North American Construction Group Ltd. (NOA) CEO Joe Lambert on Q2 2022 Results - Earnings Call Transcript

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North American Construction Group Ltd. (NYSE:NOA) Q2 2022 Results Conference Call July 28, 2022 9:00 AM ET

Company Participants

Joe Lambert - President and CEO

Jason Veenstra - EVP and CFO

Conference Call Participants

Yuri Lynk - Canaccord

Jacob Bout - CIBC

Bryan Fast - Raymond James

Aaron MacNeil - TD Securities

Maxim Sytchev - National Bank Financial

Operator

Good morning, ladies and gentlemen. Welcome to the North American Construction Group Earnings Call for the Second Quarter Ended June 30, 2022. [Operator Instructions]

This 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 and assumptions were applied in drawing conclusions or in making forecasts actions or projections that are reflected in the forward-looking information. Additional information about those material factors is containing 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

Thanks, Sergio. Good morning, everyone, and thanks for joining our call today. I’m going to start with the Q2 2022 operational performance before handing it over to Jason for the financial overview, and then I will conclude with the operational priorities and outlook for 2022, before taking your questions.

In today’s Q2 operational review, I want to give listeners some clarity on the issues affecting our business, what areas of the business are being affected, what we are doing about it, what progress we have made, and lastly, when we expect to have the issues resolved?

On Slide 3, our Q2 total recordable rate of 0.51 was a 40% improvement to our Q1 stand-alone results. But the trailing 12-month remains above our industry-leading target frequency of 0.5, and we will continue focusing our efforts on further developing our green hand new hire training programs, reducing hand and lifting incidents and prevention of high potential injury events.

On Slide 4, we show the 3 major issues affecting our business. The first is a good issue to have, high demand. I will speak more directly to this when we get to Slide 6, where we highlight fleet utilization. The second issue, inflationary pressures, is due to parts and labor price increases from key suppliers and vendors, which are at historical highs. These inflationary pressures are immediately increasing equipment costs, which are not yet being captured in the contract escalation clauses, which use lagging indices. Third on the list is the skilled labor shortage, which impacts our ability to promptly repair equipment. The skilled labor shortage in oil sands, in particular, has also driven a wage escalation of almost 30% for mechanics as competition for their services increases.

The parts price increase impact all of our businesses, but the oil sands wage escalation is impacting the 50% EBIT of our business, typically generating oil sands. The diversification of our business across increased commodities and customers has definitely helped us limit the extent of the skilled trade wage escalation impacts. However, the cost escalation impacts from [mines] 2 and 3 are driving the historically low Q2 margins. Operational execution and safety were in line with our expectations, but the continued increase in vendor parts pricing, our need to match oil sand wage escalation for skilled trades to prevent further quits and the current disconnect between actual costs and lagging indices is the reason for margin reductions.

Moving on to Slide 5. Let’s get into our response and how we are progressing against these core issues. First and foremost, we continue to develop, attract and retain our skilled maintenance tradespeople to improve fleet utilization. NACG has an extensive and comprehensive program to expand both our Acheson and field-based maintenance workforce. As an example of this progress on our Q1 call, I noted that we added approximately 20% more employees into our premise program since the beginning of the year. That increase is now over 50%. The total increase in heavy equipment technicians and the premises in Q2 was just over 6%. Our shop expansion with additional remanufacturing capacity and services and a central telematics control room is complete and will allow for continued growth in our Bench Hands program and machine health monitoring for our current around 260 real-time connected assets.

Since the start of 2022, our Bench Hands program has grown by 30%, and our telematics program is estimated to have saved just under $1 million through reduced in-house monitoring costs and early machine health issue identification and interventions. I look forward to sharing more of the benefits of our telematics system with you as connected fleet and data increases and our systems are reporting to mature.

On the cost control side, we are seeing opportunities to increase in-house component remanufacturing and equipment servicing work and are actively looking at source suppliers and inventory management to reduce costs and increase efficiency in parts delivery. Lastly, we have added senior maintenance leadership to better support the field work.

In summary, we are actively addressing all areas of cost and skilled trades development within our control.

