Earnings Call Transcript
North American Construction Group Ltd. (NOA)
Earnings Call Transcript - NOA Q4 2022
Operator, Operator
Good morning, ladies and gentlemen. Welcome to the North American Construction Group Ltd. Fourth Quarter and Year Ended Results Conference Call and Webcast on Thursday, February 16, 2023. At this time, all participants are in a listen-only mode. Following the management’s prepared remarks, there will be an opportunity for analysts, shareholders, and bondholders to ask questions. The media may monitor this call in listen-only mode. They are free to quote any members of management, but they are asked not to quote remarks from any other participants without the participant’s permission. The company wishes to confirm that today’s comments contain forward-looking information, and that actual results could differ materially from a conclusion, forecast, or projection contained in that forward-looking information. Certain material factors or assumptions were applied in drawing conclusions or in making forecasts or predictions 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, Julie. Good morning, everyone, and thanks for joining our call today. Similar to previous calls, I am going to start with our operational performance before handing it over to Jason for the financial overview, and then I will conclude with the operational priorities, bid pipeline, outlook for 2023, and our capital allocation before taking your questions. On slide three, our trailing 12-month total recordable rate of 0.53 represents a significant improvement from the start of the year, and the Q4 rate of 0.30 was the best quarter of the year. The 0.53 achieved is slightly above our industry-leading target frequency of 0.5, and we will be focusing our efforts in 2023 on prevention of high-potential injury events, implementing our active safety program, auditing critical tasks, and further advancing our use of developing technology in areas such as collision avoidance, fatigue management, and drone use for remote safety monitoring. On slide four, we highlight some of the major achievements of 2022. I am not going to go through this list individually, but I would simply summarize that we resolved our first half issues, executed well on our winter works programs, safely and efficiently closed out the year, and are focused on carrying our momentum forward into 2023 and looking to take advantage of the opportunities presented in this continuing strong demand market. Slide five shows the cumulative financial results for the year, and I am proud to say all four of the noted metrics of revenue, EBITDA, EPS, and free cash flow are company records. As you can see on the following slide six, the trend for continuing improvements is consistent. More than doubling both EBITDA and EPS in just four years is an impressive pace that we are eager to maintain. The next two slides represent two areas of our business that are key to continuing those positive trends. On slide seven, you will see we achieved our highest Q4 utilization on record after just having posted our highest Q3 on record and the demand for our fleet remains high. The Q4 utilization of 75% was directly correlated to increased maintenance manpower and improved fleet mechanical availability. We expect the high demand to remain throughout 2023 and continuing into 2024 and beyond. We likewise expect our progress on increasing the maintenance labor workforce will directly correlate to continued improvements in fleet utilization. Lastly on this slide, I would just like to point out that, other than the obvious pandemic impacts in 2020, our diversification efforts over the last several years have delivered into expectation and demonstrated higher Q2 and Q3 fleet utilization, as we have moved to smaller underutilized portions of our heavy equipment fleet out of oil sands and into other geographies and commodities where they have achieved more operating hours. The diversification now built into the business has removed much of the seasonality and cyclicality seen in previous years. Slide eight describes our advances in technology and represents another area of our business that is key to continuing the positive financial trends. I spoke earlier about the technology being used to improve safety and would like to expand here on our telematics system. Our telematics system is now installed on about half of our fleet, and it’s on the biggest and heaviest half of our fleet. We will continue adding to the remaining portion of our fleet and might be subsequently looking into our support equipment as well. In 2022, the telematics system directly saved over $2 million of machine components through proactive interventions and saved an additional 1,200 hours of maintenance labor. We expect these costs and labor savings to about double in 2023 with full year monitoring and additional assets brought online. The telematics system also contributes to improved operations through alerts and mapping that identify operator behaviors and provides locations complete with heat maps for alert events and frequency. The telematics program is really key to our ongoing performance; the better we build up from our analyses, the better we will get in improving maintenance and operations efficiency. With that, I will hand over to Jason for the Q4 financials.
