Earnings Call Transcript
North American Construction Group Ltd. (NOA)
Earnings Call Transcript - NOA Q4 2021
Operator, Operator
Good morning, ladies and gentlemen. Welcome to the North American Construction Group Earnings Call for the Fourth Quarter and Year-Ended December 31, 2021. At this time, all participants are in a listen-only mode. Following management's prepared remarks, there will be an opportunity for the analyst shareholders and bondholders to ask questions. The media may monitor this call in a listen-only mode. They are free to quote any member of management, but they are asked not to quote remarks from any other participant without that participant's permission. 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 on the company's website at nacg.ca. I will now turn the conference over to Joe Lambert, President and CEO.
Joe Lambert, President and CEO
Thanks, Rebecca. Good morning, everyone, and thanks for joining our call today. I'm going to start with our 2021 accomplishments and operational performance before handing it over to Jason for the financial overview. And then I will conclude with the operational priorities and outlook for 2022, before taking your questions. I'd like to start my prepared comments with the tragedy that occurred a little over a month ago on January 6. As I mentioned in my letter to shareholders, this fatal collision is an event that we do everything in our power to avoid. Our two absolute priorities right now are to support the family with anything we can and to determine the root cause of this incident because more than anything else, we want to make sure this never happens again. We hold the utmost respect for the process that is currently underway and are still actively investigating this event. It's difficult to transition from an event like this, but the remaining slides reflect a long list of annual achievements and records. The calendar year of 2021 was one of the most satisfying of my career, and I am tremendously proud of the NACG team. We are in no way maxed out or done, but I will keep that for the 2022 discussion and hand over to Jason for the financial summary.
Jason Veenstra, CFO
Thank you, Joe. I will begin the financial review on slide 13. As we mentioned last quarter, we want to highlight our total combined revenue. Over the past few years, those following us will recognize that the contribution from our joint ventures has increased significantly from zero in 2018 to approximately 30% of our combined gross profit in 2021. This has been crucial for achieving 50% of our EBIT from outside the oil sands region. Total combined revenue for the quarter reached $235 million, which is $65 million, or 38%, higher than Q4 2020, a challenging year due to the pandemic. This figure sets another quarterly record, surpassing the previous record of $209 million. Revenue generally met our expectations thanks to stable operating conditions. The revenue growth stemmed from multiple mine sites and business lines showing positive trends. The Millennium, Kearl, and Syncrude mines have maintained their recovery trends, and we are witnessing the ongoing resilience of the oil sands region. The mobilized fleet at the Ford Hills mine has had another full quarter of operations, and we are excited to re-engage with that site. Our operating utilization of 65% in Q4 is a key performance indicator of our on-site success. Revenue from joint ventures reached a record $54 million, up by 26% from last quarter, driven by strong volumes at the gold mine contract in Northern Ontario, the growth of our Mikisew joint venture, and early progress on the Fargo-Moorhead flood diversion project. We achieved a combined gross profit margin of 13.7%, influenced by various factors, particularly maintenance needs at the Millennium mine. Workforce availability remains a significant factor affecting our site efficiency due to a shortage of heavy-duty mechanics and operators. Additional unique challenges this quarter included supply chain issues and specific inflationary pressures. While our business is resilient, it is not entirely immune to cost pressures, and we estimate that gross profit was negatively impacted by $2 million to $3 million this quarter due to COVID-19-related supply chain issues and inflation. We are encouraged by the margin trends even with these cost challenges. Moving on to slide 14, our adjusted EBITDA of $56 million was up 24% for Q4 compared to the revenue factors mentioned earlier. The 24% margin reflects strong performance across many business lines, indicating positive trends with room for improvement. Our general and administrative expenses were net $3.7 million for the quarter, or 2% of revenue, benefiting from a reimbursement related to the Fargo-Moorhead project. Our G&A rate remains at 4% of revenue due to strict cost discipline and attention to non-essential spending. Future earnings from the Fargo-Moorhead joint ventures will be recorded as equity earnings, consistent with our other joint ventures. In terms of depreciation, we recorded expenses equivalent to 13.3% of revenue, which is reflective of our overall business. For our wholly-owned entities and heavy equipment fleet, the depreciation percentage was 16% of revenue, reflecting effective fleet use this quarter. These figures represent an improvement compared to Q4 2020's 16.3% and 19.3%. Adjusted earnings per share for the quarter were $0.54, contributing to $25.1 million from adjusted EBIT after interest and taxes. Our interest rate increased slightly to 4.7%, with a cash expense of $4.9 million this quarter, reflecting changes in our debt composition and some one-time interest expenses. We are seeing stable