Earnings Call Transcript - NOA Q1 2024

Operator, Operator

Good morning ladies and gentlemen. Welcome to the North American Construction Group Conference Call regarding the First Quarter ended March 31, 2024. At this time, all participants are in a 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 the participant's permission. The company wishes to confirm that today's comments contain forward-looking information and that actual results could differ materially from conclusions, forecasts or projections contained in the 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, Enrico. Good morning, everyone and thank you for joining our call today. I'm going to start with a few slides showing our Q1 operational performance before handing it over to Jason for the financial overview and then I will conclude with our 2024 operational priorities, bid pipeline, backlog, outlook for 2024 and finish up with our capital allocation plans before taking your questions. On Slide 3, our Q1 safety performance remains well below our industry-leading target frequency of 0.5 and we have reduced our lifesaving rules violations by 50% from Q1 last year. These statistics now include our Australian incidents and work hours. We currently are focusing our safety efforts on frontline leadership training, improving our peer-to-peer recognition program and increasing leadership visibility in the field. On Slide 4, we highlight some of the major achievements of Q1. Our recently acquired Australian business continues to deliver strong and consistent results even after some heavy rain impacted summer months and the backlog down under increased significantly with the award of a $500 million 5-year contract extension with our long-term metallurgical coal producing client. With our integration team now resident and our Australian bid pipeline showing continued strong demand, we remain confident that the Australian market will play a dominant role in maximizing our fleet utilization and return on assets. The first equipment transfers to Australia have reached their store and we're excited about the long-term opportunities we see in the Australian market. Our Fargo-Moorhead flood diversion project smoothly ramped up in Q1 in advance of its first big summer construction season and we remain confident in our overall project plan. Our telematics system continues to provide maintenance savings, achieving a record quarterly saving of almost $2 million in Q1 and we're evaluating some Australian assets for an initial rollout of telematics in Q3. And last but not least, we were awarded a 3-year contract in oil sands which generated about $225 million in 2024 backlog. On Slide 5, we show fleet utilization by region. Australian utilization remains strong with Q1 ending on a March high note after a few high rainfall impacted summer months. In Canada, our utilization suffered from mobilization fleets between oil sand sites in February and lower volumes of winter reclamation work. We remain on trend and confident in our ability to hit our Canadian target range of over 75% by the end of this year and we'll also be looking to similarly increase our Australian fleet to over 85% during the same period. I'm sure some may believe our Canadian utilization targets are stretched after coming off that February low. However, if you consider the units we expect to transfer and some sales of smaller assets, combined with improving mechanical availability and no further anticipated fleet mobilizations, our math still suggests we are capable of exceeding our target before year-end. With that, I'll hand over to Jason for the Q1 financials.

