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North American Construction Group Ltd (NOA -0.67%)
Q2Â 2020 Earnings Call
Jul 30, 2020, 1:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, ladies and gentlemen. Welcome to the North American Construction Group Earnings Call for the Second Quarter ended June 30, 2020. [Operator Instructions]
The company wishes to confirm that today's comments contain forwarding information and that actual results 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 making forecasts or projections that are reflected in the forward-looking information.
Additional information about these material factors is contained in the company's most recent management discussion an analysis, which is available on SEDAR and EDGAR as well as the company's website at nacg.ca. I will now turn the conference over to Martin Ferron, Chairman and CEO. Please go ahead.
Martin Ferron -- Chairman of the Board And Chief Executive Officer
Thanks, and a very good morning to everyone. As one of the very few companies that provided any sort of outlook for the second quarter, we were determined to both minimize the impact of the COVID-19 pandemic on the health and safety of our employees, and mitigate its effect on our business performance. Therefore, I am pleased that good headway was made on both objectives as we also helped our customers manage the virus' risk on their worksites. I'm especially proud that in typical NACG fashion, we applied a fast and firmer strength to our costs, eliminating all discretionary spending and very closely managing all third-party support expenses.
This closed stewardship of costs rather than the government federal wage subsidies rewarded us with a nicely profitable quarter despite a greater than 60% sequential fall in our revenues in the toughest operating environment we have ever experienced. We also hit our free cash flow target, which, along with the call of a convertible debenture, allowed us to reduce net debt by over 10%. With that introduction, I will now hand over the call to Joe Lambert, our President and Chief Operating Officer, to take us through the safety and other operational highlights shown on slides two to four. Jason Veenstra, our CFO, will then cover financial highlights on slides five to nine before I talk about our outlook using slide 10.
So over to you, Joe.
Joseph C. Lambert -- President, Chief Operating Officer
Thanks, Martin. Looking at slide two. I am pleased to report that our team promptly responded to pandemic and put in place safeguards to ensure workplace hygiene, physical distancing and isolation and contact protocols while maintaining our industry-leading safety results. When you consider our operating environment and the use of camps, busing and transportation needs, sanitizing the equipment and offices and adjusting to communicate with over 900 employees while maintaining social distance, the speed, efficiency and effectiveness of how our team responded was simply stated excellent. We will continue our diligence in both workplace hygiene and safety to ensure everyone gets home safe. Moving on to the business update on slide three. Faced with a previously unimaginable scenario of production cutbacks, negative oil prices and the worldwide pandemic, our operations, maintenance and support teams demonstrated the resilience of our company by rolling up their sleeves and getting to work, ensuring the health of our workers was critical to us, and then we immediately turned to addressing our rapidly changing customer needs.
Our strong oil sands customer alliances, combined with our safe and low-cost operations, allowed us to identify opportunities to increase fleet usage and efficiency on one site while demobilizing completely off another, allowing for the mutual benefit of improved fleet utilization and reduced customer costs. Similarly, in our start-up of a coal management contract in Texas, we were not only able to achieve a smooth and orderly transition, we're able to complete on time and add significant cost savings. On time and under budget are always good ways to start a project, but achievement during pandemic and cross borders is a true testament to the strength of this team. While we rapidly adjusted to our changing environment, our corporate strategy remains intact. Our focus on strong, long-term relationships in oil sands showed the mutual benefits we expect from improved customer alliances. We continue to have tender opportunities and are optimistic on potential awards before the end of the year that will provide increased geographic and commodity diversity.
We continue to increase vertical integration and external sales potential of our equipment maintenance business. Lastly, we react promptly with our capital spend and cost restraints to ensure we live within our means. Moving on from the bottom slide three and into slide four, you'll see the operational plan for 2020 remains unchanged from what was presented at the end of last quarter. We expect our customer-first mentality, safe low-cost provider reputation and client alliance relationships will put us at the front of the client call back list as we begin to ramp up out of the Q2 business trough. The need for lower cost and improved efficiency only further reinforces the value of both our internal and external maintenance services. Our new component rebuild facility got up and running in Q1, improved cost and efficiency during Q2 and will continue ramping up through year-end to provide low-cost, high-quality components, initially supporting our internal needs and growing into next year with capacity for additional external revenue.