rates in 2022 from banks and equipment financing. On slide 15, our cash flow summary shows net cash from operations of $66 million. Despite neutral working capital results in the quarter, the difference between this figure and EBITDA was due to cash from joint ventures declaring dividends, offsetting interest paid. We allocated $21 million to sustain our existing fleet during a busy winter season, with total sustaining capital for the year amounting to $102 million, which is at the high end of our $105 million range. For 2022, we project sustaining capital between $110 million and $120 million, reflecting our larger fleet size. I wanted to clarify this range from our press release, as it had been initially stated too broadly. Moving to slide 16, we illustrate our capital allocation for 2021; the free cash flow generated in Q4 aided our debt reduction, leading to a balanced approach across growth, debt paydown, and shareholder activities, such as NCIB transactions and dividends. On slide 17, our balance sheet shows approximately $200 million in liquidity, showcasing our strong position bolstered by robust free cash flow and the issuance of $75 million in convertible debentures earlier this year. Our senior leverage ratio stands at 1.5 times, with net debt declining by $40 million in the quarter due to focusing $48 million of free cash on debt reduction. Finally, on slide 18, we present our actual results compared to our initial targets set back in October 2020, and we are pleased to report that strong operational performance has led to the achievement of all financial metrics. This serves as a prelude for Joe to discuss our outlook for 2022.
Joe Lambert, President and CEO
Thanks, Jason. Looking at slide 20, this slide summarizes our priorities for 2022. I will discuss each of these items separately on the following slides, but wanted to capture the overarching theme in discussing this slide. I'm probably showing my age here, but there's a phrase from the late 60s, early 70s that I feel really captures our focus in 2022. The phrase is keep on keeping on. Keep on keeping on is about doing your best and being persistent. For NACG, that means keep delivering against the strategy and keep improving. Moving onto slide 21. The Fargo-Moorhead project is progressing well and we expect to commence earthworks this summer. The equipment fleet has been procured and the focus is on planning and hiring. NACG has a project management culture, which follows the principle that a job well begun is half done. So, we expect a smooth project startup that we can share with you in the latter half of the year. On slide 22, we highlight our continued expansion advancement of our equipment maintenance capabilities. I mentioned earlier that the business is in no way maxed out. With our current oil sand demand and low cost provider status, we could gain another 10% to 15% in our oil sands business by increasing fleet availability. This is because our availability is limited by available maintenance workforce. Maintenance labor, specifically heavy equipment technicians, is in high demand and in some areas such as the Fort McMurray area, is in extremely low supply. This labor supply issue affects anyone working in that area. Supply of additional field mechanics into our workforce, through our union or even support from our OEM vendors is minimal if not nonexistent. This skilled maintenance labor supply issue is not a new concern, but our business continues to manage this as few others can. Most businesses in the region don't have the capabilities that NACG has. At NACG, we continue to look at new ways to improve our labor situation with a key focus on two areas. Number one is how do we get more skilled maintenance workforce into the Fort McMurray region. To address this issue, we have steadily increased our apprentice program and today have around 55 ticketed trades apprentices, which is around tenfold what it was five years ago and an area we continue to expand. We likewise have developed what we call a bench hand program whereby we train people in many of the maintenance activities where a trades ticket is not required, thereby freeing up more of our heavy equipment technicians to do tasks where a trades ticket is required. We promote same or similar program implementation with our vendors, our clients, and even our competitors as this is an industry-wide issue. Secondly, and what really separates us from others is our Acheson facility, the in-house work we do here and the maintenance support we get from our recent acquisition of DGI Trading. The building, the expansion of this facility and the work we have brought in-house has provided many benefits. The cost savings have been significant and support our strategy of being the low-cost provider in a cyclical commodity business. But what often gets missed is the labor benefits. The Edmonton area is an easier place to find skilled trades and apprentices. With our world-class facility, interesting work that few can perform such as whole machine rebuilds and component manufacturing, competitive wages, and opportunities to advance or work in other areas, we have a compelling model for recruiting and retaining our skilled trades capacity. So with our expanded Acheson facility and increasing workforce, we not only lower our cost but we can move equipment down here and take some load off the field service and shops. Since we built the initial Acheson facility and including the subsequent expansions, we expect to have increased shop labor hours fourfold, adding about 270,000 man hours per year, or the rough equivalent of 130 shop workers per year. Although not totally a one for one offset, the