Jason Veenstra, CFO

Thanks, Joe. Good morning, everyone. Getting right into it and starting on Slide 7. The headline EBITDA number of $93 million and a correlated 27% margin were driven by a successful second quarter from Australia since the change of control on October 1, 2023. Our margin in particular, along with the combined gross profit margin of 18% illustrates a strong operational quarter. All business units contributed to this margin with the exception of Nuna which posted EBITDA margin of less than 10% in the quarter when factoring out the onetime costs that were incurred as part of the restructuring during the quarter. The EBITDA margin illustrates project execution risk in the joint venture and is a metric indicative of why a change was needed. Restructuring efforts were completed during the quarter and the projects in Northern BC and the Northwest territories were finalized. Restructuring expenses incurred and added back for adjusted earnings purposes related to severance costs and onetime expenses required to complete legacy projects. Moving to Slide 8 and our combined revenue and gross profit. As we will have for 2 more quarters, MacKellar provided a step change in the quarter-over-quarter variance. On a total basis, we were up $53 million quarter-over-quarter. MacKellar and DGI, which we combine in Australia in our results, were up $128 million, almost identical to the Q4 variance which could have been higher if the rainfall in January and February had been less severe. This rainfall impact can be seen in Australia's equipment utilization which got back to 80% in March after being in the mid-70s for the first 2 months of the year. This positive variance was offset by the lower equipment utilization in the oil sands region. Our share of revenue generated in the quarter by joint ventures was a net $29 million lower than Q1 2023. The Fargo-Moorhead project had a steady operational quarter, was up $10 million and achieved project metrics and milestones required of the project schedule. More than offsetting this positive though, was the variance impact of the completion of the construction project at the gold mine in Northern Ontario in Q3 2023 which led to lower quarter-over-quarter revenues within the Nuna Group of companies. Combined gross profit margin of 18% despite another challenging quarter posted by Nuna reflects the strength of a diversified business. Gross profit margins benefited both from the operations in Australia which were higher than 20% in the quarter and as normal course. And from Northern whose fleet lowers our internal costs as well as generate strong margins from services provided to external customers. Moving to Slide 9. Record Q1 adjusted EBITDA was consistent with and reflective of the revenue commentary. The 27% margin we achieved reflects an effective operating quarter and with the positive 2023 trend from the Q4 and Q3 margins of 25% and 22%, respectively, is indicative of where we see our business trending and operating adds. Included in EBITDA, General and administrative expenses were $11.1 million in the quarter, equivalent to 3.8% of revenue which remained under the 4% threshold we've set for ourselves. Going from EBITDA to EBIT, we expensed depreciation equivalent to 14% of combined revenue which reflected the depreciation rate of our entire business, including the equipment fleet at the Fargo-Moorhead project. When looking at just the wholly owned entities and our heavy equipment in Canada and Australia, the depreciation percentage for the quarter was 14.8% of revenue and reflected the addition of the Australian fleet as well as first-quarter operations in the oil sands which require higher idle time due to the cold weather. Adjusted earnings per share for the quarter of $0.78 was $0.18 down from Q1 2023 as the impacts of higher interest are factored in. The average interest rate for Q1 was over 9% in the quarter, the highest rate we've paid in a long time and remains a compelling indicator for us as we look to pay down debt in the back half of 2024. Moving to Slide 10. Net cash provided by operations prior to working capital was $74 million and generated by the business, reflecting EBITDA performance net of cash interest paid. Free cash flow usage of $36 million was driven by the $62 million draw on working capital accounts and $60 million spent on our front-loaded sustaining capital maintenance and replacement programs. Moving to Slide 11. Our PPE of $1.2 billion is up $470 million from the pre-MacKellar September 30, 2023 balance on the $430 million worth of assets we purchased in 2023 and $20 million of gross assets purchased this quarter in Queensland and Western Australia. Net debt levels ended the quarter at $781 million, an increase of $58 million in the quarter due to the $36 million of free cash flow usage as well as the investment in growth assets. Net debt and senior secured debt leverage ended at 2.0x and 1.6x, respectively and are considered reasonable levels 6 months after a transformative fully debt funded acquisition. With that, I'll pass the call back to Joe.