Along with the lower cost component rebuilds, we continue to perform second life whole machine rebuilds and have completed our second ultra-class truck, which is being commissioned this week. These whole machine and component rebuilds have an immediate impact on reduced sustaining capital spend, but the income statements benefits will show more as they depreciate over the whole of the asset life, and those further benefits increase the more units we build. To date, we have completed whole machine rebuild on a couple dozen or so of our larger machines and have current capacity to meet about 10% of our internal component demand. So we are just getting started.
To close out my brief comments, I'd like to take this opportunity to personally thank all of our employees, clients, shareholders, partners and other stakeholders that continue to support and show confidence in our business. I believe our results continue to prove the naysayers wrong and demonstrate the resilience and adaptability of our business. In response to those due to date beer is we heard from in March and April, Mark Twain said at best when he said, "the report of my death was an exaggeration."
With that, I'll turn the call over to Jason for details on our financial health.
Jason Veenstra -- Executive Vice President And Chief Financial Officer
Thanks, Joe, and good morning, everyone. I'll start with our top line on slide five. Revenue for the quarter of $71 million was $100 million below last year's Q2 as we suffered the full impact of COVID-19 in the quarter. Our quarter was dominated by site access issues, and as Joe mentioned, the correlated demobilization and mobilization that comes with that. Demobilization and subsequent mobilization are usually done in a scheduled manner, but the pandemic required quick execution, and much of our quarter was spent responding to changing situations at the mindset. All said, revenue decreased by 60% from Q2 2019. When just looking at 2020, we were down by 64% from the first quarter. And when looking at specific months, we are more than 70% down in early Q2 from revenue levels in January and February. While the resiliency of the oil sands mines was on full display during Q2 as production was not halted, the access restrictions did have a serious revenue impact for our quarter. Of specific note, bitumen throughput at the Fort Hills mine was reduced in Q2 2020, which resulted in lower demand and our equipment being transitioned to the Millennium mine.
The time required for the transition meant less revenue in the quarter. The Nuna Group of Companies was less impacted by the pandemic, but did experience general delays in site access as they commenced their busy season in June. Lastly, on revenue, external maintenance and our mine management contracts were not noticeably impacted and partially offset the year-over-year decreases as these business lines continue to grow. Gross profit margin of 30% reflected an efficient operational quarter, albeit on a much smaller scale than originally anticipated and unprecedented circumstances. On-site operations personnel reacted swiftly to the realities facing our customers, and costs incurred were exclusively reserved for specifically requested support and service. Required heavy equipment was operated effectively with minimal idle time, and immediate discretionary cost constraints were put in place to minimize employee layoffs while maintaining positive profit levels. Included in the gross margin gross profit margin was depreciation of 16.3% of revenue for the quarter.
While still generally comparable to the expected run rate of 14%, the depreciation percentage was slightly higher due to the exaggerated impact of straight-line depreciation on fixed assets during such a low revenue quarter. Direct, general and administrative expenses in the quarter were $3.5 million, equivalent to 4.9% of revenue. This spending was lower than Q2 2019 spending of $6 million but higher than the previous 3.4% of revenue. The 4.9% illustrates the low revenue in the quarter but was aided by austerity measures put in place in late Q1. The primary initiatives of the G&A reduction were mandated reduced work hours and the complete halt of all discretionary and nonessential spending. Adjusted EBITDA of $31.9 million was a $5.2 million decrease from Q2 2019 and reflects the wide-reaching impact of the COVID-19 pandemic, offset by our strict discipline to limit indirect project costs and G&A spending to essential costs only. Adjusted earnings per share for the quarter of $0.45 was comparable to the prior year based on the provided commentary, plus the temporary wage subsidy program, which I'll touch on in a moment, as well as lower interest costs.