large majority of these skilled workers would have needed to have been sourced into the difficult Fort McMurray region had we not had the facilities and workforce available in Acheson. I don't usually go into this much detail on this call, but felt this area of our business is an important area for those interested in our company to understand. Hopefully one day soon we'll get another opportunity to hold an Open House or Investor Day to allow anyone interested to see it firsthand. Slides 23 and 24 expand on our maintenance skills for sourcing used equipment and components and rebuilding whole machines or remanufacturing components. We have previously shown the significant savings of our in-house rebuild and component remanufacturing. But I would like to highlight the added value and risk reduction that our DGI business and in-house maintenance skills bring. Similar to what many have experienced in the automotive industry, the rise in demand and supply chain disruptions have also affected the heavy equipment business. As new equipment prices increase or deliveries are delayed, more used equipment will be purchased and repaired. This increased demand in repairing and rebuilding components and equipment will probably stress many vendors and drive increased pricing and delayed deliveries. By having the in-house skills and capacity to do our own remanufacturing, rebuilding, and repairs, we will not be subject to those same pressures. Of the few vendors that can supply used equipment and components and can remanufacture and repair them, even fewer of them have access to core machines and components such as NACG has through our DGI business, which is highlighted on slide 24. Lastly, in regards to maintenance, the increased skilled labor capacity in-house rebuild and remanufacturing skills primarily benefit our operations through increased equipment availability and lower costs. Secondarily, in an area we continue to grow is our external maintenance market. The more capacity we build, the more we can offer these same repair and rebuild services to others. With that expanded description of our maintenance business, I'll try and speed up through the remaining slides. On slide 25, you'll see our bid pipeline remain strong, and we expect to continue to have success in all commodity areas. One item of note is that at this time of year, we generally don't have a lot of active tenders in the oil sands market. Typically this changes in late Q1 to early Q2, which is when most summer civil construction works are tendered. We expect our tender wins and subsequent increases to backlog, shown on the next slide, will grow meaningfully later, Q1 or early Q2. Slides 27 to 29 highlight some key areas of our progress on sustainability, including emissions reductions, inclusivity, and diversity and indigenous partnership. These three slides provide a great summary of the progress we have made in all these areas. And I'd point anyone with more interest toward the 2022 sustainability report also released yesterday for a more detailed description of the progress we have made and targets we have set. On my final slide 30, this slide for me really shows the value of my new keep on keeping on mantra. Performing to plan and generating approximately $100 million in free cash flow will allow for meaningful capital allocation to debt reduction, share purchases, and growth by bolt-on M&A or fleet additions. It's disappointing that our multiples have not responded to the great strides we have made in regards to profitability, diversification, and backlog. We will continue to explain our business better and pull all the valuation levers we can to address this, with the latest one being the doubling of our dividend rate, which we approved this week. Last but not least, we have capacity within our fleet and demand from our marketplace that continues to push us to improve equipment availability and outperform even these expectations. With that, I'll open it up for any questions you may have.
Operator, Operator
Thank you. And your first question comes from the line of Jacob Bout with CIBC.
Unidentified Analyst, Analyst
Hi. Good morning, Joe and Jason. This is Raul on for Jacob.
Joe Lambert, President and CEO
Good morning.
Unidentified Analyst, Analyst
Good morning. I just had a question on the Q4 gross margin. So, we saw some margin pressure from required maintenance activity, particularly at the Millennium mine. So, just curious to know why there wasn't a similar impact at other mines. And is this more of a one-off sort of thing, or could we expect more of this through 2022?
Joe Lambert, President and CEO
The reason it exists is a buildup for increased workover in winter. So, you catch up on your backlog of all your maintenance that you have because all your fleet's going to be running in the winter. And the reason it's highlighted is because that's where the largest portion of our fleet is. So it just happens to be where they were at the time.
Unidentified Analyst, Analyst
Okay.
Joe Lambert, President and CEO
And we do typically see it when our winter season is extremely busy. And so, we tend to – in the late Q3, early Q4, pick up on all of our maintenance repair work to make sure everything's running.
Unidentified Analyst, Analyst
Great. That's helpful. Thanks. And maybe just on backlog. So, it was down quarter-on-quarter, but still much higher than a year ago. Based on the visibility of your bidding pipeline today, how do you see backlog levels trending through the year? I know you had mentioned that you do expect a bunch of the oil sands work to be tendered in the first half, but just curious as to the levels and how they trend through the year?