Moving on to Slide 6. While Q2 financial performance was well below our own expectations due to the previously mentioned market issues the demand for our fleet remains high. The Q2 utilization of 59% was essentially equal to the previous Q2 high of 60% achieved in 2019. We expect the high demand to remain into and possibly beyond 2023. We likewise expect our progress on increasing the maintenance labor workforce will directly correlate to improved fleet utilization. Between this high demand, our progress on manpower issues and our in-house maintenance capability, as highlighted in the following Slide 7, we remain confident in our future business success.

Slide 8 is a quick snapshot of our current positioning as a company. Our indigenous partners and the contracts and fleet we have in place, coupled with our ever-improving maintenance capabilities, gives us solid and tangible confidence moving forward. I will expand more on our future outlook after Jason reviews the Q2 financials.

Jason Veenstra

Thanks, Joe. The financial review begins on Slide 10 with a few of our key performance indicators. Combined revenue of $228 million represented a strong quarter for us and was generally consistent with the last 2 quarter revenues of $237 million and $235 million, respectively. This revenue consistency highlights our diversification and has culminated with trailing 12 -- trailing revenue now exceeding $900 million over the last 12 months. From a combined gross profit margin perspective, we generated 9.6% based on inflation factors that are much discussed throughout this quarter’s materials.

As referenced on this slide, the 9.6% can be split into our wholly-owned businesses, which were significantly impacted by cost inflation, and [indiscernible], ended up posting a 7.4% gross margin. That said, our joint ventures were much better positioned to manage inflation. And based on their specific situations and strong operating performances, achieved a steady and impressive 15.7% gross margin in the quarter.

Getting back to revenue. And on Slide 11. Total combined revenue for the quarter of $228 million was 30% ahead of Q2 2021. Revenue achieved in the quarter was driven by a broad listing of mine sites and business lines, which all show strong demand for our services. The remobilized fleet at the Fort Hills mine had a full quarter of operations compared to a partial quarter in Q2 2021, which was a key driver of the positive revenue variance. As you are likely aware, the commercial posture in the oil sands region is robust, and we experienced this firsthand this quarter as the focus on production means our equipment is critical to our customers’ success.

DGI Trading, which we purchased in Q3 2021, as well as the sale of Haul Trucks into 1 of our joint ventures also boosted revenue this quarter. Revenue from our joint ventures of $60 million was identical to Q1 2022 as continued volumes at the gold mine contract in Northern Ontario were coupled with the increasing prominence of our Mikisew joint venture and progress being made on the Fargo-Moorhead flood diversion project. Combined gross profit margin of 9.6% was influenced most notably by the workforce shortages in the skilled trades, which has the combined impact of lessening top line potential while increasing the need to implement less effective measures, including reliance on third-party providers and rental equipment.

Other notable drivers impacting this quarter’s margin included supplier and vendor cost increases, primarily related to parts and components, which we conservatively estimate to have directly impacted Q2 costs by around $5 million. And secondly, the timing impact of rate escalations, which lag based on published index values.

Moving to Slide 12. Adjusted EBITDA of $42 million was identical to last year, but the lower margin of 18.3% reflects the harsh cost impacts previously mentioned. Included in EBITDA is general and administrative expenses, which were $6.9 million in the quarter, equivalent to 4.1% of revenue. As always, we pride ourselves on G&A discipline and Q2 was no different in that regard. Going from EBITDA to EBIT, we expensed depreciation equivalent to 12.7% of combined revenue, which reflected the depreciation rate of our entire business. When looking at just the wholly-owned entities, and our heavy equipment within them, the depreciation percentage for the quarter was 15.7% of revenue and reflected an effective, albeit less than planned use of our fleet this quarter.

Adjusted earnings per share for the quarter of $0.17 was driven by $12.8 million from adjusted EBIT net of routine interest and taxes. Our overall effective interest rate year-to-date is now 4.8% as we trend up from the 2021 effective rate of 4.3% from the well-known interest rate increases.

Our credit facility, which currently has drawn $140 million and makes up approximately 35% of net debt, is the only instrument directly impacted by rate increases.

