Good morning, everybody, and thank you for joining the Sidoti December 2024 Small Cap Conference. My name is Julio Romero. I'm the Building Products, Industrials and E&C Analyst here at Sidoti & Company. We're really pleased to be able to host North American Construction. Their ticker is NOA. With us today is Joe Lambert, President and Chief Executive Officer, Jason Veenstra, Chief Financial Officer, and Dave Fike, IR. The format of this is going to be some prepared remarks followed by some Q&A at the end. If you have any questions that you'd like to ask for North American Construction, feel free to type those into the Q&A section at the bottom of the Zoom screen, and I'm happy to ask on your behalf. With that, Joe, Jason, and Dave, thanks so much for being here, and the floor is yours.
Thanks, Julio. I appreciate the intro, and really, I'll jump right in. I'm just going to give kind of a brief overview of our work and what we do and what separates us from others, and then I'll open it up to any questions or get into more details from there, so you know, this picture really shows it all. We really are the owners of these big assets, these large trucks and shovels. This is the biggest equipment ever made. You know, 400-ton trucks and 800-ton shovels are the largest of that fleet, and these big assets are typically used in the resource industry, and so where we target our work is in resource-rich, geopolitically stable countries, of which we'd say North America, Australia, and South America.
And, you know, as far as in those resource-rich countries, then we look for which resource industries move the largest volumes of material. That's why you'll see us in the Canadian oil sands and the Queensland coal markets in particular. That's a large chunk of our work in North America and Australia, respectively. And it's just because they move large volumes of material. You also see us pushing into areas like iron ore and gold and, again, areas where you have large volumes of movement. And then within those areas where you have resource industries where you have large volumes of movement, we're looking for blue-chip customers and those customers that will provide long-term contracts. So these assets' initial life is somewhere around 25 years. We also have the capability of rebuilding them and running them another 20 on. So they're extremely long-term assets.
Getting those tied into high utilization for long-term is obviously a big driver of the economics of our business. When we look at the specific areas, our growth engine is predominantly Australia right now. Australia is a unique business. If any of you deal with resource companies, mining companies, you'll understand this, that there's a particular nuance in the Australian marketplace where the producers of materials in Australia are more likely to hire contractors. The reason is the markets there give them a good multiple and expect them to produce more of the material, so more ounces, more tons, more pounds of product, and in finding the next mine. They allocate their capital that way versus owning yellow iron, as we would call it, or big equipment.
And so the Canadian marketplace and the Australian marketplace, it's both resource-rich countries, but Australia is about 10 times larger from a contractor perspective because of that propensity to hire contractors and allocate their capital that way. So that's the big reason why we look at Australia. And the other big reason is just plain math. It's just that Australia has better weather, especially versus Northern Alberta, as I was just showing Julio at the outside my window. Wasn't looking very good today with the snow and that. And so they just get much better weather, and that just gives you an opportunity for higher utilization. So we figure there's a built-in kind of 10% improvement from Canada to Australia in just the weather opportunity for utilization. When we look at the North American areas, we're really focused on the oil sands.
Again, it's similar to the Australian coal markets in that it's very consolidated, and there's huge volumes of material that are moved here. And when you look at oil sands, you know, we've seen a consistent growth in oil sands production over the years, and we continue to believe that's going to go on for several decades to come. We've been in the oil sands for 50 years, and we think it's a continued opportunity to improve and grow on. You know, in South America, we have looked down in South America previously. We will continue to look down there. In the last few years, there's been a bit of turbidity in the mining investment market due to some countries reassessing things like royalties and regulations.
But I do believe that's changing, and especially we would look in the Chilean marketplace, the northern copper fields and the central Chilean gold fields, those, again, areas where they move large volumes, very similar to what we do and then last but not least, we certainly see infrastructure as an area of growth opportunity both in Australia and in North America. In that, you know, similar to we have a large project in Fargo, North Dakota, which is a climate they call it climate resiliency projects, and we're seeing more and more of these large earthwork volumes move. The one in North Dakota is a flood diversion, so a river that, you know, historically used to flood every twenty years is now flooding every five or four or whatever, and so they're creating a channel to divert it.
