North American Construction Group Ltd. (“NACG” or “the Company”)
(TSX:NOA/NYSE:NOA) today announced results for the fourth quarter
and year ending December 31, 2018.
Martin Ferron, Chairman and Chief Executive
Officer of the Company stated, “We are very pleased to post a
strong end to another memorable year, in which we handily exceeded
our operational and financial objectives. For the full year we grew
revenue and EBITDA by 40% and 61% respectively, to follow on from
37% and 18% growth in 2017, against targets of 15% in each year for
both measures. We also closed the two previously announced
acquisitions during the quarter and moved into our new combined
heavy equipment maintenance facility and central office, in
Edmonton, ahead of schedule and on budget.”
Additionally, Mr. Ferron commented, “Looking
ahead we expect the two acquisitions to firmly bolster our organic
growth plan to yield further strong growth in 2019 and beyond.
Currently we expect around 70% revenue growth and about a 60%
increase in EBITDA during 2019, with the outcomes spread more
evenly through the quarters than recorded historically. These
anticipated improvements, could then propel our basic earnings to
over $1.60 per share and lead to top decile returns on equity and
capital, in our industry.”
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 and year ending December 31, 2018 for
further detail on the matters discussed in this release.
Highlights of the Fourth Quarter Ended
December 31, 2018
- Revenue for the quarter was $131.0
million, compared to $82.0 million for the prior year, an increase
of 60%.
- Adjusted EBITDA for the quarter was
$28.4 million compared to $18.1 million for the prior year, an
increase of 57%.
- On November 1, 2018, the Company
closed the acquisition of a 49% ownership interest in Nuna
Logistics Limited and related companies (collectively "Nuna"), a
civil construction and contract mining company based in Edmonton,
Alberta, for $42.8 million in cash.
- On November 23, 2018, the Company
closed the purchase of a heavy construction equipment fleet for
$198 million.
- On November 23, 2018, the
Company entered into an upsized Amended and Restated Credit
Agreement (the “Credit Facility”) with its banking syndicate led by
National Bank Financial. The Credit Facility is consistent with
existing terms, maintains attractive rates and provides sufficient
flexibility to allow for the significant asset acquisition
transaction and additional growth initiatives.• The Credit Facility
provides borrowings of up to $300.0 million with an ability to
increase the maximum borrowings by an additional $50.0 million,
subject to certain conditions (an increase from the $140.0 million
borrowing available under the previous facility).• The Credit
Facility also allows for a capital lease limit of $150.0 million
(an increase from the $100.0 million limit under the previous
facility) and other borrowing of $20.0 million.
- In November 2018, the Company
entered into a newly formed partnership, the Mikisew North American
Limited Partnership, to provide construction and mining services to
oil sands customers. The Company’s partner, the Mikisew Group of
Companies, is directly owned by the Mikisew Cree First Nation. The
Mikisew Cree are the largest First Nation of the five Athabasca
Tribal Nations and NACG is excited to be business partners and
build this relationship in the oil sands region.
- In November 2018, the Company
opened its newly constructed $28.0 million Acheson major equipment
maintenance and rebuild facility with its corporate office
attached, just outside of Edmonton, Alberta. The maintenance
facility was custom designed to accommodate all sizes of equipment,
including ultra-class 400-ton haul trucks.
- On December 10, 2018, the Company
announced a three-year extension of a key Multiple Use Agreement
with a major oil sands operator for the performance of reclamation,
overburden removal, mine support services and civil construction
activities. The long-term extension takes this agreement out to
December 2023.
- On December 18, 2018, the Company
exercised its right, under a right of first refusal option in the
newly extended Multiple Use Agreement with a customer, on an
initial offering of thirty-one trucks for delivery during 2019. The
arrangement includes sixteen 380-ton capacity ultra-class haul
trucks, a first for the Company.
Declaration of Quarterly
Dividend
On February 25, 2019, 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 March 12,
2019. The Dividend will be paid on April 5, 2019 and is an
eligible dividend for Canadian income tax purposes.
