North American Construction Group Q4 2023 Earnings Report

Thanks, Joe, and good morning, everyone. To start, I will provide brief context regarding the McKellar transaction, which closed effective October 1, 2023. As disclosed in our financial statements, the overall purchase price for The McKellar Group was $383,000,000 which included $394,000,000 of PP and E, which in our case is the heavy equipment fleet. This overall purchase price included $14,000,000 of cash, which McKellar had in their bank accounts on close. And when factoring $35,000,000 of equipment we purchased after October 1, the all in cost was $405,000,000 and consistent with expectation.

EBITDA generation to date is slightly higher than initial expectation and confirms the less than 2.75 multiple we disclosed last July. The transaction and growth spending were fully funded with debt, with approximately 70% of this debt being senior secured and 30% being vendor provided. At the time of announcement in July, we had targeted net debt leverage of 1.8 times by the end of 2023 and are very happy to have slightly beat that target. We've had an excellent 1st few months with McKellar and are looking forward to further integration and reporting progress in the months to come. Our teams are in daily dialogue between Canada and their Australian counterparts with weekly and monthly processes starting to become routine.

Moving to the financials and some brief commentary. On Slide 9, the headline EBITDA number that exceeded $100,000,000 for the first time in our company's history was driven by a full quarter of McKellar results. It exceeds our previous record by about 20% and exceeded Q3 by 70%. All business units contributed to this result with the exception of Nuna, which we will discuss later, and is a metric among many that our diversification efforts make us stronger and more consistent. Moving to Slide 10 and our combined revenue and gross profit.

As we will have now for 4 quarters, McKellar will provide step changes in quarter over quarter variances. On a total combined basis, we were up $83,000,000 quarter over quarter. McKellar and DGI, which we combined as Australia in our results, were up $128,000,000 which could have been higher if the rainfall in November December had been less severe. This rainfall impact can be seen in Australia's equipment utilization, which almost hit 85% in October, but fell to the mid-70s in November December. This positive variance was offset primarily by lower equipment utilization in the oil sands region.

Our share of revenue generated by joint ventures and affiliates was a net $10,000,000 lower than Q4 2022. The Fargo Moorhead project had an excellent operational quarter and achieved the progress metrics and milestones required of the project schedule. In addition, we had positive contributions from the continued growth of top line revenue from rebuilt ultra class haul trucks and excavators owned by our joint venture with the Mikasue. More than offsetting these positives, the completion of the construction project at the gold mine in Northern Ontario led to lower quarter over quarter revenues within the Nuna Group of Companies. Combined gross profit margin was 18.4 percent despite the challenges experienced by Nuna and again reflects the strength of a diversified business.

As both Joe and I have alluded to, losses at 3 specific mining projects within the Nuna Group of Companies had a direct impact on margins. Joe will expand in his comments for Nuna moving forward, but from a financial perspective, excluding these project losses would have yielded an overall margin of approximately 20% given the impact of $7,500,000 Gross profit margins benefited both from the operations in Australia, higher than 20% in the quarter, which is normal course, and from ML Northern, whose fleet lowers our internal cost as well as generates strong margins from services provided to external customers. Moving to Slide 11, record adjusted EBITDA was consistent and reflective of the revenue commentary. The 25% margin reflects an effective operating quarter with a positive trend from the Q3 margin of 22%, indicative of where we see our business operating at. Included in EBITDA is direct and general administrative expenses, which when excluding one time acquisition costs were $12,800,000 in the quarter, equivalent to 3.9% of revenue and remained under the 4% threshold we've set for ourselves.

McKellar runs a similar G and A profile and is not expected to change our G and A burden as a percentage of revenue. Going from EBITDA to EBIT, we expensed depreciation equivalent to 11.8 percent 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 12.8 percent of revenue and reflected the addition of the Australian fleet and an overall efficient productive use of equipment in the quarter. Adjusted earnings per share for the quarter of $0.87 was $0.23 down from Q4 2022 as the impacts of higher interest are factored in with EPS, with the project losses at Nuna being particularly impactful to EPS at approximately $0.20 The average interest rate for Q4 was over 8.5% as we are up from the Q3 rate of 7%. This effective interest rate, the highest we've paid in a long time, is a compelling indicator for us to look to pay down debt in 2024.

Moving to Slide 12, I'll briefly summarize our cash flow. Net cash provided by operations of $161,000,000 was generated by the business, reflecting EBITDA performance and working capital collection, net of cash interest paid. Free cash flow was $111,000,000 as sustaining capital of $41,000,000 was invested in the fleets in both Canada and Australia. Moving to Slide 13, our PP and E of $1,100,000,000 is up $450,000,000 from September 30 on the $430,000,000 worth of McKellar assets we purchased. Net debt levels ended the year at $721,000,000 an increase of $326,000,000 in the quarter as the $405,000,000 of net debt incurred related to McKellar was offset by free cash flow generation.

Net debt leverage and senior secured debt leverage ended at 1.7 and 1.4 times respectively and are considered reasonable levels 3 months after a transformative debt funded acquisition. And with that, I'll pass the call back to Joe.

