Earnings Call Transcript - NOA Q4 2020

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, 2020. At this time, all participants are in listen-only mode. Following management’s prepared remarks, there will be an opportunity for analysts, 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 participants' permission.

Martin Ferron, CEO

Thanks, Kinsey and good morning to everyone. After almost 25 years of doing quarterly and annual earnings calls, this will be my last one. I could not be happier that our great team of employees marks my final quarter as CEO with solid performance. In particular, they impressively met or exceeded all of our important goals in relation to safety, free cash flow and diversification. 2020 was a really challenging year and I'm very proud that we were one of the very few companies so in control of our business to reset and beat financial guidance in an operating environment dominated by the COVID-19 pandemic. Without a brief introduction, I will hand these quarterly calls over to Joe, but I'll remain on today to answer any questions directed at me. Beyond that, I will be actively supporting the executive team for the balance of the year. Jason will start us off here today with financials and then Joe will provide his outlook for the future.

Jason Veenstra, CFO

Thanks for those comments, Martin. And good morning, everyone. Given a unique call here today, I'll start us on the safety content on Slide 5. As is often stated here in North America, no financial outcome is worth celebrating if our safety culture or safety performance has been compromised. Although yet again, we did achieve industry benchmarks for safety excellence for the sixth year in a row, we did see an uptick in incident frequency in 2020. We are refocusing our efforts as the macro environment and operating protocols stabilize. As Joe will touch on later with our 2021 priorities, we will be doing everything in our power to make sure everyone gets home safe. Slides 6 to 11 provide a summarized view of 2020, but as per past protocol, these prepared remarks will focus on the quarter to avoid repeating commentary from previous quarters. And as such, we'll begin the financial review on Slide 12. Revenue for the quarter of $137 million was $53 million below last year's Q4 as we continue to recover from the widespread impacts of COVID-19. The majority of the $53 million variance relates to the strong quarter we had in 2019 at the Four Hills mine prior to their decision to temporarily reduce the operators' capacity at that mine.

Joseph Lambert, President & CEO

Thanks, Jason. On Slide 18, you'll find our operational priorities for 2021. This slide summarizes our 2021 objectives, and I will walk through the objectives at a high level, providing some brief detail on the slides to follow and finishing up with our outlook, which spoilers remain unchanged from what was presented back in October. Our number one priority is always the health and safety of our workforce. We continue to maintain rigor in our COVID protocols and have made these a part of our standard Safe Work procedures, including social distancing, masks, and other personal protective equipment. Likewise, we're always looking to target zero harm in all areas of the business. As outlined in our recently released sustainability report, we'll prioritize the progress and achievements of our ESG goals. Our equipment utilization priority links closely to our diversification objective, as we seek gains in utilization of the smaller end of the fleet, which is unpermitted and underutilized in oil sands. The diversification objective is reflected in item four, where we expect to continue the momentum of synergies of our new group of companies, as evidenced by the recent contract win at the Ontario gold mine. With this diversification focus, we expect to continue to meet our oil sands customer needs with high utilization of our large fleet while at the same time, improving utilization of the smaller fleet outside of oil sands and reducing the consolidation risk by having more customers and more commodity markets and geographic regions. We will also continue to pursue diversification in low capital intensity growth areas, such as the US mine management contracts and major earthworks infrastructure projects. These contracts generally have fleets provided and as such, don't affect our utilization calculations. But they do offer low to no capital entry and diversification into other commodities and regions. The operational priority items three and five relate to our continued push to vertically integrate equipment maintenance and expand on our external maintenance services.

Operator, Operator

Thank you. Our first question comes from the line of Aaron MacNeil with TD Securities. Please go ahead, your line is open.

Aaron MacNeil, Analyst

Good morning, everyone. Joe, I see you've set the revenue diversification goal for 2021 and also increased your target for 2022. I'm curious if you're confident in achieving these targets with your current resources, or if they suggest the need for new contract awards. I'm asking because your bid pipeline seems to only start considering diversified projects in 2022 and later, which is shown on Slide 22. Additionally, the 2021 figure you've introduced is higher than the previous 2022 figure, which is a bit puzzling. I'm trying to understand what might have shifted in the last quarter, especially since the overall guidance for 2021 remains unchanged.

