Business Context and Reporting Period
Company: North American Construction Group Ltd. (NACG)
Reporting Period: Three months ended March 31, 2020 (Q1 2020)
Filing Type: Form 6-K (Interim Report)
Business Overview: NACG provides mining and heavy construction services, primarily in the Canadian oil sands, with operations in base metals, precious metals, and diamonds through its Nuna Group subsidiary. The quarter was characterized by strong winter season demand followed by the onset of the COVID-19 pandemic and a global oil price war in mid-March, which impacted operations and customer activity levels.
Key Financial Metrics
| Metric (CAD) | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $198.8 million | $186.4 million | +6.7% |
| Gross Profit | $34.7 million | $29.6 million | +17.1% |
| Gross Profit Margin | 17.4% | 15.9% | +1.5% |
| Operating Income | $32.5 million | $14.5 million | +123.6% |
| Adjusted EBITDA | $59.9 million | $52.1 million | +15.1% |
| Net Income (Available to Shareholders) | $19.0 million | $7.2 million | +164.6% |
| Basic EPS | $0.74 | $0.29 | +$0.45 |
| Free Cash Flow | $9.4 million | ($5.3 million) | +$14.7 million |
| Total Debt | $476.9 million | $412.1 million | +15.7% |
| Liquidity (Cash + Credit Facility) | $107.7 million | N/A | N/A |
Note: All figures in Canadian dollars unless otherwise noted. Adjusted EBITDA is a non-GAAP measure.
Material Changes vs. Prior Period
- Revenue Growth: Driven by higher equipment utilization during the winter season, new growth capital assets, and a coal mine management contract. Growth was partially offset by the completion of the Highland Valley Copper Mine contract and a change in accounting for Nuna (now equity method).
- Margin Expansion: Gross margin improved to 17.4% from 15.9% due to favorable weather, optimized fleet integration, and the completion of unfavorable legacy contracts at Fort Hills in the prior year. Depreciation as a percentage of revenue increased to 16.3% due to a $1.8 million facility write-down.
- Cost Discipline: General and administrative expenses (excluding stock-based compensation) decreased to 4.4% of revenue. Stock-based compensation resulted in a benefit of $6.9 million in Q1 2020 compared to an expense of $6.0 million in Q1 2019.
- Capital Spending: Sustaining capital decreased to $38.1 million (from $50.1 million), while growth capital increased to $28.7 million (from $13.3 million) due to strategic asset purchases early in the quarter.
Outlook, Risks, and Management Commentary
Management Commentary
Management expressed pride in Q1 operational performance prior to the pandemic but acknowledged the severe impact of COVID-19 and oil price volatility starting mid-March. The company has implemented aggressive cost-cutting measures, including suspending production-related spending, reducing the work week for administrative staff, and halting discretionary spending. Sustaining capital plans for the remainder of 2020 have been reduced by approximately 50%.
Guidance and Outlook
- Q2 2020: Anticipated to be slow. Projected free cash flow is expected to be between $10.0 million and $15.0 million.
- Full Year 2020: Management expects liquidity to remain above $100 million. Full-year sustaining capital is now projected at $65.0 million to $80.0 million.
- Backlog: Anticipated backlog as of March 31, 2020, is $981.2 million, with $185.9 million expected to be performed in the balance of 2020.
- Diversification: The company is ramping up efforts to achieve 40% of EBIT from outside the oil sands by 2022.
Risks and Contingencies
- COVID-19 Impact: Lockdowns and reduced oil demand have led to customer production cuts and reduced activity levels. There is a risk of further revenue declines and potential asset impairments if conditions worsen.
- Liquidity and Debt: While the company is currently compliant with covenants (Senior Leverage Ratio 2.01:1; Fixed Charge Coverage 1.21:1), there is a risk of inability to raise financing on favorable terms.
- Convertible Debentures: The 5.50% convertible debentures ($38.6 million) were redeemed on April 6, 2020, via share issuance, reducing debt load post-period.
- Share Repurchase: A Normal Course Issuer Bid (NCIB) was commenced to purchase up to 2.3 million shares, with 594,345 shares purchased in Q1.
Key Facts for Investor Verification
- Liquidity Position: Verify the $107.7 million liquidity figure (cash + unused credit facility) and the ability to maintain this level given the projected Q2 slowdown.
- Debt Redemption: Confirm the impact of the April 6, 2020, redemption of $38.6 million in convertible debentures on the balance sheet and interest expense in Q2.
- Capital Plan Reduction: Monitor the execution of the 50% reduction in sustaining capital spending for Q2-Q4 2020 and its effect on future operational capacity.
- Asset Impairment: Review future filings for any impairment charges on long-lived assets, as management noted indicators were present but assets were deemed recoverable as of March 31.
- Customer Concentration: Note that the top four customers accounted for approximately 98% of revenue in Q1 2020, highlighting significant exposure to the oil sands sector's volatility.