Business Context and Reporting Period
Company: North American Construction Group Ltd. (NACG)
Filing Type: Form 6-K (Interim Report)
Reporting Period: Three and six months ended June 30, 2019
Business Overview: NACG provides mining and heavy construction services, primarily in the Canadian oil sands, with expanding operations in other resource sectors (coal, copper, gold, diamonds) via its Nuna Group of Companies. The company is in a growth phase driven by organic expansion and acquisitions made in late 2018.
Key Financial Metrics
| Metric (CAD) | Q2 2019 (3 Months) | Q2 2018 (3 Months) | YTD 2019 (6 Months) | YTD 2018 (6 Months) |
|---|---|---|---|---|
| Revenue | $176.9 million | $79.5 million | $363.3 million | $194.2 million |
| Gross Profit | $23.5 million | $9.7 million | $53.0 million | $36.4 million |
| Gross Margin | 13.3% | 12.1% | 14.6% | 18.8% |
| Adjusted EBITDA | $37.1 million | $15.2 million | $89.2 million | $54.3 million |
| Adjusted EBITDA Margin | 21.0% | 19.1% | 24.5% | 28.0% |
| Net Income (Shareholders) | $13.9 million | $0.03 million | $21.1 million | $11.2 million |
| Adjusted EPS | $0.43 | $0.07 | $0.93 | $0.62 |
| Free Cash Flow | $1.7 million | $13.0 million | ($3.6 million) | $29.5 million |
| Total Debt | $409.4 million (as of June 30, 2019) | |||
| Net Debt | $392.0 million (as of June 30, 2019) | |||
| Liquidity | $164.5 million (Cash + Unused Credit Facility) |
Material Changes vs. Prior Period
- Revenue Surge: Q2 revenue increased 123% year-over-year, driven by an expanded fleet from late 2018 acquisitions, catch-up production following an early spring breakup in March, and increased scope at the Kearl, Fort Hills, and Aurora mines.
- Profitability Improvement: Adjusted EBITDA rose 144% to $37.1 million in Q2. Net income jumped from $33,000 in Q2 2018 to $13.9 million in Q2 2019, aided by a $3.5 million benefit from the staged reduction in the Alberta corporate tax rate.
- Margin Dynamics: Gross margin improved to 13.3% in Q2 (vs. 12.1% prior year) but remains below the 18.8% YTD prior year due to legacy contract inefficiencies at Fort Hills and a $2.8 million out-of-period inventory correction that boosted current gross profit.
- Capital Expenditures: Sustaining capital spend increased significantly to $35.1 million in Q2 (vs. $13.9 million in 2018) to upgrade the acquired fleet, resulting in negative Free Cash Flow for the six-month period.
- Debt Structure: Total debt increased to $409.4 million, primarily due to the issuance of $55.0 million in 5.00% Convertible Debentures in March 2019 and new financing obligations.
Guidance, Outlook, and Risks
- Revised 2019 Guidance: Management now expects full-year 2019 revenue growth of approximately 75% and Adjusted EBITDA growth of 70%, up from initial estimates of 70% and 60% respectively.
- 2020 Outlook: Early projections indicate Adjusted EBITDA growth of around 15% and Adjusted EPS exceeding $2.00.
- Capital Expenditure Revision: Due to the condition of acquired equipment, sustaining capital for 2019 is revised to $110–$120 million (up from $75–$85 million). Growth capital is revised to $40–$45 million (up from $15–$25 million).
- Debt Reduction Target: The company aims to reduce total debt by $150 million between 2019 and 2021. Management noted they may lower this target to $100 million to pursue share buybacks (NCIBs) if the stock price does not reflect the growth profile.
- Key Risks:
- Seasonality: Operations are subject to "spring breakup" which curtails production; however, the company expects to be profitable in all quarters of 2019.
- Legacy Contracts: Two legacy contracts at Fort Hills are negatively impacting margins but are expected to expire by Q3 2019.
- Market Dependence: Over 75% of revenue is linked to oil sands production, though management views this sector as resilient to oil price fluctuations.
Investor Verification Checklist
- Inventory Accounting Change: Verify the impact of the $2.8 million out-of-period correction regarding spare parts inventory capitalization on future cost of goods sold.
- Capital Spend Execution: Monitor if the revised sustaining capital spend ($110–$120M) is fully funded by operating cash flow or requires additional debt/equity issuance.
- Fort Hills Contract Expiry: Confirm the timeline for the expiration of legacy contracts in Q3 2019 and the subsequent impact on gross margins.
- Convertible Debentures: Review the terms of the new 5.00% debentures ($55M) and the potential dilution impact if conversion prices are met.
- Debt Covenant Compliance: Verify continued compliance with the Senior Leverage Ratio (currently 2.10:1 vs. 4.0:1 max) and Fixed Charge Coverage Ratio (1.33:1 vs. 1.15:1 min).