Moving to Slide 13. I’ll briefly summarize our cash flow. Net cash provided by operations of $35 million was produced by the business with the difference between this figure and the $42 million of EBITDA being cash interest paid in the quarter of $5.8 million. Sustaining maintenance capital of $22 million was primarily dedicated to maintenance of the existing fleet as we invest in the fleet that drives our core business.

Working capital was flat for the quarter and similar to last year’s Q2.

I’ll end on Slide 14. Total capital liquidity of nearly $200 million reflects our strong position as we benefit from our disciplined approach in years past. On a trailing 12-month basis, our senior leverage ratio, as calculated by our credit facility, remained steady at 1.6x. Net debt levels increased $10 million in the quarter as free cash flow of $10 million was more than offset by the purchase and subsequent cancellation of over 1.1 million shares or $17.4 million in the quarter.

And with those summarized the financial comments, I’ll pass the call back to Joe.

Joe Lambert

Thanks, Jason. Looking at Slide 16. This slide summarizes our priorities for 2022. I’ve addressed Item 4 as part of our response to the current macro environment. Now looking at Item 1, we are and will continue to be laser-focused on contract administration in regards to the application and accuracy of contract escalation clauses and, in particular, the local oil sands maintenance wage increases and the impact of OEM and vendor equipment parts price increases. As I’ve stated previously, we are confident that our transparency and long-standing client relationships will result in mutually acceptable resolution. We have 4 oil sands customers, and we’re in active daily discussions with all of them, and we fully expect to achieve resolution within Q3.

Of the 2 remaining priorities, Item 2 detailed on Slide 17, is our ongoing efforts to ensure a well-planned and smooth start-up of our Red River Valley Alliance, Fargo-Moorhead project. The project is progressing well, and we expect to commence earthwork as planned in Q3. The equipment fleet has been procured, design work and planning are rapidly approaching construction-ready status and hiring remaining field staff and workers has commenced. We are eager to get going and look forward to the latter half of the year when we can start providing progress reports on the actual construction activity.

Moving on to Slide 18. This bid pipeline slide highlights our remaining Item 3 from the priority Slide 16. Our bid pipeline remains strong, and we expect to win our fair share of their large Red Dot regional oil sands tender, and believe we will see another blue dot win outside oil sands before year-end. Demand continues to grow and the number of projects in the active tender stage, that is the second row of the bid pipeline, has doubled since Q1 for both oil sands from 1 to 2 projects, but more impressively, outside oil sands from 5 to 10 active tender projects.

On Slide 19, our backlog sits at $1.6 billion, and we continue to replenish and win our fair share of work across all resource sectors. What I believe are key takeaways on this slide is that our backlog is roughly proportionate to our diversification target, demonstrating both confidence and sustainability of our diversification efforts. And lastly, but possibly most importantly, if we achieve the bid wins noted on the previous slide, we expect our backlog to exceed $2 billion before the year is out.

On Slide 20, we have provided our revised outlook for 2022. As I stated in my shareholder letter, while lowering guidance is neither enjoyable or something we want to be seen as common in our business, the fact that our business can withstand such unusual inflationary and market pressures and still produce a free cash flow that enables reductions of debt and common shares by 7% to 8% and allows modest growth investment, gives us confidence in the business core strength and resiliency.

On the upside, we see Slide 21 as a reasonable projection of our business based on high demand, modest growth, improved utilization from our expected stronger maintenance workforce and increasing margins as we continue to lower cost and advance operations efficiency. Combined, we see these last 2 slides as showing a business with the core strength to endure high near-term inflationary impacts, while maintaining a strategy and execution to provide consistent long-term growth and returns in shareholder-friendly ways.

With that, I’ll open it up for any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Yuri Lynk from Canaccord.

Yuri Lynk

Joe, I wanted to circle back on your discussions with your customers on the contract escalation clauses. Well, assuming you’re successful, will those be retroactive at all? Will they go back into, you say, the spring, when you started to see these really higher costs? And the second part of that question would be, what’s assumed in your guidance for these discussions?