Cash-related interest expense for the quarter was $3.7 million, representing an average interest rate of 3.6% as we continue to benefit from both reductions in posted rates as well as competitive rates in equipment financing we were able to secure in the quarter. Lastly, of note, adjusted EPS was impacted for the full quarter by the April six issuance of 4.6 million common shares as part of the redemption of our 5.5% debentures. This issuance was offset by share repurchases of 1.2 million shares. These transactions resulted in our weighted average number of common shares for the quarter being 28.8 million shares versus a Q1 average of 25.6 million shares. We'll touch briefly on the Canada emergency wage subsidy provided with a summary provided on slide six. As disclosed in detail in our financial statements, net income includes approximately $11 million of salary and wage subsidies received under the program. These subsidies are presented with their correlated employee expenses in both project and equipment costs as well as general and administrative expenses.
These subsidies reimbursed us for a portion of the wages we paid and greatly helped in our efforts in retaining our workforce. As noted in the simplified slide, the program essentially reimbursed us for 20% of the all-in employee costs, which in turn allowed us to maintain 20% of the headcount level, we may have otherwise had to reduce either temporarily or permanently. From our perspective, the program has worked effectively and better positions us moving forward as we look to ramp up activity levels. Moving to slide seven, I'll summarize our cash flow. Stated simply, free cash flow in the quarter of $11 million was the compilation of the adjusted EBITDA of $32 million, offset by sustaining capital of $14 million, cash interest expense cash interest paid of $4 million and the timing impact of changes in other balance sheet items. Sustaining maintenance capital was heavily constrained in the quarter based on the much discussed macro environment, and consistent with cost of sales, validates the variable nature of our capital spending program.
As referenced on the slide, free cash flow was heavily impacted in the quarter by the build in both capital inventory and capital work in process as we continue to advance our internal component rebuilding processes. Moving to our balance sheet on slide eight. Liquidity of $135 million is the midyear watermark based on steady free cash flow, plus the impact of approximately $25 million of additional equipment financing in Q2. This equipment financing was secured at low interest rates and allowed us to increase liquidity as funding was directed to the credit facility. On a trailing 12-month basis, our senior leverage, which includes the equipment financing, was 2.1 times, well below our covenant of 3.0. And to close out on slide eight, slide nine, I'll briefly touch on the capital returns. As at June, return on invested capital was 10.2%. Impressively, this is actually slightly up from the 9.9% posted in Q1 as adjusted EBIT for the quarter of $19.5 million was up year-over-year.
And with those financial comments, I'll pass the call back to Martin.
Martin Ferron -- Chairman of the Board And Chief Executive Officer
Thanks, Jason. And now turning to slide 10 to talk about our outlook, which covers the balance of the year. As I explained last time, our customers either limited or denied us access to some of our core oil sands mine sites starting around mid-March. This allowed them to manage virus pace more effectively by either operating with the fewest people possible or bringing forward maintenance turnaround activity. Also, for the first time, we saw production cut back at an oil sands mine as physical storage for the product became a real issue, where the virus also creating a sharp decline in oil demand. While our mining operates with just one production train, the need for our services is limited. However, our contract structure contemplated these types of the currencies, and the customer had the ability to move the committed volumes between operations. This occurred during the quarter that there was a two-month time lag needed to negotiate a contract amendment and transfer the equipment fleet from the first site to the second.
Therefore, as we predicted, most of the disruption to our business fell in Q2, and we still anticipate that our oil sands operations will normalize as the year progresses. Nuna was less impacted with our active seasonal work just kind of started late in the quarter. Also, as Joe mentioned, we commenced the operation of a second coal mine by the middle of the year. Our EBITDA range for the year is now $140 million to $170 million. And we expect to produce another $20 million to $40 million of free cash flow in the second half of the year, but most of that likely to occur in Q4. Therefore, free cash flow could be more than $30 million higher than last year. And adjusted EPS is about flat, which would be quite an achievement in this extraordinarily tough year.
We're also making good progress in our quest to diversify our business, such that we still expect to have around 40% of our EBIT come from oil sands as early as 2022. We hope to have positive news on that front in this third quarter. I will end with a comment on our stock price, being that we had produced $1.4 of adjusted earnings per share in the first six months of the year, with over half of that time being rabid by the virus pandemic. We have clearly demonstrated the resilience of our business model and our ability to cut spending to protect profit margins and free cash flow in the face of extreme adversity at our stock price as a seven number.