Joe Lambert, President and CEO

Thanks, Jason. Looking at Slide 13. This slide summarizes our priorities for the year. This slide is unchanged, so I'll just hit the high points. The MacKellar integration continues to progress smoothly. As I mentioned in my letter to shareholders, we are thrilled with the Australian market in general and see great opportunities for growth and continued efficiency improvements with our stronger systems and processes in place. Under the second point, we highlight our ongoing efforts to win strategic projects for our business. As we look to sustain and grow our infrastructure business, we will need to win the infrastructure work and with a strong potential U.S. infrastructure in the bid pipeline, we have initiated a partnership with a known international construction company and set this year's priority to qualify on one major infrastructure project. The second part of this priority is to win a meaningful project that uses our smaller mining assets that are currently underutilized in our oil sands business. We have several active tenders that would utilize these smaller assets and we expect to win one of these projects this year. Item 3 prioritizes continued expansion of our operational and maintenance expertise. We will prioritize new technologies such as our telematics system and continue to in-house and vertically integrate our maintenance services and supply, including a near-term focus on identifying and sharing best practices between our Canadian and Australian businesses. We believe this prioritization and focus will continue to lower cost and improve equipment utilization, resulting in increased competitiveness and likelihood of winning the tenders mentioned in the previous item 2. The final area prioritizes returning Nuna backed operational excellence and setting it up for growth and consistent performance. This work commenced earlier this year and I'm confident the changes made will ensure that Nuna will be back on its feet in time for their big summer projects and growing off a much stronger and stable foundation before the end of the year. Moving on to Slide 14. Our bid pipeline has grown significantly with over $500 million in additional projects under tender. While we anticipate strong demand in oil sands to continue for many years, the diversified opportunities in Australia and the strong demand for heavy equipment also present avenues for further diversification and improved return on assets. There's a handful of these bids that are integral to our business. Two projects in oil sands consisting of one involving typical summer civil works that should be awarded imminently and a big stream diversion project which we expect to submit in Q2 with award in late Q3, are important projects for improving near-term utilization on our smaller mining assets. Longer-term opportunities to fully utilize these smaller mining assets have been tendered in multiyear projects in the Quebec iron ore mine and a South Australian magnetite mine. Our larger mining assets which remain in high demand and utilization but are in general uncommitted beyond 2024 have been tendered into opportunities for 5-year commitments in New South Wales and Queensland coal operations. We are excited about these opportunities and a couple of wins would provide meaningful insight and stability into our projections for 2024 and beyond. On Slide 15, our backlog stands at $3 billion. This includes the recent award of a major metallurgical coal mine in Queensland and the regional oil sands contract balanced by our typical quarterly drawdown from executed work. This backlog enhances our confidence and predictability, particularly in our Australian operations. Slide 16 reiterates our outlook for 2024 and is unchanged from our last presentation in March. Lastly, Slide 17 focuses on capital allocation. We continue to manage our interest rate. We expect to use our projected free cash flow of $160 million to $185 million for deleveraging while maintaining an open mind for more favorable risk-return opportunities that may arise. We continually analyze all options to ensure that our capital allocation decisions are both opportunistic and aligned with our long-term strategic goals. With that, I'll open up for any questions you may have.

Operator, Operator

Thank you. Your first question comes from Tim Monachello from ATB Capital Markets.

Tim Monachello, Analyst

I just wanted to touch on the commentary on transferring assets and potentially selling some of the underutilized ones. Can you say how many assets you would view as structurally underutilized in the Canadian market that might be up for transfer or sale?

Joe Lambert, President and CEO

We'd be looking at about 100 of them, Tim. Some of them that aren't committed into next year and some of them that aren't being used right now. So there's some smaller ones we expect to get engaged in this summer work, as I mentioned, and we see opportunities next year in a few different areas. So those kinds of 5 major projects that are under tender now we think would get the utilization of that fleet if we win a couple of those into the high ranges we expect to be in. But it's about 100 units. I'd say, more weighted towards the smaller end of the fleet. So it's disproportionate to where the smaller units are a bigger chunk of that 100.

Tim Monachello, Analyst

Okay. And would that not include the 20 that you already transferred or are currently transferring?

Joe Lambert, President and CEO

Yes, that would be part of it.

Tim Monachello, Analyst

Are additional units that you're looking at?

Joe Lambert, President and CEO

Yes, we expect the ones we sent will actually get some utilization in late Q3.

Tim Monachello, Analyst

I was encouraged to see that those were going to work with contract. Are those going to existing sites or new sites in Australia?

Joe Lambert, President and CEO

They're pretty much supporting existing sites. There were just opportunities. They're not all going one spot. There are 3 here, 4 there, where there was opportunities where we didn't have fleet either Western Plan or MacKellar.

Tim Monachello, Analyst

Could you provide some insights on the net asset value of those assets that you consider underutilized?