Jason Veenstra, CFO
Thanks, Joe. This quarter’s financial review starts on slide 10, highlighting a few key performance indicators. Our combined revenue reached $320 million, marking the highest revenue level for the company in any quarter and reflecting a significant change for various reasons we will briefly discuss. This revenue resulted in trailing 12 revenue surpassing $1 billion, coinciding conveniently with the final quarter of our fiscal year. The $1.054 billion exceeded our previous record of $1.016 billion, but came under a different margin profile. From a gross margin perspective, we achieved 17.8% this quarter, which aligns with our expectations, based on the improved context mentioned by Joe and discussed throughout this quarter's materials. Moving to slide 11, combined revenue was 36% ahead of Q4 2022. Revenue from our core heavy equipment fleet increased by 30% quarter-over-quarter, driven by contributions from adjusted equipment and unit rates, as well as better equipment utilization. In Q4, we had a full quarter of updated equipment and unit rates, revised in late Q3 to address inflationary cost pressures in the Fort McMurray region. Equipment operating hours rose over 15% this quarter, and stable operational and maintenance staffing led to a utilization rate of 75%, notably higher than Q3 2021’s rate of 64%. Steady vacancy rates for Heavy Equipment Technician roles, combined with increases in third-party vendors, were key factors in our overall equipment utilization. Our wholly owned business lines, mainly DGI Trading and external sales of rebuilt haul trucks, achieved strong revenue this quarter consistent with Q4 last year. The ML Northern acquisition on October 1, 2022, allowed us to operate for a full quarter following a smooth integration. Our share of revenue from joint ventures and affiliates in Q4 was $87 million, compared to $54 million in Q4 2021. The Nuna Group of Companies maintained solid activity at the gold mine in Northern Ontario, with their core operations performing better than historical norms. The growth in combined revenue was driven by increased topline revenue from rebuilt haul trucks owned by our joint venture with Mikisew, along with the significant impact of joint ventures focused on the Fargo-Moorhead flood diversion project. We completed our first full quarter of construction work at the Fargo project, with activities ramping up, staying on budget and schedule at this early stage. As previously mentioned, the combined gross profit margin of 17.8% improved from the 14.7% reported in Q3 2022, reflecting strong operational performance in Fort McMurray, Northern Canada, and Northern Ontario, where we experienced consistent cold weather conditions for most of the quarter. Our joint ventures sustained strong operating margins, and the updated equipment and unit rates helped Fort McMurray operations return to historical margin levels. Operating margins benefited from the ML Northern acquisition, both through reduced internal costs and strong margins from services to external customers. Our second life rebuild program sold another 240-ton haul truck this quarter, concluding a very successful 2022. Moving to slide 12, adjusted EBITDA reached $86 million, setting a company record by exceeding the previous record by over 40%, as the increase in revenue translated to a significant rise in EBITDA driven by strong margins. Included in EBITDA are direct general and administrative expenses of $6.6 million for the quarter, which remained consistent with Q3 and represented 2.8% of our robust revenue. We take pride in our discipline regarding G&A, and Q4 was no exception. Transitioning from EBITDA to EBIT, we accounted for depreciation equivalent to 12.5% of combined revenue, reflecting the depreciation rate for our entire business. For just the wholly owned entities, particularly our heavy equipment, the depreciation percentage was 15.5% of revenue, indicative of effective fleet use amidst higher idle times due to colder temperatures. Our adjusted earnings per share for the quarter were $1.10, up $0.51 from Q4 2021, reflecting revenue improvements down to net income. EPS was driven by $45.7 million of adjusted EBIT after accounting for interest and taxes. Interest rates for Q4 were at 7.1%, increasing from 4.7% in Q4 2021 due to well-known interest rate hikes. Our gross interest expense of $7.8 million is expected to be a peak as we have reduced debt in late Q4 and anticipate stable rates moving forward. Moving to slide 13, I will summarize cash flow. Net cash from operations amounted to $64 million, with the difference between this amount and the $86 million EBITDA being due to cash interest paid during the quarter and the timing of joint venture cash distributions related to their generated EBITDA. We allocated $26 million for sustaining maintenance capital to maintain our existing fleet, which supports our core business. Changes in working capital generated cash in the quarter as anticipated. For the year, our total of $70 million in free cash flow can be categorized simply: $44 million for shareholder activities, mainly share purchases and dividends; $13 million for growth acquisitions like ML Northern; and $13 million for net debt reduction. Moving to slide 14, total liquidity has risen above $200 million, showing the impact of the quarter's free cash flow generation. Net debt decreased by $52 million in the quarter, with $67 million of free cash flow mainly directed toward debt reduction, while the remainder was invested in ML Northern. Our net debt leverage now stands at 1.5 times, consistent with our expectations by year-end. Due to the timing of cash receipts within the last days of 2022, we concluded the year with $69 million in cash, exceeding our target balance of $15 million to $20 million. On a trailing 12-month basis, our senior leverage ratio, per our credit facility, dropped to 1.5 times, unaffected by this high cash balance and coincidentally aligning with our net debt leverage. Finally, on slide 15, I want to highlight our ROIC and return on equity. We are particularly proud of the ROIC metric of 13.0%, showcasing our goal to leverage our equipment fleet and expertise prudently and profitably. With that, I will pass the call back to Joe.
