more than normal to bring that fleet up to our standards. Stable equipment and operating costs have allowed NACG to offer increasingly competitive rates to clients while improving our bottom line, a true win-win. On Slide 9, you'll see we achieved our highest Q1 utilization in five years after just having posted our highest Q4 on record, and the demand for our fleet remains high. The Q1 utilization of 79% was directly correlated to improved fleet mechanical availability. We expect the high demand to remain throughout 2023 and continuing into 2024 and beyond in what I view as a stronger for longer commodity environment. We likewise expect our progress on increasing the maintenance labor workforce will directly correlate to continued improvements in fleet utilization. Lastly on this slide, I'd just like to point out two items. First, and as many of you have previously heard, other than the obvious pandemic impacts in 2020, our diversification efforts over the last several years have delivered expectations and demonstrated higher Q2 and Q3 fleet utilization as we have moved the smaller underutilized portions of our heavy equipment fleet out of oil sands and into other geographies and commodities where they have achieved more operating hours. The diversification now built into the business has removed much of the seasonality and cyclicality seen in previous years. Secondly, we have now posted two consecutive quarters into our targeted range and are focused very much on getting our typically lower Q2 and Q3 utilization up such that we have a trailing 12 months in or close to the range, which would have us achieving our target close to a full year earlier than originally estimated. With that, I'll hand it over to Jason for the Q4 financials.
Jason Veenstra, CFO
Thanks, Joe. Good morning, everyone. We've streamlined our financial commentary this quarter based on feedback, so my remarks will be brief. There were no unusual items this quarter besides significant timing impacts on free cash. On Slide 11, combined revenue reached $321 million, slightly surpassing Q4 2022, which was our highest quarterly revenue ever. Our return on invested capital at 14.3% is the highest recorded, and trailing 12-month EBIT reached $132 million on stable invested capital. Overall, revenue was up 35% compared to Q1 2022. Reported revenue, mainly from our core heavy equipment fleet, increased by 37% quarter-over-quarter, driven by contributions from adjusted equipment and unit rates as well as better equipment utilization. Equipment operating hours rose over 20%, achieving a utilization rate of 79%, up from 65% in Q1 2022. ML Northern, acquired on October 1, contributed a full quarter of fuel and lube delivery and has performed excellently in its first six months. Our joint ventures generated $78 million in revenue in Q1 2023, up from $60 million last year. Nuna Group of Companies also had a strong quarter at the gold mine in Northern Ontario, with the core business operating above historical levels. Revenue was bolstered by growth in repaired haul trucks and purchased excavators from our joint venture with Mikisew, along with contributions from joint ventures focused on the Fargo-Moorhead flood diversion project. Construction work at the Fargo project continued over the past quarter, with activities ramping up while remaining on budget and on schedule. Our combined gross profit margin improved to 17.4%, up from 13.7% in Q1 last year, reflecting solid operational performance throughout the quarter, especially in the Fort McMurray, Northern Canada, and Northern Ontario regions, which benefitted from favorable cold weather conditions. Our joint ventures maintained consistent operating margins, and updated equipment and unit rates were instrumental in Fort McMurray operations returning to historical margin levels. Operating margins gained from the ML Northern acquisition due to reduced internal costs and strong margins from services offered to external customers. The second-life rebuild program also delivered another ultra-class truck this quarter. Moving to Slide 13, adjusted EBITDA reached $85 million, closely matching the Q4 2022 record of $86 million based on strong margins. G&A expenses in the quarter were $8.2 million, which is 3.4% of revenue. As our business expands, we incur certain incremental G&A costs, but we remain well below our goal of 4% of revenue. When we move from EBITDA to EBIT, depreciation accounted for 13.1% of combined revenue, reflecting the overall depreciation rate of our business. Our diversification into less capital-intensive services has helped lower the depreciation percentage. For wholly-owned entities and our heavy equipment, depreciation was 15% of revenue, indicating effective fleet use during a quarter with higher idle time due to colder weather. Our internal maintenance programs continue to yield low-cost, long-lasting components, impacting depreciation rates positively. Adjusted earnings per share for the quarter were $0.96, an increase of $0.45 from Q1 2022 as rising revenue translated into net income. EPS was supported by $45.7 million from adjusted EBIT after interest and taxes. The average interest rate for Q1 was 6.7%, up from last year’s 4.5% due to well-known interest rate hikes. Gross interest expense reached $7.3 million, likely the peak for the year as we anticipate generating free cash flow to reduce debt with rates expected to stabilize. Moving to Slide 14, net cash from operations was $66 million, reflecting strong EBITDA performance but significantly influenced by changes in working capital. The sustaining maintenance capital in the first quarter was $47 million, which is frontloaded; we expect it to be around 35% to 40% of full-year capital based on historical data. Free cash flow of $26 million was used this quarter, impacted by roughly $49 million in timing issues. Changes in routine A/R and A/P balances accounted for about half, as our equipment operated right through quarter-end, increasing receivables while we paid suppliers on regular terms. The other half of the timing impacts were split between rises in capital maintenance work in progress from our rebuild programs and joint ventures that did not distribute cash in the first quarter. Moving to Slide 15, total liquidity stands at $172 million, reflecting the effect of free cash flow utilization this quarter. Net debt increased by $28 million, largely due to $26 million of free cash flow financed by debt along with dividend payments. Despite the rise in debt levels, net debt leverage decreased to 1.4x as the growth in EBITDA outweighed the increase in debt. On a trailing 12-month basis, our senior debt leverage ratio as per our credit facility dropped to 1.2x, and we ended the quarter with our usual and targeted cash balance of about $15 million. Now, I’ll pass the call back to Joe.