Joe Lambert, President and CEO

I don't have that information right now, but I can probably get it for you later. The net asset value really depends on which units we choose, and it can vary significantly between two different units of the same fleet based on the remaining value in the components of those assets. For example, 200-ton trucks can differ in net asset value by as much as double, depending on the components they have.

Tim Monachello, Analyst

Right. Okay. That makes sense. And then in Canada, obviously some weak utilization in Q1 but some optimism around growing utilization through the rest of the year. Curious if you could comment on how utilization for the Canadian fleet exited Q1 and is trending in Q2?

Joe Lambert, President and CEO

Well, it was definitely at a low in February when we're moving fleet around and then started picking up in March. And yes, we expect that to continue through Q2 and we expect to achieve that 75% by the end of the year.

Tim Monachello, Analyst

Okay. And then big working capital build in the quarter, Jason, curious, can you talk a little bit about what the drivers of that were and how you see that playing over the rest of the year should that unwind?

Jason Veenstra, CFO

Yes, we do expect it to unwind. It was mainly in Canada during a very busy March. We recorded some significant accounts receivable that were collected in April. So, we anticipate that will resolve itself. MacKellar experienced a similar situation, although their accounts receivable build in March wasn't as large. However, they did have a stronger March compared to January and February, which also increased their accounts receivable. Therefore, we expect it to unwind, and for 2023, we hope for working capital to remain neutral for the full year, with similar expectations for 2024. It won't all unwind in the second quarter, but we anticipate it will happen over the next nine months.

Operator, Operator

Your next question comes from the line of Aaron MacNeil of TD Cowen.

Aaron MacNeil, Analyst

Joe, I know you mentioned the bid opportunities for smaller mining assets but it looks like some of the bigger bid opportunities in your pipeline don't occur until 2025? I know it's early but as we think about 2025, what do you see as the big puts and takes year-over-year? Like does it look a lot like '24 with maybe the benefit of some fleet reallocation? Or are there other major factors that we should be thinking about?

Joe Lambert, President and CEO

I believe the opportunities in fleet allocation are not solely about improving utilization. In Australia, the weather and project setups naturally create more chances to increase equipment hours. We see potential not just in moving parked assets but also in securing long-term commitments for equipment that was previously uncommitted in 2025, which may now see high usage. I have analyzed the net impact on revenue and our expectation has been a 5% annual improvement rate, which I have incorporated into these actual figures. There are significant projects, like the coal projects in Australia, which are valued at $300 million to $400 million. We anticipate that around 30 of our 100 assets will be allocated to these projects, using underutilized equipment. While it won't involve the entire fleet, there may be some additions for growth capital, such as matching shovels. Overall, we view this as a promising opportunity to align with our growth trajectory.

Aaron MacNeil, Analyst

So the 30% you just mentioned, would that be incremental over and above the $20 million that you've already sent over there?

Joe Lambert, President and CEO

Yes.

Aaron MacNeil, Analyst

Got it. And then for the balance, I guess, $20 million plus $30 million, minus 150 remainder, like where do you think the most likely end markets for those sort of remaining $50 you had to guess?

Joe Lambert, President and CEO

I would say we place about half of them into summer work in oil sands this year and possibly into iron ore or Australian magnetite next year. The remaining roughly 20 units are likely to be sold as is or rebuilt and then sold. I believe there are opportunities for our maintenance team to add value through rebuilding, and we are currently assessing those markets. It wouldn't be a significant dollar amount; I estimate it to be around $20 million.

Operator, Operator

Your next question comes from the line of Jacob Bout of CIBC.

Jacob Bout, Analyst

Joe and Jason, this is a problem on for Jason. So looking at Slide 5 targets of fleet utilization of about 85% in Australia and 75% in Canada. So you touched a bit about this in the prepared remarks but what would you say are the biggest factors that would help you base those targets?