Joe Lambert, President and CEO
Thanks, Jason. Looking at slide 17, this slide outlines our priorities for 2023. I previously talked about our use of technology mentioned in item two, but I'd like to emphasize the other three areas that will be especially crucial for our advancement this year. The first priority, which is central to our culture and values, is our continuous commitment to ensuring that every employee returns home safely at the end of each workday. Earlier, I noted how we utilize technology to enhance safety through collision avoidance systems, fatigue monitoring, and drones to assess and monitor remote work areas. We are also focusing on our workforce, as our growing team will require more new hires, and the industry currently has a shortage of experienced workers. To address this, we are placing a greater emphasis on developing our front-line supervision and expanding our green hand training programs. Moving from item three to item four, we remain dedicated to increasing our skilled trades workforce. NACG has a robust program aimed at expanding both our Acheson and field-based maintenance teams. We have also engaged our procurement team to bring in additional vendors from other provinces and countries to support our maintenance needs, as existing vendors and OEMs have had difficulty meeting the rising industry demand. There is a slide in the appendix on page 31 that details the workforce numbers for both NACG and our vendors, for those interested in seeing how we've developed the skilled trades workforce over time. Our ongoing priority will be to enhance both internal and vendor capacity until we have maximized our mechanical availability and fleet utilization, while also continuing to hire and train internally to replace higher-cost vendors. As mentioned before, we anticipate that our efforts to increase the maintenance labor workforce will directly lead to improvements in fleet utilization, allowing us to consistently achieve utilization rates of 75% to 85%. Lastly, item three outlines our goal of winning bids to achieve a backlog of over $2 billion by year's end, which brings us to the next slide, slide 18. Slide 18 emphasizes the strong demand and active project tenders we are experiencing. In Q4, we secured a couple of projects through our Nuna partnership that amounted to just over $40 million for work on a gold mine in BC and some roadworks in the Northwest Territories. We are also beginning to see increased bidding activity in oil sands. Notable projects in oil sands include our anticipation that the large regional oil sands five-year scope will be retendered in late Q1, likely awarded in Q3. We expect to capture our fair share of the large regional oil sands tender, and we are eager to review the updated tender package and work scopes. Another significant tender in oil sands is an approximate $75 million scope for fueling and servicing the oil sands customer’s equipment fleet over the next five years, representing our first major tender from our newly acquired ML Northern Equipment Servicing business in collaboration with our Mikisew partnership. We believe we have a strong chance of winning this contract and continue to grow our ML Northern business, while leveraging our internal skills to reduce our equipment servicing costs and enhance efficiency. Additionally, we have identified four compelling opportunities outside of oil sands, represented as the four upper left blue dots, that align well with the timing of our fleet transitioning from our Northern Ontario Gold Mine partnership with Nuna. We are optimistic about securing another blue dot win outside of oil sands in the upcoming quarter, which would further our diversification success and potentially provide upside to our anticipated smaller fleet utilization. On slide 19, our backlog stands at $1.3 billion as we continue to secure our fair share of work across all resource sectors. A key takeaway from this slide is that our backlog aligns closely with our diversification target, showcasing both confidence and sustainability in our diversification initiatives. Lastly, regarding our backlog, we expect to surpass $2 billion by the end of the year. Slide 20 presents our enhanced outlook for 2023. With our strong Q4 performance and progress on our priorities, we have adjusted the midpoint for a few of our key financial metrics upwards. The winter work season has been quite successful, and we aim to build on this momentum to exceed even our enhanced outlook. However, it's still early in the year, and our middle two quarters tend to carry the most risk concerning fleet utilization. I anticipate questions about the quarterly breakdown during the Q&A, so I'll use our EBITDA as an example. Our EBITDA distribution is approximately equal between the first and second halves of the year, with Q1 typically being the largest at about 30% of our annual EBITDA, and Q4 usually being slightly larger than Q3. As I stated in my letter to shareholders, capital allocation is a vital priority for NACG, and our free cash flow projection of $85 million to $105 million gives us the flexibility to explore all four options: deleverage, share repurchases, dividends, and acquisitions. Our first step, announced yesterday, was to increase our dividend by 25%. Deleverage is our current focus, especially given the rising cost of capital due to interest rate increases. As I’ve reiterated many times, our capital allocation decisions are under continual review, and we will redirect cash flow toward share repurchases or growth opportunities that yield better returns for our shareholders. Slides 21 and 22 offer a review of our capital allocation history and trends, which we believe has been disciplined, shareholder-friendly, and judicious. The past few years, we have maintained a consistent approach with our NCIB programs, as the earnings outlooks we have provided have generally not correlated with our share value. Finally, on slide 23, I’d like to point out our sustainability report, which was released yesterday. I'm pleased with the progress we've made in our sustainability efforts, focusing on tangible and measurable outcomes, and I look forward to sharing updates on our advancements next year. In conclusion, I would like to express my gratitude to the excellent team at NACG for their efforts and support in achieving these record annual financial results amidst a challenging economic landscape. With that, I'll open the floor for any questions you may have.
