Earnings Call Transcript - NOA Q1 2025

Operator, Operator

Good morning, ladies and gentlemen. Welcome to the North American Construction Group Conference Call regarding the First Quarter Ended March 31, 2025. At this time, all participants are in a listen-only mode. 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 discussion and analysis, which is available on SEDAR and EDGAR, as well as on the company's website at nacg.ca. I'll now turn the conference over to Joe Lambert, President and CEO. Please go ahead.

Joe Lambert, President and CEO

Thanks, Jennifer. Good morning everyone, and thanks for joining our call today. I'm going to start with a brief overview of our Q1 2025 operational performance before handing it over to Jason for the financials, and then I'll conclude with the operational priorities, a review of our growth opportunities in Australia and the infrastructure markets, our expanding bid pipeline, our backlog, and our outlook for the remainder of 2025 before taking your questions. On Slide 3, our Q1 trailing 12-month total recordable rate of 0.34 improves upon our Q4 results and remains better than our industry-leading target frequency of 0.5. We continue to advance our systems and training with a key focus on Human and Organizational Performance principles, commonly called HOP, and look to continue the trend with our ultimate goal of getting everyone home safe. On Slide 4, we highlight some of the major achievements of Q1. While we struggled to overcome the weather impacts to our business, we were able to achieve some meaningful accomplishments. We expanded our heavy equipment fleet in Australia by over 10%, boosting capacity to meet growing demand. In Canada's oil sands, we achieved an impressive 68% equipment utilization rate in the quarter, with February peaking at 70%, reflecting our focus on operational efficiency. Early stage development and heavy civil infrastructure work began at a major copper mine in New South Wales, positioning us for long-term value in the critical minerals sector. The Fargo project continued to advance, surpassing 65% completion with final construction now underway in Q2. Financially, we reached a new milestone with trailing 12-month combined revenue hitting a record $1.5 billion. Our disciplined management approach kept administrative costs at 3.9%, meeting our internal targets. Additionally, our parts and component supply and services agreement with Finning delivered a full quarter of impact, effectively combining our in-house capabilities with their expertise to drive improving cost and equipment utilization. Moving on to Slide 5, you can see that the Q1 utilization of 68% was the same in both Canada and Australia. Our Canadian fleet improved to our best quarterly utilization since the winter of 2022, 2023. And while we expect Canadian utilization to drop modestly in Q2, we also fully expect it to then trend back up, approaching our 75% target by year-end. Australia took a major hit in Q1 due to rain impacts, but we remain confident in our ability to hit our target range of 85% in late Q2 to early Q3. With that, I'll hand it over to Jason for the Q1 financials.

Jason Veenstra, CFO

Thanks, Joe, and good morning everyone. Starting on Slide 7, the headline EBITDA number of $100 million and the correlated 25.5% margin were both negatively impacted by the weather in Australia and Canada. We included a comment here about our steady growth since the second quarter of 2024, which was our weakest revenue quarter post the MacKellar acquisition. We generated $330 million of combined revenue in that quarter after absorbing a 25% reduction in Canada from the first quarter. Since that time, our combined revenue has been steadily climbing and the $392 million of revenue this quarter represents an overall increase of 18%. When just looking at Australia and Canada, it represents a 25% increase in just three quarters. The Canadian operations posted an encouraging top-line of $178 million this quarter, which is impressively 45% higher than the second quarter of 2024. Moving to Slide 8 and our combined revenue and gross profit. MacKellar Group and DGI Trading, which we combine as Heavy Equipment Australia in our results, were up $24 million on a quarter which was impacted by heavy rains in February and March. The reason for the quarter-over-quarter increase is due to the 25% increase in fleet capacity since March of last year. This top-line positive variance was further bolstered by higher revenue in the oil sands region and, as previously mentioned, was importantly and significantly up from the fourth quarter. Our share of revenue generated in the first quarter by joint ventures was consistent with last year as higher scopes in the Fargo-Moorhead project were mostly offset by lower scopes within the Nuna Group of Companies. Before getting into the weather, our reported combined gross profit margin of 13.2% was impacted by unusually high early component failures in Canada. Excluding these abnormally high component failures, which we have addressed through the reorganization of our component supply approach, overall combined gross profit was approximately 14%, and Canada's gross profit margin was approximately 8%. As mentioned, the weather significantly impacted gross margins with the dual impact of lower top line revenue not covering overheads and the increased costs incurred during idle time. In Australia, the consistent rain resulted in poor utilization, and in Canada, February was the month that had the most serious impact on operations with the extreme cold requiring both equipment to be idled for extended periods of time and incurs costs to keep personnel and equipment warm. It is estimated based on historical precedent that the weather impacted gross margins by between 5% and 7% in the quarter. Moving to Slide 9; Q1 EBITDA essentially matched last year as the revenue increase was fully offset by operational challenges. Included in EBITDA is general and administrative expenses of $11.1 million in the quarter and equivalent to 3.3% of reported revenue, which is below the 4% target we've set for ourselves. Adjusted earnings per share for the quarter of $0.52 reflects the steady EBITDA performance but was significantly impacted by the $11 million of increased depreciation. Moving to Slide 10, I'll briefly summarize our cash flow. Net cash provided by operations prior to working capital of $76 million was generated by the business, reflecting EBITDA performance net of cash interest paid. Moving to Slide 11, net debt levels ended the quarter at $867 million, an increase of $11 million in the quarter. Of note, subsequent to quarter end, we issued $225 million of 7.75% senior unsecured notes. ROIC of 10.6% as at March 31 decreased more than 1 percentage point in the quarter. As we get the full trailing 12 benefit of the increased Australian fleet and with the Fargo project achieving certain financial milestones, we expect to see a trend back to our company target of 15%. With that, I'll pass the call back to Joe.