Jason Veenstra, CFO

I believe the main factor is within our control, which is maintaining our high level of maintenance support for the fleet. This ensures that the fleet remains operational when demand is present. Additionally, we need to activate our underutilized fleets by securing the bids I mentioned. However, even with demand, without mechanical availability to keep the equipment running, we cannot achieve the necessary utilization. The primary responsibility lies with us, which is why we encourage our maintenance team to keep improving and performing strongly. Furthermore, we aim to allocate these assets in ways that maximize long-term utilization opportunities.

Jacob Bout, Analyst

Right. That's helpful. And then maybe just a question on Nuna. So you mentioned that restructuring was effectively done in Q1 and you've brought a new leadership. I would appreciate if you could talk a bit more about the steps that have been taken there? And do you still see margins at Nuna now getting back to normalized levels by the summer?

Joe Lambert, President and CEO

Yes, starting from the end. We have implemented stronger project controls and processes, particularly in contract administration and change management, to align with North American standards. I am confident because we have very strong performers in these areas. Additionally, I see potential for building synergies and enhancing our collaboration between our two offices, as both are located in Edmonton.

Operator, Operator

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

Maxim Sytchev, Analyst

Joe, could you provide some insights on MacKellar? There have been strong contributions from those assets in the first two quarters, but I'm interested in hearing about the integration process, your thoughts on ERP, and how these factors might affect potential profitability and asset utilization moving forward. Additionally, if you could touch on any infrastructure opportunities in Australia, that would be helpful.

Joe Lambert, President and CEO

Yes, I'll begin with the infrastructure. We are still in the early stages and I don't have many specific projects to mention. We're mostly focused on research and team setup, so it's still quite early. I anticipate that by the end of Q2 or Q3, we will have more information available. The rollout of the ERP system has gone smoothly and we expect it to fully launch in Q3. I believe there are significant opportunities for us to improve efficiencies, although it's challenging to quantify that right now. With better inventory control systems and improved work order management, we can enhance our efficiencies since we'll have greater insight into our equipment and parts. I expect to see gains, but I doubt we'll be able to measure them perfectly because we’re comparing to a baseline we don’t fully understand yet. This has been done before, both here and at Nuna, and we often find improvements retrospectively that we weren’t aware of initially. There are ongoing opportunities for growth across most commodity markets, except perhaps for nickel and possibly lithium, which have seen some downturns in Australia. The markets for iron ore, gold, and all types of coal—ranging from PCI metallurgical to thermal—are very strong, with reputable clients interested in longer-term contracts, which is beneficial given the nature of our assets. Did I cover everything you wanted to know, Max?

Maxim Sytchev, Analyst

No. And just maybe building a little bit on sort of the opportunity on the commodity side of things because you have extended one of your major contracts in Australia. I'm just wondering if there's any other ones that are on sort of kind of rolling forward basis that need to be renewed. Yes.

Joe Lambert, President and CEO

I don't believe there is anything scheduled for this year. While I don't have the slide memorized, I don't think there are any immediate items that require renewal. There are some for next year and beyond. Most of these mines have been on board with MacKellar for decades, so the risk of renewals is quite low, especially for the major ones where they are the sole equipment supplier, including the two major coal mines, one of which is thermal and the other met. From what I've gathered, our client relationships have been exceptionally positive, and I believe that with improved systems and performance, those relationships will continue to strengthen.

Maxim Sytchev, Analyst

Right. Absolutely. Okay. And then maybe just one follow-up for Jason, if I may. So again, like a lot of things on teller side of things are being tightened up right now. How should we think maybe around, I don't know, sort of EBITDA or free cash flow conversion from those assets kind of like before and after, if you don't mind, maybe talking directionally, how should be thinking about this?

Jason Veenstra, CFO

Yes. We've discussed the margin aspect with the new ERP and are tightening it within the 1% to 3% range. Max, we're not anticipating a significant change in their margin profile. They maintain an EBITDA margin above 30% and have a robust focus on cost management and operational excellence. Therefore, we don't foresee any substantial shifts in margins. Additionally, their sustaining capital for the quarter is approximately $15 million. Their free cash flow conversion is likely 10% to 15% higher than ours over the full year, as we have a front-loaded capital program compared to them. The run rate they have achieved in the first six months is indicative of their performance; we don’t expect significant changes with the ERP or growth assets since they are operating at an efficient level. Our goal is to improve their utilization to remain in the 80s and exceed 85.