Operator, Operator
Thank you. Your first question comes from Yuri Lynk from Canaccord. Please go ahead.
Yuri Lynk, Analyst
Good morning, guys. Great quarter.
Joe Lambert, President and CEO
Thanks, Yuri.
Yuri Lynk, Analyst
Just on the utilization, I think you said you are targeting 75% to 85%. So should we think about that as the seasonally weaker quarters are at the lower end of that range and quarters like Q4 could be towards that mid-80s level. Is that the way to think about it for this year?
Joe Lambert, President and CEO
It’s certainly getting to that point where we are consistently in that range. I would expect Q4 and Q1 to be on the higher end and Q2 and Q3 to be on the lower end of that range. And that’s really what we need to demonstrate in this Q2 and Q3 is that we can get into the lower ranges of that.
Yuri Lynk, Analyst
Okay. So, the main reason is that small fleet of construction equipment that has left the oil sands, correct? Where have you deployed it? Is it being used for smaller and medium-sized projects or larger ones?
Joe Lambert, President and CEO
I would break it down into several points, Yuri. There are still 100-ton and 150-ton trucks in the oil sands that remained very active during the winter, but over the past six years, they have not achieved high utilization during the summer construction season. In the winter, they are typically well engaged in reclamation work, but historically, activity declines in the summer. Additionally, we are making progress on utilization outside of the oil sands, particularly with the completion of the Northern Ontario Gold project, which is leading to a transition of that fleet. I would say, conservatively, we expect it to come out of that mine and move into the oil sands, resulting in lower utilization and, naturally, a period of non-use while being transported. Therefore, there is potential for improvement with those assets as well.
Yuri Lynk, Analyst
Okay. Suncor is out there talking about looking to trim their contractor headcount or use of contractors for a variety of reasons. But is that an opportunity for you guys or a threat or how do you think about that?
Joe Lambert, President and CEO
We haven’t seen that coming in the earthworks side. So I guess our impression, Yuri, that it’s mostly happening on plant site side and they are consolidating vendors, which makes a lot of sense. We have got a lot of work consolidated in the earthwork site already. So I don’t think this is an area that they are looking to reduce contractors. And from what we see in the demand and the volume requirement side, we don’t see any reduction in that demand for a long time.
Yuri Lynk, Analyst
Okay. I will leave it there, guys. Thank you.
Joe Lambert, President and CEO
You bet.
Operator, Operator
Your next question comes from Aaron MacNeil from TD Securities. Please go ahead.
Aaron MacNeil, Analyst
Hey, guys. Thanks for taking my question. Joe…
Joe Lambert, President and CEO
Good morning, Aaron.
Aaron MacNeil, Analyst
Hey. If I compare your Q4 slide deck with the Q3 one, it looks like that large oil sands bid got pushed out a couple of quarters, am I right in interpreting that correctly and how should…
Joe Lambert, President and CEO
It was actually supposed to be put on the commencement date, but we mistakenly put it on the tender date in the previous one. These contracts run through the end of 2023. The date was always meant to be January 1, 2024. The dates are intended to reflect when the work begins. That aspect hasn't changed; we just made an error by placing it in Q3.
Aaron MacNeil, Analyst
Yeah. No problem.
Joe Lambert, President and CEO
And the tender process has pushed out from last year to this year, but obviously, there’s plenty of time to have it awarded before next year.
Aaron MacNeil, Analyst
And I guess just as a quick follow-up on that, how much of that work would be like work you currently have versus incremental work?
Joe Lambert, President and CEO
I would estimate that about half of it is work we are currently undertaking. The key difference is that right now, our backlog shows only a year remaining, while this would cover a five-year period. Therefore, we anticipate reaching peak levels in our backlog every five years with these oil sands contracts, which will then gradually decline over that time before new awards are made. Currently, we are at the lower end of our backlog and the work that has been awarded, and I would say that around half of this involves the work we are actively engaged in.
