North American Construction Group Ltd. (“NACG” or “the Company”)
(TSX:NOA/NYSE:NOA) today announced results for the third quarter
ended September 30, 2018.
Martin Ferron, Chairman and Chief Executive
Officer of the Company stated, “We were pleased to exceed our
financial targets for the quarter, despite having to overcome
unseasonal wet ground conditions for much of the period. It is also
noteworthy that, excluding mark to market stock based compensation
expense and one off costs related to the recently announced
acquisitions, basic earnings per share would have been over $0.20
for the quarter”.
Additionally, Mr. Ferron commented, “Looking
ahead, we hope to post a strong outcome for Q4 similar to last year
and we anticipate closing both significant acquisitions by the end
of the year. Beyond that, our meaningful organic growth program,
together with the combined impact of the exciting acquisitions
could result in our basic earnings per share exceeding $1.60 in
2019”.
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 September 30, 2018 for further
detail on the matters discussed in this release.
Highlights of the Third Quarter Ended
September 30, 2018
- Revenue for the quarter was $84.9 million, compared to $70.0
million for the prior year, an increase of 21.3%.
- Adjusted EBITDA for the quarter was $19.1 million compared to
$11.5 million for the prior year. Adjusted EBITDA margin was 22.5%
compared to 16.4% for the same period last year.
- Net income for the quarter was $1.5 million, compared to a net
loss of $0.6 million for the prior year.
- On September 20, 2018, the Company announced that it had
entered into a definitive agreement to acquire all of the
outstanding shares of an entity that holds a 49% ownership interest
in Nuna Logistics Limited and minority interests in other related
companies (collectively, “Nuna”), a civil construction and contract
mining company based in Edmonton, Alberta, for $42.5 million in
cash.
Highlights of Events Post Third
Quarter
- On October 3, 2018, the Company announced that it had entered
into a definitive purchase and sale agreement to acquire the heavy
construction equipment fleet and related assets of Aecon Group Inc.
("Aecon"), a Canadian based construction company serving the
infrastructure, energy and mining industries, for $199.1 million in
cash, subject to customary closing adjustments. The Company
anticipates that it will be fully financed at closing through an
upsized and extended credit facility with its syndicate of banks,
led by National Bank Financial Inc.
- On October 3, 2018, S&P Global Ratings ("S&P")
changed the Company’s outlook from "stable" to "positive" while
affirming its "B" long-term corporate credit rating.
Declaration of Quarterly
Dividend
On October 29, 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 November 30,
2018. The Dividend will be paid on January 4, 2019 and is an
eligible dividend for Canadian income tax purposes.
Consolidated Financial
Highlights
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
(dollars in
thousands, except per share amounts) |
|
2018 |
|
|
|
2017 |
|
|
|
Change |
|
|
|
|
2018 |
|
|
|
2017 |
|
|
|
Change |
|
Revenue |
$ |
84,886 |
|
|
$ |
70,045 |
|
|
$ |
14,841 |
|
|
|
$ |
279,060 |
|
|
$ |
210,511 |
|
|
$ |
68,549 |
|
Project costs |
31,593 |
|
|
31,429 |
|
|
164 |
|
|
|
104,849 |
|
|
82,626 |
|
|
22,223 |
|
Equipment costs |
28,021 |
|
|
22,594 |
|
|
5,427 |
|
|
|
83,268 |
|
|
67,369 |
|
|
15,899 |
|
Depreciation |
10,942 |
|
|
10,250 |
|
|
692 |
|
|
|
40,171 |
|
|
32,881 |
|
|
7,290 |
|
Gross
profit(i) |
14,330 |
|
|
5,772 |
|
|
8,558 |
|
|
|
50,772 |
|
|
27,635 |
|
|
23,137 |
|
Gross profit
margin(i) |
16.9 |
% |
|
8.2 |
% |
|
8.7 |
% |
|
|
18.2 |
% |
|
13.1 |
% |
|