Joseph Lambert, President & CEO

What you see for 2021 is what we have in our forecasting right now. So, there's no anticipation in that 45 of being awarded anything new or quickly. And the increase to 50% in 2022 is based on our expectation of winning some of those external or other area awards that we have highlighted on that bidding pipeline page.

Aaron MacNeil, Analyst

Okay. Maybe you can also walk us through how these diversified projects in the bid pipeline will ultimately be fulfilled? You mentioned the new joint bid in your prepared remarks just a minute ago, but I guess we've got a couple of questions. First, will the majority of these projects flow through Nuna? Or through a Nuna-North American joint venture? And then if that's the case, do the project sizes contemplated on the slide represent total revenues for the project or just North American share? And then second, my understanding is that you've essentially fully committed on your current own fleet. So how do you plan to finance, bid, or operate these new projects?

Joseph Lambert, President & CEO

I'll do my best. There were quite a few questions there. I'll try to address them. Regarding the bid pipeline, these are indicative of our share or our share with Nuna. I would estimate that about one-third of these are projects that Nuna examines individually. There are only one or two that we are looking at together with Nuna, while the majority are handled by us alone or with other partners. We do collaborate with other partners, particularly for larger infrastructure projects. Most of the infrastructure and mine management work utilizes their own equipment, as I mentioned earlier. Generally, in the commodity sectors we focus on, such as iron, gold, diamonds, and coal, especially in other areas, the smaller fleets, typically 150-ton trucks and smaller, have been largely underutilized in oil sands over recent years. While there may be some incremental additions, we do not anticipate a large amount of capital to pursue these projects at this time. Not all bids progress to actual projects; many are deferred. For instance, a major infrastructure job we are bidding on that began four years ago has been postponed twice. Projects face various success rates in moving forward and may encounter permitting challenges. One aspect highlighted in my presentation that excites me is the potential for satellite mining and resources in different areas. When there is an existing mine site with established permitting, expansions can be pursued successfully, or for underground mines with surface deposits that are contracted, those tend to have a smoother path forward due to lower barriers. We are optimistic that a normal volume of projects will proceed, and there may be some additional opportunities from bids that involve satellite deposits. Did I address everything, Aaron? Or did I overlook anything?

Aaron MacNeil, Analyst

No, that's great. That's perfect. So that's all for me. Martin, as you know, I used to cover this company before you took the helm and the way you've transformed this company is nothing short of incredible. So, wishing you all the best in the future, and Joe, congrats again on the new gig. So that's all for me. I'll turn it over. Thanks.

Martin Ferron, CEO

Thanks, man.

Operator, Operator

Our next question comes from the line of Tim Monachello with ATB Capital Markets. Please, go ahead. Your line is open.

Tim Monachello, Analyst

Hey, good morning, everyone. Maybe I'll follow up on Aaron's question first. I'm just curious about the satellite mine opportunities. What percentage of the bid book would be those types of opportunities and would also be the lower capital intensity mine operating contracts?

Joseph Lambert, President & CEO

I'd estimate that we have around $400 million to $500 million currently under consideration linked to our satellite mines that are already operational. These projects are more targeted toward the near term.

Tim Monachello, Analyst

Okay, that's great. And then in past quarters, I guess through the downturn, it seemed like there were a number of projects in the oil sands that had been deferred out of 2020 and into 2021. Obviously, commodity prices are a lot more constructive today than they were for most of the year. So, are you starting to see those opportunities return?

Joseph Lambert, President & CEO

We haven't seen a lot right now, Tim, but that's not unusual. We usually don't see summer construction tenders until late February, even up to the end of April. Because there are usually May, June starts. Depending on the scope and that often we don't hear about much until that kind of timeframe, end of Q1 beginning of Q2.

Tim Monachello, Analyst

Okay, I guess the upper end of your guidance for 2021, would that contemplate that work returning this year?

Joseph Lambert, President & CEO

Not to any significant increase from what we've seen in the past. It's pretty much based on normalized 2019.

Tim Monachello, Analyst

Okay, got it. And then just last one for me. You guys talked a little bit about that at the Acheson expansion this year. Is that contemplated within the $5 million to $10 million growth CapEx?

Joseph Lambert, President & CEO

Yes, that's right in the middle of that, I'd say.

Tim Monachello, Analyst

Okay. If you guys win some of these other awards, do you think there's upside to that CapEx guidance for the year?

