North American Construction Group - Q3 2024
October 31, 2024
Transcript
Operator (participant)
Good morning, ladies and gentlemen. Welcome to the North American Construction Group conference call regarding the third quarter ended September 30, 2024. 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 on the Company's website at NACG.ca. I will now turn the conference over to Joe Lambert, President and CEO.
Joe Lambert (President and CEO)
Thanks, Laura. Good morning, everyone, and thanks for joining our call today. I'm going to start with our Q3 2024 operational performance before handing over to Jason for the financial overview, and then I'll conclude with the operational priorities, bid pipeline outlook for the remainder of 2024 and expectations for upcoming winter works and 2025 before taking your questions. On slide 3, our Q3 trailing twelve month Total Recordable Rate of 0.39 improves upon our Q2 results and remains below our industry leading target frequency of 0.5. We continue to advance and improve our health and safety management systems with recent focus on hazard analysis, frontline supervision effectiveness and audiometric testing. Naturally, at this time of year we ramp up our winter preparedness in Alberta. Oddly enough, we'll also be commencing preparation for our summer programs in Australia with heat hydration and cyclone weather as recurring topics.
On slide 4, we continue to be recognized with industry awards in both safety innovations and leadership. Nothing makes me prouder than seeing our employees being recognized by our industry peers as being safety leaders across our business. We consistently see employees dedicated in living our core value of getting everyone home safe. On slide 5, we highlight some of our major achievements of Q3. Although having a record quarter for practically every financial metric we measure is a fantastic achievement, it was likewise pleasing to see all areas of the business performing at or above expectations. Our Fargo and Nuna Joint Ventures finished off their busy summer season as expected.
Our oil sands business continued as planned and our Australia business continues to outperform. Australia also commenced the ERP rollout, received the final equipment shipment from Canada with expectations to have them all put to work by the end of the year and achieved record quarterly fleet utilization. Our contracts and procurement team were also busy finalizing a parts and component supply agreement with Finning in Q3. The new agreement re-establishes a strong vendor partnering structure which we believe will improve fleet reliability and lower cost while supporting our in-house maintenance program and growth plans. We see Finning as a strategic partner and look forward to increasing our work together going forward. Moving on to Slide 6, you can see that the aforementioned Q3 record utilization of 84% in Australia was just a hair below our 85% target utilization.
Our Canadian fleet improved to 51% off the Q2 low of 42% and we expect the Canadian fleet to be back in the 60s at year end and remain there through our busy winter season. We remain on trend and confident in our ability to hit our target of 85% in Australia early in the next few months. In Canada we expect to achieve our target range of 75% by the end of next year. With that, I'll hand over to Jason for the Q3 financials.
Jason Veenstra (CFO)
Thanks, Joe. Good morning, everyone. Starting with Slide 8, the headline EBITDA numbers of CAD 106 million and 29% margin were driven by another successful quarter from Australia. We have now posted four successful quarters in a row with growing quarter over quarter results. Combined gross profit margin of 22% illustrates strong operational performance. We included a comment here about our oil sands business which although down from last year's top line revenue, is posting more consistent quarter to quarter results than in the past and generated an 8% increase from the second quarter on improved site conditions and steady usage of the equipment. The improved consistency is due to the nature of the contracts in oil sands which are now focused on more steady time and material and rental arrangements. Moving to Slide 9 and our combined revenue and gross profit as we will have for this last quarter.
Now McKellar provides step changes in quarter over quarter variances. Our wholly owned businesses were up CAD 90 million quarter over quarter, improved variance from the second quarter when we were up CAD 81 million. McKellar and DGI which we combined as Australia in our Results were up CAD 134 million on a steady consistent quarter during which McKellar posted an impressive 84% equipment utilization peaking in July at 88%. This top line positive variance was offset by lower equipment utilization quarter over quarter in the oil sands region. Our share of revenue generated in Q3 2024 by joint ventures was consistent with Q3 2023. The Fargo-Moorhead project had a strong operational quarter, was up CAD 12 million quarter over quarter and achieved the progress metrics and milestones required of the schedule.