So these kind of large earthworks infrastructure projects fit us very well because it's similar to heavy civil work we've done in the mining marketplace. And we've got some good partners in that Fargo project. Our partner there is actually the number one or number two infrastructure contractor in Australia as well. So we look to build off that relationship and continue to expand in the infrastructure marketplace, especially around these climate resiliency projects. We've got another one in Canada or in the U.S. that we're looking to pre-qualify for right now that's in Northern California. And again, it's actually Northern California has been going through stages of flood and drought. And so now they're looking to, in stages of flooding, let's retain the water such that in times of drought we can use it.
So that's the kind of projects, again. They're more and more frequent with climate resiliency happening. Then as far as in these markets and what we do and what creates our competitive advantage, with this big equipment, it's really the maintenance and how you operate and maintain this equipment over its life. Those 400-ton trucks are CAD 10 or 11 million brand new. You know, we've been able to build up our maintenance skills such that we can rebuild those at 30%-50% less than new. So we can take that CAD 10 million dollar truck, tear it down to the frame, and rebuild it to brand new specs for, you know, CAD 6 million roughly.
And then when you look at the components within that truck, so when I say components, I mean the powertrain, the engine, the transmission, the torque converter, the final drives in the wheels. So, you know, on a CAD 10 million dollar truck roughly, you'll put CAD 40 million dollars of components into that truck over its life. So it's not like your car. In these assets, you're going to change the engine every three years in that 25-year life. So you might put seven or eight engines in it. And we've been able to rebuild those components ourselves and bring that skills in internally or partner with others and do it at 30%-40% less than the OEMs or the dealers can provide them. So this is a big area of what we think separates us competitively because it's a cost driver.
So we look at any commodity cycle. Every commodity has a cycle, and the guys who survive on the downside of cycles are the low-cost safe providers. And that's what drives us to be that is our maintenance. And we also have some really cool in-house technology in our equipment telematics system. So this is a real-time machine health monitoring system. We actually, Caterpillar is actually our partner in developing this software. And we've got it on almost 400 pieces of equipment right now. We're going to look to expand this into Australia over the next year or so. Besides, you know, what it does is it basically gives you quantifies for you when the equipment isn't performing right, and we can actually intervene before there's a failure of these parts. This is really an improvement in our maintenance asset life of those components.
And it also helps us increase our operational efficiency. And, you know, overall just fits in with our in-house maintenance and driver to be the low-cost providers. So, you know, that's really what our competitive advantage is. This industry has huge barriers to entry, not just the cost of these assets. They're not that available. So to give you an idea, on a 400-ton truck, again, the OEMs make about 50-60 trucks a year. So they're and most of them are booking out somewhere between 24 and 36 months in advance. So not only are they expensive, they're very hard to get, and they don't make many of them. And so it's that fleet.
And then our, you know, our in-house maintenance skills we've built this up over, you know, 60-odd years of the company and being in oil sands and being in heavy equipment and now expanding in Australia. We've learned a lot. There's not a lot of people that know how to do this work, especially on this big of equipment. And then our indigenous relationships, both in Australia and Canada, that we're in the areas we work in the resource industry areas we work. These indigenous partners give us access into a lot of what we call, you know, industry business agreements with local indigenous partners and also gives us an ability to contribute to those communities.
And we've been very successful in both our partnerships, our joint venture partnerships such as Nuna, which is with the Kitikmeot Inuit Association, and also the Mikisew and oil sands, and then our different partnerships in Australia with the indigenous groups there. So, you know, it's a big part of what we do. And then, you know, I'd also say that our safety and our safety performance when you're around these big assets, safety is a very big concern for potential customers. And last but not least, our experience. We work in some very harsh operating environments, especially in Northern Canada and very unique conditions. So oil sands, as an example, is very soft underfoot conditions. We love the winter because everything freezes up and it's hard, and it's easier to operate when it's minus 30 than when it's plus 30.
And also when you compare that to, you know, like Australian coal is very similar, but you get into Western Australia, the hard rock is very similar to Eastern Canada. And just, you know, with 60-odd years of experience throughout these industries, it really what separates us and creates a barrier to entry to these areas. So I think I ran over a bit there, Julio, but I'll open up for any questions you might have.