Joe Lambert, President and CEO

Thanks, Jason. On Slide 13, we highlight our 2025 priorities. These priorities remain unchanged. Safety is our social license to operate and our moral obligation to our employees and will forever be our highest priority. Equipment is our largest, most controllable cost and high utilization drives return on capital and financial performance. Geographic and commodity diversification is both our growth engine and opportunity to engage underutilized assets and increase the stability and consistency of our business. Customer satisfaction, especially with our Queensland and Alberta markets in which we have worked continuously for many decades, is what drives our expectations for 100% renewal rates in those markets and opportunities to increase scope with expected increasing client production forecasts. As we have grown, we have also relied on expanded and upgraded systems to increase our management information, cost monitoring, and ability to enter new markets such as unit rate work in Australia, which we have had recent success with our win and smooth start-up of the copper mine in New South Wales. Lastly, we continue to look to improve and expand our internal maintenance skills to improve our internal costs and expand our revenue streams through external customers. I don't have a slide specifically on tariffs, but this is as good a place as any to clarify. We have had two vendors identify increases in costs due to tariffs. One is a U.S. engine manufacturer who had advised of a 3% to 4% increase due to tariffs. The other is a U.S.-based tire manufacturer for our ultra-class truck tires, which has a 25% tariff increase in pricing. Overall, we expect the tariffs to potentially raise our internal costs less than one-half of one percent over the next year or so should the tariffs remain in place. On Slide 14, we highlight the growing civil infrastructure spend in our key markets of the U.S., Canada, and Australia. Aging infrastructure, energy transition, climate resiliency, and tariff threats are driving what we believe is a vastly growing opportunity in the civil infrastructure markets. We see the desired speed for development also lowering the risk for contractors. The growing opportunity and lower risk is why we believe we can build our infrastructure business to about 25% of our overall business in the next three years. We have a new executive member starting with us in a couple of months, and she will be leading our Infrastructure business in what we see as an exciting area for growth. On Slide 15, we highlight what we believe is our biggest organic growth opportunity going forward, and that is our continued expansion in Australia. The Australian contractor marketplace is massive and growing. Western Australia, in particular, is 50% of the active mines in the entire country, and we have less than a 1% share of that market. We have just started to see initial tender packages and budgetary proposals coming out of Western Australia and believe we will begin to receive RFPs in late Q2, early Q3 for 2026 project starts. Slide 16 highlights a strong bid pipeline of $15 billion with a massive increase around $4 billion in our upcoming infrastructure opportunities. Moving to Slide 17; with the Q1 typical quarterly backlog consumption, our pro forma backlog now sits at $3.2 billion and is a decrease of about $300 million from our year-end 2024 backlog. With the previously mentioned activity level in our bid pipeline, we expect our backlog to hit a record $4 billion mid-year this year and demonstrate increasing geographic and resource diversification. On Slide 18, we have provided our outlook for 2025 with unchanged key metrics from year-end. We believe we can make up for the Q1 weather impacts in both Australia and Canada over the course of the year and expect December construction activity in North America will be busy, particularly in Q3. Lastly, regarding capital allocation going forward, we have been active in our NCIB having purchased and canceled 250,000 shares since inception to quarter end, demonstrating our commitment to shareholder-focused allocation. We have increased liquidity with our high-yield raise, which gives us confidence to continue investing in our NCIB and provides us funds should we need to settle our remaining convertible debt with cash, which is now a current liability. The high-yield also provides additional funding should we need letters of credit for future infrastructure bids or fund other high-return investment opportunities. Q1 weather dragged down our start of the year, but we see great opportunities, improved financial performance, and continued shareholder-friendly investments going forward. With that, I'll open up for any questions you may have.