Operator, Operator

Your next question comes from the line of Frederic Bastien of Raymond James.

Frederic Bastien, Analyst

I know a priority of yours is to deleverage and bring down your debt-to-EBITDA ratio to within 1.5x by year-end. But do share buybacks re-enter the picture with your stock price trading below $30 right now?

Joe Lambert, President and CEO

It's definitely always a topic of discussion, Frederic. We constantly evaluate how to measure the return, which is a risk-return conversation with the Board. I would note that the return on our debt is substantial, especially as we reach our highest rates. Conversely, the risk associated with paying down debt is minimal. We're weighing that against the risk and return regarding where we believe our share price should be appropriately valued. Additionally, even with our growth, we will still consider small acquisitions this year. If a larger M&A opportunity arises, we will discuss it, but it likely won't impact this year since these projects typically take time, like MacKellar which took about 2.5 years. We continue to explore opportunities for vertical integration, growth capital, and securing certain bids where fleet expansion may be necessary, while balancing those risks against our core goals of reducing debt and optimizing our share price. We aim to establish tangible metrics for these discussions, and in our upcoming Board meeting next month, we will determine at what price we would consider reallocating our deleveraging funds towards growth capital or share buybacks. We expect to define these parameters with clarity.

Operator, Operator

Your next question comes from the line of Adam Thalhimer of Thompson Davis.

Adam Thalhimer, Analyst

Congrats on the record Q1. Is it too early to give high-level thoughts for the oil sands demand in the next peak season? I'm thinking about this Q4 and the next year's Q1.

Joe Lambert, President and CEO

Yes. I mean we generally don't see our winter reclamation scopes until September or so, October. And so it's hard for us to gauge the winter programs. And they've varied our win and work. If you go back over the last 4 or 5 years, our win work has been in our small truck, like reclamation work has been high as $80 million in a winter with small truck works to as low as 20%. And we've seen that kind of volatility in the winter scope works. As far as the bulk work and the base overburden, we see that being steady or growing. This year's reductions were a bit of a surprise in scope. But generally, we think that's more of a deferral than an elimination. And I expect volumes and demand in big earthworks in oil sands to increase next year. But I don't have that scope. And again, we've got a 3-year contract but it's being awarded in 1-year terms. And I would expect to see next year's volumes, I'm guessing sometime between July and September of this year for us to tender on for next year.

Adam Thalhimer, Analyst

I know it's a difficult question to answer, but there were many factors involved last year. In Australia, you've mentioned the weather impacts on MacKellar for several quarters, despite strong results. I'm curious about how much weather affected MacKellar in the fourth quarter and the first quarter when considering the year-over-year comparisons.

Jason Veenstra, CFO

Compared to the previous year or...

Joe Lambert, President and CEO

They had significant cyclone activity in Queensland in both Q4 and Q1, especially January and February. So they incurred a pretty wet year. And when you get a lot of rain there, roads actually start getting shut down and you can't get supplies into mine sites. It's generally not the mine site's ability to operate as far as operators get in truck, it's getting supplies and people to the site because massive rains have cut off road access and that can last for a week at a time kind of thing.

Adam Thalhimer, Analyst

Yes. And I guess I'm just thinking because of the weather, MacKellar, even though the results were good, they actually had easy comps. Because of the way in Q4, Q1. Is that fair?

Joe Lambert, President and CEO

We would typically expect less weather-related disruptions than what we had this year. Usually, it would be more December, January centric and we actually had November, February kind of impacts as well.

Adam Thalhimer, Analyst

Okay. And then the high end of the revenue guide, what would have to happen for you to trend more towards the high end?