Aaron MacNeil, Analyst
Got it.
Joe Lambert, President and CEO
And the other point is that we have five years of planned work for this year. Is that clear, Aaron?
Aaron MacNeil, Analyst
Yeah. No. That’s perfect. Joe, you mentioned in your prepared remarks that Q2 and Q3 have the most uncertainty around utilization. You are guiding to a relatively flat year next year on a year-over-year basis. There’s obviously some puts and takes. So I thought it might be a good opportunity for us to kind of just get a bit more context around the various moving parts, like from what I can think of, I am sure there’s other ones too, but you have had the negative impact of inflation in 2022 versus 2023. You have got a full year of Fargo-Moorhead in 2023, and then offsetting that, you have got the maybe the negative impact to the Côté Project in 2023. So, I guess, could you frame how material all three of those impacts are and then...
Joe Lambert, President and CEO
I think you have almost finished answering your own question there.
Aaron MacNeil, Analyst
I just…
Joe Lambert, President and CEO
That’s exactly what I would have said is that, where we place that Côté fleet, there’s actually opportunity even on the same site and in the same regions that could have great improvements on utilization from forecast. The Fargo-Moorhead ramp up, but it is lower risk, lower margin work at Fargo, with the big infrastructure work, which I think we have always said. And then there are some areas in projecting the improvements in utilization and projecting the benefits that we are achieving in telematics, where I’d say we are cautious to project trends that are going very up very quickly without a lot of data points. And we certainly want to get a few more dots on the map or data before we confidently project things higher than where we currently are. So I think those are all opportunities that we will see really out of Q1 and what we see happening in Q2, and get a little closer to it.
Aaron MacNeil, Analyst
Maybe I will ask the question a bit differently. I am wondering on materiality. Like if you take those three factors and forget everything else, like, net-net, are those...
Joe Lambert, President and CEO
They would all be positive.
Aaron MacNeil, Analyst
Okay. So there’s potential for upside revisions to your guidance to the extent that...
Joe Lambert, President and CEO
I have been in the mining business for 40 years and what I would say is that I believe we are experiencing a strong, lengthy demand cycle in the commodity market, particularly due to electric vehicle metals. Across all commodities—energy, coal, metallurgical coal, thermal coal, base metals, precious metals, lithium, and graphite—we are witnessing a generational demand. I have never seen anything like it in my lifetime, and this overall trend gives us confidence in demand. Our focus now is on improving the mechanical availability and utilization of our fleet while executing effectively.
Aaron MacNeil, Analyst
Okay.
Joe Lambert, President and CEO
…and that’s what we do.
Aaron MacNeil, Analyst
Thanks, Joe. I will turn it over.
Joe Lambert, President and CEO
You bet.
Operator, Operator
Your next question comes from Jacob Bout from CIBC. Please go ahead.
Rahul Malhotra, Analyst
Hi. Good morning. This is Rahul on for Jacob.
Joe Lambert, President and CEO
Good morning, Rahul.
Rahul Malhotra, Analyst
Good morning. So I just had a question on 2023 guidance and the current backlog. So guidance, if we look at the EBITDA guidance, it implies an improvement over 2022, but the backlog levels are lower both quarter-on-quarter, year-on-year. If you just talk about backlog duration and whether you expect to use more from backlog this year compared to last year?
Joe Lambert, President and CEO
No. As I mentioned several times during the presentation, we anticipate our backlog to exceed $2 billion by the end of the year. This is due to the cyclical nature of our regional contracts, which are associated with four main producing sites operating on a five-year cycle. Each time these contracts are awarded, there will be a peak, and over the next five years, we will see a drawdown. I am referring to just half of our business in the oil sands segment. Therefore, a decline from quarter to quarter is expected since these contracts are awarded every five years. Initially, we thought the awards might happen last year, but due to inflationary pressures, they were postponed until this year. We expect that around 75% of our work in oil sands will be secured through a five-year contract. Consequently, a decline in backlog from one quarter to the next is not significant. This pattern will occur every time these awards are made in the oil sands sector. Additionally, we have secured important projects outside of this sector, such as a major infrastructure project in the United States, which has six and a half years of construction and 29 years of operations and maintenance. This backlog will draw down significantly during the construction phase. Does that address your question, Rahul?