Joe Lambert, President and CEO
Thanks, Jason. Looking at Slide 17, this slide summarizes our priorities for 2023. Our priorities for the year are unchanged and we remain focused on our safety, execution efficiency, winning tenders and building up our backlog, and continuing to grow our skilled trades workforce. Slide 18 highlights the continuing strong demand in active project tenders. No projects were lost in Q1, and we added about $400 million in new tenders, about half of which is outside of oil sands and roughly matches our current diversification. One big item of note is that earlier in the week, we had our first client meeting and update on the large regional oil sands tender. We continue to expect to win our fair share of the large regional oil sands tender and look forward to putting together a compelling low-cost tender package for our clients' consideration. A couple of other items to note. We believe Nuna will have their fleet fully committed for the year with anticipated awards in Q2. We also believe we have a good chance of being awarded an approximate $75 million over a five-year scope for fueling and servicing of an oil sands customer's equipment fleet. If successful, this award would represent our first major tender of our newly acquired ML Northern equipment servicing business working under our Mikisew partnership, and we believe we will see one or two more tenders like this over the next six to 12 months. On Slide 19, our backlog sits at $1.1 billion and provides consistency that allows for planning and efficiency of our workforce and our fleet. What I continue to believe is a key takeaway on this slide is that our backlog is roughly proportionate to our diversification target, demonstrating both confidence and sustainability of our diversification efforts. Lastly on backlog, we continue to have expectations of exceeding $2 billion before the year is out. On Slide 20, I'm excited to provide an enhanced outlook for 2023. With our strong Q1 results, progress on priorities, and focus on carrying some of that momentum into the summer, we've been able to meaningfully increase the midpoints for all of our key financial metrics. We are again on track towards accomplishing another record year. We have had a great winter work season and are confident that we will continue to build on what was another outstanding quarter. As I stated in my letter to shareholders, capital allocation based on the new free cash flow range of $100 million to $115 million will, as always, be prudent and directed in a way that maximizes value. At this point in time, we see dividends, share repurchases, and debt repayments staying similar to previous guidance and the anticipated increase coming in growth and acquisition allocated to expansion of external maintenance services. And as I've said many times, our capital allocation decisions are consistently analyzed, and we will of course redirect cash flow to share repurchases or growth opportunities if they provide superior return to our shareholders. In closing, I would just like to thank the great team I have here at NACG and all of our partners for all your efforts and support in helping us achieve these strong results as we continue to exceed expectations. With that, I'll open it up for any questions you may have.
Operator, Operator
Thank you. The first question comes from Tim Monachello at ATB Capital Markets. Please go ahead.
Tim Monachello, Analyst
Hey, good morning, everyone.
Joe Lambert, President and CEO
Good morning, Tim.
Jason Veenstra, CFO
Good morning, Tim.
Tim Monachello, Analyst
I was interested to hear that you're essentially backfilling the Nuna contract with Cote exiting in Q2. Can you discuss your confidence in filling that backlog for the second half of the year and what guidance you're providing related to that?
