North American Construction Group Ltd. (“NACG” or “the Company”)
(TSX:NOA/NYSE:NOA) today announced results for the second quarter
ended June 30, 2018.
Martin Ferron, Chairman and Chief Executive
Officer of the Company stated, “This was a watershed period when we
have demonstrated that, by taking proactive steps to mitigate the
impact of seasonality on our business, we can achieve profitability
in any quarter”.
Additionally, Mr. Ferron commented, “Looking
ahead we now aim to achieve at least 30% growth in adjusted EBITDA
and a very strong gain in earnings (EPS), for the full year. Beyond
that our robust outlook has been further boosted by the previously
announced awards of approximately $280 million of earthworks term
contracts, by one customer, to be mainly executed in the 2019-2021
time frame”.
The Company has prepared its consolidated
financial statements in conformity with accounting principles
generally accepted in the United States (US GAAP). Unless otherwise
specified, all dollar amounts discussed are in Canadian dollars.
Please see the Company’s Management’s Discussion and Analysis
(“MD&A”) for the quarter ended June 30, 2018 for further detail
on the matters discussed in this release.
Highlights of the Second Quarter Ended
June 30, 2018
- Revenue for the quarter was $79.5 million, compared to $47.6
million for the prior year, an increase of 67.0%.
- Adjusted EBITDA for the quarter was $15.2 million compared to
$2.0 million for the prior year. Adjusted EBITDA margin was 19.1%
compared to 4.1% for the same period last year.
- Net income for the quarter was $33 thousand, compared to a net
loss of $6.2 million for the prior year.
- In June 2018, the Company announced two new contracts bringing
its anticipated backlog to $328.5 million of which $54.9 million is
expected to be performed over the balance of 2018.
- On June 16, 2018, the Company received the Alberta Mine Safety
Association Award of Safety Excellence for companies with over one
million hours for mining work in Alberta.
- In the quarter, 647,800 shares were purchased and subsequently
cancelled, leaving 288,986 shares remaining for purchase under the
current NCIB.
Declaration of Quarterly
Dividend
On July 31, 2018, 2018 the NACG Board of
Directors declared a regular quarterly dividend (the “Dividend”) of
two Canadian cents ($0.02) per common share, payable to common
shareholders of record at the close of business on August 31,
2018. The Dividend will be paid on October 5, 2018 and is an
eligible dividend for Canadian income tax purposes.
Consolidated Financial
Highlights
|
Three months ended June 30, |
(dollars in thousands, except per share amounts) |
2018 |
|
2017 |
|
Change |
Revenue |
$ |
79,471 |
|
|
$ |
47,624 |
|
|
$ |
31,847 |
|
Project
costs |
31,793 |
|
|
21,990 |
|
|
9,803 |
|
Equipment
costs |
26,990 |
|
|
18,720 |
|
|
8,270 |
|
Depreciation |
11,037 |
|
|
8,073 |
|
|
2,964 |
|
Gross profit (loss)(i) |
$ |
9,651 |
|
|
$ |
(1,159 |
) |
|
$ |
10,810 |
|
Gross
profit (loss) margin(i) |
12.1 |
% |
|
(2.4 |
)% |
|
14.6 |
% |
Select financial information: |
|
|
|
|
|
General and administrative expenses (excluding stock-based
compensation) |
5,450 |
|
|
4,944 |
|
|
506 |
|
Stock-based compensation expense |
2,757 |
|
|
391 |
|
|
2,366 |
|
Operating income (loss) |
1,696 |
|
|
(6,590 |
) |
|
8,286 |
|
Interest expense |
1,622 |
|
|
1,758 |
|
|
(136 |
) |
Net
income (loss) |
33 |
|
|
(6,200 |
) |
|
6,233 |
|
Net income
(loss) margin(i) |
0.0 |
% |
|
(13.0 |
)% |
|
13.1 |
% |
EBIT(i) |
1,663 |
|
|
(6,605 |
) |
|
8,268 |
|
EBIT
margin(i) |
2.1 |
% |
|
(13.9 |
)% |
|
16.0 |
% |
EBITDA(i) |
12,788 |
|
|
1,674 |
|
|
11,114 |
|
Adjusted EBITDA(i) |
$ |
15,205 |
|
|
$ |
1,955 |
|
|
$ |
13,250 |
|
Adjusted
EBITDA margin(i) |
19.1 |
% |
|
4.1 |
% |
|
15.0 |
% |
|
|
|
|
|
|
Per
share information |
|
|
|
|
|
Net income (loss) - Basic |
$ |
0.00 |
|
|
$ |
(0.23 |
) |
|
$ |
0.23 |
|
Net income (loss) - Diluted |
$ |
0.00 |
|
|
$ |
(0.23 |
) |
|
$ |
0.23 |
|
|
|
|
|
|
|
Cash
dividends per share |
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
0.00 |
|
(1) See “Non-GAAP Financial Measures”. A reconciliation of net
income to EBIT, EBITDA, and Adjusted EBITDA in the section titled
“Non-GAAP Financial Measures”.