I will now hand the call back to the operator, Denise, for the Q&A session. Thanks.
Questions and Answers:
Operator
[Operator Instructions] Your first question comes from Yuri Lynk with Canaccord Genuity. Your line is open.
Yuri Lynk -- Canaccord Genuity -- Analyst
Good morning, guys. Ordinary mall in Europe. Martin or Joe, just can you give us some sense of the revenue recovery cadence as we work through the quarter and any early observations on July?
Martin Ferron -- Chairman of the Board And Chief Executive Officer
Joe, you want to take that?
Joseph C. Lambert -- President, Chief Operating Officer
Yes. I think we we see our sites coming back other than remember the there was one train was shut up down. So where the train was shut down at the Fort Hills site the public information has said, that is going to be shut down through 2021, and recent announcements from the owners suggest it could be earlier. We're still anticipating that being the public date of 2021. But we do see other sites that have brought turnarounds forward, starting to ramp up just just starting this month, and we think can be back to, I'd say, close to full levels by Q4. And so we kind of expect that ramp-up to occur overall across the business from really right now through October. And then we think our winter season is going to be as busy as all our winter seasons, where we're pretty fully engaged. Does that cover what you're looking for?
Yuri Lynk -- Canaccord Genuity -- Analyst
Yes. Yes, yes, that's good. And then I guess on the guidance that you've issued, does the EBITDA guidance include further wage subsidy benefits above and beyond the $11 million received in the quarter?
Martin Ferron -- Chairman of the Board And Chief Executive Officer
Yes, it does. Our we're hoping or expecting a similar amount in the six months, right? So in Q3 and Q4. But I'd say and Jason explained it well that we're spending a lot of our money on retaining people. Our business is recovering, but we still have a lot more people and we need for the workload. So it's really a retention tool. It's working very effectively, but it's cost associated with it, right? So it's in the mix, but it's certainly not a direct order to the bottom line.
Yuri Lynk -- Canaccord Genuity -- Analyst
No. I'm just trying to square the revenue recovery with the if you're going to if you expect to get benefits in the back half of the year, then wouldn't your revenue have to be down 30% or more year-on-year in each quarter? And is that in line with what you're expecting?
Martin Ferron -- Chairman of the Board And Chief Executive Officer
Jason?
Jason Veenstra -- Executive Vice President And Chief Financial Officer
Yes. We still expect to qualify here. Given the how far qualified we did in the 60% to 70% range, we still will qualify for the 30%. And we are still getting through some of the nuances of the new qualification, but it seems actually easier to qualify periods five and onwards. So we expect to qualify. And our estimate, like Martin said, is about the same as what we got in the first 3.5 months.
Yuri Lynk -- Canaccord Genuity -- Analyst
Okay. Okay guys, I'll turn it over. Thanks.
Jason Veenstra -- Executive Vice President And Chief Financial Officer
Thank you, Rick.
Operator
Your next question comes from Daine Biluk from CIBC Gold market. Your line is open.
Daine Biluk -- CIBC Gold market -- Analyst
Good morning, everyone. We're so I guess, maybe just starting off in activity in the back half of the year. Is there anything you can share on how you expect activity to ramp? I guess what I'm trying to get at is it fair to think Q4 will be busier than Q3 from an EBITDA perspective, excluding any weather impacts?
Martin Ferron -- Chairman of the Board And Chief Executive Officer
Joe, can you take it on again, if you don't mind?
Joseph C. Lambert -- President, Chief Operating Officer
Yes, I think it's that would be our normal. I think that's going to be the same even with the ramp-up that we'll have a slightly higher Q3 than or Q4 than Q3.
Daine Biluk -- CIBC Gold market -- Analyst
Okay. And then maybe just following up on the same thing. You mentioned Q3 free cash flow is going to be closer to breakeven. What's driving that? Is that largely just you guys reactivating equipment or working capital considerations or anything else?
Martin Ferron -- Chairman of the Board And Chief Executive Officer
It's mainly yes. Go ahead, Joe.