Joe Lambert, President and CEO
I'm looking for an increase in backlog by the end of this year from what it was last year. So, I expect we're going to win our fair share of projects and hopefully extend terms on work that we already have.
Jason Veenstra, CFO
I would add, our backlog is contractual in nature. So, our backlog is quite specific to contracts. So, as we complete the work, it's going to draw down. So, the increases will come through won contracts and projects.
Unidentified Analyst, Analyst
Great. Okay. And maybe just the last one for me. So, nice uptick in equipment utilization in Q4. But with the ramp of Omicron in recent months, do you expect there to be more of an impact, like a COVID impact in terms of labor availability for Q1, or do you see utilization rates continue to improve on a year-on-year basis?
Joe Lambert, President and CEO
I'd say we had some absenteeism from the Omicron wave of COVID from mid-December through to about now. It's really coming down quickly. Like – just like everyone else. It actually has – even though it was a much higher level of infection rates in Omicron, it was actually worse at this time last year because of the amount of close contacts and the isolations that we had to do with close contacts and the amount of time they had to spend in quarantine. So, even though there were more individuals with infection, as you are not attending, we didn't see as many because of the close contact stuff.
Unidentified Analyst, Analyst
Great. Okay. Thank you. That's it for me.
Joe Lambert, President and CEO
No worries.
Operator, Operator
And your next question comes from the line of Yuri Lynk with Canaccord Genuity.
Yuri Lynk, Analyst
Hey, good morning, guys.
Joe Lambert, President and CEO
Good morning, Yuri.
Jason Veenstra, CFO
Good morning, Yuri.
Yuri Lynk, Analyst
Good morning. I thought slide 11 was interesting. It's showing your operating hours on the legacy fleet are still below pre-pandemic levels. Is that because you've got fewer assets or less demand, or is it a result of the joint ventures? Just how should we think about that going forward?
Joe Lambert, President and CEO
It's actually, I'd say, slight increase. I would also remember that we actually have taken some of our assets and put them into those joint ventures as an example of that Northern Ontario gold mine. So, the reporting side of that might not be as accurate as you think, but overall the trending is absolutely accurate. So that it's increasing and I expect this to be at pre-pandemic levels going forward. And much more consistent in the Q2s and Q3s than historically was there. That cover off what you're looking for, Yuri?
Yuri Lynk, Analyst
Yeah. And that brings me to my second question related to that. I mean, now that half of your EBIT is outside of the oil sands, any kind of guideposts in terms of how we should think about how the quarters shake out in terms of contribution to full year EBITDA. I mean, we generally have a pretty big dip Q2 from Q1, any color on how we should think about that, especially with Fargo-Moorhead ramping up in the summer.
Jason Veenstra, CFO
Yeah. That's a great question. We were looking at that. I think for 2022 in specific, it's looking quite flat, the quarters. We'll see how Q4 looks with the Northern gold mine. But Q4 could be oddly one of our lower quarters, given what happens there. But I would say the uniqueness of Fargo, hopefully ramping up in Q2, will offset a strong Q1, and then being fully engaged in Q3 with Nuna having such a strong Q3 in their base business, really results in 2022 showing quite a flat profile actually all four quarters.
Yuri Lynk, Analyst
Okay. Thank you, guys. I'll turn it over.
Jason Veenstra, CFO
Yuri, thank you.
Operator, Operator
Your next question comes from the line of Aaron MacNeil with TD Securities.
Aaron MacNeil, Analyst
Hey, guys. Thanks for taking my questions. I'm not sure if this one's for Jason or Joe, so leave it to you guys. But you obviously doubled the dividend. Don't want to diminish that, but still pretty small in the context of your overall capital allocation. So, I guess, the question is, you've earmarked leveraging for most of your free cash flow this year, a little bit for the NCIB, the dividends. But I guess what's the message to shareholders, is your goal to leverage, or is it a stopgap to sort of prep the balance sheet for other longer-term opportunities? Like larger diversified bids or M&A like, I guess I'm just A, trying to get a sense of where you think leverage should shake out and B, what your longer-term capital allocation plans are?
Joe Lambert, President and CEO
On the topic of capital allocation, we believe there are excellent opportunities to implement shareholder-friendly measures such as dividends and share repurchases. This year, we will review dividends twice, as we typically do in the fall, and last year we moved this review to the current quarter. Thus, we will conduct a second review with our board this fall. Alongside these actions, we continue to see potential for strategic, smaller acquisitions that could add value without being overly large. For example, we considered the acquisition of DGI last year to be a strong move, and if a larger, accretive opportunity arises, we will certainly evaluate it. However, given our current multiples, we do not see that happening very often, which is why it isn't reflected heavily in our plans. This approach still allows us to substantially reduce our debt. As I mentioned in the presentation, we are exploring every possible avenue within our capital allocation strategy to enhance the value of our business and will continue to assess all potential areas for improvement.