Joe Lambert, President and CEO

I would say we are expecting a significant amount of summer work in the oil sands over the next few months, along with a substantial winter program that begins early, as well as taking on work at the iron ore mine in Quebec.

Operator, Operator

Your next question comes from the line of Prem Kumar, an individual investor.

Unidentified Analyst, Analyst

I have a couple of questions regarding capital allocation. In the previous discussion, there was a mention of buying back shares. My questions are aligned with that, particularly given the current trading price of the shares. The expected range for free cash flows this year is approximately $150 million to $185 million. Even after we reach our leverage target of 1.5 and pay the dividend, there will still be a significant amount of funds available. How important are buybacks on the agenda for this additional capital?

Joe Lambert, President and CEO

Currently, our primary focus is on reducing debt due to the higher interest rates. However, we will reassess our approach based on future circumstances and the share price. As we progress through the year, particularly in the latter half, we expect to have more opportunities because our free cash flow is heavily weighted towards the third and fourth quarters. This is when we will have increased flexibility. Right now, we are considering all options, including mergers and acquisitions, increasing dividends, and share buybacks. Each of these strategies will be evaluated with a balanced perspective of risk and reward, and we discuss them at every board meeting. Yes, I believe there are always opportunities. With low share prices, it's challenging to find beneficial deals. However, if another deal similar to MacKellar becomes available, we would definitely pursue it. Our primary focus is in North America and Australia, but we are also considering South America, particularly Chile, as a potential market. We view the market there as becoming more stable with growth opportunities, especially due to their strong copper and gold markets. We will keep an eye out for those opportunities, and if a highly beneficial deal arises, we will certainly pursue it. Typically, these developments take about 1.5 to 2.5 years, so we wouldn't anticipate any impact even if a deal were on our desk today.

Operator, Operator

Your next question comes from the line of Karthi, a private investor.

Unidentified Analyst, Analyst

Thank you so much for this conference call. It's been a fantastic run with you folks so far. Just had a question when I look at Joe's letter, he's mentioning about the contracts becoming more about time and material. So just wanted to understand what is the implication on your EBITDA margin or any of those margin metrics that you want to talk of when you move towards contracts which are more of time and material in nature.

Joe Lambert, President and CEO

Yes. I went into more detail about the year-end aspects related to the oil sands work, which has historically been more focused on unit rate work. In this model, we were paid a fixed price per unit of material moved, which exposed us to operating productivity and weather risks. We have increased our reliance on equipment rentals, including maintained and operated rentals, as well as time and material work compared to the past. Roughly speaking, we were around 75% unit rate work historically, but now we're closer to 25%. This shift in rental work means we lack longer-term commitments and the upside potential typically associated with them, but it also introduces downside risk. Generally, you can expect higher EBITDA margins with lower risk. While net margins have remained stable, the absence of operators and some operating costs allow for a higher EBITDA relative to the overall rate. Does that make sense to you?

Unidentified Analyst, Analyst

Sure, Joe. Thanks for this, very helpful. Thank you.

Operator, Operator

Your next question comes from the line of Tim Monachello from ATB Capital Markets.

Tim Monachello, Analyst

Yes, just a follow-up here. I'm wondering if you can help us contextualize the guidance range relative to your utilization targets? Like what's embedded in your guidance on the top and bottom?

Jason Veenstra, CFO

We expect to exceed our targets of 75% and 85% by the end of the year. To understand how it ramps up, you can look at the EBITDA split and how it relates to utilization, which should finish at 75% or 85% in the fourth quarter. I anticipate we'll peak in the third quarter, followed by a leveling off or a slight dip in the fourth quarter, but we expect to remain within that range.

Tim Monachello, Analyst

Okay. So like the midpoint of your guidance would include you achieving those utilization targets? Is that the right way to think of it?

Jason Veenstra, CFO

By the end of the year, yes. So we're not going to be at 75% in Q2.

Tim Monachello, Analyst

Like you won't do 75% on average in Canada in '24?