Joe Lambert, President and CEO
Yes. I believe what we currently have is similar to our previous fleet arrangements for that job. Nuna is planning to utilize their fleet elsewhere. The fleet at that mine is divided into three segments: a Nuna-owned fleet, a North American fleet, and a joint venture fleet. Our fleet is expected to return to oil sands but at a lower utilization, indicating potential growth for us. We feel that Nuna is deploying their fleet in other opportunities that are emerging. Additionally, we have several areas in our bid pipeline that seem promising for the larger portion of the fleet we plan to utilize, although those bids have not yet been awarded.
Tim Monachello, Analyst
Okay. So about a third of the fleet at Cote right now is expected to see a decrease in utilization as it returns to the oil sands. Is that correct?
Joe Lambert, President and CEO
Yes, it's not a large number. There are probably around 25 or 30 pieces of equipment that are in North America.
Tim Monachello, Analyst
Okay. But incrementally, positive outlook for the fleet compared to what you would have been talking about with the Q4 results?
Joe Lambert, President and CEO
On the Nuna side, ours would be unchanged.
Tim Monachello, Analyst
On the Nuna side.
Joe Lambert, President and CEO
Yeah.
Tim Monachello, Analyst
Yeah. Okay. Got it. Okay. I appreciate it. And then I appreciate the detail that you had on the multi-site contract that you're negotiating in the oil sands. Your customer just announced a big acquisition of one of its partners in the oil sands today. I'm wondering if there's any initial implications from that deal, if that might change the scope of work or have any other implications that I'm not thinking about for NOA?
Joe Lambert, President and CEO
I don't think it will. I believe they are just acquiring the interest of one of their partners, if that's what you meant. We have been presented with a brief outline of the timing and intentions this week, but we will receive the actual scope of the RFP and the volumes in about two weeks. However, we don't expect any significant changes from previous volumes based on the amount of work we are considering.
Tim Monachello, Analyst
And can you remind what you think the timing of that award will be? Because if I'm not mistaken, those existing contracts roll off at the end of the year, right?
Joe Lambert, President and CEO
Yes. They're expected to award at the very end of October.
Tim Monachello, Analyst
Okay.
Joe Lambert, President and CEO
That's what we were told this week.
Tim Monachello, Analyst
Okay. Great. And then I was just curious if you could speak a little bit about the incremental growth CapEx that you have in the guidance. And is that related at all to the five-year fueling contract that you've been talking about a little bit?
Joe Lambert, President and CEO
Yes, that's exactly what it is. So, we have strong expectations, strong enough such that we forecasted that growth capital in there.
Tim Monachello, Analyst
And what would the return profile look like for that type of investment?
Joe Lambert, President and CEO
Do you have that, Jason?
Jason Veenstra, CFO
It meets our typical investment criteria, showing a 20% internal rate of return and a payback period of three to four years. These are longer-life assets, but the economics are very favorable.
Joe Lambert, President and CEO
The fueling and servicing contracts are much lower capital intensity than our overburden and big truck works would be, Tim.
Tim Monachello, Analyst
Great. So like the $5 million to $10 million of investment, is that basically to build the fleet so that you have enough equipment to service the contract?
Joe Lambert, President and CEO
Yes, we have some already, but it would be topping that up. And there's some specialty items in the scope that we didn't have.
Tim Monachello, Analyst
Is that with an existing client?
Joe Lambert, President and CEO
Yes. And we believe there are two more that will look very much like it coming in the next six to twelve months.
Tim Monachello, Analyst
Okay, very interesting. All right. I appreciate all the details, guys. Nice quarter. I'll turn it back.
Joe Lambert, President and CEO
Thanks.
Jason Veenstra, CFO
Thanks, Tim.
Operator, Operator
Thank you. Next question comes from Bryan Fast at Raymond James. Please go ahead.
Bryan Fast, Analyst
Good morning, guys.
Joe Lambert, President and CEO
Good morning, Bryan.
Bryan Fast, Analyst
I mean, when you look at the cost structure of North American, the improvements you've made over time, which has been very apparent in results. I mean as you look across the business, Joe, where do you see I guess opportunities for further improvements here?
Joe Lambert, President and CEO
The most significant opportunity we see is in utilization, as it is something we can control. Currently, we are in a unique situation with exceptionally high and steady demand. Our focus is on keeping the equipment operational while managing maintenance. We truly believe that achieving a utilization range of 75% to 85% is realistic, and we have been operating within that range for the past six months. This represents the largest opportunity in our business without needing to speculate; it is already present. Additionally, we are observing growth in the bid pipeline, particularly with increasing demand outside of oil sands, which is creating more opportunities for us. We anticipate that we will be able to enhance utilization of the smaller part of our fleet by leveraging these opportunities beyond the oil sands sector.