Good morning, Yuri.

No, I think that's an accurate assessment, Yuri. These projects are predominantly complete. There's a little bit of tail end work on 1 or 2 of them. I don't expect we put new leadership in place. The issues we saw were really around risk management and predominantly dealing with junior minor clients, change management and contract administration.

These are things that are in our wheelhouse. We were blessed to have some strong bench strength here where we were able to put guys in place that have confidence in running those systems and processes going forward. So I'm very and this is the slow time of the year for Nuna. Nuna really picks up in Q2 and Q3 with their summer work predominantly up north. And so I think the timing and the moves we've made will put it in the past very quickly.

And I fully expect that our summer and our kickoff of our summer works will go as planned.

Again, I think you're accurate there, Jorg, that we've got a little bit of an unusual year this year. I think we will be more consistent between quarters. But this particular year, like I just said, Nuna's big quarters are Q2 and Q3, same in Australia. So Australian cyclone season is in the summer, which is our winter. So they're usually impacted operationally more in Q4 and Q1.

And then with our biggest construction year at Fargo, that summer is also the biggest part of that Fargo job. So even though we had a good sized construction year in 2023, it's even bigger in Fargo this year and there's more infrastructure construction like bridges and roadwork that occurred during Q2 and Q3, whereas our previous earthworks was more year round. Then we've just had a bit of a slower winter this year in oil sands even and we're shuffling around some equipment in Q1. So it is going to be more consistent between quarters, but the lower Q1 this year is, I believe a one off.

I think so going forward, but we're going to have projects that come and go too, Yuri, depending on when they end. I think we're going to be within 1 or 2 points between quarters going forward. But obviously, if there's a new project start or stop in any one quarter, it can distort a year. But generally, I would say it's going to be very consistent.

Good morning, Max.

Yes. I think we provided in the regional tender, we provided pricing for unit rate work and we also provided pricing for maintained rental equipment and operated and maintained rental equipment. Historically, the unit rate work was awarded. And this year, about half of our big trucks are being rented or maintained rentals with operators versus the unit rate work. And it's just the client believes that they have some excess assets in some categories.

So they'd rather rent piecemeal versus unit rate and it's believed that by doing this, I believe they believe they're lowering their cost and we have to respect that and hopefully it is and we're very happy to do it. It's very similar to what's being done in Australia. Certainly lowers our operating risk. You do take a bit of a hit on the top line, but it's not a huge difference. And this is just a contracting philosophy whereby the clients are trying to be more efficient with their own assets to lower their costs and we're happy to participate in that.

I think the biggest difference is in the risk. When you're in unit rate work, you wear a lot more risk of productivity and that could be in weather related stuff like that. So I guess the downside risk, I would say, is much lower. But I would agree that the visibility is less so more because of the contract structure with the 3 years with only the 1 year commitments, more so than I think this change of philosophy a bit on the unit rate work.

You're referring to the 10x market item there, Max? Yes. Yes. I think it's from we get that from industry numbers in Australian Mining Industry and how much work is contracted out. And we the coal mine data, it's just a huge marketplace.

There's a much higher propensity to contract mine there. The 2 main operations we're on, we're the only operators there. The client is not operating next to us. It's just a different marketplace. It's a huge resource industry, very similar to Canada.

But the big separator is that the producers there allocate their capital more towards producing an extra ounce or a pound or finding the next deposit than they do on owning Yellow Iron like we do. And so it's just a much bigger, stronger marketplace. And as I discussed earlier in my slides before my Mitch McConnell moment there, I was talking about the coal marketplace where there's 50 minutees of which we're only on 6 of them. It's just a great opportunity, great marketplace Airmax.

Yes. So we've obviously, the go live date is obviously the most important date. So we've circled September 1 as our target. Project team is fully engaged at the moment and they are at peak capacity currently. So it's pretty exciting actually for our organization to be going through an ERP like this, rolling out what we do here there is generated a lot of excitement.

So, if all goes to plan, it should be pretty seamless. And then, yes, we will start to see, hopefully, some margin improvements post go live and that would be seen more in 2025.

Yes. We would capitalize, but it's not big dollars. We're talking in the $1,000,000 to $2,000,000 range for this. We're doing really a cut and paste here, a copy and paste. It's not we are not using a lot of external resources for this.

So it's not what you see in a typical ERP implementation.

understood. Yes, I would

Okay. Okay, that's great. Thanks so much.

So quickly just wanted to switch over to the acquisition point that was talked about earlier. Overall, do you expect in Australia that there's any more sort of material acquisitions that you guys could make that would be able to be done at the multiple point that Mackellar was done or is that kind of standing as a pretty unique deal for you guys?

And then looking forward, obviously,

of stuff to do or just a process ahead of you on your plate for the integration. Like when does acquisitions actually and bolt ons become a priority or something that's very realistic? Is that maybe far deeper into 2024? Or is that actually an opportunity in the coming months here?

Okay, perfect. Yes, I'll jump back in the queue. Thanks.