Offsetting this positive variance was the variance impact of the completion of the construction project at the gold mine in Northern Ontario in Q3, which led to lower quarter over quarter revenues within the Nuna group of companies. Combined gross profit margin of 21.9% reflects strong operational excellence across our business. Gross profit margins benefited both from the operations in Australia, which were higher than 20% in the quarter, which is normal course, and the Canadian operational personnel and fleet posting solid margins as they benefited from from consistent and stable operating conditions. Moving to Slide 10, Q3 EBITDA beat the previous Q3 record by 75% as a result of the McKellar acquisition.
As mentioned, the 29% margin we achieved reflects an effective operating quarter and is indicative of where we see our business operating at with our trailing twelve month EBITDA margin now at 27% which covers a very eventful twelve month time frame. Included in EBITDA is direct general and administrative expenses which were CAD 9.6 million in the quarter and equivalent to 3.4% of reported revenue which is below the 4% threshold we've set for ourselves. G&A costs in Canada in particular have been decreased in light of lower revenue being generated in the oil sands region. Going from EBITDA to EBIT, we expensed depreciation equivalent to 12.1% of combined revenue which is exactly the same as the second quarter and reflects the depreciation rate of our entire business including the equipment fleet at the Fargo-Moorhead project.
Adjusted earnings per share for the quarter of $1.17 reflects all the positive factors mentioned but was offset by the impact of higher acquisition related interest which reduced earnings by $0.54 compared to $0.22 in the prior quarter. The average cash interest rate for Q3 was 6.5%. Moving to Slide 11, net cash provided by operations prior to working capital was $80 million and generated by the business reflecting EBITDA net of cash interest paid. Free cash flow of $11 million was driven by another $32 million draw on working capital accounts and $12 million spent on capital work in progress. Moving to Slide 12, net debt levels ended the quarter at $883 million, an increase of $50 million in the quarter due to growth assets purchased as well as the change in the Australian exchange rate of the $883 million.
470 million or roughly half is denominated in Australian dollars but is naturally hedged with the heavy equipment assets we own in Australia. Net debt and senior secured debt leverage ended at 2.3 times and 1.8 times respectively, and are expected to decrease in Q4 on free cash flow generated in the quarter. With that, I'll pass the call back to Joe.
Joe Lambert (President and CEO)
Thanks Jason. On Slide 14, we highlight our progress on our 2024 goals. Items one and four have pretty much been completed with the turnaround at NUNA and the ERP rollout in Australia. Item two we still expect to achieve these contract wins in Q4 and Item three is a bit of a mixed bag with our telematics and sharing of best practices having progressed as planned and possibly achieving our Australian utilization targets being positives and the negative being our Canadian utilization targets pushed off a year. Looking at Slide 15, this slide summarizes our priorities moving forward. Our safety focus will be on further developing our frontline supervision and establishing consistency across our increasingly diversified business. Although we have many varied safety programs and policies for the differing environments we work in, we want to ensure certain aspects are consistent across all areas of the business.
To ensure that consistency, we perform both internal and external audits on the HSE management system in general and in field verification. Those plans are being followed. Item two notes our equipment utilization goals, which I spoke about earlier in this segment. In addition to our utilization targets, we also expect to have our telematics system further advanced and rolled out on a few units in Australia, with a more detailed plan for full implementation in Australia by the end of 2025. Item three outlines our focus on prioritizing winning bids to grow our backlog, ensuring stability and consistency in both operations and financial projections. This strategy also supports our ongoing diversification into commodities and regions that help reduce risk while enhancing asset returns or lowering capital intensity. Item four is focused on early renewals and extensions on contracts with existing customers.
As you may have seen with some of our press releases on contract awards earlier this year, some of our contracts have options for expanding or extending based on mutual agreement. We believe these types of negotiated contract agreements of high value as they demonstrate the strength of our customer relationships and can provide increased commitment over a longer term, allowing us to better forecast our business performance. Item five is the logical extension from our goal to roll out our ERP in Australia this year. As we have done these ERP rollouts both internally and with Nuna, we have seen how improved monitoring and reporting can help identify business improvements and lower costs. The final area emphasizes our commitment to expanding our external maintenance business.