Joseph Lambert, President & CEO

Yes, certainly. Some of these major bids that required might have some support equipment or maybe a unique piece of equipment that's associated with it. So yes, there could be, but it would also be associated with an increase in revenue.

Tim Monachello, Analyst

Right. Okay. Great. That's fantastic color. I appreciate it. I'll turn it back.

Operator, Operator

Our next question comes from the line of Bryan Fast with Raymond James. Please, go ahead. Your line is open.

Bryan Fast, Analyst

Thanks. Good morning, everybody. Just on the component rebuild facility. The chart in the presentation really illustrates well the value adds that you're achieving with that initiative. Are you now operating at full capacity at the facility? And are the savings in average component costs exceeding your expectations?

Joseph Lambert, President & CEO

We are operating at our full capacity. What we expect to do, we've ramped up from when we started in February last year. We have more capacity if we wanted to put through it, but we'd have to get more external requests if we wanted to push more through. As far as what it's saving us and what it's doing, I think it has met or exceeded those expectations.

Bryan Fast, Analyst

Okay, good. Thanks, Joe. And then I guess now that we hopefully have the worst of the pandemic behind us, are you starting to see those M&A channels open up? Or is that something that's on the radar right now?

Joseph Lambert, President & CEO

We're seeing some interesting activity. Obviously, it's very hard to do anything when it deals with hard assets like ours and traveling to see things or putting your hands on them is pretty important. I think we've seen some smaller stuff and we keep our eyes open. We're always looking for something that's accretive and interesting and fits our diversification strategy.

Bryan Fast, Analyst

Okay, thanks. That's it for me, and Congrats, Martin, on the retirement and Joe with the new equipment.

Joseph Lambert, President & CEO

Thanks, Bryan.

Operator, Operator

Our next question comes from the line of Maxim Sytchev with National Bank Financial. Please go ahead, your line is open.

Maxim Sytchev, Analyst

Hi, good morning.

Martin Ferron, CEO

Good morning, Max.

Maxim Sytchev, Analyst

I was wondering, going back to the shop expansion, is it possible to talk a little bit about how you think about payback terms on these investments in terms of percentages, like ROIC or time horizons? Maybe any color on that front?

Joseph Lambert, President & CEO

The compelling economics I was discussing, Max, is very similar to what we experienced when we built the remanufacturing facility; the paybacks are around three years. It's pretty fast, and since we have successfully filled our shop and attracted skilled maintenance labor, which has helped to increase hours and throughput, we are confident that we will achieve that three-year payback in this expansion.

Maxim Sytchev, Analyst

Yes, absolutely. Okay. That's helpful. And then, do you mind maybe just commenting around the ramp-up on the gold project? How that's going? That you have conversations with the client about early issues and your learnings? Any color on that, please.

Joseph Lambert, President & CEO

As far as the Ontario gold mine? Is that what you're talking about, Max?

Maxim Sytchev, Analyst

Yes, exactly. Yes.

Joseph Lambert, President & CEO

I think that typical of most ramp-ups we've experienced, especially considering the circumstances with COVID, there is usually some minor disruption at the beginning, such as setting up camps and establishing lay-down areas. There are often slight scheduling issues, but nothing out of the ordinary. We didn't have high activity levels at the start, so the significant activity is set to begin around April-May. We are still confident in our ability to reach those project milestones as originally planned.

Maxim Sytchev, Analyst

Okay, that's helpful. And do you mind maybe just commenting a little bit around how we should be thinking about this winter work program versus maybe last year? Are the clients back to sort of almost the same level of production activity levels? Or are we 10% to 15% below? Maybe just any granular directional color you might provide on that?

Joseph Lambert, President & CEO

I'd say our level of activity is probably almost the same or maybe slightly lower, but not much. I'd say it's very similar to what we saw last year. I think the overall marketplace, the small truck side is about the same. The big truck marketplace is less, but we have more of it.

Maxim Sytchev, Analyst

Okay. So, is it the way that we should be thinking about this as greater market share? Is that how you see this?

Joseph Lambert, President & CEO

I think there's probably a little less overall being done, especially on the big dirt side and the overburden, but we're doing more of that. So, our numbers are very similar, slightly below I’d say.

Maxim Sytchev, Analyst

Given the rebound in the underlying commodity, are you noticing any changes in customer behavior? Is there an increased desire to outsource more, or do you have any insights from that perspective?