All good, Joe. We appreciate the rundown. So again, if folks have any questions for North American Construction, feel free to type them into the Q&A section at the bottom of the screen. Happy to ask on your behalf. I'll kind of kick it off here with, you know, you talked about Australia being a growth engine for you guys.
The acquisition of MacKellar Group, can you kind of just expand on that for a little bit? You know, the rationale, what's gone right the last 12 months, and how are you thinking about kind of next M&A targets as well?
Yeah, the rationale, you know, if you look at the economics of the deal when we went through it, very favorable economics. What we liked is it was, it was, I called it North American with an accent because they had a very strong focus on maintenance and of the equipment. The founder was a mechanic. And they started in as a rental company and now have expanded into more mining and coal mining services. You know, the economics were great, the diversification both geographically, customer-wise. Like I said, the Australian marketplace from a contractor perspective, there's no better place to be. It's, you know, it integrated very simply.
We weren't on a lot of amount of sites. We were able to bring our operating platform and our ERP to help them expand their skills and services, which will look to drive us into WA for growth opportunities there. It was just a great fit, and I think there's more to come from this. You know, I say there's some best practices. There's some things we do in Australia that we don't do in Canada and vice versa, so I think the sharing of best practices is going to help us continue to improve on our internal maintenance skills and drive those costs down.
And then, you know, and then taking our larger systems and processes, which MacKellar had fairly well outgrown their own, and we'd been through this 10-odd years ago, and bringing those in and integrating to help them understand their costs more, we just see opportunities to continue to lower our costs, improve our margins, and expand our marketplace both in Australia and in Canada by this acquisition. Did I cover off what you wanted there earlier? There was another part of that. As far as the M&A side, you know, absolutely, we think this is settled in here in the next bit. I mean, currently, our capital allocation is focused on debt reduction in our NCIB. We do think we're the best investment right now in buying our own shares. But certainly, another MacKellar comes in.
We still have some dry powder, and these kind of opportunities at those kind of financial returns, you know, it was less than 2.75 EBITDA. It was a very quick payback. The accretion was plus 50%. I mean, it was a pretty fantastic deal. And those kind of deals, if it comes along, absolutely, we'd be jumping on it. You know, that one took about two years to get fully done. So they, you know, they don't always move in a matter of months. But I do think there's other opportunities for us to continue to grow. And again, we had focused on those, you know, North American, Australian, and probably South American marketplaces. And yeah, I think as we complete this integration of MacKellar, I think it puts us in a spot to look at the next opportunity.
Excellent. Excellent. Thanks very much.
And maybe staying on Australia for a little bit, do you kind of see, you know, how long of a tail is this, you know, good times in Australia, so to speak?
And you know, I think there's a, sorry to jump in on the,
no, no, no problem.
I was going to answer the first one before you confused me in another one. But as far as the tail in Australia, I think, you know, we've got 10 or 15 years here where you've got a very strong mining and resource industry marketplace because of both the continuing demand for fossil fuels, be it coal in Australia. So 90% of Australian coal is exported to China and India. You know, that's the biggest area of our marketplace over there, both metallurgical and thermal. Australia is, you know, that market is going to continue to grow.
Essentially, their biggest competitor and the largest exporter of coal is Indonesia. And Australian coal is much cleaner and much more efficient burning. So roughly, you need to burn about 30% more of the average coal in those other countries versus Australia. And that's why their export marketplace. And then just location. They're very short shipping routes into India and China. So we see that kind of hydrocarbon marketplace continuing even into 2050 and further. And then you have the normal commodity, be it iron ore or gold or nickel. And then you see an increasing demand due to these transition metals. And I would say, you know, iron ore, nickel, copper, you know, everything that's going to be needed in the transition side. A lot of people highlight lithium and graphite, but those are very small volumes.
There's a lot more aluminum and nickel in your car, electric cars than there are lithium and graphite, so.
Yeah, absolutely. And then, you know, how commodity price kind of dependent is, you know, is what's going on in Australia these days?
You know, I'll use the coal marketplace as the biggest. I mean, most commodities are, but we've got some integrated producers. So as an example, if you look at our major thermal coal client, which is the biggest chunk of MacKellar right now, they're producing for themselves. They aren't selling into the export marketplace. So they've contracted the entire mining operations. We do all the mining. There's a separate contractor that does all the coal plant operations. And then our client actually is more of a mine owner and infrastructure owner. So they own the mine. They own the rail from the mine to the port.