Rahul Malhotra, Analyst
Okay. Yeah. Yeah. That’s helpful. Thank you. And maybe just on the Fargo-Moorhead project. So has that project been fully ramped up or would you say there’s still more runway from a quarterly contribution perspective over the next couple of quarters?
Joe Lambert, President and CEO
No, we just opened it up in roughly September of last year. We just started earthworks, and this year, we will approach peak earthworks. So we will have a full year of operating this year, having had roughly a quarter last year. This year and next year, we will reach peak production and workforce on those sites. Generally, this will occur during the summer, but the operations will continue throughout the year. They are currently operational and have been for the past week, and they will continue to operate consistently for the next six years.
Rahul Malhotra, Analyst
Great. And maybe just last one for me, so when we look at your guidance ranges, I guess, the question is, what determines the low and high end, and does this assume a relatively quick transition of the Côté Gold Mine fleet?
Joe Lambert, President and CEO
We have got a pretty conservative estimate of that fleet coming out of Côté, taking a reasonable amount of time for transportation and then going into a lower utilization aspect. But if we had a very quick transition and got it into a 24x7 high utilization, which is what we would like to do and what results in higher returns. So it’s not a huge amount. It’s not going to change that range. But there are a lot of other contributing factors, predominantly our utilization and whether our fleet mechanical availability. As I have told people before about every point of utilization is worth about $1 million a month in topline. So continuing to add and if you look at last year’s averages versus this year, if we can repeatedly add and get better and get into that range of 75% to 85%, it will have positive impacts going forward.
Rahul Malhotra, Analyst
Great. Thank you. I will pass it over.
Joe Lambert, President and CEO
Thanks.
Operator, Operator
Your next question comes from Tim Monachello from ATB Capital Markets. Please go ahead.
Tim Monachello, Analyst
Hey. Good morning, guys.
Joe Lambert, President and CEO
Good morning, Tim.
Jason Veenstra, CFO
Good morning.
Tim Monachello, Analyst
Congrats on blowing the roof up on this quarter. It’s been a long time coming.
Joe Lambert, President and CEO
Thanks.
Tim Monachello, Analyst
I also got to say, you got to be quick on the trigger finger to get a question in this queue. These analysts, I don’t think I could win in a duel.
Joe Lambert, President and CEO
Yeah.
Tim Monachello, Analyst
For some of these companies, things are working out. Many of my questions have already been addressed. However, regarding the maintenance headcount slide, the information you've given about the difference between third-party vendors and your NACG headcount is quite interesting. It appears that the gap is starting to widen slightly, yet it seems to fall within your historical range. You mentioned in your prepared remarks that you hope to increase both of those lines and effectively reduce the reliance on third-party vendors. What ratio of NACG headcount to third-party vendors are you aiming for, and how would closing that gap impact your margin profile?
Joe Lambert, President and CEO
I don’t know if I have calculated that one, Tim. I could take a stab at it. But we would probably want a good 90% of that workforce to be our own internally. We have always got some around generally you want for any kind of warranty work, as well as some technical support, if you need it. And I’d have to sit down with Jason to calculate that number. But external guys are probably roughly twice as much as internal guys in the expense side. You are carrying obviously, a lot of another company’s cost and overheads in not just the direct labor, and they are not doing it for free also. So we have been good. We have dropped them out when we have needed to. Obviously, you will see during the pandemic. Last year, it dropped because they couldn’t give us guys. That’s what that trough is, and we had to build up more vendor support just to get to where we needed to. But as we increase our own and approach that high utilization, then we will start pulling vendors out.
Tim Monachello, Analyst
Okay. Got it. And, obviously, it doesn’t seem like it’s much of an issue anymore having trying to staff. So maybe you can just put in context, like what does the market look like now for heavy equipment mechanics compared to what it looked like in the middle of 2022?
Joe Lambert, President and CEO
We could have done more. I believe we weren't close to the maximum mechanical availability of our fleet, even with the current utilization. There was enough demand to keep all our equipment running with the operators we could find. This situation isn’t going away, Tim; it will be a lasting challenge related to skilled trades in Canada. We see this as an ongoing issue rather than a seasonal one, and it's not just a matter of years or cycles. We are redefining our business approach, including how we manage our premises, engage with vendors, and bring in more equipment to perform additional work in regional shops where we can find more personnel. We continue to expand our facilities, and we expect this to be a long-term conversation. We will still be discussing this ten years from now because it’s not going to become easier, and we want to be at the forefront of this challenge. As you've noticed, it significantly impacts utilization, which is crucial for our business.