We believe our in house component rebuilds, whole machine rebuilds, telematics and strategic partnership with OEM dealer will provide increasing opportunity for external maintenance sales. Slide 16 highlights a strong bid pipeline of over $10 billion with quarterly increases in the active tenders, that is the top line representing increased activity in Australia and diversified resources in Canada. The items on the middle line are the potential contract extensions and expansions in the oil sands, we expect to have concluded in Q4 and an early renewal opportunity in Australia. Moving to Slide 17 with the Q3 contract wins combined with the typical quarterly backlog consumption, our pro forma backlog now sits at 3.1 billion and is an increase of about 300 million from our Q2 ending backlog.
With the previously mentioned contract discussions expected to be concluded in Q4, we expect our year end backlog to remain healthily above CAD 3 billion and demonstrate increasing geographic and resource diversification. On slide 18 we have provided our outlook for 2024 with unchanged key metrics from Q2 and updated capital allocation representing increased growth, capital and debt supporting the Q3 contract wins in Australia. Once we have finalized contract terms and scopes in our oil sands business, we will provide our outlook for 2025. We expect a meaningful increase of year on year financial metrics from the growth of our Australia business, consistent contributions from our JVS and a stable oil sands business. We anticipate the breakdown of our earnings generation will be similar to what is shown on slide 19 with Australia producing over half of earnings and Canada about 1/4.
Lastly, regarding capital allocation going forward, we have announced a 20% dividend increase alongside a Normal Course Issuer Bid, clearly demonstrating our commitment to investing free cash flow in shareholder-focused ways. We are also prioritizing debt management and maintaining liquidity to support the company's sustained growth. As I said in my letter to shareholders, this year has brought fluctuations in both our business and share price, and I'd like to thank our shareholders for their continued support, patience as we position ourselves for a robust year-end positive growth and profitability in 2025 and the free cash flow to drive further shareholder benefits. With that, I'll open up to any questions you may have.
Operator (participant)
Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the STAR followed by the number one. On your Touch-Tone phone you will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the STAR followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Our first question comes from the line of Aaron MacNeil from TD Cowen. Go ahead, please.
Aaron MacNeil (Equity Research Analyst)
Morning all.
Joe Lambert (President and CEO)
Morning
Aaron MacNeil (Equity Research Analyst)
Joe.
Joe, I can appreciate that you've sort of pushed off the Canadian utilization target to the end of next year, but I think last quarter in your prepared remarks you talked about total oil sands market volumes being up year over year in the winter season and some discussion about additional smaller RFPs that you'd received. So just setting sort of a bigger recontracting with Suncor aside, you know, can you just speak more broadly about some of the smaller opportunities in the oil sands?
Joe Lambert (President and CEO)
Yeah, I mean we don't announce those. Probably we have a 25% increase in reclamation works this winter over last winter. I think that's what you're referring to, Aaron. You know, that's a small portion. That's something where we've gone from CAD 30 million last year to CAD 40 million this year kind of in relative terms for our winter reclamation work. So, you know, on the overall oil sands number, it's not really a huge impact, you know, as far as next year. And again, we don't have the details until we get these contracts. And you know, this is the first time we've been in this position, Aaron. Like previous to this last year we had five year contracts with committed volumes. So we weren't waiting on contract awards in September. We knew what those volumes were going to be.
Last year was the first time we had 80% of our oil sands business because the consolidation under the one operator in one contract and we didn't have the award and we didn't get it until February and we estimated what we thought we were going to get without that and we did very poorly on that and that's why we pushed that off this year. So in general, we expect 2025 in oil sands look very much, very similar to 2024. But we really don't want to put kind of brackets around that range until we have these contracts signed off.
Aaron MacNeil (Equity Research Analyst)
Makes perfect sense. And then just on the bid pipeline more generally, can you walk us through what some of the diversified bid opportunities are that are opening up this year and how we should think about replacing some of the bigger diversified projects like Fargo-Moorhead and the containment line. And I know Fargo's still going, but just how you're thinking about that more generally?