Aaron MacNeil, Analyst
And maybe, Jason, on where you think optimal leverage should be?
Jason Veenstra, CFO
Yeah. I think, we gave a nice range there for net debt. I think 1.2 to 1.7. We look at companies that are in the low ones, and they do seem to reflect strong share multiples. So, I think if we can get into the low one, that's great. This to me feels a little bit like we're getting back into pre-COVID, our 2019 year where we wanted to drive down debt and see what that meant from a shareholder perspective. And so, we're just going to play out the year and put up the performance that we expect and see how things play out. But we'd love to be in that 1.2 to 1.7 range by the end of the year.
Aaron MacNeil, Analyst
Okay. Maybe I'll ask a slightly different question, but related. It seems like there's a few additional diversified projects in your bid pipeline in the active tender phase when I compare this quarter slide deck versus last quarter. Can you maybe give me a sense of what you're seeing in terms of incremental opportunities? And is there a capital component that might be attached to those opportunities?
Joe Lambert, President and CEO
I think the higher proportion is due to the fact that many of the oil sand summer bids are released late in Q1 or early Q2. We are noticing more chances for diversification, including a promising Alaska gold mine that we hope to know more about by the end of this quarter or the beginning of next quarter. Additionally, we see opportunities in other commodities like iron ore and potash. It's a strong array of bids we've encountered, although some can be short-lived due to permitting issues or financing challenges, especially for junior projects. However, I am quite confident about several of the projects represented, including the Alaska gold mine.
Jason Veenstra, CFO
And I can confirm Aaron, like nothing on the bid pipeline slide would require working capital investment, similar to Fargo-Moorhead, which we've really enjoyed. Financial close happens in the quarter, but no working capital investment was required by us into either joint venture. So, the growth spending that we put in our guiding is really, as Joe mentioned, if bolt-ons could become available, or incremental, noticeable increases to our fleet where we make strategic investments, but the growth capital is not designed to support that bid pipeline slide.
Joe Lambert, President and CEO
Yes, the situation with the Alaska mine is akin to our other existing assets. From what I can observe in the bid pipeline, I don’t identify any significant capital additions that are necessary.
Aaron MacNeil, Analyst
Okay. Understood. One final question for me, kind of a bit of an oddball. But weather in Alberta has been all over the place in Q1, really cold, really warm. Is there any implications for your Q1 quarter just for your core oil sands operations?
Joe Lambert, President and CEO
No. I think, we actually got quite a bit done and welcomed the cold weather that was late December through the end of kind of January. The warm stretch really hasn't affected our winter works. I think we're in an excellent position in our swap over of our works, overburden works here in Q1. And I don't think we're going to be impacted regardless of the timing of spring breakup on that.
Aaron MacNeil, Analyst
Okay. Great. I'll turn it over. Thanks for taking my question.
Joe Lambert, President and CEO
Thanks, Aaron.
Operator, Operator
Your next question comes from the line of Tim Monachello with ATB Capital Markets.
Tim Monachello, Analyst
Hey, good morning, everyone.
Joe Lambert, President and CEO
Good morning, Tim.
Tim Monachello, Analyst
You'd be quick on the draw to get some questions in on this thing. I think most of mine have been answered so far. But perhaps on the project opportunity, you've called it a few that you've been following and appreciate that. A couple others that I was curious about with the Baffinland project. Obviously, there's the Calgary Flood Diversion project and a couple of chasing in Quebec on the non-oil sand side. So wonder if you can just give a little bit of an update on those ones?
Joe Lambert, President and CEO
I didn't catch the last half after Baffinland. What are the ones you're looking at, Tim?
Tim Monachello, Analyst
The ones that you guys were chasing in Quebec. I think one was back on the bid sheet at the last update.
Joe Lambert, President and CEO
I don't believe it has been awarded to anyone yet, and we also haven't received any feedback on the Quebec bid. The Baffinland project is still in the bid pipeline, and based on the community support we've observed, we are quite confident that it will progress. However, it's important to note that it is still in the permitting phase, which means we can't be completely certain until everything is finalized. Nevertheless, I believe this project would be excellent, particularly for Nuna, and it presents a great opportunity for us to get involved as well.
