Good morning, ladies and gentlemen. Welcome to the North American Construction Group Earnings call for the Second Quarter ended June 30, 2021. At this time, all participants are in a listen-only mode. Following management's prepared remarks, there will be an opportunity for analysts, shareholders and bondholders to ask questions.

The media may monitor this call in listen-only mode. They are free to quote any member of management, but they are asked not to quote remarks from any other participant without that participant's permission.

The Company wishes to confirm that today's comments contain forward-looking information and that actual results could differ materially from a conclusion, forecast, or projection contained in that forward-looking information.

Certain material factors or assumptions were applied in drawing conclusions or in making forecasts or projections that are reflected in the forward-looking information.

Additional information about those material factors is contained in the Company's most recent management's discussion and analysis, which is available on SEDAR and EDGAR as well as the Company's website at nacg.ca..

Thanks, Rebecca, and good morning, everyone. I'm going to give a brief high-level overview of the quarter, turn over to Jason for the financial details, and then we'll close with a deeper dive into a few areas of our business and finish up with the outlook ahead of us before opening it up to any questions you may have.

While I'm excited to talk today about our solid Q2 operational and financial performance, I am even more eager to share with you the milestones achieved this quarter, which are integral to our future success and reinforce the confidence we have in our overall corporate strategy.

In particular, the progress made through items such as the major contract wins, the DGI acquisition, continued indigenous partnership growth, expanding internal and external maintenance capabilities, progress on our sustainability plans, increasing market diversification, growth, record backlog, record-free cash flow projections, record low senior leverage ratio and increased overall opportunities with line-of-sight to achieve or exceed our strategic goals.

I will talk more in-depth on these impressive milestone achievements later on in the deck. These achievements were accomplished during a quarter where we had the largest impact on our workforce due to the pandemic.

As stated in my shareholder letter, the third wave impact in Fort McMurray had a 70% increase in positive cases and close contacts requiring quarantine than any previous quarter. Thankfully, our pandemic plan minimized the spread of the virus in our workplace and employee recoveries were better than average.

However, the loss of the available workforce in Q2 is estimated to have had a 5% to 10% negative impact on fleet utilization and top-line revenue. With that brief preamble, I'll touch on our safety performance on Slide 4 before Jason goes into the financials.

Our Q2 total recordable injury rate improved significantly from Q1, and our trailing 12 months is now back within our target range. We are continuing our focus on high hazard areas and improved communications to offset pandemic protocols. We do expect continued relaxing of pandemic protocols as infection rates decrease and vaccinations increase.

However, we expect some protocols will continue through year-end. With those opening comments, I'll pass the call to Jason for our financial review..

Thanks, Joe. Good morning, everyone. We'll begin the financial review on Slide 9. Revenue for the quarter of CAD140 million was CAD69 million ahead of last year's Q2, which was, as we all know, an unprecedented quarter and proved to be a difficult quarter to compare against.

The year-over-year variance represents virtually a 100% improvement in revenue and generally came in as expected..

Thanks, Jason. On Slide 15, you'll find our current operational priorities for 2021. This slide summarizes our objectives, and I will walk through the topics in the slides that follow and finish up with our outlook.

Slide 16 highlights the milestone win of a major infrastructure job in our Red River Valley Alliance with partners, Acciona and Shikun & Binui. As the largest infrastructure project in company history, we are prioritizing the planning, staffing and pre-mobilization work to ensure a smooth project start up.

We believe this project win and a smooth start could provide us additional experience we can leverage when tendering a similar earthworks flood diversion project in Alberta that we expect to come out in RFP before the end of this year. On Slide 17, you will see some highlights of our recent acquisition of DGI Trading.

At approximately one month post close, I am happy to report the business transition and the integration has progressed smoothly, and we see future opportunity for growth as core machines and components have demonstrated to be the most economic method to support internal growth and likewise, provides increased external maintenance sales opportunities..

Your first question comes from Aaron MacNeil with TD Securities..

You touched on your prepared remarks, but I'm just curious to know what's your batting average on the diversified projects? And I'm also curious to know how you're identifying projects that you put in your bid pipeline slide.

So are you only bidding on stuff you think you have a high probability of winning or are you pursuing a whole bunch of stuff and seeing what sticks? So just kind of trying to get a sense of that..