Consolidated Financial
Highlights
|
Three months ended December 31, |
(dollars in thousands, except per share
amounts) |
2018 |
|
|
2017 |
|
|
Change |
|
Revenue |
$ |
131,001 |
|
|
$ |
82,046 |
|
|
$ |
48,955 |
|
Project costs |
48,094 |
|
|
33,720 |
|
|
14,374 |
|
Equipment costs |
46,424 |
|
|
24,460 |
|
|
21,964 |
|
Depreciation |
18,179 |
|
|
11,854 |
|
|
6,325 |
|
Gross
profit |
18,304 |
|
|
12,012 |
|
|
6,292 |
|
Gross profit margin |
14.0 |
% |
|
14.6 |
% |
|
(0.6 |
)% |
Select
financial information: |
|
|
|
|
|
General
and administrative expenses (excluding stock based
compensation) |
8,034 |
|
|
5,738 |
|
|
2,296 |
|
Stock-based compensation expense |
2,509 |
|
|
1,617 |
|
|
892 |
|
Operating
income |
7,531 |
|
|
4,538 |
|
|
2,993 |
|
Interest
expense |
3,444 |
|
|
1,989 |
|
|
1,455 |
|
Net income and
comprehensive income available to
shareholders |
$ |
2,656 |
|
|
$ |
2,450 |
|
|
$ |
206 |
|
Net income and
comprehensive income available to shareholders margin |
2.0 |
% |
|
3.0 |
% |
|
(1.0 |
)% |
|
|
|
|
|
|
EBIT(i) |
$ |
7,524 |
|
|
$ |
4,510 |
|
|
$ |
3,014 |
|
EBIT margin(i) |
5.7 |
% |
|
5.5 |
% |
|
0.2 |
% |
EBITDA(i) |
$ |
25,755 |
|
|
$ |
16,478 |
|
|
$ |
9,277 |
|
Adjusted
EBITDA(i) |
$ |
28,442 |
|
|
$ |
18,100 |
|
|
$ |
10,342 |
|
Adjusted EBITDA
margin(i) |
21.7 |
% |
|
22.1 |
% |
|
(0.4 |
)% |
|
|
|
|
|
|
Per share
information |
|
|
|
|
|
Net income -
Basic |
$ |
0.11 |
|
|
$ |
0.10 |
|
|
$ |
0.01 |
|
Net income -
Diluted |
$ |
0.10 |
|
|
$ |
0.09 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
Cash dividends per
share |
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
- See “Non-GAAP Financial Measures”.
A reconciliation of Net income and comprehensive income to EBIT,
EBITDA, and Adjusted EBITDA in the section titled “Non-GAAP
Financial Measures”.
Results for the Fourth Quarter Ended
December 31, 2018
For the three months ended December 31, 2018,
revenue was $131.0 million, up from $82.0 million in the same
period last year. The increase in revenue was a result of a strong
ramp up of the Company’s winter work programs at the Mildred Lake
and Millennium mines, which benefitted in the last five weeks of
the year from the contribution from the recently acquired fleet.
Adding to the strong quarter was the incremental contribution of
continued reclamation work under a previously announced contract at
the Mildred Lake mine and an early-works heavy civil construction
project at the Kearl mine which offset last year's revenue
generated from mine support activities at the Fording River coal
mine in southeast British Columbia. New volumes this quarter
included overburden removal and heavy civil construction work at
the Fort Hills mine and mine services and reclamation work at the
Aurora mine, both generated from backlog subsequent to the asset
acquisition. Revenue from the Company’s three-year mine support
services contract at the Highland Valley copper mine in central
British Columbia improved when compared to revenue from the same
site last year, as last year saw a slow ramp-up of activities
during the prior period.
The Company continued to grow the external
maintenance service offering in the quarter as it took on more
customers and grew its reputation as a quality alternative service
provider. This was bolstered by the November opening of the
Company’s new maintenance facility in Acheson, Alberta which
allowed the Company to expand its capacity for external maintenance
activities and take on maintenance for larger sized equipment.
Revenue in the quarter also included the
Company’s share of the last two months of revenue generated from
its acquisition of Nuna. Nuna's activities were at a typical
seasonal low as they had recently wrapped up work on summer civil
construction and mine support contracts and were in the initial
stages of the ramp-up of their winter road construction
activities.
For the three months ended December 31, 2018,
gross profit was $18.3 million or 14.0% of revenue, up from a gross
profit of $12.0 million or 14.6% of revenue during the same period
last year. The higher gross profit in the current period was driven
by the higher volume of activity in the quarter coupled with
improved productivity on the Company’s winter works programs at the
Mildred Lake mine as a result of a strong transition from summer
reclamation activities, coupled with improved margins on the
Company’s civil construction activities at multiple mine sites
compared to last year. Gross profit margins were negatively
affected by an increase in equipment costs as a percent of revenue
in the current quarter as a result of inspection and repair costs
related to ensuring that the equipment fleet acquired from the
asset acquisition was in good operating condition and ready to be
integrated into the Company’s existing fleet and ongoing work.
Contributing to the lower gross profit margin in the quarter was
the typical seasonal low activities outside the oil sands, which
included wind-down of mine support activities and the ramp-up for
winter road construction activities in Northern Canada.