Joe Lambert (President and CEO)
Yeah, I think most of the projects you see are, you know, we've got some opportunities in Australia and we've had some in magnetite, iron ore, copper, zinc. So we're seeing a lot of different commodities. And then, you know, on the infrastructure side, we really got our eyes on pre-qualifying for one major project right around the end of the year. Again, we're working with one of our same partners that we are in Fargo to qualify for those. And as you know, those are some fairly long processes. The bid process can be a couple of years on those. We're seeing a lot of activity in Canada, other resources. So, you know, BC copper, gold, we've got some gold in Ontario. You know, there is some, I think probably our largest bid pipeline outside of oil sands that we've ever seen.
We're just starting to scratch the surface on the Australian infrastructure world. We have been focused on integrating McKellar there and getting our ERP rolled out. So, you know, that would be more of a 2025 focus, is to really advance our business development on the infrastructure side there, that's where some of those big dots in the bottom line and to the far right are. So.
Aaron MacNeil (Equity Research Analyst)
Gotcha.
Thanks guys. I'll turn it back.
Operator (participant)
Our next question comes from the line of Yuri Lynk from Canaccord Genuity. Go ahead, please.
Yuri Lynk (Managing Director and Equity Research Analyst)
Hi, good morning, guys.
Joe Lambert (President and CEO)
Morning, Yuri.
Jason Veenstra (CFO)
Morning.
Yuri Lynk (Managing Director and Equity Research Analyst)
What drove the sequential recovery we saw in JV revenue?
Joe Lambert (President and CEO)
The sequential quarter on quarter?
Yuri Lynk (Managing Director and Equity Research Analyst)
Yeah, it went from last quarter. In Q2 it was 53 odd million and 80 million. In Q3 it was a bit higher than I was expecting.
Joe Lambert (President and CEO)
Yeah, there was both big activity and then some critical milestones crossed at our Fargo-Moorhead project which trigger payments. So the payments there aren't hour by hour, they come from milestones of achievement. And Q3 had more milestone achievements as the busiest quarter we've had at Fargo-Moorhead. So that'd be the big difference here.
Yuri Lynk (Managing Director and Equity Research Analyst)
Okay.
Joe Lambert (President and CEO)
Okay.
Yuri Lynk (Managing Director and Equity Research Analyst)
Then when we think about your Canadian revenue, obviously been depressed this year, some tough comps due to Côté, but the base oil sands business does seem to be down. What are you, I mean, what are your expectations for 2025? I think you mentioned that it would be kind of similar in 2025. I'm hearing that, you know, there's been some work delayed, deferred. Does that provide an opportunity for some upside in 2025? Just any additional color on the outlook for oil sands would be helpful.
Joe Lambert (President and CEO)
Yeah. You know, I think the oil sands is pretty much been steady at these levels for several months. We expect it to be this way. We expect 2025 to look very much like 2024. You know, I, I don't. The downturn that we didn't anticipate was the change in scope. And really that's why we've held off on the guidance here. But I, I don't think we'll find any big surprises this year. But you know, and I think the opportunity for upside is there predominantly on if there's more civil construction activity. I think the bulk earthworks and large equipment is going to remain very consistent. I think we have an upside potential on civil construction which we're projecting similar to this year, and in the last few years that's been very low.
So, I think, you know, we're projecting civil construction in summer of next year that's lower than our last 10 years average, if you would say. But it's consistent with where we are right now. So, I do think upside is there's still good upside in oil sands.
Yuri Lynk (Managing Director and Equity Research Analyst)
When you talk about.
Joe Lambert (President and CEO)
I also think, Yuri, I'd also say that if you look at every producer's projections on barrels, they've all got increasing barrels. And so, you know, increasing barrels is increasing material movements. That's a pretty one-to-one correlation. And so, you know, we think there could be upside potential from that as well. But as of now, we really don't have the numbers that we can quantify that really, really tight for you.
Yuri Lynk (Managing Director and Equity Research Analyst)
Yeah, well, that's kind of what I'm getting at. I mean, when you talk about the scope changes, what exactly does that mean? Like, they are your customers. Is the work going to other players? Are they doing it themselves? Are they not? Like, where's the dirt going?