Tim Monachello, Analyst
Okay. That’s great. One other thing that I wanted to touch on, I think, Yuri asked about it was just around that utilization range that you are alluding to in the 75% to 85% range and thinking that you might be able to get to the bottom end of that range in Q2, and historically, your Q2 has sort of maxed out around the 60% range in terms of 60% to 65% range in terms of utilization. How do you get that extra 10 points of utilization in Q2 in the oil sands?
Joe Lambert, President and CEO
The key factor driving our growth is the availability of our large truck fleet, which we know is in demand. This is something we can manage. We are also anticipating an uptick in demand for our smaller fleet as civil construction activities ramp up over the summer. Initially, we need to see this demand, and then we can ensure that the equipment is ready and operators are assigned. We consistently have demand for the larger equipment throughout the year, and we are eager to determine if there will be further increases in demand for the smaller equipment. We are also considering reallocating some of that smaller equipment away from oil sands to enhance utilization. It is crucial for us to execute our maintenance strategy effectively to ensure we have mechanical availability beyond our immediate needs. That's why I mentioned the importance of committing to certain figures and making projections; we need more data points to draw accurate conclusions. I am pleased with our progress and the fact that we have surpassed our expectations thus far. However, many variables are at play, and the second and third quarters will be critical indicators of our ability to reach our targets, even at the lower end. I'm feeling increasingly confident about making year-round projections.
Tim Monachello, Analyst
Where would utilization be in Q1 so far?
Joe Lambert, President and CEO
We are in the 70s.
Jason Veenstra, CFO
Actually, we are in the high 70s.
Tim Monachello, Analyst
I mean that you are referring to Q1, which is a January figure. So it is continuing from where it was in December. Okay. That’s really helpful. And then what would be the utilization that you are assuming for the year in your guidance range?
Joe Lambert, President and CEO
I don’t have that number off hand. I’d have to get back to you, Tim.
Tim Monachello, Analyst
Okay, no worries there. The other question I had was about the free cash flow guidance. I noticed there’s a $25 million deferral related to distributions from the Fargo-Moorhead project, which wasn't added back, and it appears flat from 2023 to 2022. I'm curious, if the cash being held in the Fargo project or any of your joint ventures that aren't being distributed were included, what would the free cash flow profile look like for the entire business year-over-year?
Jason Veenstra, CFO
I can address that, Tim. It's a somewhat complex question. I'm not sure if you're looking for a normalization of 2022 figures. However, the impact we've observed between earnings and cash distributed is between $20 million and $25 million. Whether you decide to add that amount to 2022 or 2023 is up to the interpretation. For 2023, as you mentioned, we have maintained the same range. We have slightly increased the core business's cash generation and have kept the expectations from our joint ventures consistent with our projections from last October. We remain aware of the variability in JV distributions and anticipate distributions from the JVs to be in the range of $40 million to $45 million, as we expected last quarter. Should the JVs perform better than expected, that would present an upside. However, considering the impact experienced in 2022, we wanted to avoid making overly optimistic promises for 2023. Thus, our cash flow generation range of $85 million to $105 million remains robust and marks a significant advancement in our capital allocation flexibility, despite the inherent volatility in free cash flow.
Tim Monachello, Analyst
No, absolutely. I am just trying to better understand the underlying operational free cash generation of the business. I realize why you are focusing on the distributions out of the joint ventures, but to grasp the value proposition here, we also need to consider the cash flow and cash-generating aspect of those joint ventures. That's what I was aiming to discuss. Anyway, I will turn it back and thanks very much for the details.
Joe Lambert, President and CEO
Yeah. Thank you.
Operator, Operator
Your next question comes from Bryan Fast from Raymond James. Please go ahead.
Bryan Fast, Analyst
Yeah. Good morning, guys.
Joe Lambert, President and CEO
Good morning, Bryan.
Bryan Fast, Analyst
Just on the inflation adjustments midway through the year. Is it safe to say that that was fully reflected in Q4 or is there any lag there?
Jason Veenstra, CFO
It was fully reflected in Q3 already, Bryan. So, yeah, there’s no lag and no lag or retro in Q4 either, so.
Bryan Fast, Analyst
Okay. Thanks. And then I appreciate the color on the telematics, but are you able to quantify maybe the returns or payback relative to your investments just on that installation?
Joe Lambert, President and CEO
I’d say the savings already exceed operating costs even in its first year, and we expect that trend to continue. We anticipate the savings to double this year without adding any personnel or costs. The operating cost per machine hour is lower than we had anticipated, and the savings are greater. Thus, it pays for itself very quickly.