Joe Lambert

So we’ve got an estimate on the resolution, and I think we’re conservative on that. I really want to tell you specifics. We’re in negotiations. And I would -- I’d like to think that we might be able to improve upon that. But essentially, we’re -- the reason for the drop down in the guidance is we do believe there’s a timing gap. It will then have an overhang when there’s deflation, if you would. But roughly, we think we’re probably about 2 months of overlap on that, that we aren’t going to be able to recover and that would be predominantly as we incurred it in Q2. So we do think the Q3, Q4 numbers and our projection for the outlook are in line with the timing and what we think we’ll get. Does that cover it off, Yuri, I’m sorry, it’s a little bit vague in that.

Yuri Lynk

No, no. I understand you’re in the middle negotiations. So -- but I guess, the point would be that there’s no kind of catch-up payment for Q2 that could conceivably boost Q3 above where it might otherwise be. It doesn’t sound like that’s the case. It sounds like you’re trying to get the costs adjusted such that the back half of the year kind of reverts to more normalized margins. Is that it?

Joe Lambert

Yes, I said that spot on Yuri.

Operator

Your next question comes from Jacob Bout from CIBC.

Jacob Bout

Wanted to go back to the escalation costs. How much of these contracts can be negotiated versus it’s just systemic and we just have to deal with these [lagging] indices?

Joe Lambert

We’ve done this consistently over time, both with increases and decreases. So when -- particularly in oil sands, Jacob. So the contracts we have in oil sands, they’ve been amended outside of contractual arrangements based on what’s going on in the market. So whether we had a depressed oil price, and we are looking for ways to reduce our costs and pass on to customers, which we’ve done, or, in this case, where it’s escalating, we would expect -- at any time we have unusual market conditions, both up or down, either our clients or we -- we’ve approached our clients or our clients has approached us for amendments outside of the normal cycle of the contract.

Jacob Bout

So -- but to be clear, all -- in your view, all of these contracts should be negotiable?

Joe Lambert

Yes. And I would say we’ve probably done this in the order of half a dozen times in the last 6 or 7 years.

Jacob Bout

Okay. And then just on the technician shortages. The -- what’s your equipment utilization baked into the second half guidance if things return to normal or...?

Joe Lambert

It actually starts to return to normal over Q3, and we believe we can possibly improve upon that come Q4. So it’s a return to normal. We really just started gaining, I’d say, in May and June. That’s where we picked up that 6% of the workforce during the quarter. It was predominantly in the latter half. So based on our projections, which I believe were reasonably conservative, we would get back to a more normal utilization over Q3. And then we’ve got kind of normal into the forecast, but I do believe there could be some upside in Q4 if we’re able to progress in some of the areas better. It’s a direct correlation between manpower and utilization right now.

Jacob Bout

And I’m assuming there’s a cost associated with attracting that new talent, like how are you competing against guys like Finning or [Deer]?

Joe Lambert

It’s market wage for us. And I think one of the things -- the different areas we’ve built upon like our Bench Hands program aren’t things that a lot of other people can do. That’s kind of a shop-based setup and you got to have enough mass. And our apprenticeship program, it’s for somebody to be able to build up, I think we’re somewhere in the range of around 70 total apprentices. That doesn’t happen overnight, especially because they’re scattered through the years in equal distribution. So we think we’ll get roughly 1/4 of that third of the 1/4 will come out of full HETs every year. So not everybody can do that. I know some of our vendors have 0 apprentices or had -- the last time I check, some had a significant amount.

The Bench Hand program isn’t something I hear a lot about different companies doing that. Our ability to move people around, the shop environment we have here versus the field and get work that matches, some guys might want to work longer, extended schedules that more opportunity over time in living camps or some might want to be home-based and be home every night and be more shop-based. So I think we certainly have an offer of work here. I think it matches a lot of different people’s work life balance and what they want to do. And I don’t think a lot of others have that, even vendors.

Jacob Bout

Last question is just -- so you talked about 6% increase in hiring. Maybe you can just comment on what attrition has been over the first half of the year.