5.1 |
% |
Select
financial information: |
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses (excluding stock-based
compensation) |
6,191 |
|
|
4,605 |
|
|
1,586 |
|
|
|
17,544 |
|
|
15,566 |
|
|
1,978 |
|
Stock-based compensation expense (benefit) |
4,368 |
|
|
(71 |
) |
|
4,439 |
|
|
|
9,023 |
|
|
2,378 |
|
|
6,645 |
|
Loss on
sublease |
— |
|
|
— |
|
|
— |
|
|
|
1,732 |
|
|
— |
|
|
1,732 |
|
Operating
income |
3,686 |
|
|
1,010 |
|
|
2,676 |
|
|
|
22,449 |
|
|
8,869 |
|
|
13,580 |
|
Interest
expense |
1,699 |
|
|
1,830 |
|
|
(131 |
) |
|
|
5,140 |
|
|
4,954 |
|
|
186 |
|
Net income
(loss) |
$ |
1,466 |
|
|
$ |
(585 |
) |
|
$ |
2,051 |
|
|
|
$ |
12,630 |
|
|
$ |
2,814 |
|
|
$ |
9,816 |
|
Net income (loss)
margin(i) |
1.7 |
% |
|
(0.8 |
)% |
|
2.5 |
% |
|
|
4.5 |
% |
|
1.3 |
% |
|
3.2 |
% |
EBIT(i) |
$ |
3,702 |
|
|
$ |
1,054 |
|
|
$ |
2,648 |
|
|
|
$ |
22,442 |
|
|
$ |
8,901 |
|
|
$ |
13,541 |
|
EBIT margin(i) |
4.4 |
% |
|
1.5 |
% |
|
2.9 |
% |
|
|
8.0 |
% |
|
4.2 |
% |
|
3.8 |
% |
EBITDA(i) |
$ |
14,763 |
|
|
$ |
11,550 |
|
|
$ |
3,213 |
|
|
|
$ |
62,973 |
|
|
$ |
42,586 |
|
|
$ |
20,387 |
|
Adjusted
EBITDA(i) |
$ |
19,097 |
|
|
$ |
11,461 |
|
|
$ |
7,636 |
|
|
|
$ |
73,392 |
|
|
$ |
44,982 |
|
|
$ |
28,410 |
|
Adjusted EBITDA
margin(i) |
22.5 |
% |
|
16.4 |
% |
|
6.1 |
% |
|
|
26.3 |
% |
|
21.4 |
% |
|
4.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share
information |
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) - Basic |
$ |
0.06 |
|
|
$ |
(0.02 |
) |
|
$ |
0.08 |
|
|
|
$ |
0.51 |
|
|
$ |
0.10 |
|
|
$ |
0.41 |
|
Net
income (loss) - Diluted |
$ |
0.05 |
|
|
$ |
(0.02 |
) |
|
$ |
0.07 |
|
|
|
$ |
0.44 |
|
|
$ |
0.09 |
|
|
$ |
0.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per
share |
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
0.00 |
|
|
|
$ |
0.06 |
|
|
$ |
0.06 |
|
|
$ |
0.00 |
|
(1) See “Non-GAAP Financial Measures”. A reconciliation of Net
income (loss) to EBIT, EBITDA, and Adjusted EBITDA in the section
titled “Non-GAAP Financial Measures”.
Results for the Third Quarter Ended
September 30, 2018
For the three months ended September 30, 2018,
revenue was $84.9 million, up from $70.0 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, despite
abnormally wet weather experienced at both mines during the summer
months which negatively affected operating performance. The
increased overburden removal activity at the Mildred Lake mine was
performed under a term contract with the customer. Higher
levels of heavy civil construction activity at the Kearl mine
complemented an increase in mine service activity at the same mine,
compared to last year. The Company is continuing to generate civil
construction revenue from its 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 its Dene North Site Services partnership (or "Dene North
partnership") at multiple oil sands operations. The Company
continues to see increased activity generated from its external
maintenance service offering as demand continues to grow in the
Company’s ability to be a cost effective and reliable service
provider.
Revenue in the previous period included mine
support service revenue from the Fording River coal mine in British
Columbia, which was completed in the first quarter of 2018; civil
construction revenue from the Red Chris copper mine in British
Columbia, which was completed at the end of 2017; and revenue from
a site development project adjacent to the Aurora mine performed by
the Dene North partnership, which was substantially completed at
the end of 2017. Revenue in the previous year was impacted by the
cancellation of a significant earthworks contract as a result of a
fire at a customer's plant and the subsequent delays in start-up
from equipment repositioning.