Well, I guess I'd start with, we have a pretty extensive business development tracking system where we track projects in the resource industry from initial concepts or where they're in expiration to where they go through feasibility and development and permitting.

And then in expectations, if they look like they fit our fleet and our usage that we're going to see a prequal or an RFP when they come out.

As far as when we pursue them, we really look at the project itself and how it fits our strategy, our fleet availability, our access to other fleet, both in size, duration, what size fleet they're using versus what size fleet we might have more capacity in.

And as far as our win percentage, I don't know if that's something you could -- you can really put a finger on because it can be quite a changing marketplace. You can have bids that actually never get awarded. You're going to have projects you track for 10 years that never get permitted.

Once a bid is there, and we put an RFP in, we usually have a pretty good idea who our competitors are and where we might have advantage or not.

As an example, on these two Quebec jobs that we did lose, I think our risk there, and it was a risk we took clearly was that we made an assumption that would need to be a remote workforce with camp and fly-in and fly-out because we didn't see access. And our partners are extremely experienced in this area, and that was there. They were 100% on that.

And when we reviewed it, we agreed with them. So that could have been something unrelated to fleet that could give somebody a commercial advantage if they thought they could get people but in reviewing that risk, that just wasn't one.

So that's something where we weigh that into our ability that if there were a local guy there, and he could get people, then might have a better advantage than us commercially on some of that work. So any time we look at the bid pipeline, putting, I think I'll be 10% or 40% accurate in winning these is pretty difficult.

I -- on a per project basis, I could tell you, but -- or give you my estimate, I can't really tell you but -- so it kind of bounces around a bit like that.

So I don't know -- that cover up what you're looking for, Aaron?.

Yes, that's great. Maybe a more specific question then related to the gold project. I assume the answer is yes to the first one but do you see it as a reference for bids on future work? And then if the answer is yes.

Is there enough work in that area that it could become a second core area for you and somewhere where you constantly have a level of activity?.

Well, when we won the Ontario gold mine project in our Nuna joint venture, we highlighted what we thought was our advantage there, both with Nuna and our experience.

The very strong indigenous partnerships that Nuna has in regions in addition to being Inuit owned, and felt we could bring that in other areas and I believed in the last quarter or 2, I've also highlighted that we felt there is a job in Saskatchewan to be coming up, where the procurement team had actually asked us to bid under that same joint venture arrangement because they felt it would be stronger for us.

And we've actually received our first RFP from that project. And we'll be submitting a bid as the same joint venture structure as we have in Ontario gold mines. So I do believe it's provable, we'll see as far as winning this job. That would be a pretty good success ratio if in two bids with our Nuna JV, we win them both, so that would bode well for us.

But I think that structure of our experience, Nuna's experience, the combined fleet efficiency, the manpower efficiency, and the indigenous relationships is a pretty powerful, along with being a safe, low-cost provider. It's a pretty compelling RFP we're going to put together..

Fair enough. And final question for me, just bringing it back to the core business. The scope and volume increase of that announcement with the Mikisew partnership last week was pretty large in the context to the original agreement.

So I guess I'm just wondering at a higher level across your oil sands customers, when you talk to them, are you getting the sense that they're sort of playing catch-up right now given the reduction last year? And if that's the case, how long do you think this surge in activity might last before things start to normalize? Or maybe you'd characterize it completely differently.

So just trying to get your sense of how you're seeing the oil sands outlook in general?.

Well, yes, I think it's pretty easy to state that the demand is far higher than last year just because of the downturn from the pandemic, but longevity, I think what we're seeing is there's a -- I certainly perceive a stronger demand longer term. And I think -- with this, I think we're getting clients that see the value of tying us up longer term.

So as demand increases, and you want to confirm that you have somebody there that you trust and value to do it. That -- I think we're going to see more longer-term commitments from our clients because of increasing demand, and they want to lock down their guys..

Your next question comes from the line of Yuri Lynk with Canaccord Genuity..

I guess wanted to just dig in a little bit on the DGI acquisition. Wondering a few things.

If -- just from a modeling perspective, if you'd be able to put any revenue -- expected revenue on that or EBITDA margin profile of that business? And any -- is this a cost synergy play for you guys or more on the revenue synergy side as you look at maybe further moves in Australia related to DGI?.

I'll let Jason take the first part, and I'll answer the second. As far as the....