Joe Lambert

Well, we had about -- I actually have the numbers here. We had lots of above, I’d say, 20-odd people total in Q1 going into April of Q2, and we’ve recovered more than half of that in the May and June time frame. So -- and this was really Jacob, this was us resisting to pay those increases. We didn’t see increasing wages is bringing more skilled trades into the region. And that if all you’re doing is people walking across the street, we’re not actually bringing more resources into the area. We’re not fixing the issue. But ultimately, we start to have people leave because these are significant wage increases. This isn’t somebody getting $0.50 an hour more, it’s them getting $15 an hour more. And so ultimately, we had to match it or we would keep losing people. And that’s what we did. And then that stopped, and we were able to start recruiting again.

Operator

Your next question comes from Bryan Fast from Raymond James.

Bryan Fast

Yes. Maybe just some comments on DGI. How has that part of the business performed of late? And are you seeing an increase in interest as we continue to see that tight equipment in parts market?

Joe Lambert

Yes, certainly, it’s performed as planned, slightly better, I believe, and which was a tremendous accomplishment, certainly during the pandemic and the limited ability to travel because a lot of this work is finding assets and cores that are all around the world. So travel is a pretty integral part of that business. But certainly, the demand on new equipment and people wanting to extend used equipment life longer, including ourselves, we’re one of DGI’s best customers internally. It is -- certainly bodes well for their future. We have them looking at expanding more into Canada. There’s a significant market here, and I think we’re going to set up a bit of a shop here for our DGI guys and be able to grow this business. So it’s not a huge top line business, but it’s certainly shown to be resilient and consistent with great opportunities for growth.

Bryan Fast

Okay. And I know you provided some color, but is there any reason to believe that technician availability is different from prior cycles? I mean, is this a tighter environment where your available talent pool has actually shrunk as people have left the industry?

Joe Lambert

I’m just talking from my perception. I don’t think the numbers have shrunk. I think the demand for equipment has increased, and so you got more equipment operating hours and the same amount of people. We’re not drawing them in. So that’s just making the ones that are there of higher value. So we’ve got looking at ways we can get people from outside of the regions. And again, this is just my perception, Bryan. But I think a big -- historically, we’ve been able to draw from other resource areas that were in a downturn. So whatever commodity it was, people that were working in that commodity in those regions, that were no longer working, those were areas you recruited.

And there’s not really any commodity areas down, so people aren’t looking to leave whatever region they’re in now, and that’s really why we pushed that apprenticeship program saying we need to build our own, be it Bench Hands or premises and not count on them just coming from different areas of the country that might be a more depressed resource markets.

Operator

Your next question comes from Aaron MacNeil from TD Securities.

Aaron MacNeil

Joe, I’m sure you’re dying to answer more questions about inflation. So figure I’ll add one. What are you doing to ensure project like Fargo-Moorhead or some of the other diversified projects don’t experience the same inflationary pressures that you’ve seen in your oil sands operations? And I can appreciate the oil sands are -- its own unique animal, but I mean inflation pressures across parts and people are pervasive across sectors. So I just want to get your sense of what you’re doing now to ensure that you don’t see these pressures elsewhere?

Joe Lambert

Well, in areas we’re actively bidding, including that large regional oil sands contract, we’re putting it into the contract clauses that there’s reopeners based on these unusual market conditions. So we’re making it more a contractual right than a mutually agreed upon amendment, just giving it a bit more force, and then also trying to increase the frequency. Just when there’s high volatility, you don’t want the overhang. You want the timing to match up as best you can. And the difference is in indices 3% and your actual was 4% or 2%, no big deal. When the variance grows as big as it is, then the overhang a big deal. And then the -- so we’re -- we’re putting that into contracts. Places like Fargo-Moorhead are, I guess, I would say, probably less of an issue because they have longer-term profiles.

When you have 6 years of construction and 29 years of operation and maintenance, things tend to move towards the averages when you have a terms like that. And short-term inflationary pressures won’t necessarily adjust. And my guess is, 10 years down the road, Fargo’s inflation looks like an average inflation, although it may put some pressure on the first year of operating here. And then -- so that -- I guess that’s -- the key for us is just making sure what we learn and how the disconnect between indices and real costs are we trying to put direct into contract language so that it’s not a mutually agreed negotiation, it’s actually a contractual right.