They own the port. They own the port in India where it goes to. They own the rail in India. They own the power plant in India. And they own the power distribution in India. So they're just producing coal for themselves. So they're not at risk of spot marketplace. If anything, what they might look to do is increase their production when spot markets are high. So we see a lot of that. You know, when you look at our oil sands business, it's very similar. I don't know if Dave got the slide of oil sands production. It's not very affected by oil price and has steadily climbed. So, you know, we've seen oil price go up and down, but that's a really consistent profile of increasing production in oil sands on that slide. You see two dips.
One was a wildfire in 2016 that affected the Fort McMurray region. The other one is COVID. Other than that, you couldn't find a more consistent production profile. And our clients in oil sands, they're projecting another 200,000 roughly barrels per day increase in 2025 from now. And there's roughly four tons of material that has to be moved for every barrel of oil produced out of oil sands. So that's 800,000 tons per day. That's like three massive mine sites anywhere else opening up. And those are the kind of volume that we go after because we think there's opportunity in the peak shaving there. So whether Australian or Canadian marketplaces, you know, I think that whole commodity market is going to continue for the next 10 or 15 years with the transition metals driving a lot of that.
So, you know, if historically, I guess the law of average would say if there's 10 commodities, five are down and five are up. I think over the next 10 or 15 years, we're going to see six or seven up versus the historical numbers. And I think this marketplace and the demand for contractors is continuing to increase.
Yeah, makes a lot of sense. And the demand for contractors probably leads to, you know, the lack of supply of labor, better project selection for you guys. So can you maybe just talk about how you think about project selection in terms of balancing profit potential versus kind of maybe labor satisfaction along with existing long-term contracts?
Yeah, you know, we've got a massive bid pipeline, probably as big as it's ever been.
You know, how we weigh these is, you know, just how they really our equipment fleet, what makes us more, what makes us the lower cost in a particular area or a particular commodity and whether we can use that to make us more competitive to win the bid and lowering our cost or whether it helps us be a higher margin. We're going to look at the customers and the commitment. You know, the guys that are willing to commit to 24/7 operations for five years or more, you know, that's a great time for asset utilization in the long term. Obviously, blue-chip customers, you know, the mining industry has a lot of, you know, small producers and developers that can be high risk.
We tend to stick with the blue-chip guys or put contracts in place to where we're not at risk of those guys. You know, if you have a single mine producer and they have an interruption, it can go bad pretty quick, but certainly with our list of customers, you can see in this slide, you know, these are very much blue-chip companies at very low risk, and we've seen in oil sands, we've been there over 50 years, and in Queensland coal, we've been over there 50 years, so we know the players and the opportunities, and then when we look outside of that, you know, we're just looking to where we can be the most competitive versus the local contractors, and again, looking for blue-chip guys that'll make longer-term commitments, so we see more of those opportunities growing now, both in Australia and in Canada.
You know, we'll look to diversify our MacKellar operations outside of coal as an example to keep increasing that. Our North American operations outside of oil sands, you're going to see more non-oil sands and non-coal contracts to help us increase our diversification. We're able to do that. We've done that and shown that we can do that without having lower margins and buying our way into a marketplace. Our competitive advantage is proven across commodities, if you would.
Very helpful. Then, you know, zooming out a little bit, you know, I can't help but see the share price, right, and how much it's jumped three months ago.
Can you maybe just discuss the reasons, you know, why, in your opinion, the share price has moved this way and whether this kind of reflects any material change in kind of the fundamentals for you guys?
We had a meaningful bump when we did the acquisition of MacKellar and people saw the financials and put in. I think most recently, there's been anxiety over our oil sands business more than anything else. You know, which just reinforced our reasons for getting into Australia. We, you know, six years ago, were 95%-98% oil sands driven in our business. You know, now it's down to 25% going forward. Australia will be over half of our business. You know, I think when we went from, you know, we were over CAD 30 after the acquisition.