Yes, I'll just pull up the slide, Yuri. So as far as revenue versus cost, we've said about 25% of DGI sells into us. So that would be a cost synergy to us. You can see from the EBITDA multiple that we disclosed of three times, we're kind of in the CAD8 million EBITDA impact range.

Some of that will come through cost savings, as I said, about 1/4 of that, and then the remainder will just hit our revenue and cost. There should be virtually zero depreciation in margins in the 30 to 40 range, like a part supplier would normally enjoy.

So much different business model than us, but we'll be definitely accretive and I would say, is not indicative of our M&A typical targets. This is a vertical integration, move. Joe can elaborate more on strategy, but those are some of the high-level figures..

I think we're too early to quantify some of these things, Yuri, but I certainly see synergies and opportunities in the crossover our business, both with the vertical integration. But just to give a bit more color, DGI's access to used components worldwide and knowing where these things are, is of extremely high-value to us.

I'll give you an example, that if for some reason, you fail a component, on a piece of equipment, an engine, a transmission final drive, a dip housing. And there are occasions when there's not used cores readily available.

You can't find somebody that has a used core to re-manufacture, and you have to actually go out and buy a new one, a new core or a new engine completely rebuilt. The cost differential is massive.

So having somebody who can find you those used cores and knows where to look for them and is focused not just on their business, of some, but on our business, I think we're going to have some synergy of that, both from a component basis and from a whole machine.

So finding home machines -- and historically, DGI has been one of our largest providers of finding used whole machines for second life rebuilds.

And as I've stated before, those are great value for us, and I mentioned in the text that rebuilding whole machines for second life versus new, we've been doing that at 50% to 60% of the cost anew and actually having better warranty on our components than the new unit would. So that's DGI for us.

Us for DGI would be -- certainly, their -- I think, I believe it's about 25% of their work is done in Alberta.

I believe our -- we have an opportunity to not only cross-sell or provide some of our clients' access to DGI, but also to support them in, whether it's finding and tearing down equipment in our own facilities or support in the field where we already have maintenance personnel.

So I don't have a lot of quantifiable information yet, but I'm certain in the quarters going forward, we'll be able to identify those synergies and those opportunities that we've been able to -- between us and -- between DGI bringing into us more so and us bringing into DGI more so..

Okay. That's helpful. Second and last one for me, maybe just for Jason.

I wanted to clarify, are you saying now that the depreciation is going to be in the high teens, on an annualized basis going forward? And if so, are you able to help us at all with revenue guidance -- some kind of revenue range, so we can better model D&A, given it's a pretty large expense item?.

Yes. I would say it's trending in that way. Obviously, we've been going through a step change since, really since the Aecon purchase in 2018, we've seen steady increases in depreciation as a percentage. So I think high teens is a good modeling input and then backing into -- into that gross expense based on revenue.

I think our core business, which is reported revenue -- 2019 is -- laid out a pretty good road map for what our core fleet is able to do and so I think that's a good revenues profile to look at. What will be interesting, obviously, is the equity accounted revenue, which we think for 2022 is going to be 30% to 40% of combined revenue.

So that's -- and within what equity accounted investments, depreciation should be in the 5% to 10% range. So we could see depreciation much different between our joint ventures and our core fleet. So hope that's helpful for modeling, but that's the trend that we're seeing right now..

Your next question comes from the line of Bryan Fast with Raymond James..

Just on the big project win in the U.S., could you talk about your strategy in expanding in the U.S.

markets? And do you think that this project win opens up similar P3 type opportunities?.

I think whether U.S. or Canada, that large infrastructure jobs that have a major component of earthworks, those are the ones we're interested in. So as they come up -- they're not a consistent flow, but they do come up like this, the one in the flood diversion in Calgary.

I think I've been talking about it for five years, but it looks like it's going to be coming forward now. That's one where there's a bit of road and a bit of bridge work, but there's an awful lot of earthworks, and that's where we would see opportunities for us to participate in infrastructure jobs.

So any -- their hydro projects that have earthworks, roadworks that have flood diversions. Those would be the ones and obviously, we'll continue to look at mine management opportunities that we've been successful in, in the U.S., we'd look at those additionally.

That cover up what you're looking for, Bryan?.

Yes, you bet.

And then just further on that to that contract win, how much of the contract award is slated for the construction portion of the project and then how much is tilted towards the O&M part of the contract?.

About 65% of the headline number, which was around CAD2.2 billion was -- the entire project was 65% of that is the construction project. And then the tail is the remainder..