Tim Monachello, Analyst
Okay. And then on the oil sand side and kind of referring to slide 36 with crude prices well above the $65 per barrel mark, what are you hearing from your customers in terms of expansions and debottlenecking projects and perhaps adding scope to current operations that you're working on today?
Joe Lambert, President and CEO
The overburden and winter reclamation work present significant opportunities for us, particularly if we can enhance our fleet's efficiency and exceed our initial expectations with increased availability. This correlates with the 10% to 15% growth potential I mentioned. Regarding the debottlenecking, those efforts are tied to the summer civil projects we expect to discuss in Q1 or Q2. The amount of summer civil construction projects is a key indicator of whether we are in an upcycle, as many of these projects are discretionary. An increase in such projects indicates positive trends. Therefore, I anticipate seeing more summer civil projects, including MSC walls that support debottlenecking and production growth efforts.
Tim Monachello, Analyst
Okay. So, I guess, if I was to rephrase what I've heard is that labor capacity is the biggest constraint on increasing utilization of the current fleet during bidding times, but you could see some upside in sort of the summer periods based on some expansion work in terms of civil construction.
Joe Lambert, President and CEO
Yeah. The labor is mechanics, heavy equipment technicians. We can – it's stressed on the operator side, but we're very good at finding inexperienced operators and training them and getting them up to speed. You can't do that overnight with mechanics. There have to be ticketed trades. It's a three or four-year program. We can train operators very quickly, and we have very good training teams to do that. The mechanics specifically, they are very hard.
Tim Monachello, Analyst
Okay. And then, last one for me here. Just on the EBITDA guidance range for 2022. Can you just talk a little bit about what you would include in that top end and what would be included in the bottom end of that range?
Jason Veenstra, CFO
Yeah. To me, it's project execution ranges, particularly. I think Fargo has some uncertainty about how much work will get done. And so that is a big factor. And then equipment utilization is a defining factor in the top end and the bottom end of the ranges. We don't have to quote your Baffinland question. We don't have Baffinland in the top end and then not in the bottom end. The range is based on existing work and contracts that are in place. So it comes down to execution and how the projects and the sites perform.
Joe Lambert, President and CEO
Yeah. I'd say there's some timing in that too, Tim. And that – when you transition the fleet out of that Northern Ontario gold mine, right now it's anticipated that it's in Q4. If that work is actually expanded or extended, then that kind of loss of operating hours for the demo and the remote back into wherever they're going is in there. And so if that gets extended or you find more work for it in the area, those are the opportunities on the upside.
Tim Monachello, Analyst
Okay. That's great color. I appreciate you guys. I turn it back.
Joe Lambert, President and CEO
No worries.
Operator, Operator
Your next question comes from the line of Bryan Fast with Raymond James.
Bryan Fast, Analyst
Yeah. Good morning, guys.
Joe Lambert, President and CEO
Good morning.
Bryan Fast, Analyst
As you reflect on the DGI acquisition, could you provide some color on how it has performed relative to your expectations? And then, if you see opportunities for expanding that part of the business.
Jason Veenstra, CFO
I can provide some insights on our expectations. For six months, we had set a target for a year, and at the six-month mark, it aligned perfectly with the model we used to justify the acquisition. However, the management team in Australia feels like they are not meeting their expectations and would like to see better results. Travel restrictions from Australia have been quite restrictive, but overall, we have met our expectations. As for further expansion, Joe may want to address that.
Joe Lambert, President and CEO
We had two main operating personnel in the office yesterday and engaged in productive discussions, highlighting the excellent potential we see. As I mentioned, this applies to both our fleet and servicing operations, as well as the external maintenance market. There's an increasing amount of used equipment and repair work due to the prices and availability of new gear, leading me to believe that demand will continue to rise. The work they do involves supplying core components that are crucial for the repair and reuse cycle in our business. Additionally, I believe there's significant potential for us to collaborate and integrate our operations with them. This was our first face-to-face meeting, providing a valuable opportunity for us to deepen our understanding. They are also handling a substantial amount of business right here in Alberta, aside from our operations. I look forward to sharing more specific details as we progress, likely around the Q2 reporting for Q3, when I can provide clearer insights into our efforts to integrate and expand their operations in the area.
Bryan Fast, Analyst
Okay. Good stuff. I look forward to the more color there. So, Jason, I might have missed this, but are you able to quantify the impact on the reimbursement from Fargo-Moorhead spending in the quarter, just that flowed through SG&A?