Bryan Fast, Analyst
Okay. That’s it for me. Appreciate the color.
Jason Veenstra, CFO
Thanks, Bryan.
Operator, Operator
Your next question comes from Maxim Sytchev from National Bank Financial. Please go ahead.
Maxim Sytchev, Analyst
Hi. Good morning, gentlemen.
Joe Lambert, President and CEO
Good morning, Max.
Maxim Sytchev, Analyst
Just a couple of quick ones for me, if I may. Joe, I guess, do you mind providing a bit of color on your initial perception around Fargo, how that’s ramping up, sort of any changes? I think you made some comments a number of months ago, like in terms of how inflation could be potentially impacting the economics. Just wondering if you have some refreshed math as, obviously, some of the things have normalized. So, yeah, maybe any color on that, please?
Joe Lambert, President and CEO
It’s ramping up well. We have been meeting our productivity targets. We peaked for the year during the summer. On the earthwork side, which is currently in progress, things are going very well. Equipment, personnel, and everything else are functioning smoothly. We will soon begin bridge work with our partners, who will start this summer. We conducted our initial forecast reviews and assessed inflation and its impacts on our risk evaluations. The increases we experienced fell within our risk parameters, and we are adequately covered. Our project margins and schedule remain intact. We expect to conduct a comprehensive forecast towards the end of this year or the beginning of next year, which will be our first real evaluation of the project’s status compared to its execution. We are hopeful for positive results from our earthwork efforts over the summer and aim to exceed our targets during this significant ramp-up year. In summary, stay tuned, and I want to emphasize that we have considered inflationary pressures, and we have not observed a decline in our projected project margins.
Maxim Sytchev, Analyst
Okay. Super helpful. Thank you so much. And then last question, pertaining more to capital allocation and some of the earlier comments, Joe, that you made around sort of EV battery metals and how it’s such a robust market. Do you mind maybe painting a bit of a picture in terms of how that potentially could fit sort of the preference for M&A or just maybe any color from that perspective? Thanks.
Joe Lambert, President and CEO
To provide some insight regarding the bidding landscape, when examining the bid map, the blue dots represent significant areas rich in iron ore, copper, nickel, and gold. These areas are recognized as having a high likelihood of success in securing opportunities. Our bidding activities outside of oil sands in other commodities have shown robust performance. We are actively exploring additional markets globally for M&A opportunities. This aligns with our overall capital allocation strategy. We have adjusted our dividend and are evaluating our debt in light of rising interest rates, but we also see potential in M&A avenues. Our past successes with vertically integrated acquisitions, like ML Northern and DGI, have generated substantial value, and we anticipate this trend to continue. If attractive opportunities arise that promise strong returns, we will pursue them. We consistently find smaller opportunities and believe there are prospects for larger ones, although historically, those have been less beneficial. However, they must meet our return criteria, or we will focus on reducing debt, which is a valid strategy in itself.
Maxim Sytchev, Analyst
Yeah. No. Absolutely. And maybe—one maybe providing a bit of sort of read-through on how the expectations of sellers changed or maybe not over the last kind of nine months, has it been static or have you seen sort of a reset of expectations on that side as well?
Joe Lambert, President and CEO
I've never really seen anything consistent in that area. I believe it's about being opportunistic; you encounter sellers at the right moment when you're evaluating something. We have been fortunate to find strong matches with sellers on our DGI and ML Northern, and their cultures fit well with ours. This has led to a very smooth integration into our business. However, I wouldn't classify these situations as typical. It's been an advantageous opportunity for us. Each seller is unique, and I don't think there's a consistent trend. When we identify opportunities where business integrations and cultures align, leading to synergy and mutual growth, those are typically the ones that yield the best financial results. We seek out prospects that integrate well into our business model, deliver good returns, help us reduce costs, and allow us to expand our services or similar businesses. We believe this strategy will enhance our geographic diversification, as well as diversify our commodities and customer base, resulting in strong accretion. These are the types of opportunities we are pursuing.
Maxim Sytchev, Analyst
Yeah. Makes sense and I appreciate all the comments. Thanks so much.
Joe Lambert, President and CEO
No worry. Thanks, Max.
Jason Veenstra, CFO
Thanks, Max.
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.
Joe Lambert, President and CEO
Thanks, Julien, and thanks, everyone. I really appreciate you joining us today and look forward to talking to you again next quarter.
Operator, Operator
Ladies and gentlemen, this concludes your conference for today. We thank you for joining and ask that you please disconnect your lines. Thank you.