Joe Lambert (President and CEO)
You know, either they're moving it themselves or they're deferring it. We don't, you know, we believe we can see all of our other contractors, we think this year we got what would be our normal kind of market share of that work. We just think the work was reduced. You have to keep in mind that they, you know, the mining cycle in oil sands is very long. The material you're moving on the surface today is uncovering an ore ton that they're going to be putting through their process six, seven years from now. So, you know, any annual decrease doesn't necessarily reflect a long term perspective. You can move quite a bit of volume from one year to another or spread it across five or six years. And you know, we're not privy to that level of detail in our client's planning obviously.
So, you know, my guess is it's being deferred and going to be made up over future years. But again, I don't know those numbers. You know, that's just my perspective.
Yuri Lynk (Managing Director and Equity Research Analyst)
Yeah, understood. Okay guys, thanks for the color. I'll turn it over.
Operator (participant)
Our next question comes from the line of Adam Thalhimer from Thompson Davis. Go ahead please.
Adam Thalhimer (Director of Research and Senior Research Analyst)
Hey, good morning guys. Congrats on the strong quarter.
Joe Lambert (President and CEO)
Thanks, Adam.
Adam Thalhimer (Director of Research and Senior Research Analyst)
Can you guys just give us a.
General update on the turnaround at Nuna, kind of where we are and your current thoughts on it?
Joe Lambert (President and CEO)
You know, I think we've completed the turnaround. I think they're focused on their winter work programs. This is their slow time of the year and then they're really, really focused on winning work for next year. Which, you know, over this winter and into Q1 is when a lot of tenders happen in their business. You know, I'm very confident we have the operations team that can operate, you know, safe and effectively there. You know, our intention is we've stabilized it, we're back to profitability now. Let's grow it back again. You know, our team is there 100% focused on it. Then I think they've done an excellent job in turning this business around in the last seven, eight months.
Adam Thalhimer (Director of Research and Senior Research Analyst)
Joe, I really liked your comment about the largest bid pipeline outside of.
The oil sands ever.
Joe Lambert (President and CEO)
I was curious if you could kind of flesh out what you're seeing on the commodity side in the bidding.
I think it's no surprise. If you look across the commodity market, the only ones really suffering are the EV metals at this time, the lithium and the nickel. Everything else is pretty strong and steady. When you look at resource rich countries like Australia and Canada, in Australia, certainly the met coal, the thermal coal, the iron ore, the gold, very strong copper. Then across Canada we see the same things with iron ore, gold. We think those commodity cycles are going to continue to do well and actually expect those EV metals to pick right back up again too. I think we're in a strong long term commodity market that's going to increase production in those commodities and increase contractor demand.
So, long term, I think we're in a really good spot. And even short term with this bid pipeline, it's very strong, especially the amount of work that's being the amount of blue dots. If you look at our bid pipeline versus red has grown tremendously. If you compare that to even a couple of years ago.
Adam Thalhimer (Director of Research and Senior Research Analyst)
That's good color, Joe. And then just lastly quickly on where.
Are we on moving trucks to Australia?
Joe Lambert (President and CEO)
We're complete, so we moved 25 units. The last of them are there. And we actually expect all of them to be put to work in maintaining that high utilization by the end of the year. You know, if there's some other opportunities that we're bidding on, they could attract some resources from Canada, but there's nothing committed at this time beyond that.
Adam Thalhimer (Director of Research and Senior Research Analyst)
Great. I'll turn it over. Thank you.
Joe Lambert (President and CEO)
Thanks, Adam.
Operator (participant)
Our next question comes from the line of Maxim Sytchev from National Bank Financial. Go ahead, please.
Maxim Sytchev (Managing Director and Senior Equity Analyst)
Hi, good morning, gentlemen.
Joe Lambert (President and CEO)
Morning, Max.
Maybe a couple of sort of finance related questions for Jason, if I may. Jason, so when we think about free cash flow generation, can we maybe walk through a little bit the conversion from like EBITDA to fcf? How we should be thinking about this as time progresses and as you get more of your total pie coming from Australia?
Thanks.