Okay. And then just on labor supply issues.

Beyond the impacts of what's happening with COVID, has it been difficult to source labor in this market?.

We've always struggled and continued struggling and are putting in a lot of practices as far as getting maintenance. We haven't seen a lot of issues in getting operations and operators, I think our -- probably the continuing issues besides the pandemic is the limited travel.

So when we're bringing people in from different areas and doing fly-in, fly-out operations, the -- it's -- there's not really convenient flights in a lot of places anymore and so people aren't willing to come -- if it's -- if I'm going to spend 25 hours to get from the East Coast to northern Alberta, and I get a week off, it makes it pretty hard to do so.

I think as those travel restrictions loosen up here in the next few months, I think -- and we get more flights to more places, we'll see better access going forward..

Your next question comes from the line of Tim Monachello with ATB Capital Markets..

So first one is just on the utilization. In one of the slides you showed the utilization progression through the quarter, and looks like it's been trending down, April, May and June.

Just wondering around that square with the commentary in the MD&A saying that June was a pretty strong quarter relative to the first two months of the quarter? Sorry, strong months relative to the first two months of the quarter?.

I'm not sure what -- far as April, May, June, what those exact numbers are, do you have those, Jason?.

Yes, I'll just pull them up here..

I know the 53 that was the average of the quarter is the average of the month, but....

Yes, so we saw the momentum really carried us through June and did post -- you can see it in the graph on Slide 21 that it was -- June was a lower utilization than May.

I think where we saw efficiencies was just in our planning around, getting work for us to the equipment that was available so we saw a nice profitability increases, but we expect utilization to turn the corner here in July and moving forward..

Yes. I wouldn't focus a lot on month-to-month accuracy, Tim, as like -- when we pick up, when we move, in this instance, into Fort Hills, you lose several weeks moving equipment from site-to-site in operations opportunities too.

So it's not -- in June, you might not have had the issues of the third wave as we're coming off of that, but we are mobilizing fleet and in any one month, that can have a significant impact..

Okay.

I guess, more importantly, would just be, are you seeing pretty strong rebounds into the third quarter?.

Yes, absolutely. What I would hesitate to say is that I saw that for the second quarter too. And we were talking in April, and we were coming off the second wave. We're at the trough after the second wave and vaccinations were rolling out, really didn't anticipate that third wave at all.

And for it to actually not only be a third wave hit us, but to hit us worse than the other two of them there combined. So I hesitate to jump out in front and say too much but in general, yes, if things progress as planned with the vaccinations and decreasing cases and opening up, yes, we would fully expect that to happen, Tim..

Okay. Great.

And is that basically the one pivotal factor which underpins the range in your EBITDA guidance for the year?.

Yes, I would say so..

Okay. Got it. Second question here is on Fort Hills. Suncor released results today, and they kept the production guidance for Fort Hills for the year. And I think one of the factors that they mentioned was inability to get third-party contractors.

So that points to sort of a tightening of the market and dovetails with the extension in the contract you saw in the oil sands earlier -- or I guess, subsequent to the quarter.

What are you seeing in pricing dynamics? And is that market pretty tight for equipment?.

Certainly, the large equipment is tight and demand, but you really don't know whether clients have opportunities to defer to balance out. But from an RFP perspective, we certainly see increasing demand.

The opportunities at repricing there -- I think one of the things we see is -- and I would highlight is that Q2 is usually our lowest kind of margin on the project perspective because our escalations, both in contracts and negotiated generally apply in the second half of the year.

And on the other side of that, the cost side, our labor because of burdens -- and these aren't huge differentials, but our burden in the first half of the year is higher than the second half. So those are a bit of an impact, too. So some of the pricing will improve because an escalator applies in June.

And typically, that's one of our annual escalations applying contracts is in the second half of the year..

Okay. Got it.

Do you think across the remainder of your portfolio in the oil sands, you could see some similar expansions to contracts?.

Yes. We think there's opportunities to extend terms. I think over the next year, we might have better opportunities to extend on those MSAs and get -- and have the associated commitments on them. So, yes..

Your next question comes from the line of Maxim Sytchev with National Bank Financial..

Joe, I guess, operationally, we've had obviously some strange weather.

How is that shaping? Any impact or negative impact on how you're ramping up through Q3?.