For the three months ended December 31, 2018,
depreciation was $18.2 million (or 13.9% of revenue), up from $11.9
million (or 14.4% of revenue) in the same period last year. The
current period depreciation increased due to the increased volumes
while the decrease in depreciation as a percent of revenue
continues to reflect the benefits the Company is realizing from its
recent program of securing quality used equipment at discounted
prices from sellers looking to exit the market place, while also
leveraging its strong maintenance expertise and programs to extend
the expected lives of the Company’s current fleet.
For the three months ended December 31, 2018,
operating income was $7.5 million, compared to operating income of
$4.5 million during the same period last year. G&A expense
(excluding stock-based compensation expense) was $8.0 million, or
6.1% of revenue for the three months ended December 31, 2018, up
from $5.7 million, or 7.0% of revenue in the same period last year.
The increase in G&A spend reflects the timing of accruals for
short-term incentive plan costs recorded in the quarter, compared
to last year, and mainly one time higher personnel and consulting
costs as a result of the integration of the two acquisitions in the
quarter. The lower G&A as a percent of revenue in the current
period, compared to the previous period, reflects the Company’s
ability to absorb higher volumes of activity with limited increases
to its overheads.
Stock-based compensation expense increased $0.9
million compared to the prior year primarily as a result of the
upward movement in share price in the current quarter and its
effect on the carrying value of the liability classified award
plans.
For the three months ended December 31, 2018,
net income was $2.7 million (basic income per share of $0.11 and
diluted income per share of $0.10), compared to a net income of
$2.5 million (basic income per share of $0.10 and diluted income
per share of $0.09) during the same period last year. Net income in
the current quarter included the recording of $3.4 million in
interest expense compared to $2.0 million recorded to interest
expense in the previous period as a result of the increased
borrowings to fund the Company’s two acquisitions. The combined
income tax expense recorded in the current period of $1.4 million
for the three months ended December 31, 2018 is an increase from
the $0.1 million combined income tax expense recorded for the three
months ended December 31, 2017.
Outlook
The Company has just completed the second year
of a three-year growth plan that targeted a minimum 15% compound
increase in revenue and Adjusted EBITDA over that period. The
Company’s strategy to achieve the growth, organically and via
acquisitions, 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 18% growth in revenue
and Adjusted EBITDA respectively in 2017, the Company achieved a
further 40% and 61% growth in the same two measures for 2018, as
well as a meaningful improvement in profitability. The Company has
also recently closed two important acquisitions that had only a
marginal contribution to 2018 results but have the potential to
provide a leap change in the Company’s financial results for 2019
and beyond. The Company currently anticipates the 2019 improvement
to be around 70% for revenue and 60% for Adjusted EBITDA which
could propel its basic EPS to over $1.60.
Due to the magnitude of this improvement the
Company believes it is important to assist readers with an estimate
of Adjusted EBITDA outcome proportionality by quarter during the
year, which NACG presently assesses as approximately 30%, 20%, 22%
and 28%, respectively. The main variables impacting this
assessment, for the first half of the year, are the timing of
spring break up and the pace that the Company can schedule
maintenance and repairs for some of the acquired mine support
assets. Also, the busiest quarters for the work linked to the
Company’s stake in Nuna are typically in the second and third
quarters and so this is completely counter-seasonal to oil sands
operations. Additionally, for this assessment it is important to
note that the term contracts we have in hand allow more even
scheduling of work throughout the year for cost optimization
purposes.
The Company’s confidence in this positive
outlook is underpinned by the fact that over 75% of the revenue
will be derived from work linked to oil sands production, which has
proved to be very resilient to oil price falls in recent years. In
addition, the Company’s backlog via term contracts now stands at
over $1.2 billion, compared to less than $0.1 billion at this time
last year.
Given the senior debt financing of over $250.0
million in 2018 for strategic growth acquisitions, the Company’s
management will be focused on de-leveraging in the mid-term. Free
cash flow in 2018 of $60.7 million was generated from the Company’s
highly utilized fleet while prudently maintaining it for the
long-term. The 2019 free cash flow is expected to benefit from the
projected uplifts in revenue and Adjusted EBITDA but the Company
anticipates a one-time impact of onboarding of the newly acquired
fleet to NACG standards. The Company expects to reduce total debt
by $150.0 million in 2019 to 2021 while maintaining its
forward-looking posture of looking for strategic M&A
opportunities as well as continuing to assess junior debt as an
alternative to existing senior debt instruments.
Conference Call and Webcast
Management will hold a conference call and
webcast to discuss the Company’s financial results for the quarter
ended December 31, 2018 tomorrow, Tuesday, February 26, 2019 at
9:00 am Eastern Time (7:00 am Mountain Time).