Joe Lambert, President and CEO

Not on the average, we will get to 75% by the end of the year and we would expect to be able to hold that through next year.

Operator, Operator

No worries. Your next question comes from the line of Phil Goodrich of Goodrich & Company.

Phil Goodrich, Analyst

What would you consider a reasonable nominal run rate for taxes for modeling purposes, and how would you differentiate between cash tax and deferred tax?

Jason Veenstra, CFO

Yes, great question. We're currently at about 30% in Australia and 25% in Canada. If you want a blended modeling rate, you could use 27.5%. Approximately half of that is cash taxable. Australia has a cash taxable regime due to their history, and they don’t carry loss carryforwards, which maxes out their tax depreciation. Therefore, we do pay cash taxes in Australia, but we don’t have any cash taxes in Canada this year. We anticipate paying some cash taxes in Canada in 2025.

Phil Goodrich, Analyst

Okay. Please help me understand the seasonal pattern we should expect to see throughout the year.

Joe Lambert, President and CEO

It's a unique year. We expect that as we move into next year, our performance will be much more consistent from quarter to quarter due to the transition and the manner in which the contract for equipment movements in oil sands was awarded. This year, Q1 is our lowest point, and we anticipate a ramp-up to Q3 with a slight decline in Q4. We've provided significant information indicating that we expect 45% of our EBITDA in the first half of the year and 55% in the second half. Looking ahead to 2025, I expect that the quarterly results will be much more consistent, and we won't experience the 10% variances we've seen previously; rather, we'll be looking at single-digit fluctuations.

Phil Goodrich, Analyst

Great. Thanks. So paint the picture of long-term capability growth capability for the company going over a number of years. And clearly, you have some vision to this, especially given your large backlog. How do you see the company being able to grow organically and whatever tuck-ins you have in mind over the next 4 or 5 years?

Joe Lambert, President and CEO

I believe that most of our tuck-ins, particularly our vertical integrations, are primarily focused on lowering our internal costs by bringing maintenance in-house. Our growth opportunity is, as I’ve mentioned before, between 5% and 15% annually in our marketplaces. If we examine the first 20% or 30% of that growth, we can largely manage it with our existing assets by enhancing their utilization. However, this often requires some growth capital. For instance, we are considering deploying some assets in Australia under a long-term contract, which involves not only equipment we currently possess but also additional equipment to complement our fleet. We don’t always have everything we need on hand, so we may need to procure more. As Jason mentioned, we have added $20 million in growth capital thus far to respond to the demands in the Australian market. This type of growth can be achieved by making the most of our current fleet, but we believe we can handle the initial 20% of growth with our existing assets and minor further investment in growth capital.

Phil Goodrich, Analyst

So planning on your plate now as you continue to work in MacKellar. So how long do you feel it takes to digest all of that and the plate is now empty and you're ready for something significant again at one point in the future.

Joe Lambert, President and CEO

I’m very pleased that we were able to establish an integration team and change leadership at Nuna within the last six months. The business has adapted well to these changes without affecting performance, so I feel confident about our future. We have the right people in place as we continue to operate at Nuna and manage the integration in Australia. I’m comfortable with their performance and don’t see any signs of anxiety regarding potential challenges. Our plate is not empty, nor do I expect it to be, but if any good opportunities arise, we are prepared to take them on because we have the necessary resources and capabilities.

Phil Goodrich, Analyst

Except for the balance sheet. So I presume that's the principal limiting factor here?

Joe Lambert, President and CEO

If we were to consider a debt-funded MacKellar in the near future, I believe it would take two years, similar to the pace of the original MacKellar. I would be quite confident that by the end of this year, we would have the balance sheet to start exploring larger opportunities like that.

Operator, Operator

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

Joe Lambert, President and CEO

Thanks, Enrico. Thanks again, everyone, for joining us today. We look forward to providing next update upon closing of our Q2 2024 results.

Operator, Operator

Thank you. This concludes the North American Construction Group conference call on Q1 2024.