Results for the Second Quarter Ended
June 30, 2018
For the three months ended June 30, 2018,
revenue was $79.5 million, up from $47.6 million in the same period
last year. Current year revenue was driven by an increase in both
mine support services revenue and overburden removal and earthworks
activity at each of the Mildred Lake and Millennium mines. Higher
levels of heavy civil construction activity at the Kearl mine more
than offset the drop in mine service activity at the same mine,
compared to last year. The Company continues to generate civil
construction revenue from a three-year mine support contract at the
Highland Valley copper mine in British Columbia, which began in the
third quarter of 2017 and from mine support services realized from
the Dene North Site Services partnership at multiple oil sands
operations. While still not at significant levels, the Company
continues to see increased activity generated from its new external
maintenance service offering as interest continues to grow in the
Company’s ability to be a cost effective and reliable alternative
to established service providers.
Revenue in the comparable previous period was
negatively affected by the cancellation of a significant earthworks
contract as a result of a plant fire. The Company was able to
secure replacement work for the majority of the fleet committed to
the cancelled project, but lost the early start-up advantage as the
Company had to relocate the equipment to other sites. The previous
period also included mine support service revenue from the
mobilization to the Fording River coal mine in British Columbia
late in the quarter. This project was completed in the first
quarter of 2018.
For the three months ended June 30, 2018, gross
profit was $9.7 million, or a 12.1% gross profit margin, up from a
$1.2 million gross loss in the same period last year. The strong
improvement in current quarter gross profit was a result of more
consistent activity levels through the quarter, compared to the
previous period which was impacted by the aforementioned
cancellation of a significant earthworks contract and subsequent
equipment repositioning and delays in start-up of spring
activities. Equipment costs as a percent of revenue in the current
quarter improved over the prior period as the stronger and more
consistent second quarter revenue supported the scheduled drawdown
of maintenance backlog generated from the Company’s very strong
first quarter winter works program. In comparison, the previous
period’s scheduled drawdown of maintenance backlog was at a
disproportionate rate to its volumes in that period.
For the three months ended June 30, 2018,
depreciation was $11.0 million, or 13.9% of revenue, up from $8.1
million, or 17.0% of revenue in the same period last year. The
lower depreciation as a percent of revenue reflects the benefits
realized from the purchase of used equipment at below market
pricing combined with the benefits from the Company’s maintenance
initiatives designed to extend the useful life of its equipment
fleet beyond historical levels.
For the three months ended June 30, 2018, the
Company recorded operating income of $1.7 million, an increase from
a $6.6 million operating loss for the same period last year.
General and administrative expense, excluding stock-based
compensation cost, was $5.5 million for the quarter, slightly
higher than the $4.9 million for the same period last year, driven
primarily by higher short-term incentive costs and the one-time
cost of consolidating the Company’s office space in Edmonton.
Stock-based compensation expense increased $2.4
million compared to the prior year primarily as a result of the
effect of a stronger share price on the carrying value of the
Company’s liability classified award plans.
For the three months ended June 30, 2018, the
Company recorded net income of $33 thousand (basic and diluted
income per share of $0.00), compared to the $6.2 million net loss
(basic and diluted loss per share of $0.23) recorded for the same
period last year.
Interest expense was $1.6 million for the
quarter, down slightly from $1.8 million for the same period last
year, primarily due to lower pricing secured under the Company’s
current Credit Facility, executed during the third quarter or 2017.
The Company recorded $8 thousand of deferred income tax expense in
the current period compared to the $2.2 million of deferred income
tax benefit recorded in the period year driven by the improved
results in the current period.