Yeah, I think we're still in that 30%-35% conversion ratio, max. Clearly, working capital has had a large impact this year with the decrease in revenue in the oil sands and moving trucks from Canada to Australia. It has made for that conversion ratio isn't in place at the moment, but we see Australia more in the above 40% conversion ratio and then Canada in the 30% ratio. So, yeah, I think for 2025, when we do provide guidance, I would expect that conversion ratio to be in place. You know, as is understood, we do expect a big working capital swing positively in Q4. We expect 2025 to be much more consistent. 2025 should be a year that we can generate free cash flow more consistently. From my perspective, there's no reason why we shouldn't be able to.
So.
Yeah, that's the context on free cash flow.
Maxim Sytchev (Managing Director and Senior Equity Analyst)
Okay. No, that's super helpful. And then just one quick clarification around Fargo. So that project was structured as an SPV, right? And sort of all the equipment that you have is kind of fenced within that. And obviously when that project is finished, like you're not sitting with idle equipment, I guess, like even in the worst kind of case scenario. Right.
Joe Lambert (President and CEO)
No, that equipment is actually fit to the timeframe of the job, and when that job's done, that equipment will be disposed of. So we don't. They're all joint venture assets. You know, basically they run the life of the project and then they're disposed of at salvage value.
Maxim Sytchev (Managing Director and Senior Equity Analyst)
Okay, okay, that's great. And Joe, you mentioned quickly some of early discussions around, you know, opportunities in Australia on the infrastructure side, was curious just in terms of how advanced are those discussions and what you might be potentially seeing on the 2025 time horizon? Thanks.
Joe Lambert (President and CEO)
Yeah, they're pretty immature right now, Max. We really haven't got into details of them. Our team is really fully consumed in the integration of MacKellar and this ERP rollout, all of that. We'll kind of finish up before year end here and then I think our Australia team will have a lot more time and capacity to look at growth in both the infrastructure side and just look at other opportunities within the business. And same here. Even in Canada, we have a lot of people supporting that integration and that rollout. And then I think we'll have a lot more capacity. You know, we do have the one project I talk about that we want to pre qual for is actually in the U.S. with one of our partners at Fargo. And we are seeing some other opportunities, but in North America.
But they, again, they are at early stages. So I'd say Q1. Stay tuned for that would be the time frame in that Q1, Q2 time frame that I expect to start digging in more to that infrastructure work both in Australia and here.
Maxim Sytchev (Managing Director and Senior Equity Analyst)
Yeah, okay, excellent. That's it for me. Thanks so much.
Joe Lambert (President and CEO)
Thank you, Max.
Operator (participant)
Our next question comes from the line of Tim Monachello from ATB Capital Markets. Go ahead, please.
Tim Monachello (Analyst)
Thanks very much.
A lot of my questions have been asked and answered.
I'm curious just around sort of the.
Givens and takens for Free Cash Flow in 2025, namely, what are your expectations?
For growth CapEx at this stage of.
The game and how should we think about, I guess, distributing distributions out of the JVs in 2025, particularly for Fargo-Moorhead?
Jason Veenstra (CFO)
Yeah, Tim, I could take that as far as growth. You know, I would say the contract win we had in Q3, which we announced, you know, not all that growth is shown in the growth range that we provided for 2024. So whatever isn't in 2024 will fall into 2025. So that's in kind of the CAD 40 million range. And that's all we have assigned right now. So we, you know, right now we see a very busy 2025 without any growth. So, you know, we'll probably guide more specifically when we announce guidance. That said, in historical precedent, we've provided growth ranges more in the February March timeframe, but that's a placeholder for growth for next year. And then as far as the JV goes, Fargo is the big diversion. They continue to accumulate their earnings in those joint ventures.
We likely won't include a sizable distribution in 2025. My understanding is that is scheduled for 2026, so that could be delayed piece of free cash flow, but Nuna will distribute, you know, the EBITDA they generate, as will the Monell joint ventures, and so, yeah, to the earlier question, I would expect free cash flow to be more consistent and in that kind of 35% conversion ratio.
Tim Monachello (Analyst)
Okay. A follow-up on Max's question on Fargo Equipment.
There's a lot of debt that's carried in that JV. Do you think that the equipment dispositions at the end of the JV, when that wraps up, will satisfy the debt obligations there?