Joseph C. Lambert -- President, Chief Operating Officer
I was just going to say, it's predominantly the ramp-up of those sites. And then also the preparation on the maintenance side for for the winter work, which in starting in well, really, it starts and end in Q4 but continuing through Q1 next year. So there's a big ramp-up in work as we go through the year, but there's also a larger ramp-up of having fleet available to be utilized come Q1 next year. So...
Daine Biluk -- CIBC Gold market -- Analyst
Understood. And then I guess maybe one more question for you, too, Joe. Just following up on your earlier comments on Fort Hills. Just to confirm, you guys are the current guidance doesn't bake in any core sales activity for the back half of the year. And then secondly, if it did resume operations, how much of a tailwind would that be? Or is it more of a 2021 story still?
Joseph C. Lambert -- President, Chief Operating Officer
I we don't have anything at Fort Hills projected of any significance through the end of this year. And even if operations started up late in this year, we don't think the demand for our services would necessarily start-up this year, it would likely be next year. So it'd likely be Q1, Q2 next year where we because they have mined in advance having one train down, so they are a bit buffered from they're contracting needs right now.
Daine Biluk -- CIBC Gold market -- Analyst
Got you. Okay. That makes sense. That's good color. And then just last one for me, and I'll turn it back. Any goalposts you can share on onetime costs associated with the mobilization of equipment off of Fort Hills?
Jason Veenstra -- Executive Vice President And Chief Financial Officer
Yes. Order of magnitude, it's a few million dollars, Daine. Obviously, it was it's part of the noise of Q2 kind of behind us. We did at the end of March, have to make determinations as well. So part of that was in Q1, but it's in the single-digit millions of dollars, and it's not inexpensive to move this fleet around.
Daine Biluk -- CIBC Gold market -- Analyst
Got it. That makes and that's good color. Thank you. I appreciate the color, guys. I'll turn the call back spring again
Operator
[Operator Instructions] Your next question comes from Maxim Sytchev with National Bank Financial. Your line is open.
Maxim Sytchev -- National Bank Financial -- Analyst
Hi, good morning gentlemen. My remarks are Max Mike, I was wondering if you have these numbers kind of on the top of your head, in terms of the 60% year-on-year decline in revenue how much of that is in relation to restricted access to sites versus production curtailments versus weather? So we're just trying to gauge better how to think about the forthcoming quarters in terms of revenue progression.
Martin Ferron -- Chairman of the Board And Chief Executive Officer
Yes. I would kind of say about 70% is site access issues, maybe 20% due to the production cut back and 10% due to a pretty wet June, actually. So that's kind of the way I'd look at it.
Maxim Sytchev -- National Bank Financial -- Analyst
Okay. Fair enough. And then in terms of so the site access right now, Martin, do you mind providing some color in terms of if you're if that has fully normalized? Or there's still some frictions for you guys?
Martin Ferron -- Chairman of the Board And Chief Executive Officer
It's not fully normalized. There's one site in particular where there's maintenance turnarounds going on still. So we're discussing with the customer the timeframe for us to reengage that site. We expect that to gradually occur during Q3. Such that in Q4, we should be back to more normal, as Joe mentioned. So it's a progression. I think we get there in Q4.
Maxim Sytchev -- National Bank Financial -- Analyst
Okay. No, that's helpful. And then just curious to see your views around client behavior. Having seen sort of the pressure for pricing concessions, things like that, that we would have seen in 2014? Just maybe any color there.
Martin Ferron -- Chairman of the Board And Chief Executive Officer
Yes, definitely. Obviously, the oil price collapse, plus trying to manage the virus, made things very tough for our customers. I really sympathize with. So we engaged in discussions on pricing, sure. And as usual, we've done our best to give back some concessions on price. And that's taking into account in the outlook.
Maxim Sytchev -- National Bank Financial -- Analyst
Okay. And then your comment around Nuna and potentially some opportunities in Q3. Do you mind maybe commenting on the business development environment right now? Obviously, some of the commodities outside of the oil are doing quite well right now. So do you mind maybe commenting there?