Outlook
The Company just completed the second quarter of
the second year of a three year organic growth plan that is
targeting a minimum 15% compound growth in revenue and EBITDA over
that period. The Company’s strategy to achieve the growth is
to:
- Build production related recurring services volumes in the
Company’s core oil sands market, together with the addition of
value creating services.
- Expand the Company’s market coverage to include other resource
mines (e.g. coal, copper, gold, diamonds etc.) and infrastructure
related projects that involve major earthworks.
Following on from 37% and 24% growth in revenue
and EBITDA respectively in 2017, the Company is also on track to
exceed its growth objectives for 2018. EBITDA growth is now
expected to be at least 30%, bringing strong earnings (EPS) gains.
The Company also believes that it can meet its growth targets for
2019, with this very positive outlook supported by:
- The successful renewal of all of the Company’s oil sands long
term services agreements such that the Company is not faced with a
contract expiration until late 2020;
- The Company’s customers continuing to use economies of scale in
production to dramatically lower oil sands operating costs per
barrel. On this theme the Company executed two large earthworks
jobs for the winter season with volumes similar to last year's
strong program. Also during the second quarter the Company
negotiated three-year term contracts for both overburden stripping
and reclamation services, with one customer, with a combined value
of around $280 million. Work on the reclamation contract will
commence this winter with the overburden work starting in the
spring of next year, essentially providing a three year extension
of the current 2018 overburden removal contract.
- The new Fort Hills oil sands mine is anticipated to provide a
direct benefit in terms of incremental demand for the Company’s
services and an indirect benefit from the overall tightening of
heavy equipment supply;
- A good line of sight to meaningful heavy construction activity
for the summer season of 2018, after a four year hiatus, due to the
deep cyclical downturn in the oil industry;
- The award of a three year site support contract at the Highland
Valley copper mine. Revenue, which started in the fourth quarter of
2017, was modest at first, but it is expected to increase over the
work duration;
- The availability of several bidding opportunities for further
natural resource related contracts, both in Canada and the USA. The
Company plans to build on its bidding success of 2017, with
additional awards in 2018 and 2019;
- Further success at pre-qualifying to bid for major
infrastructure projects. In late 2017 the Company was chosen (three
from seven), as part of a strong international consortium, to bid
for a significant gravel road construction job in the Northwest
Territories, which, if successful would lead to an anticipated
mobilization in the Fall of 2019; and
- Good progress with leveraging the Company’s core equipment
maintenance competence into work for third parties. The Company
already has jobs for five customers in its Edmonton maintenance
facility and believes that this initiative could have a discernible
impact on the Company’s 2018 results. Beyond that, the Company
plans to be up and running in a new, purpose designed and built,
state of the art maintenance facility, which will be capable of
handling the largest of the Company’s customers’ equipment assets.
Eventually, this external maintenance business could potentially
provide more than $30 million in annual revenue stream for the
Company.
Overall, the Company is very encouraged by this
bright outlook and intend to achieve the growth objectives while
maintaining a strong balance sheet.
Conference Call and Webcast
Management will hold a conference call and
webcast to discuss the Company’s financial results for the quarter
ended June 30, 2018 tomorrow, Wednesday, August 1, 2018 at 9:00am
Eastern time.
The call can be accessed by dialing:
Toll free: 1-866-521-4909International: 1-647-427-2311
A replay will be available through September 1, 2018, by
dialing:
Toll Free: 1-800-585-8367International: 1-416-621-4642
Conference ID: 4572928
The live and archived webcast can be accessed at:
http://event.on24.com/r.htm?e=1793730&s=1&k=591E0E997CA595B1BBAFA839C8ABD13E
Non-GAAP Financial Measures
This release contains non-GAAP financial
measures. A non-GAAP financial measure is generally defined by the
Canadian regulatory authorities as one that purports to measure
historical or future financial performance, financial position or
cash flows, but excludes or includes amounts that would not be
adjusted in the most comparable GAAP measures. In this release,
non-GAAP financial measures are used, such as “gross profit”,
“margin”, “Backlog”, “EBIT”, “EBITDA”, and “Adjusted EBITDA”.
“Gross profit (loss)” is defined as revenue
less: project costs, equipment costs, and depreciation.