Bryan Fast, Analyst
Great, that's helpful. And then with ML Northern, I know part of the business for a couple of quarters here, it sounds like things are progressing well and you just provided some good color. But could you frame just how that business has trended relative to your internal expectations?
Joe Lambert, President and CEO
Well, it's already exceeding, slightly exceeding what we had planned. And then with these potential external maintenance items, it would be far ahead of what we had originally anticipated. We didn't plan for that rapid of growth and opportunities to expand in the external maintenance side.
Bryan Fast, Analyst
Okay, that's helpful...
Joe Lambert, President and CEO
I'm sorry, Bryan, did I cut you off there?
Bryan Fast, Analyst
No, all good, Joe. Thank you.
Operator, Operator
Thank you. Next question comes from Jacob Bout at CIBC. Please go ahead.
Unidentified Analyst, Analyst
Hi. Good morning, Joe and Jason. This is Rahul on for Jacob.
Joe Lambert, President and CEO
Hey, Rahul.
Unidentified Analyst, Analyst
So, backlog is down, and I understand that's really just due to the timing issue related to a large regional oil sands tender. But outside of that, given the broader macro uncertainty, are you seeing any hesitancy at all from customers for tendering new work, especially outside of the oil sands region?
Joe Lambert, President and CEO
No, not at all. We are seeing increases in that area. Perhaps we need to distinguish our oil sands backlog from the rest, as our oil sands are now becoming fairly well aligned with five-year cycles. We believe there will be a significant increase this year, which will taper off over five years, followed by another increase, making it very uneven. Our other contract in oil sands is only a year apart. It's really the external factors where I think we could emphasize that there are increasing opportunities. Overall, we haven't seen any decline; in fact, we are encountering more projects, particularly outside of oil sands and in other commodity markets, than we have ever experienced.
Unidentified Analyst, Analyst
Okay. And I noticed in the MD&A that the amount of revenue expectation to be generated from existing backlog this year was increased to $593 million from $499 million previously. Just curious what's driving that increase exactly for this year?
Jason Veenstra, CFO
Yes, I can take that. It's really just a function of forecasting. We have jobs that go between our time and material scopes and unit rate, and so it can change that proportion. Our top-line revenue estimates haven't really changed, but how it draws down our backlog can change slightly. That can be anywhere between 50% to 60% of backlog and then it gets trued up in Q4. But it's really no impact on the combined revenue estimates we have for the year.
Unidentified Analyst, Analyst
And I think it was on Slide 27 of the presentation deck, it shows that you've been doing a pretty good job steadily increasing the maintenance headcount over the past several quarters. Would you say that you're happy with where you are sitting today from a headcount perspective? And if possible, would you look to replace some of that third-party vendor employee force with your own at some point?
Joe Lambert, President and CEO
Absolutely, that's exactly the plan. So, we will continue to increase both internally and externally until we maximize our utilization. And then once we hit that, we'll continue to increase our internal workforce and replace higher-cost third parties.
Unidentified Analyst, Analyst
Got it. Okay. Thank you very much. I'll pass it over.
Jason Veenstra, CFO
Thanks, Rahul.
Joe Lambert, President and CEO
Thank you, Rahul.
Operator, Operator
Thank you. Next question comes from Devin Schilling at PI Financial. Please go ahead.
Devin Schilling, Analyst
Hey, guys. Thanks for taking my question this morning here. With Canada making a push into the critical minerals market, can you guys comment on I guess the potential here for NOA to benefit from this growth segment? Like is there anything currently in your bid pipeline relating to this, or are you guys seeing anything on the horizon?
Joe Lambert, President and CEO
Yes. We have some activity both in Quebec and Nunavut iron ore. I wouldn't necessarily call those critical mineral sites, but just on the overall commodity. And then nickel work in Ontario, open pit mining nickel in Ontario. So, I don't think I've ever seen an open pit nickel mining contract in Ontario since I've been with the company, so I believe that's definitely driven. And we're starting to see some pre-tender stuff in some BC copper, but we haven't actually seen a tender yet.
