North American Construction Group Ltd. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Financial Challenges: Higher maintenance costs in Australia due to ramp-up lag in recruiting heavy equipment technicians, unplanned outages in the oil sands leading to higher operational and overhead costs, and a margin adjustment at Fargo due to a settlement and updated project plan. Excluding these, EBITDA would have been over $100 million.
• Revenue Growth: Australia showed consistent growth, Canada's oil sands had revenue growth despite the shutdown, and Fargo had consistent revenue with a project plan adjustment.
• Safety: Trailing 12-month total recordable rate was 0.42, better than the industry-leading target of 0.5.
• Major Achievements: Record trailing 12-month revenue, Fargo project on track, disciplined administrative costs at 3.6%, a big contract win in Australia, renewal of the Texas thermal coal mine management contract, $225 million senior unsecured notes offering, and new senior team hires.
• Growth Opportunities: Australia growth, civil infrastructure opportunities in North America driven by aging infrastructure, energy transition, etc. Infrastructure goal to be 25% of business by 2028, and a strong bid pipeline including top 20 infrastructure projects around $2 billion.

Segment Performance

• Australia: Generated $168 million in Q2, a 14% increase from last Q2. Revenue more than doubled since Q2 2022 (from $81 million pro forma). MacKellar Group set a company record for monthly revenue in June.
• Canada: Oil sands region had revenue growth but was impacted by inconsistent demand in April. Equipment utilization in the region was 76%, but rainy weather in April affected performance. Fargo had consistent revenue but a $8 million reduction in recognized revenue due to an updated project plan. Combined revenue for the quarter was $371 million, a 12% increase from last Q2.

Guidance

• Second Half: Confident in delivering results consistent with original expectations except for the oil sands business, with unchanged combined revenue and free cash flow expectations setting up for 2026 growth.
• Long-Term: Anticipates organic revenue growth of 5%-10% annually, driven by Australia growth, infrastructure projects, and mining projects.
• Infrastructure: Growing civil infrastructure opportunities in North America, expect to secure 2 project teams for top 10 projects by year-end, with infrastructure aiming to be 25% of business by 2028.
• Bid Pipeline: Top 20 infrastructure projects around $2 billion, including a $2 billion win at the Queensland Coal mine, and a mine management contract extension at the Texas coal mine negotiated directly.

Risks

• Subcontractor labor costs in Australia due to ramp-up lag in recruiting critical heavy equipment technicians.
• Unplanned outages in the oil sands leading to higher operational and overhead costs.
• Margin adjustment at Fargo due to a settlement and updated project plan.
• Component issues in the Canadian heavy equipment fleet.

Question and Answer Q: Future free cash flow generation A: Jason responds about working capital, EBITDA impact on free cash flow.

Q: Australian labor issues A: Joseph talks about skilled trade challenges and easier management at lower growth rates.

Q: Canada revenue growth despite shutdown A: Joseph explains direct revenue and cost impacts of the shutdown.

Q: Q3 vs Q4 guidance A: Jason says flat quarter-over-quarter with Fargo stronger in Q3 and Australia stronger in Q4.

Q: OEM partnerships A: Joseph talks about a Caterpillar dealer partnership for component remanufacturing.

Q: Contract labor in Australia A: Joseph explains skilled trade difficulties and reaction.

Q: Contract backlog in Australia A: Joseph says it's a big client with a 5-year term, percentage will drop as other projects are won.

Q: Infrastructure progress A: Joseph talks about earthwork-oriented infrastructure projects and project teams.

Q: Free cash flow A: Joseph says confident in free cash flow projections returning to normal.

Q: Australia gross margin A: Jason says low 20% with subcontractor issue rectifying, expect improvement in Q4.

Q: Infrastructure bid pipeline timing A: Joseph says some projects as early as summer 2026, most in 2027.

Q: Fargo JV profitability A: Joseph says expected to maintain margin, a onetime impact.

Q: Australia labor issues in 2026 A: Joseph says not expected to reoccur.

Q: Oil Sands margin H2 A: Joseph says impact from lower revenue, component issues, but solutions in place.

Q: Oil Sands committed spend A: Joseph says $150-200 million gone through, confident in 1/3 assumption.

Q: Oil Sands contract volatility A: Joseph says need good client relationships.

Q: Australia gross margin change A: Joseph says mix of work with lower margin labor components.

Q: Moving equipment from Canada to Australia A: Joseph says moving some pieces, big opportunities in 2027.

Q: Nuna revenue outlook A: Joseph says modest this year, great opportunities from 2026