And then there's the oil sands clients have consolidated, especially on the leadership side. So even though there's different mine sites, they have the same senior leadership managing them. And that's really consolidated. And that leadership has changed direction on a lot of their contracting strategy. And it just reinforced for us our continued need to go out and diversify. But, you know, as far as where it's come down to and where it's at, you know, again, it's why we issued the NCIB is we, you know, we overestimated the oil sands going into this year, but we've diversified and moved our equipment and integrated MacKellar and see it as a very strong, consistent business going forward and without that customer consolidation. And, you know, right now, we think our multiples are fairly ridiculous. And that's why you'll see us more active in the NCIB side of things.
Makes sense and very helpful context there. Curious with everything kind of going well in Australia and, you know, opportunities in South America and other regions. You know, I see that, you know, U.S. is about 10% of the backlog. Just curious if that's something where, you know, maybe that's less of a focus because of the other opportunities out there. Just any additional context on, you know, how you see the U.S. market?
I think there's great opportunities for us in the infrastructure side of things. You know, there's not a lot of mining in the U.S. where they're contracting large volumes out. We do think there might be some opportunities going forward in the Western U.S. gold and copper markets. But the biggest opportunities we see are these large infrastructure climate resiliency projects.
So both similar to the Fargo one we have now, there's another. There's one in Northern California. And then we just think that infrastructure marketplace in the U.S. and whether it's earthworks associated with roads and bridges or other infrastructure and climate resiliency projects, I think that's going to be a huge marketplace in the U.S. going forward. These projects don't develop overnight. So this isn't something where you get a bid package and three months from now they award you. These are very long-cycle bid and award infrastructure jobs and can be two or three years in the horizon from when you get a package until you actually are awarded it, which is our Fargo one was almost five or six years. It's got recycled a couple of times. But I think that's the biggest opportunity in the U.S. is continuing to build in our infrastructure works.
It's where we're going to talk to a lot more of the potential partners down there in the near future in our business development side, especially in, you know, I think, you know, the Southeast and the West of the U.S. I think there's great opportunities.
Very helpful. Then just I want to ask one about the balance sheet a little bit. Just, you know, in terms of you talked about the NCIB, but in terms of debt servicing, how are you thinking about the timeline to service debt? Are there any particular goals or targets around debt ratios or anything of that sort?
Yeah, I think we want to get below two times in the near term and below one and a half times in the longer term. We'll distribute our capital appropriately.
So I think, you know, even though we think we're the best buy in town right now with our share price, we need to generate the additional cash to continue to do those things. And so, you know, like right now, as we pay down more debt, you know, I think we'll be at a ratio of NCIB participation and debt repayment. We can do both at the same time. I think we can walk and chew gum at the same time. And those will be our main focus. And then as our debt draws down and hopefully our share price goes up, we'll look at what opportunities have the best return versus risk.
You know, if there's some M&A opportunities, we've done a lot of small deals where we've bought companies like ML Northern and DGI, which really integrated into our maintenance and our fully integrated maintenance side of things. And they have been dead simple economics and, you know, CAD 30-40 million deals that have had like two-year paybacks. Even expanding on our internal maintenance capabilities, those are great opportunities going forward. But right now, it's, you know, pay down our debt and at these share prices, buy some shares. And the more our cash flow improves, because we are very heavily weighted towards Q4, then the more and the lower our debt gets, then the more we'll participate and increase in those shareholder-friendly actions like NCIB. And we also increased our dividend 20%.
Excellent.
With about 30 seconds left, if you could give us, bring us back to the value proposition elevator pitch, so to speak, of you guys.
Yeah, you know, I think we're a very unique business with these large assets. I think we're very unique in how we maintain and create that safe, low-cost environment. I think we've got a great marketplace here for the next 10-15 years with this overlapping of commodity and kind of the transition metals. You know, I think we're well positioned in the geographic regions. I just think we're an extremely undervalued business because there's a lot of people that just don't understand us that well. You know, I really thank you for the time and opportunity to present it.
Joe, Jason, Dave, thank you for the time. Thanks for being with us. Thank you, Julio.
And just to note, Julio, we didn't come close to answering all the questions that were submitted.
That's right. We did not.
And a number of them were under anonymous. And maybe just those folks can reach out to me directly through the platform.
Yeah, we'd be happy to set up time to discuss one-on-one if they'd like.
Yeah. Excellent. Thanks very much, guys.
Thank you.