Joe Lambert (President and CEO)
The debt obligations are more around just financing the project itself. As the authority pays their milestone payments, that debt will come down. The equipment is a tiny piece of that debt. The debt will come down as the milestones are achieved. There will be very little debt at the end of that project because it's all structured around completion of the project. When they get to financial completion, there'll be no debt associated with the project.
Tim Monachello (Analyst)
Okay, great. And I was happy to see you stepping in at the NCIB. Can you talk a little bit about?
The cadence of repurchases that you're planning?
Joe Lambert (President and CEO)
Yep. I think that, you know, these kind of share prices, we plan to be active in the market. So I don't think we wouldn't announce NCIB if we didn't have intention to buy shares.
Tim Monachello (Analyst)
Okay.
Joe Lambert (President and CEO)
Great. Well, I look forward to getting some more color over the coming months on 2025.
Tim Monachello (Analyst)
Yes, you bet.
Operator (participant)
Our next question comes from the line of Prem Kumar, private investor. Go ahead, please.
Prem Kumar (Analyst)
Hey, good morning, team. Good morning, Joe. Jason, congrats on the quarter. Great to see Canada utilization heading in the right direction and definitely appreciate the dividend as well as the NCIB looking forward to share repurchases in the future. I had a couple of questions. First one is on the parts and component supply and service agreement with Finning. Could you expand on how that is different from before? And like, what are the main changes, if you don't mind?
Joe Lambert (President and CEO)
Yeah, I'd say, I guess the easiest way I'd say is we do a lot of our own components and a lot of our own maintenance. And in-house, we had three partnerships, essentially three, three primary partnerships. One of those partnerships, we in-house and we took it on all ourselves. So we just brought, you know, we've taken what was a 50-50 partnership and just taking it over and doing it all ourselves. And the other two partnerships we swapped from the vendors we had to Finning for the components that they were doing in that partnership. And we've got strong confidence in Finning and then the terms that they gave us as far as getting better life out of our components and lowering our overall cost.
And you know, we've done a few initial partnering works on equipment rebuilds and you know, I think it's a, you know, it's a great partnership that's going to help us do more and cost less. So you know, without getting into the details of it, we really just swapped a couple of partnerships from vendors in the U.S. to our OEM dealer and we took the other one in house ourselves.
Prem Kumar (Analyst)
Perfect. Appreciate the color. And on revenues, like diversification of revenues in a recent presentation shows us the revenues of about 10%. So I'm curious, like what are some barriers to expand in the U.S. for now? Any plans on increasing revenues from U.S.? Just want to get a color on it's 10% now, but maybe why it's 10%, not more.
Joe Lambert (President and CEO)
I think the big opportunities we see, Prem, in the U.S. are the infrastructure works, in particular large earthworks infrastructure that are like our Fargo one, that are climate resiliency projects. That is the big infrastructure project that we hope to pre qual for in the end of this year, beginning of next year. But they would be more longer term out there, I'd say, you know, we'd like to see one in place before the large construction years of Fargo end, which would, you know, in the next three years. And so we're going to get a lot more active in that infrastructure market in the U.S. here in the time to come. But we would expect that to be affecting our U.S. revenue until, you know, probably late 2026 or more likely 2027 kind of time frame.
Prem Kumar (Analyst)
Okay, but are there smaller opportunities, let's say in either like the copper space or the gold space? Anything.
That you.
Would be looking into?
Joe Lambert (President and CEO)
We certainly look at it and we consider it. We've seen some minor opportunities in copper, but we haven't seen any major contracts come up. And really you need something of reasonable size to be able to mobilize from far away and to compete with local guys that don't have those mobilization costs. And we just haven't seen that like in the U.S. resource commodity mining kind of space as of yet. But we certainly would, we monitor it and we would be active in those tenders. We have multiple U.S. entities now set up, you know, from Texas and Wyoming and North Dakota. And so yeah, you know, if something comes up in Arizona or Nevada, you know, we certainly would pursue it.
Prem Kumar (Analyst)
Okay.
