North American Construction Group CEO Joe Lambert says the Canadian mining and construction contractor is seeing a return to pre-COVID levels of business opportunity and continuity as it heads into winter with strong earnings momentum and a record C$1.9 billion contract backlog.
“As far as [how the company is positioned] this winter … I would absolutely say we are back to [a] pre-pandemic normal; normal being that pre-pandemic period that was a time of significant opportunity for us,” Lambert said on a conference call after the TSX-listed company (NOA) reported a 77% year-on-year increase in September quarter revenue and doubling of net income, yoy, for the period. He said NACG had a full order book for the period ahead.
“The pipeline is probably at or slightly higher than it was nine months ago … I think it’s extremely strong not just from a size standpoint but also from a diversification standpoint.
“This is typically a slow time between now and early spring [for contract awards], but we do still expect significant bidding activity during that timeframe.”
NACG’s “total combined revenue” in the first nine months of 2021 totalled C$577 million versus $413m last year. The total combined revenue (TCR) number includes joint venture contributions. Q3 TCR this year came in at $204m – exceeding the record revenue number for the company set in the first quarter of 2020 – compared with $119m in Q3 2020.
EBITDA was up from $37m a year ago to $48m in the latest quarter, while for the first nine months of 2021 the earnings number was $151m ($129m).
Lambert said Q3 this year was “transitional” for the company as it set about mobilising vital equipment and crews at new sites, ahead of the winter period, and fleet utilisation trended up to pre-pandemic, higher levels.
“These [remobilised] fleets are now set up for, at a minimum, a couple of years of 24-7 work,” Lambert said.
NACG lifted its FY21 guidance to include adjusted EBITDA of $205-215m and free cash flow in the $65-85m range. Lambert said improved contract and fleet-use visibility allowed the company to frame FY2022 EBITDA of $215-245m, FCF of $95-115m and earnings per share of $2.15-2.55 ($1.95-2.15 in FY21), with the higher FCF offering “capital allocation optionality”. He said the $105m midpoint in estimates represented about 25% of the company current net debt level and c20% of its current market capitalisation.
“I am, of course, keenly aware of the exciting momentum we feel internally here at NACG but it really shows up quantitatively when we look at the estimates for next year”
NACG’s share price is up about 64% year-to-date and has doubled in the past 12 months, capitalising the company at more than $630m.
“Without taking our eye off of this critical Q4, we look to 2022 and have provided our range of outcomes based on the projects we currently have in place,” Lambert said. “I am, of course, keenly aware of the exciting momentum we feel internally here at NACG but it really shows up quantitatively when we look at the estimates for next year.
“Our ability to project earnings in the range $215-245m is a result of a decade’s worth of steady momentum.”
Asked about increasing its dividend payout in the context of capital allocation options, Lambert said that would be weighed in upcoming board discussions.
He said with primary and support equipment, and operational personnel, in place on major project sites, hitting the higher end of guided earnings targets would depend on how effectively the company could deploy the 900 heavy equipment assets it had at its disposal. That also came back to continuity in the workforce – hampered to varying degrees over the past 18 months by COVID isolation requirements and interprovincial travel restrictions – and the contractor’s capacity to counteract, as best it could, ongoing shortages of skilled technicians and operators.
“Fleet utilisation is such a critical KPI for us and one we’ll track closely through 2022,” Lambert said.
“We fully expect pre-pandemic levels going forward, and being able to more closely follow our longer-term trend line.
“We continue to expect the COVID protocols to loosen. There are now more vaccinated people [and] less quarantining than we were seeing in Q2 and Q3.
“In terms of [the labour pool] I guess we’ve always seen issues around heavy equipment technicians. It’s not something we haven’t seen during oil sands boom times; this is what our training and recruitment are set up for. But [it’s] not easy.”
Continuing the transition theme, Lambert said ramp-up of work on the US$3 billion Fargo-Moorhead project in northern USA post final closure of financing for the project, gold work in Canada and other non-oil sands activity were moving NACG closer to its goal of deriving 50% of earnings outside the traditional mainstay oil field.
The company’s Nuna, Mikisew North American and Dene North Site Services indigenous partnerships in Canada continued to produce higher revenues and earnings: “The impact of our JVs has grown from zero in Q3 2018 only three short years ago to what we see today, in Q3 2021, with approximately 35% of combined gross profit coming from our share of JV revenues.”
Meanwhile, Lambert said external equipment remanufacturing activity – bolstered by NACG’s recent $23.5m acquisition of Australia’s DGI Trading – was growing strongly in a period of supply-chain disruption for mining and construction original equipment manufacturers.
“When we first built the new office and workshop [in Acheson, Alberta] I talked about the ability to generate about $30m of outside maintenance income out of there,” Lambert said.
“We’ve had COVID interrupt that, but I think we’re going to be very close to that level this year and I think we’re going to have an opportunity to exceed that next year.”