Devin Schilling, Analyst
Okay. Great. No, that's helpful, guys. Maybe if we could just talk about the acquisition landscape out there right now. Obviously, the valuation is looking a little bit better than it has been in the past. Is there anything out there looking interesting right now?
Joe Lambert, President and CEO
We've had great success to continue to look for some of these small bolt-ons that vertically integrate into our maintenance. Those have been kind of our staple for the last few years with TGI and ML Northern. On the bigger side, we are seeing some opportunities both in North America and in Australia. And yes, they are looking more accretive than in the past, and certainly, we'll be digging into them further. And it would just be a competition for capital. Deleveraging at these higher interest rates carries a little more value than it has historically as well. Is this awkward pause on purpose, Devin?
Devin Schilling, Analyst
No, that's everything. Thanks, guys.
Joe Lambert, President and CEO
Oh, no worries.
Operator, Operator
Thank you. Next question comes from Maxim Sytchev at National Bank Financial. Please go ahead.
Maxim Sytchev, Analyst
Hi, good morning, gentlemen.
Joe Lambert, President and CEO
Good morning, Max.
Maxim Sytchev, Analyst
Hey, Joe. I was wondering if you don't mind please commenting on the ability to hire, making adjustments right now? And just maybe an update given the fact that you've been increasing the guidance and so forth, if there's also a need to increase the hiring pace? Thanks.
Joe Lambert, President and CEO
Yes. I think Tim in his previous question, I said that we did have some success in a minor amount of internal mechanics we were able to hire in Q1. But winter is typically our least successful recruiting time; people usually remain in position. So, we hope to build on that in Q2 through Q4 here. Certainly, we've been looking at a lot of different programs, increasing our apprenticeships, continuing to build up our Bench Hand programs which are non-ticketed trades in our remanufacturing side. We just added a cylinder rebuild here in the last quarter into our remanufacturing. And both internally and external mechanics we continue to hire. I think we'll see bigger increases on that in Q2 and Q3 going forward, at least we're hoping to do that with our recruitment and retention plans.
Maxim Sytchev, Analyst
Okay. That's very helpful. And then another two-part question in terms of Fargo. I was wondering if you can provide a bit of color in terms of how the execution is progressing there. And maybe a related question to sort of infrastructure outlook in general, if there is any incremental slot diversion type work that might be coming through the pipe, especially in the U.S. over the coming let's call it 12 to 18 months? Thanks.
Joe Lambert, President and CEO
Execution progress is about 10% complete on that job. Our earthworks have gone as planned. There was a particularly snowy winter, which resulted in more spring runoff than usual. This will lead to softer and muddier conditions, but it is something we are accustomed to from our years working in oil sands. That covers the near-term operational execution, and we don’t expect any significant impact on the overall project. Regarding the infrastructure outlook, the market appears strong. While we haven’t received any bids yet, there is often a delay between the announcement of infrastructure spending and the release of design and bid packages. We anticipate seeing more activity, but we haven’t noticed a significant increase so far. There may be an opportunity in a Manitoba hydro project, which we have been monitoring, but nothing else has emerged at this time.
Maxim Sytchev, Analyst
Okay. That's very helpful. That's it from me. Thank you very much.
Joe Lambert, President and CEO
Thanks, Max.
Operator, Operator
Thank you. Next question is a follow-up from Tim Monachello at ATB Capital Markets. Please go ahead.
Tim Monachello, Analyst
Hey, thanks, guys. Just a couple of quick follow-ups. Joe, I was wondering if you could have better color or visibility into the summer work programs in the oil sands at this point.
Joe Lambert, President and CEO
Not much has changed. The awarding of projects often happens at the last minute. We have some ongoing projects, including reclamation and haul roads. In the bid pipeline, there are several smaller contracts shown on the slide, including a couple related to fuel and lube. The other bids consist of a tailings dam job, atmospheric fine drying, reclamation work, and the haul road construction, which is our main project for the summer. We are still waiting for updates on that. Additionally, we occasionally receive awards for time and material scopes under existing contracts, which we may not see until late May. I hope that clarifies the situation. Overall, while there hasn't been a significant change, we do have better visibility for future tenders.
Tim Monachello, Analyst
Okay. Got it. Are any of those large enough that they would be something in press release if you want?
Joe Lambert, President and CEO
I wouldn't think so. We typically need to reach figures above $100 million. Generally, those summer jobs, which last around three to six months, fall within the range of $20 million to $70 million. They accumulate and provide substantial work for the small fleet. The large equipment fleet is already scheduled and focused on significant overburden projects.