Jason Veenstra, CFO
Yeah. I think, I put it in my script, but the difference between our run rate of a little over 4% of G&A and the 2% that we posted is the delta. So, you get in kind of the $5 million range, as far as the Q4 impact. And again, Fargo earnings will continue. And so, it feels one-time to certain people, but that's a continuing source of EBITDA moving forward, but that's kind of order of magnitude how it hit. Moving forward, it'll all be in equity earnings, but the way the transaction happened in Q4, the majority of the earnings was in G&A, but there was a small portion reported in equity earnings in Q4.
Bryan Fast, Analyst
Okay. Fair enough. That's it for me. Thanks.
Operator, Operator
Your next question comes from Maxim Sytchev with National Bank Financial.
Maxim Sytchev, Analyst
Hi, good morning, gentlemen.
Joe Lambert, President and CEO
Good morning, Max.
Maxim Sytchev, Analyst
Joe, just wanted to follow up on the Fargo-Moorhead project. Maybe do you mind providing any color in terms of sort of any initial surprises regarding the relationships with the client that you'll be partners with? So, anything incremental on the project you can speak off.
Joe Lambert, President and CEO
Right now, it's all about planning, processing, and obtaining approvals from the authorities. It's progressing as expected. Our procurement efforts and equipment acquisition have gone smoothly. The main work on the earthworks execution will begin in the summer, and that's when we will really focus on hiring. Our relationships with the authorities are solid. There are several permitting and land acquisition activities happening during this period, and I haven't noticed anything that could delay our schedule for starting the physical work. So, our current focus is on planning and continuing to navigate the hiring market.
Maxim Sytchev, Analyst
Great. And in terms of equipment procurement, so like, obviously there's a lot of delays right now in tightness when they use the equipment market. But so you still believe that you should be able to hit sort of the capacitive requirements to start the project with what you have in hand or what you can, or where you have the visibility to source that equipment, right?
Joe Lambert, President and CEO
Yeah. As soon as we had the award and knew the financial close date, Max, we were working with the suppliers to make sure we locked that stuff in and we did, and we will get our equipment on time as needed.
Maxim Sytchev, Analyst
Okay, that's really helpful. Thank you. Just one last question at a high level. In the presentation, you mentioned that producers still handle most of the overburden instead of your company or the contracting supply chain as a whole. I’m curious if you are noticing any efforts to grow your market share in that area. Any insights from a medium-term perspective would be appreciated. Thanks.
Joe Lambert, President and CEO
It's all speculative, Max. When people say we're 70% of the marketplace, that's true for the contract market, but it only represents 7% of the overall volumes being moved because our clients perform similar work. I'm focusing on several areas where processes are being streamlined to increase throughput. As I've mentioned many times, for every barrel produced, there are four yards of material that need to be moved. So, if someone claims they will produce 100,000 barrels a day more, that translates to 400,000 BCM of material that must be handled. These represent significant opportunities. Specifically, I'm observing shifts in how some operators are approaching cutoff grades and the fines content of the ore, which I believe will enhance the quality of the ore and boost the volumes of materials moved. We are well-positioned to facilitate that increase.
Maxim Sytchev, Analyst
Okay. Super helpful was always. Thank you so much. That's it for me.
Joe Lambert, President and CEO
No worries. Thank you, Max.
Operator, Operator
And your next question comes from Richard Dearnley with Longport Partners.
Richard Dearnley, Analyst
Good morning. To follow up on that last question, when I first got involved with your company many years ago, the idea of doing more than just overburden was being discussed and then it seemed to fade away. Now, it appears to be a focus again on slide 38. Has there been a significant change, or did I misinterpret that entire situation?
Joe Lambert, President and CEO
No, Richard, that slide really is more on the overburden side. I think there still is an opportunity. It's not an area, I think that industry is in right now. Because giving up ore is giving up your revenue stream and that's going to take a lot of trust for the client and something we continue to work on. But what I'm talking about is the volumes of overburden moved and are going to increase both with increasing production of barrels. But the other side of is increasing strip ratios and that strip ratios increasing because of reclassifications of ore, because of fines content. So those overburdened volumes are going to increase, and we think we can get a larger proportion of those, especially if they're over shorter timeframes, because our clients typically aren't looking to buy 25-year assets for a five-year peak in overburden stripping. And that's where we can come in and look more of the peak shaving for them all. That answers your question.
Richard Dearnley, Analyst
Now, let's connect our ability to do peak shaving to the next question regarding fleet utilization. In the fourth quarter, we occasionally see utilization reaching 75% to 80%. However, aside from the first quarter, it seems that the peak area is in the mid-sixties. Will this trend change in the future?