Operator, Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from the line of Adam Thalhimer from Thompson, Davis. Please go ahead.

Adam Thalhimer, Analyst

Hi, good morning guys.

Joe Lambert, President and CEO

Good morning Adam.

Adam Thalhimer, Analyst

Can you help us a little bit thinking about seasonality for the rest of the year? I'm curious how you guys think Q2 might trend versus Q1 from a top-line and an EBITDA perspective.

Jason Veenstra, CFO

Yeah, I can take that one, Adam. We actually see top line and EBITDA being quite consistent with Q1. The oil sands is seasonally slower. It's less of an impact in our more diversified business, but we see utilization in the oil sands coming down a little bit. But with lower depreciation, we see on the EPS side, a nice increase in Q2. So top-line and EBITDA consistent with Q1.

Adam Thalhimer, Analyst

Great. And then, Joe, can you just expand? You talked about a new hire on the infrastructure side and just maybe what you're seeing for large infrastructure bidding in the U.S. and Canada.

Joe Lambert, President and CEO

Yeah. I mean predominantly what we're looking at recently has been a big increase in P3s in the U.S. The ones we are looking at are — there's a couple of dozen actually. It's all around energy transition and climate resiliency. We're seeing quite a few dam construction levy raises around flooding. We see a lot of water retention in the Western U.S. And so we've really just got into the business development side of this, which is the big adds you are seeing. Those are all P3 projects. About half of them are the U.S. Corps of Engineers. And yeah, we've got what we think is a great leader for that business and our overall business development starting here at the beginning of July. So we think those are great opportunities. We also see them as lower risk in the form of contracts that are coming out. So most of the stuff you'll see on our bid chart is actually from the P3 conference in Dallas in the U.S. and that's really what's driving that part of the business.

Adam Thalhimer, Analyst

And is that in your $4 billion backlog expectation by midyear or would that be?

Joe Lambert, President and CEO

That wouldn't be in this year at all. They're longer lead times. They'd be more in the 2027 kind of range on average. If you look at that bid chart, the two that are the furthest to the right on the bid pipeline are both flood protection jobs from the Corps of Engineers. There is some potential for some earlier, but that's kind of the timeframe we're looking at is around 2027 for most of these to kick off.

Adam Thalhimer, Analyst

Perfect. I’ll turn it over. Thanks guys.

Operator, Operator

Thank you. And your next question comes from the line of John Gibson from BMO Capital Markets. Please go ahead.

John Gibson, Analyst

Good morning guys. Thanks for taking my questions. Just first, wondering if you could quantify the financial impact of the rainy weather in Australia in Q1?

Jason Veenstra, CFO

Yeah. We put it at about 5% to 7% of gross profit margin in Australia. Was your question just on Australia, John?

John Gibson, Analyst

Yeah. I guess just what a normalized quarter would have been absent the severe weather impact.

Jason Veenstra, CFO

Yeah. So we are kind of in the $10 million range in Australia. They're normally at about 25% gross profit margin. They came in at 16% or 17%. So that kind of order of magnitude.

John Gibson, Analyst

Okay, great. And then second one for me, just your oil sands work continues to improve. I guess what's changed here? Is it the new contract structure? Is it just a bit of a pickup from some work that was delayed last year?

Joe Lambert, President and CEO

I think it is very similar top-line. I think we are getting a bit more efficient in the operations there. Obviously, Q1, we had a big hit on the cold weather. When it gets extremely cold, you just have to leave equipment running because if you turn it off, it's very difficult to get them started again. Other than that, I think we are seeing very strong demand. Q2 is usually our weakest quarter in oil sands, and then we think we're going to finish strong there and look forward to the projections for next year. We think with production continuing to increase and material movements will follow, and we see modest growth potential year-on-year.

John Gibson, Analyst

Okay, great. Congrats on the solid quarter in light of some tough operating conditions.