Tim Monachello, Analyst
Okay. Got it. And then just a follow-up for you, Jason, just around your initial comments of there being about $40 million of timing impacts on free cash flow in the quarter. I'm wondering if you can speak a little bit to your expectations for at least the working capital piece of that unwinding over the next couple of quarters?
Jason Veenstra, CFO
Yes. We expect it to fully unwind by year-end. I would expect about half of it to unwind in Q2 here, and then the rest in Q4. Q3 is a unique quarter for us with Nuna's ramp-up. They tend to drive some accounts receivable increases through the summer, their busier time. So, yes, we expect a nice working capital turnaround in Q2 and then the remainder in Q4. And it all is contained in our free cash flow expectations.
Tim Monachello, Analyst
Okay. And then with regards to those free cash flow expectations, the guidance is up a little bit. You've got a little bit of growth spending, but it looks like there's some wiggle room in there where incremental free cash flow hasn't really been allocated to deleveraging or shareholder activities. What's the preference right now for incremental free cash flow in terms of allocation between those two and perhaps M&A?
Joe Lambert, President and CEO
It just depends on what opportunities we see at the time and the returns. We will evaluate any acquisitions, whether significant or minor, based on how they stack up against the expected default and the known interest rates and values.
Tim Monachello, Analyst
Makes a lot of sense. Okay. Thank you, guys.
Operator, Operator
Thank you. Next question comes from Yuri Lynk at Canaccord Genuity. Please go ahead.
Yuri Lynk, Analyst
Hi, good morning, guys.
Joe Lambert, President and CEO
Good morning, Yuri.
Jason Veenstra, CFO
Good morning, Yuri.
Yuri Lynk, Analyst
Looking at Slide 8, your operating costs on the Caterpillar 777, fascinating chart. Just wondering if you can speak to your ability now versus anytime in the last 10 years to put more of those savings in your own pocket. I think I might be wrong on this, but I think when the markets were tougher, you had to give a lot of that margin that paid away to your clients. But with rates are rising with inflation, I'm just wondering if you're able to maybe put a little bit more in your own pocket.
Joe Lambert, President and CEO
Yes, certainly, Yuri. While we may not have the slide in the main presentation, it’s still included in the appendix where we outline our anticipated growth in revenue and profit margins. The increase in margins is expected to outpace revenue and EBITDA growth, which is rooted in our historical performance. Over the past decade, we've significantly reduced costs in our equipment division. In the initial five years, we had to maintain volume by offering lower prices. However, in the last five years, we have started to improve our margins and profitability, and we expect this trend to continue. We believe we are now the low-cost, reliable provider, which means that as we save more, we won't necessarily have to lower our prices significantly. We anticipate an improvement in margins of around 1% to 3% over the next few years, based on our historical performance in those areas.
Yuri Lynk, Analyst
Okay. And that margin improvement that you referenced there, anything that you got on improved utilization would be in addition to that, right?
Joe Lambert, President and CEO
Yes, the utilization is just getting more running hours.
Yuri Lynk, Analyst
Yes. Regarding utilization, Q2 is typically the weakest quarter seasonally, but I recognize you are making efforts to balance the variability across quarters. Do you expect to fall out of the target range presented on Slide 9 in the second quarter?
Joe Lambert, President and CEO
Yes, we would. Q4 and Q1 are always our highest quarters as you noted. I think Q2 and Q3, we would expect to be in the high 60%-s, low 70%-s. And then Q4 back into the mid to high 70%-s again. Our forecast right now for the year is to be slightly below that range. And that's why I said if we manage to get into there off the Q2 and Q3, then we'd be kind of a year in advance of when we thought we'd be in it.
Yuri Lynk, Analyst
Yes, makes sense. Okay, guys. Another great quarter.
Joe Lambert, President and CEO
Thanks, Yuri. Appreciate it.
Jason Veenstra, CFO
Thanks, Yuri.
Operator, Operator
Thank you. This concludes the Q&A section of the call, and I will pass the call back over to Joe Lambert, President and CEO, for closing comments.
Joe Lambert, President and CEO
Well, thanks, everyone. I appreciate you joining the call today. Look forward to talking to you next quarter.
Operator, Operator
Ladies and gentlemen, this concludes the conference call for today. We thank you for participating, and we ask that you please disconnect your lines.