I don't think the weather has impacted as much as the pandemic. I mean weather is really, especially in Alberta, is predominantly which month you're going to get rain in, in the summer, and sometimes it's June, sometimes it's July, sometimes it's August, sometimes it's the whole summer. But I don't -- we aren't expecting anything unusual.

It just may be heavier in June than in July or heavier in July than in August. So I don't expect any weather impacts. We always qualify that with, I don't predict the weather either. So -- but we haven't seen in a longer period of time, looking at quarter-over-quarter or year-over-year that significant impact from weather this year..

Okay. That's helpful. And then just wanted to circle back to the Fargo project. Was wondering if you don't mind, maybe, first of all, talking about the risk profile of this project and how you're managing that part.

And then maybe the second part is a question to Jason in relation to how we should be thinking about revenue progression between T-0 and for the next couple of years just from a modeling perspective?.

On the first part, Max, I think it's no different than any other project, other than we want to maintain a very strong focus on the planning, planning of getting people in there, equipment in there, having the fit, making sure you get the right gear at the right time and qualified operators.

And more than anything else, it is doing good planning and expecting changes to happen and then having plan Bs and Cs and Ds for when they do. So for our part, it's really putting good guys on the job that have the experience and the skills to perform here and then doing the planning associated with it. So this is an earthworks job.

This isn't -- it might be a big P3 in North Dakota, but it's another dam construction job for us. And that's with an M not an N on the end of it.

So the -- we just want to be very focused on doing good planning, good scheduling on people and assets, making sure we're setting up training programs to bring in skilled operators and mechanics and anticipating anything that can happen there, weather-wise or anything else..

And there is no issue in terms of shifting people around right now, right, despite, obviously, challenges with the border and things like that?.

No, no. We have North American -- current North American employees on other sites that will be heading to this one. And I don't think we'll find an issue recruiting or finding skilled operators or even staff people in those areas. We've done quite a bit of recruiting with our U.S. coal mine management contracts in and around the U.S.

So we've got a pretty good understanding of that marketplace..

Yes, I guess, just off the top, obviously, revenue for this project will go through equity accounting, Max. So be careful where you put it as far as revenue projections. Very little revenue we expect to recognize this year upon financial close in Q4.

The lion's share, 75% of the CAD650 million will be over the four years of 2022 through 2025, with the biggest year being 2024. So it will continue to escalate in '22, '23 and then '24 is what's modeled as the biggest year and then comes down in 2025.

And then outside of that, there's a couple of years of inspection before substantial completion and then the O&M contracts. So definitely a lot of activity in those critical years '22 through '25..

Okay. That's helpful. And then the last question, there was a remark in terms of capital allocation and potential dividend increase.

Just curious if you don't mind maybe talking about how you think about that as a percentage of, I don't know, net income or free cash flow? What are the parameters that you are using internally to drive your decision-making on that side?.

All right. Those would be the parameters and, Max, every fall we have our Board meeting, where we review our dividends, and we'll be having that discussion coming up, and we'll share that outcome with you guys when it comes..

And your final question comes from the line of Richard Dearnley with Longport Partners..

I am intrigued with the Fargo-Moorhead contract. Who, in general, were you bidding against there? It's intriguing that a Spanish-Israeli and Canadian company would win a contract in the U.S., and maybe I just don't understand the contracts.

Could you talk about that?.

Sure. The -- this started with multiple consortiums. So generally, every team that's putting something together here is a mix of several groups of construction people and experienced construction people. And then it was shortlisted down to three, of which our team was one.

As far as -- I think it's a bit misleading as far as where companies' headquarters are. As an example, Acciona, just -- I think their -- just celebrated their 20th year in North America. And same with Shikun & Binui, had been doing operations across North America.

Some of these large international construction contractors, they might have a headquarter somewhere, but they're very experienced in North America.

So I think it comes down to the technical package, the execution, and the pricing along with our experience in particular areas that we believe carried us across the finish line in that particular project..

Okay. This concludes the Q&A section of the call, and I will pass the call over to Joe Lambert, President and CEO, for closing comments..

Thanks, Rebecca, and my thanks to all of you for joining us today and for your continued interest in our growth and diversification journey. I'm very excited about the opportunity to advance the business this year. And obviously, we all hope and expect to be a much healthier and more stable environment going forward. Thanks again..

Thank you. This concludes the North American Construction Group Q2 2021 conference call. You may now disconnect..