Operator, Operator

Thank you. Your next question comes from the line of an unidentified caller. Please proceed.

Unidentified Analyst, Analyst

Hey, good morning guys. Hoping you having a good day. Joe and Jason and the whole team, thanks for your time. I was coming through the financials and saw that the subcontractor services increased a good bit. It looks like from $59.6 million ballpark to $75.6 million comparing 2024 Q1 to 2025 Q1. How would you comment on that? What was the reason for the increase?

Joe Lambert, President and CEO

Yeah. So that's all Australia driven, and we are doing some new work in Australia that requires subcontractor services, particularly at that copper mine in Australia as well as the rainy weather required some services to be brought into sites that we coded as subcontractors. About $18 million of that increase is MacKellar related. We enjoy a margin on that subcontractor work, so it is all kind of part of the different scopes year-over-year.

Unidentified Analyst, Analyst

Okay, got it. And then my second question is I think that you guys are doing an excellent job as far as management is concerned. But how do you respond to any investors who might be losing confidence in management's ability to execute based on repeated issues related to climate and weather?

Joe Lambert, President and CEO

I think our job is to deliver results that we say we are going to get. And so yeah, Q1 was a bit down due to weather, and we need to deliver into the yearly guidance, and that's our expectation. I think any market is just expecting that if you put up a number that you hit it or beat it. And that is our internal expectations as well.

Unidentified Analyst, Analyst

Excellent. Thank you so much guys. Hope you have a good day.

Operator, Operator

Thank you. And your next question comes from the line of Chris Thompson from CIBC. Please go ahead.

Chris Thompson, Analyst

Good morning guys.

Jason Veenstra, CFO

Good morning Chris.

Chris Thompson, Analyst

Last quarter, you put out a bit of guidance on the quarterly cadence of EBITDA. You kind of framed it as percentage of your guidance per quarter. Just wondering if you could reiterate that for us going forward?

Jason Veenstra, CFO

Yeah, Chris, just as mentioned in the previous call, I think we didn't put that in Joe's shareholder letter this quarter, but we do see Q2 looking a lot like Q1 on the EBITDA perspective. I think as far as first half, second half, the way we see it is on the EBITDA anyway that about 55% being in the second half of the year with 45% in the first half. So that's kind of the cadence we're seeing right now. Q3 will be a little bit up on Q4. But yeah, you are getting into the 1s and 2 percentages at that point.

Chris Thompson, Analyst

Okay. And then just with respect to the guidance, when you said it back in December, these weather impacts would have been unforeseeable. And you talk about your run rate EBITDA margin being about 3% higher than what you put up in the quarter. So that implies there's potential slack in the guide. So I'm just wondering like given the context of that, how should we be thinking about the guide? Even the range, are you feeling like you'd be leading more to the lower end of the range after the tough Q1?

Joe Lambert, President and CEO

I guess it depends on how you look at the law of averages, Chris. I think we're expecting average weather becomes average weather. And I think that's a reasonable expectation. If you project the weather in Q1 through the rest of the year and generally, 2 and 3 are — we're obviously not running into idle issues even if we get rain in Q2 and Q3. We had a colder Q1. Do you expect a warmer Q4? The law of average would suggest so. But I don't think, we project our guidance with any kind of slack or anything else. We project the midpoint is what we think is our 50% probability number, and the range where we think the volatility of that is. So I fully expect to deliver into the range. If we have worse than average weather for the year, will we be in the lower end of it? Probably. We go by the law of averages. We forecast on average weather. And so I expect we are going to be close to average when the year ends.

Chris Thompson, Analyst

Got it. Okay. And then just touching on the weather. Looking at rainfall data in Queensland, it looked like April was still relatively high versus historic. I mean, significantly less rain compared to February and March. So I'm just wondering like do you expect a bit of a gross margin headwind in Australia for part of Q2 or is the general drying trend enough that you are not seeing those kind of impacts?

Joe Lambert, President and CEO

I'm impressed that you are following the Australian weather that closely. But yeah, Chris, April started with some rain continuing into it in Australia. We think by the end of the quarter and by midyear, those things will average out. It was just a late rainy season in Australia and a very rainy season. They are measuring rainfalls in feet. But yeah, there was a bit of disruption to the beginning of April, but we think that will work its way out through the year. And then we had a very warm April in oil sands. I think Q2 looks better in the oil sands side in not having to deal with the spring break up in Q2 because it all kind of occurred in Q1.