The call can be accessed by dialing: |
|
Toll free:
1-877-291-4570International: 1-647-788-4919 |
|
A replay will be available through March 26,
2019, by dialing: |
|
Toll Free:
1-800-585-8367International: 1-416-621-4642 Conference ID:
5829207 |
The live and archived webcast can be accessed at:
http://event.on24.com/r.htm?e=1928604&s=1&k=AF6628103878EEAECB11A52F52032E93
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 US GAAP measures. In this release,
non-GAAP financial measures are used, such as “gross profit”,
“margin”, “total debt”, “free cash flow”, “backlog”, “EBIT”,
“EBITDA”, and “Adjusted EBITDA”.
“Gross profit” 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 income (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.
"Total debt" is defined as the sum of the
outstanding principal balance (current and long term portions) of:
(i) capital leases; (ii) borrowings under the Credit Facility
(excluding outstanding Letters of Credit); (iii) convertible
unsecured subordinated debentures (the "Convertible Debentures");
(iv) liabilities from hedge and swap arrangements; (v) mortgage;
(vi) vendor promissory notes; and (vii) equipment promissory notes.
The Company’s definition of total debt excludes deferred financing
costs related to total debt. The Company believes total debt is a
meaningful measure in understanding its complete debt
obligations.
"Free cash flow" is defined as cash from
operations less cash used in investing activities (excluding cash
used for growth capital expenditures, cash provided by for certain
equipment financing arrangements, cash used for acquisitions, cash
used for the investment in affiliates and joint ventures and cash
provided by business dispositions) less sustaining capital
expenditures financed through capital leases. The Company feels
free cash flow is a relevant measure of cash available to service
its total debt repayment commitments, pay dividends, fund share
purchases and fund both growth capital expenditures and strategic
initiatives. A reconciliation of free cash flow can be found in the
Company’s annual MD&A for the year ended December 31, 2018.
"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 US
GAAP term, is similar in nature to the "transaction price allocated
to the remaining performance obligations", defined under US GAAP. A
reconciliation of backlog can be found in the Company’s annual
MD&A for the year ended December 31, 2018.
"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 (liability classified) and non-cash (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).
The Company believes that EBIT and Adjusted
EBITDA are a meaningful measure of business performance because
they exclude 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 EBIT and 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 December 31, |
(dollars in
thousands) |
2018 |
|
|
2017 |
|
Net income and
comprehensive income available to shareholders |
$ |
2,656 |
|
|
$ |
2,450 |
|
Adjustments: |
|
|
|
Interest
expense |
3,444 |
|
|
1,989 |
|
Income tax
expense |
1,424 |
|
|
71 |
|
EBIT |
$ |
7,524 |
|
|
$ |
4,510 |
|
Adjustments: |
|
|
|
Depreciation |
18,179 |
|
|
11,854 |
|
Amortization of intangible assets |
52 |
|
|
114 |
|
EBITDA |
$ |
25,755 |
|
|
$ |
16,478 |
|
Adjustments: |
|
|
|
Loss (gain)
on disposal of property, plant and equipment |
216 |
|
|
(54 |
) |
(Gain) loss
on disposal of assets held for sale |
(38 |
) |
|
59 |
|
Equity
classified stock-based compensation expense |
1,549 |
|
|
755 |
|
Liability classified stock-based compensation expense |
960 |
|
|
862 |
|
Adjusted EBITDA |
$ |
28,442 |
|
|
$ |
18,100 |
|
|
|
|
|
|
|
|
|
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 expects its two
recent acquisitions to firmly bolster its organic growth plan to
yield further strong growth in 2019 and beyond and potentially
provide a leap change in the Company’s financial results for 2019
and beyond; expects around 70% revenue growth and about a 60%
increase in EBITDA during 2019 with the outcomes spread more evenly
through the quarters than recorded historically; believes its basic
earnings per share could exceed $1.60 in 2019 and lead to top
decile returns on equity and capital, in our industry; anticipates
a 2019 improvement of around 70% in revenue and 60% in Adjusted
EBITDA; believes that its Adjusted EBITDA proportionality by
quarter during the year will be approximately 30%, 20%, 22% and
28%, respectively; expects that over 75% of its revenue in 2019
will be derived from work linked to oil sands production; believes
that sands production will continue to be resilient to oil price
falls; expects that 2019 free cash flow will benefit from projected
uplifts in revenue and Adjusted EBITDA, subject to the Company
anticipating a one-time impact of onboarding of the newly acquired
fleet to its standards; and that the Company expects to reduce
total debt by $150.0 million in 2019 to 2021 while maintaining its
forward-looking posture of looking for strategic M&A
opportunities as well as continuing to assess junior debt as an
alternative to existing senior debt instruments.
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 December 31, 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 one of Canada’s largest providers of heavy civil
construction and mining contractors. 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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