On the cash flow, free cash flow, so per year guidance, I think Q4 would be one of the bigger cash flows. I think we need about CAD 130 million or more to hit the lower end of the free cash flow range. I understand there's some growth capital still left. I think about CAD 25 million maybe. With the remaining mostly move towards reducing leverage. In the longer term, what's kind of like the company's leverage target? I know we've updated it to 2.1 for year end, but over the long term, kind of like what's like the baseline leverage that you'd be targeting.
Joe Lambert (President and CEO)
Yeah. You know, we've always wanted to keep at least one times EBITDA in our debt ratios and in pocket, but you know, I think depending on where the interest rates are, you know, getting down to one times, you know, would be great. You know, but if there's opportunities for investment in buying our own shares back, like we're seeing right now with our NCIBs and those kind of returns, you know, we're going to look at our capital allocation like we always do as far as the risk versus return. And although I think we'll get a substantial portion of that debt paid down this year in Q4 with this big cash flow that you rightly stated in our Q4, I also think we can still participate in our NCIB and in what we see as an extremely high return on purchase.
Okay,
Prem Kumar (Analyst)
that's all I had, and thanks a lot. I appreciate the color.
Joe Lambert (President and CEO)
Thank you, bro.
Operator (participant)
Ladies and gentlemen, just a reminder, should you have a question, please press the star followed by the number one on your touch-tone phone. Our next question comes from the line of Devin Schilling from Ventum Financial. Go ahead, please.
Devin Schilling (Equity Research Analyst)
Hi guys, and congrats on the quarter here.
Joe Lambert (President and CEO)
Thanks, Devin.
Devin Schilling (Equity Research Analyst)
Just in your shareholder letter here, you guys talk about adjusting your operational strategy given some of the changing conditions in.
The oil sands market.
Maybe you can just elaborate on this a bit. Like, is this strictly about reallocating equipment?
or is there more to this?
Thank you.
Joe Lambert (President and CEO)
On the small end of the equipment, it's reallocation. On the bigger end, it's adjusting to changes of scope, getting more into the rental market. Very, very similar to what we have in Australia. So, you know, it's really looking at how we track our cost and how we look at things. It's different from renting a piece of equipment. It's different from unit rate work significantly in how you track your costs and compare. So really it's just adjusting our strategy so that we understand our costs in the business that much better, and it's changed from more unit rate work or time and materials to these straight rentals. It doesn't affect our strategy as far as what our expectations of margins are. It just changes some of the risk.
Then we just need to look at our costs a little differently because, you know, some of them go away and it simplifies a lot in the rental market. Yep.
Devin Schilling (Equity Research Analyst)
Okay. No, that makes sense. And I guess just on a follow up on the 25 trucks that you guys shipped to Australia, maybe you can just comment on your expected incremental EBITDA contribution from these trucks for the next year.
Joe Lambert (President and CEO)
Thank you. Yeah, you know, I just kind of, rule of thumb, I don't have it calculated specifically to those fleets because that fleet got split up and is going six different directions, even the 25 units. So I couldn't tell you exactly. I would expect that they're going to be, you know, somewhere in the, I'd say CAD 10 million-CAD 20 million range of EBITDA contribution to McKellar next year.
They were fully underutilized in 2024, correct?
Devin Schilling (Equity Research Analyst)
Correct.
Joe Lambert (President and CEO)
Yeah, you know, for six months they were being torn down and on the water. And before that they were being parked, and they'll be back to work by the end of the year.
Perfect. No, that's great to hear. That's everything for me.
Devin Schilling (Equity Research Analyst)
Thanks.
Thanks again.
Joe Lambert (President and CEO)
Yours. Thank you, Devin
Operator (participant)
There are no further questions at this time. I'd now like to turn the call back over to Joe Lambert, President and CEO of North American Construction Group.
Joe Lambert (President and CEO)
Thanks, Laura. Thanks again everyone for joining us today. We look forward to providing the next update upon our closing of our Q4 2024 results. We'll also provide some more color on the guidance with these contract conclusions in Q4 here, and you'll know that sooner than our Q4 results there.
Thank you. Ladies and gentlemen, this concludes the North American Construction Group conference call on Q3 2024. We thank you for participating and ask that you please disconnect your lines.