Chris Thompson, Analyst

Got it. Okay. And then just touching on the oil sands. You mentioned that there was additional work at Millennium and then lower scopes at Fort Hills. I'm just wondering if you could give us some color on what's driving that.

Joe Lambert, President and CEO

I think was that quarter-over-quarter? We've seen pretty consistent demand. We recently had some scheduled shutdowns and turnarounds on specific sites, and those usually create some near-term impacts and maybe some shuffling around sites. Overall, we are seeing strong demand for our services across the oil sands. And it is typically a Q2 low in the oil sands, and I think we will be typical of that. And then it starts to ramp up again and peak in Q4.

Chris Thompson, Analyst

Okay. Last question for me. Just on the NCIB. I'm just wondering what — just given where the share price has gone over the last few months, how much flexibility you have with respect to your debt target? Can you lean on the NCIB a little harder in the near-term and then maybe sacrifice on the debt side in exchange? Maybe just frame how you guys are thinking about that.

Joe Lambert, President and CEO

I believe we can increase our focus on pricing and our perceived intrinsic value. It really depends on market movements. We now have greater liquidity from our recent high-yield raise, so we'll take advantage of opportunities and make investment decisions that we believe are right. Currently, I think buying back our shares is the best investment option available to us.

Chris Thompson, Analyst

Great. Thank you guys. I’ll hop back.

Operator, Operator

Thank you. And your next question comes from the line of Devin Schilling from Ventum Financial. Please go ahead.

Devin Schilling, Analyst

Hi guys. Good morning.

Joe Lambert, President and CEO

Good morning Devin.

Devin Schilling, Analyst

I see a couple of contracts up for renewal here in 2025. Any updates on these two renewals on timing and maybe expectations on any potential scope changes?

Joe Lambert, President and CEO

Yeah. The first one in the middle row there, that is the earlier one is actually a negotiated early renewal. We've been very successful with these. And like I said before, you can't be any more successful. We've had a 100% renewal rate. The second one is actually an expansion of an existing operation and that one we'll know more towards the end of the year. The one in the middle of the early renewal potentially we should know in the next quarter or so.

Devin Schilling, Analyst

Okay. That's helpful. I believe in the past, you guys mentioned a large infrastructure opportunity in California that you're aiming to qualify for. Any updates on that project?

Joe Lambert, President and CEO

Yeah. We were unsuccessful in that. We have added quite a few other projects. We have a lot of dam building experience, but we haven't done it in California. So unfortunately, that was a weakness in that particular tender. But from what we've added and the information we've seen now in these large earthworks projects like picking up two dozen projects that we followed out on infrastructure earthworks, we see plenty of backfilling for the one that we just didn't qualify for. And I think with this new exec we're adding on and our focus on the infrastructure side and expansion, I look forward to much success in that market.

Devin Schilling, Analyst

Understood, I’ll hop back in queue. Thank you.

Operator, Operator

Your next question comes from the line of Maxim Sytchev from National Bank Financial.

Unidentified Analyst, Analyst

Good morning everyone. It's Caspin here for the Maxim team. My question is about the technician count. You've mentioned previously that it has been a bottleneck. I'm curious if that is still the case for both Canada and Australia. If so, how much of a shortfall do you believe you have in technician count? Is it still affecting your ability to meet utilization targets in both regions, or is the gap mainly due to weather conditions in your business?

Joe Lambert, President and CEO

I'll start with Australia; we've got very full demand in Australian long-term contracts. I think the consistency of how equipment stays on site and the consistency of our labor workforce, especially our skilled labor and mechanics. We've been successful in attracting and retaining maintenance personnel. I think skilled trades are an issue around the world, but I think we manage it extremely well in Australia. In Fort McMurray, the oil sands, we're getting when we get into that close to 70% range and above, that means we're full on demand and getting from 70% to 75% is the efficiency of our skilled labor workforce. So it is not hindering us at any point right now. And as we go forward, we think we've got the systems and processes as far as attracting and retaining skilled workforce in place, both in Australia and in Canada.

Unidentified Analyst, Analyst

Okay, thank you guys. That’s helpful. That’s it from me.

Operator, Operator

Thank you. There are no further questions at this time. I will now hand the call back to Joe Lambert for any closing remarks.

Joe Lambert, President and CEO

Well, thanks very much, and Jennifer, and thanks again, everyone, for joining us today. We look forward to providing the next update upon our closing of our second quarter results.

Operator, Operator

Thank you. And this concludes today's call. Thank you for participating. You may all disconnect.