For the three months ended September 30, 2018,
gross profit was $14.3 million, or a 16.9% gross profit margin, up
from a $5.8 million gross profit or an 8.2% gross profit margin in
the same period last year. The strong improvement in current
quarter gross profit was a result of a growth in activity levels
through the quarter, compared to the previous period which was
impacted by the cancellation of a significant earthworks contract.
The increase in gross profit margin was achieved despite the effect
of production interruptions caused by the abnormally wet summer
months as the Company was able to realize production efficiencies
through a more consistent demand for services.
For the three months ended September 30, 2018,
depreciation was $10.9 million, or 12.9% of revenue, up from $10.3
million, or 14.6% 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 benefits from higher utilization and
maintenance initiatives designed to extend the useful life of the
Company’s equipment fleet.
For the three months ended September 30, 2018,
the Company recorded operating income of $3.7 million, an increase
of $2.7 million from the $1.0 million operating income for the same
period last year. General and administrative expense, excluding
stock-based compensation cost, was $6.2 million for the quarter,
higher than the $4.6 million for the same period last year, driven
primarily by higher short-term incentive costs and the one-time
expenses of legal and consulting services used in support of our
significant acquisition activities.
Stock-based compensation expense increased $4.4
million compared to the prior year, primarily from the effect of a
stronger share price on the carrying value of the Company’s
liability classified award plans.
For the three months ended September 30, 2018,
the Company recorded net income of $1.5 million (basic and diluted
income per share of $0.06 and $0.05, respectively), compared to the
$0.6 million net loss (basic and diluted loss per share of $0.02)
recorded for the same period last year.
Interest expense was $1.7 million for the
quarter, consistent with $1.8 million recorded for the same period
last year, primarily due to lower pricing secured under the
Company’s current Credit Facility, executed during the third
quarter of 2017, which offset the cost of increased borrowing
compared to the previous period. The Company recorded $0.5 million
of deferred income tax expense in the current period compared to
$0.2 million of deferred income tax benefit recorded in the prior
year, driven by the improved results in the current period.
Outlook
The Company has just completed the third 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 its core
oil sands market, together with the addition of value creating
services.
- Expand its 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 on track to exceed
its growth objectives for 2018. EBITDA growth is expected to be at
least 45%, bringing strong earnings per share (“EPS”) gains. The
Company has also recently announced two significant acquisitions
that it anticipates will both close in Q4 and will have the
potential to provide a leap change in the Company’s financial
results for 2019. More commentary on the impact of these
acquisitions will be provided in the Company’s annual report. In
the meantime, the positive outlook for the next few years is
supported by:
- The successful renewal of all of the Company’s oil sands long
term services agreements such that it 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 has been contracted for two
large earthworks jobs for the winter season with volumes similar to
last year's strong program. During the second quarter the Company
negotiated two, three-year term contracts for both overburden
stripping and reclamation services with one customer, having a
combined value of around $280.0 million. The Company anticipates
that additional term contracts could be secured in the near
term.
- The new Fort Hills oil sands mine is expected to provide a
direct benefit in terms of incremental demand for the Company’s
services and an indirect benefit from the overall short term
tightening of heavy equipment supply;
- A good line of sight to meaningful heavy construction activity
for the summer season of 2019, after a five-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;
- 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 it believes that this initiative could have a
discernible impact on its 2018 results. Beyond that, the Company
plans to be up and running, by the end of Q4, 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 $30.0 million in annual revenue
stream for the Company.
Overall, the Company is very encouraged by this
bright outlook that, together with the completion of the two
acquisitions, could propel its basic EPS to over $1.60 for 2019,
while the Company also maintains 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 September 30, 2018 tomorrow, Wednesday, October 31, 2018 at
9:00 am Eastern Time (7:00 am Mountain Time).
The call can be accessed by dialing:
Toll free: 1-866-521-4909International: 1-647-427-2311
A replay will be available through December 1, 2018, by
dialing:
Toll Free: 1-800-585-8367International: 1-416-621-4642
Conference ID: 3558509
The live and archived webcast can be accessed at:
http://event.on24.com/r.htm?e=1859016&s=1&k=7743A02C27BA40E96FF8FE5148777172
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”, “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.