Joe Lambert, President and CEO
That's what we're trying to do, Richard, is keeping that 7% CAGR line you see on that slide and keeping and bringing that up and the way we're looking at doing it, the diversification side is what we're looking to really prop up the Q2 and Q3, and that's via Nuna and via getting more summer work where our smaller equipment fleet was underutilized in the oil sands and then just driving the whole line by having increased mechanical availability and increased demand from our clients. So, yeah, we want to get all of those dots above that trend line and keep that trend line going up.
Richard Dearnley, Analyst
You mentioned several times that you are fully utilized, which suggests that in the fourth quarter, 65% is effectively full capacity.
Joe Lambert, President and CEO
What I'm saying is that we have opportunities to increase the hours available for our equipment. This means we're looking at how to better utilize the hours when the trucks are available. To achieve that, we need to make more trucks mechanically available by improving our maintenance efforts in order to exceed the growth rate trend you see.
Richard Dearnley, Analyst
Okay. Thanks.
Joe Lambert, President and CEO
No worries.
Operator, Operator
Your next question comes to line of Tim Monachello with ATB Capital Markets.
Tim Monachello, Analyst
Hey, guys, me again.
Jason Veenstra, CFO
Welcome back, Tim.
Joe Lambert, President and CEO
Welcome back.
Tim Monachello, Analyst
Can you guys just talk a little bit about the aspirational targets you set in the sustainability report around scope one emissions, intensity reduction? You got 10% reduction by 2025, which is near-term, good to see that 20% by 2028, and then net zero by 2050. What's going to take to get there? And do you expect CapEx allocation towards those ESG goals?
Joe Lambert, President and CEO
One of the key aspects for us is that we aimed to focus on practical actions, with a clear understanding of the numbers involved. The 10% and 20% reductions are based on the actual allocation of technology that we believe will be available within that timeframe. For the 10% reduction, the primary factors are idle reduction through our telematic systems and stop-start technology. These technologies are already available, as we've discussed previously regarding telematics. The subsequent increase for the 20% reduction will focus on hybrid technology, specifically smaller engines supported by batteries. This technology is already present in the automotive industry and is less complex compared to fuel cell electric vehicles or fully electric vehicles. Thus, these are the main drivers. Looking toward 2050, and as we hope to provide more detailed updates and interim steps, my perspective is that hydrogen and fuel cell electric vehicles, along with hydrogen combustion, will be crucial, especially with emissions being zero or nearly zero, particularly when combined with carbon capture and blue hydrogen. Therefore, the near-term reductions of 10% and 20% are directly linked to those technologies, while the long-term efforts will increasingly focus on hydrogen solutions.
Tim Monachello, Analyst
Okay. That's helpful. Regarding the near-term outlook for telematics, you mentioned the capital expenditures for the year, with zero being the minimum expected. Are you planning to invest in telematics in 2022? If so, what will that entail? Additionally, considering hybrid technology for the rest of the decade, will its implementation be based solely on equipment rebuilds and replacements, or do you anticipate retrofitting existing equipment that still has useful life left in the engines?
Joe Lambert, President and CEO
The telematics capital is included in our budget and forecast, where we expect to add around 400 machines this year. We should have most of our heavy equipment fleet completed by the end of this year. The stop-start technology does not require significant capital investment, and it will mostly come from the telematics aspect. Thus, I don't anticipate any significant capital expenditures beyond what we've already planned. Regarding the hybrid technology in the long term, there will be some capital involved. However, I believe it will balance out because when an engine needs replacement, it will likely be swapped for a smaller engine along with a battery setup. Therefore, I don't expect the capital cost difference to be substantial, as there will be cost savings associated with the smaller diesel engine and an expense for the battery setup. While I can't provide a definitive answer right now, I believe it will be more of an exchange with possibly a slight increase compared to what a typical engine remanufacturing and rebuild would have cost.
Tim Monachello, Analyst
No, no. That's great color. I appreciate it.
Joe Lambert, President and CEO
Excellent.
Jason Veenstra, CFO
Appreciate those questions, Tim.
Operator, Operator
And this concludes the Q&A section of the call. I will pass the call over to Joe Lambert, President and CEO, for closing remarks.
Joe Lambert, President and CEO
Thanks, Rebecca. And thanks again everyone for joining us today. And until next time, keep on keeping on.
Operator, Operator
Thank you. This concludes the North American Construction Group Q4 2021 conference call. You may now disconnect.