The Company believes that gross profit is a
meaningful measure of the business as it portrays results before
general and administrative overheads costs, amortization of
intangible assets and the gain or loss on disposal of property,
plant and equipment and assets held for sale. Management reviews
gross profit to determine the profitability of operating
activities, including equipment ownership charges and to determine
whether resources, plant and equipment are being allocated
effectively.
“Backlog” is a measure of the amount of secured
work the Company has outstanding and, as such, is an indicator of a
base level of future revenue potential. Backlog, while not a GAAP
term is similar in nature and definition to the "transaction price
allocated to the remaining performance obligations", defined under
US GAAP and reported in "Note 7 - Revenue" in the Company’s
financial statements. The Company has set a policy that its
definition of backlog will be limited to contracts or work orders
with values exceeding $1.0 million. In the event that the Company’s
definition of backlog differs from the US GAAP defined "remaining
performance obligations" the Company will provide a reconciliation
between the US GAAP and non-GAAP values. The Company defines
backlog as work that has a high certainty of being performed as
evidenced by the existence of a signed contract or work order
specifying job scope, value and timing. However, it should be noted
that the Company’s long term contracts typically allow its
customers to unilaterally reduce or eliminate the scope of the as
contracted work without cause. These long term contracts represent
higher risk due to uncertainty of total contract value and
estimated costs to complete; therefore, potentially impacting
revenue recognition in future periods. The Company’s measure of
backlog does not define what it expects its future workload to be.
The Company works with its customers using cost-plus,
time-and-materials, unit-price and lump-sum contracts. This mix of
contract types varies year-by-year. The Company’s definition of
backlog results in the exclusion of cost-plus and time-and-material
contracts performed under master service agreements or master use
contracts where scope is not clearly defined. While contracts exist
for a range of services to be provided under these service
agreements, the work scope and value are not clearly defined
The Company will often identify a relevant
financial metric as a percentage of revenue and refer to this as a
margin for that financial metric. “Margin” is defined as the
financial number as a percent of total reported revenue. Examples
where NACG uses this reference and related calculation are in
relation to “gross profit margin”, “net loss margin”, “EBIT
margin”, or “Adjusted EBITDA margin”.
NACG believes that presenting relevant financial
metrics as a percentage of revenue is a meaningful measure of its
business as it provides the performance of the financial metric in
the context of the performance of revenue. Management reviews
margins as part of its financial metrics to assess the relative
performance of its results.
"EBIT" is defined as net income (loss) before
interest expense and income taxes.
"EBITDA" is defined as net income (loss) before
interest expense, income taxes, depreciation and amortization.
"Adjusted EBITDA", which is defined as EBITDA
excluding the effects of unrealized foreign exchange gain or loss,
realized and unrealized gain or loss on derivative financial
instruments, cash and non-cash (liability and equity classified)
stock-based compensation expense, gain or loss on disposal of
property, plant and equipment, gain or loss on disposal of assets
held for sale and certain other non-cash items included in the
calculation of net income (loss). Adjusted EBITDA is used in the
calculation of the financial covenants in the Company’s current
Credit Facility.
The Company believes that Adjusted EBITDA is a
meaningful measure of business performance because it excludes
interest, income taxes, depreciation, amortization, the effect of
certain gains and losses and certain non-cash items that are not
directly related to the operating performance of its business.
Management reviews Adjusted EBITDA to determine whether property,
plant and equipment are being allocated efficiently. In addition,
the Company believes that Adjusted EBITDA is a meaningful measure
as it excludes the financial statement impact of changes in the
carrying value of the liability classified award plans as a result
of movement of the Company’s share price.
As EBIT, EBITDA, and Adjusted EBITDA are
non-GAAP financial measures, the Company’s computations of EBIT,
EBITDA, and Adjusted EBITDA may vary from others in the industry.