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 because 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 (loss) to EBIT, EBITDA, and
Adjusted EBITDA is as follows:
|
Three months ended |
|
|
Nine months ended |
|
September 30, |
|
|
September 30, |
(dollars in thousands) |
|
2018 |
|
|
|
2017 |
|
|
|
|
2018 |
|
|
|
2017 |
|
Net income (loss) |
$ |
1,466 |
|
|
$ |
(585 |
) |
|
|
$ |
12,630 |
|
|
$ |
2,814 |
|
Adjustments: |
|
|
|
|
|
|
|
|
Interest expense |
1,699 |
|
|
1,830 |
|
|
|
5,140 |
|
|
4,954 |
|
Income tax expense (benefit) |
537 |
|
|
(191 |
) |
|
|
4,672 |
|
|
1,133 |
|
EBIT |
$ |
3,702 |
|
|
$ |
1,054 |
|
|
|
$ |
22,442 |
|
|
$ |
8,901 |
|
Adjustments: |
|
|
|
|
|
|
|
|
Depreciation |
10,942 |
|
|
10,250 |
|
|
|
40,171 |
|
|
32,881 |
|
Amortization of intangible assets |
119 |
|
|
246 |
|
|
|
360 |
|
|
804 |
|
EBITDA |
$ |
14,763 |
|
|
$ |
11,550 |
|
|
|
$ |
62,973 |
|
|
$ |
42,586 |
|
Adjustments: |
|
|
|
|
|
|
|
|
Loss (gain) on disposal of property, plant and
equipment |
— |
|
|
24 |
|
|
|
(105 |
) |
|
243 |
|
Gain on disposal of assets held for sale |
(34 |
) |
|
(42 |
) |
|
|
(231 |
) |
|
(225 |
) |
Loss on sublease |
— |
|
|
— |
|
|
|
1,732 |
|
|
— |
|
Equity classified stock-based compensation
expense |
773 |
|
|
785 |
|
|
|
2,568 |
|
|
2,170 |
|
Liability classified stock-based compensation
expense (benefit) |
3,595 |
|
|
(856 |
) |
|
|
6,455 |
|
|
208 |
|
Adjusted EBITDA |
$ |
19,097 |
|
|
$ |
11,461 |
|
|
|
$ |
73,392 |
|
|
$ |
44,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 hopes to post a
strong outcome for Q4 similar to last year, anticipates closing
both significant acquisitions by the end of the year, believes its
basic earnings per share could exceed $1.60 in 2019, The Company
anticipates that it will be fully financed at closing through an
upsized and extended credit facility with its syndicate of banks,
led by National Bank Financial Inc, 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,
including EBITDA growth of at least 45% and strong earnings per
share (EPS) gains, believes that it will achieve a leap change in
its financial results for 2019 through its recent acquisitions,
expects that its customers will continue to use economies of scale
in production to dramatically lower oil sands operating costs per
barrel, expects that term contracts in addition to the
three-year-term reclamation services contracts we recently
negotiated may be secured in the near term, 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 short term tightening of heavy equipment
supply, believes that there will be meaningful heavy construction
activity for the summer season of 2019, expects that revenue from
the three year site support contract at the Highland Valley copper
mine will increase over the work duration, expects that there will
be several bidding opportunities for further natural resource
related contracts, both in Canada and the USA, expects that it will
have further success at pre-qualifying to bid for major
infrastructure projects and that if successful, the significant
gravel road construction job in the Northwest Territories we bid
would lead to mobilization in the Fall of 2019, 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 and that the Company
believes that completion of the two recently announced acquisitions
could propel its basic EPS to over $1.60 for 2019, while the
Company also maintains a strong balance sheet.
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 September 30, 2018.
Actual results could differ materially from those contemplated by
such forward-looking statements because 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 a 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.
For further information contact:
David Brunetta, CPA, CMADirector; Investor RelationsNorth
American Construction Group Ltd.(780)
969-5574dbrunetta@nacg.cawww.nacg.ca
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