Joseph Lambert, President & CEO

I haven't had a lot of tangible feedback from the clients. I think we'll probably hear and see more of that as we go into the summer because that's usually when you see capital project work starting up. So, like I said before, I think we'll have more insight into that, Max, in the next few weeks, couple months. Overall, I'd say there's a long-term drive. I think overburden volumes will continue to increase. Obviously, the one mine that had closed down is reopening and producing. So, we think that's going to start to create some demand in the future. Overall, I think that the barrels slowing are higher. It's typically more barrels you're going to produce, the more material you get to move.

Maxim Sytchev, Analyst

Right. Okay, that's very helpful. And then just last question, in terms of M&A, and maybe that's the question to Joe and Martin. In terms of the type of potentially assets that you're looking at, obviously, NOI has performed extremely well and in a resilient fashion throughout the crisis. The type of situations you're looking at right now, is there a bit more of a distress component attached to it? Or how should we think about what's potentially on the horizon, if anything from an acquisition perspective?

Joseph Lambert, President & CEO

I'll let Martin comment for himself. In my point of view, Max, we are looking for similar businesses that fit our skillset. We're not indifferent in diverse areas for commodity and geography. So, I think anything that fits that that's accretive is something we would look at. We're going to be capital-conscious, too. But those would be the areas that we'd look at? I don't think there's a huge amount of distress out there that I've seen anyways. I don't know if you have anything you'd add, Martin.

Martin Ferron, CEO

Yes. I'll just say that the strong demand for every single natural resource right now takes away distressed assets pretty much because only assets are needed for projects. So, I think our M&A will be focused upon geographic diversification maybe, I could say that, but that's all I'll add at this point.

Maxim Sytchev, Analyst

Okay, that's very helpful. Thank you very much, gentlemen. And again, Martin, amazing job and Joe, congrats.

Joseph Lambert, President & CEO

Thanks, man.

Martin Ferron, CEO

Thanks for the kind words from everybody. I appreciate it.

Operator, Operator

Our next question comes from the line of Richard Dearnley with Longport Partners. Please go ahead, your line is open.

Richard Dearnley, Analyst

Good morning. On Slide 19, the question is with Nuna, how does Nuna change the fourth quarter utilization perspective? It would seem like you don't get the same kind of highs. You get higher second and third quarter utilization, but lower fourth quarter.

Joseph Lambert, President & CEO

This is just our own fleet, Richard. So, this doesn't have Nuna's fleet utilization. But you are correct; they're typically countercyclical to us. So, if we had their fleet in here, you would probably see more highs in Q2 and Q3 for them.

Jason Veenstra, CFO

And we'll still be looking at Nuna in this, Richard.

Richard Dearnley, Analyst

Right. And their fleet is the 270 that you mentioned?

Jason Veenstra, CFO

That's right.

Richard Dearnley, Analyst

Right. Okay. And then I'm curious about the solar-only part of the Acheson expansion, how much does the solar of that size cost these days?

Joseph Lambert, President & CEO

We're doing a full rooftop on the shop side of the facility. I think it's roughly in there at about $0.5 million. The economics of it are pretty good and I guess it's fairly breakeven or slightly favorable at today's rates. But if you expect future power rates to increase, which I think is a pretty safe bet, that it will actually be a positive for us going forward. Along with obviously the reduction in emissions by producing your own solar power.

Richard Dearnley, Analyst

Sure. Are you going to own that or are you going to lease that?

Joseph Lambert, President & CEO

We'll own it. We did the same thing on our Dreamland facility last year, Richard, and it's performed very well.

Richard Dearnley, Analyst

I see. Thank you. Okay, thank you. And Martin, sorry, I'm going to miss your colorful commentary on stock price and other things. But thank you for the past.

Martin Ferron, CEO

Well, I'll miss your great questions too, Richard. So, all of us do, too. Thanks.

Operator, Operator

This concludes the Q&A section of the call and I will pass the call over to Joe Lambert, President and CEO for closing remarks.

Joseph Lambert, President & CEO

Thanks, Candy. My thanks to all of you for joining us today and for your continued interest in our growth and diversification journey. I'm very excited about our opportunities to advance our business in 2021 and what we all hope is a much healthier and more stable environment.

Operator, Operator

Thank you. This concludes the North American Construction Group's Q4 2020 conference call.