EBIT, EBITDA, and Adjusted EBITDA should not be considered as
alternatives to operating income or net income as measures of
operating performance or cash flows and have important limitations
as analytical tools and should not be considered in isolation or as
substitutes for analysis of the Company’s results as reported under
US GAAP. A reconciliation of Net income to EBIT, EBITDA, and
Adjusted EBITDA is as follows:
|
Three months ended |
|
June 30, |
(dollars in thousands) |
2018 |
|
2017 |
Net income
(loss) |
$ |
33 |
|
|
$ |
(6,200 |
) |
Adjustments: |
|
|
|
Interest expense |
1,622 |
|
|
1,758 |
|
Income tax expense (benefit) |
8 |
|
|
(2,163 |
) |
EBIT |
1,663 |
|
|
(6,605 |
) |
Adjustments: |
|
|
|
Depreciation |
11,037 |
|
|
8,073 |
|
Amortization of intangible assets |
88 |
|
|
206 |
|
EBITDA |
12,788 |
|
|
1,674 |
|
Adjustments: |
|
|
|
(Gain) loss on disposal of property, plant and equipment |
(185 |
) |
|
5 |
|
Gain on disposal of assets held for sale |
(155 |
) |
|
(115 |
) |
Equity classified stock-based compensation expense |
1,075 |
|
|
611 |
|
Liability classified stock-based compensation expense |
1,682 |
|
|
(220 |
) |
Adjusted EBITDA |
$ |
15,205 |
|
|
$ |
1,955 |
|
Forward-Looking Information
The information provided in this release
contains forward-looking statements. Forward-looking statements
include statements preceded by, followed by or that include the
words “aim”, “anticipate”, “believe”, “continue”, “could”,
“estimate”, “expect”, “likely”, “may”, “on track”, “potential”,
“should”, “target” or similar expressions. Forward looking
statements include the statements that the Company aims to achieve
at least 30% growth in Adjusted EBITDA and a very strong earnings
per share for the full year, statements related to estimates of the
value of our backlog and when we anticipate it being performed,
statements that the Company believes that it will be able to
achieve a minimum 15% compound growth in revenue and EBITDA over
the period of its three year organic growth plan, believes that it
will be able to achieve growth through building production related
recurring services volumes in its core oil sands market together
with the addition of value creating services and through expanding
its market coverage to include other resource mines and
infrastructure projects that involve major earthworks, believes
that it will be able to exceed its growth objectives for 2018 and
achieve its growth objectives for 2019, expects that its customers
will continue to use economies of scale in production to
dramatically lower oil sands operating costs per barrel, expects
that work on the three-year-term reclamation services contract we
recently negotiated will commence this winter and that work on the
three-year-term overburden contract we recently negotiated will
commence in the spring of 2019, anticipates that the new Fort Hills
oil sands mine will provide a direct benefit in terms of
incremental demand for its services and an indirect benefit from
the overall tightening of heavy equipment supply, believes that
there will be meaningful heavy construction activity for the summer
season of 2018, expects that revenue from the three year site
support contract at the Highland Valley copper mine will increase
over the work duration, expects that it will build on its bidding
success of 2017 on natural resource related contracts, with
additional awards in 2018 and 2019, expects that it will have
further success at pre-qualifying to bid for major infrastructure
projects, believes that its third party maintenance work could have
a discernible impact on its 2018 results, expects that it will be
up and running in a new, purpose designed and built, state of the
art maintenance facility, which will be capable of handling the
largest of its customers’ equipment assets and which could
ultimately provide more than $30.0 million in annual revenue stream
for it.
The material factors or assumptions used to develop the above
forward-looking statements include, and the risks and uncertainties
to which such forward-looking statements are subject, are
highlighted in the Company’s Management’s Discussion and Analysis
(“MD&A”) for the quarter ended June 30, 2018. Actual results
could differ materially from those contemplated by such
forward-looking statements as a result of any number of factors and
uncertainties, many of which are beyond NACG’s control. Undue
reliance should not be placed upon forward-looking statements and
NACG undertakes no obligation, other than those required by
applicable law, to update or revise those statements. For more
complete information about NACG, you should read the Company’s
disclosure documents filed with the SEC and the CSA. You may obtain
these documents for free by visiting EDGAR on the SEC website at
www.sec.gov or on the CSA website at www.sedar.com.
About the Company
North American Construction Group Ltd.
(www.nacg.ca) is the premier provider of heavy construction and
mining services in Canada. For more than 60 years, NACG has
provided services to large oil, natural gas and resource companies.
The Company maintains one of the largest equipment fleets in the
region.
For further information contact:
David Brunetta, CPA, CMADirector; Investor RelationsNorth
American Construction Group Ltd.(780)
969-5574dbrunetta@nacg.ca www.nacg.ca
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