Martin Ferron -- Chairman of the Board And Chief Executive Officer
Yes. I'll speak in general. I think I've learned in the past not to speak about specific projects. So yes, in house, we've got several bids, several opportunities that we're developing from a business perspective of commodities, other than oil. As you mentioned, obviously, gold is doing extremely well right now. So you would expect activity in that area. So we're hopeful. I think our cost structure can be used in other areas, as we've demonstrated in the past. So we're bidding away in developing these opportunities, and we really hope that we'll have some good news to share.
Maxim Sytchev -- National Bank Financial -- Analyst
Okay. And my last question is just on capital deployment thoughts. I mean obviously, NCIB is part of that. But do you mind maybe commenting in terms of where the focus is? I mean fully realizing that right now, it's focusing on some of the post-COVID environment, but, in the more normalized sort of backdrop, what are the priorities?
Martin Ferron -- Chairman of the Board And Chief Executive Officer
Yes. So obviously, in the current environment, there's a certain amount of distress. So I think there'll be some opportunity for us to pick up some assets at good prices. So we'll be opportunistic in that approach. Otherwise, as you mentioned, I think we're fortunate that we'll be in a position to both continue NCIB and reduce debt. So we'll tailor the pace of purchases according to the price of the stock and use excess cash to lower debt in the absence of any distressed asset purchases. But you could see some things in that area.
Maxim Sytchev -- National Bank Financial -- Analyst
Right. And I guess, Martin, I mean, here, you talk about assets, specifically sort of assets with full yields or you're talking about companies. I mean how is that sort of environment? Are there any distressed situations that could be of interest to you?
Martin Ferron -- Chairman of the Board And Chief Executive Officer
Yes. Again, I'm not going to speak to it specifically, but the virus and the oil price situation has caused a lot of distress, and it wouldn't be surprising to see parts of businesses or individual assets come up to a sale with decent prices. So as I mentioned, if we can pull off a deal or two like that, we will certainly look at it. It's something we're engaged in.
Maxim Sytchev -- National Bank Financial -- Analyst
Okay. Okay, that's very helpful, thank you very much.
Operator
Your next question comes from Devin Schillling with PI Financial. Your line is open.
Devin Schillling -- PI Financial -- Analyst
Hi guys, good morning. I know in the past, you guys have talked about the RD project, I believe in Nuna that you guys were shortlisted for. Any updates here? Or is everything around this project on hold at the moment?
Martin Ferron -- Chairman of the Board And Chief Executive Officer
No. I think we're hopeful that project goes ahead, Devin. We always were hopeful with just some delays in terms of permitting and approvals. So I believe a lot of the progress is being made this year, and we could see some positive news. So that will be a really big shortly arm for Nuna, and obviously, it will benefit us, too. So we're hopeful, very hopeful that will go ahead.
Devin Schillling -- PI Financial -- Analyst
Okay. And just to touch a little bit on your guys's revenue visibility right now from some of your key clients. Are you guys currently scheduling work a couple of weeks out? Or have talks can progress where things have stabilized a bit were now where, I guess, you're looking at a couple of months out instead?
Martin Ferron -- Chairman of the Board And Chief Executive Officer
No. We have a certain amount of backlog, which we can plan months in advance on the sites we're back fully engaged on, Devin. There are many discretionary projects going on right now, not much spot work. So to the extent they pop up, then, yes, that's a shorter-term planning-type style, but we have a backlog backbone of work that keeps us engaged for months.
Devin Schillling -- PI Financial -- Analyst
Okay, great.
Operator
Okay. And are no further questions queued up at this time. I turn the call back over to presenters.
Martin Ferron -- Chairman of the Board And Chief Executive Officer
Well, thank you for joining us today. We look forward to speaking to you next time. Thanks.
Operator
[Operator Closing Remarks]
Duration: 35 minutes
Call participants:
Martin Ferron -- Chairman of the Board And Chief Executive Officer
Joseph C. Lambert -- President, Chief Operating Officer
Jason Veenstra -- Executive Vice President And Chief Financial Officer
Yuri Lynk -- Canaccord Genuity -- Analyst
Daine Biluk -- CIBC Gold market -- Analyst
Maxim Sytchev -- National Bank Financial -- Analyst
Devin Schillling -- PI Financial -- Analyst