Aaron MacNeil

Okay. Understood. I’m done on the inflationary thing. Maybe a couple of more follow-ups. Could you maybe walk us through your slate of projects for Nuna this summer, given that it’s the seasonally strongest quarter? And how does the job mix, I guess, compare year-over-year?

Joe Lambert

Pretty similar, the largest driver being the Northern Ontario gold mine. There’s -- when we go through the bid pipeline, that’s a combined Nuna North American bid pipeline. And it’s -- there’s equal distribution. I’d say probably the broadest distribution in those 10 or 12 -- those 12-odd dots in that middle row. There’s a couple of oil sands that’s easy to pick out, the red ones. There’s a couple of infrastructure. There’s a couple of gold, there’s potash, iron, gold, platinum, nickel, diamonds. It’s probably is the most diverse and active bid pipeline we’ve seen in a long time. And a lot -- a good chunk of that is Nuna because it’s outside of oil sands or areas we would look to partner with Nuna if there’s larger asset requirements. And they’re meaningful terms and jobs as well.

Aaron MacNeil

The last question I had. It looks like there’s a lot of diversified projects on the radar. A lot of them being smaller. Like how many of these smaller projects could you reasonably execute on before it kind of becomes too cumbersome for a company of your size? And I guess, like the context of the question is just the oil sands operations were so efficient because they’re all big and they’re all in the same area. So I guess I’m just wondering if you’re worried about losing some of those efficiencies if you were to take on a lot of those little projects?

Joe Lambert

These projects actually have good term and reasonable size. So 7 out of those 12 projects are plus $100 million. So these aren’t a $10 million [indiscernible] lift for 2 months in the summer, somewhere -- and multiple ones of them -- not to be redundant, but multiple of them are multiple year contracts. So it’s not typical 3-month summer work kind of contract. There is some significant term in volume and dollar value in these contracts. And that’s really what’s extremely exciting about not only diversification. And so these are areas that typically are underutilized fleet in oil sands are 100 and 150-ton trucks that are small in oil sands and typically get high utilization in the winter, but very low in summer.

This gives us an opportunity to get year-round utilization on those fleets for multiple years, hopefully, in these longer-term contracts. And so these aren’t distractions that are going to be 2-month jobs. These are meaningful jobs that will have at least more than half of them that will be gains in utilization along with diversification.

Operator

Your next question comes from Maxim Sytchev from National Bank Financial.

Maxim Sytchev

Just maybe the first question for you. Do you mind just reminding us how we should think about the revenue ramp-up at Fargo because I presume it’s going to be some JV accounting, can you just remind us how we should be thinking about this?

Jason Veenstra

Yes. Next year, 2023 is the big year, 2023 and 2024, with $650 million of our backlog is Fargo and about $150 million of that per year is in ‘23 and ‘24. And that comes through in our combined revenue. So it won’t be reported revenue, but it shows in our combined revenue. And that’s quite a steep ramp from this year. Year-to-date, it’s been very modest in the kind of $15 million year-to-date and a little higher than that through Q3 and Q4, but that’s kind of the ramp. We’ve always said 2023 is going to be kind of a step change for Fargo.

Maxim Sytchev

Okay. Okay. That’s helpful. And then another question for Joe. Some of the clients in the oil sands have been facing some management changes and some pressure. Just wondering, in terms of what you’re hearing in relation to the trends to in-source versus outsource work, what is your sense right now from some of these bigger clients, if you can maybe comment?

Joe Lambert

Yes. I guess I don’t have much of a change in sense until I get a better understanding of what may happen on the -- with those executive teams. Generally, the people we deal with are the guys with P&L responsibility that are overseeing the mine sites. They’re generally those VP of Ops, or GMs of sites that are usually the decision makers and the ones we’re very much engaged with. And then ultimately, they get approval from whatever level in their organization. But I don’t think any of the changes that are occurring or may occur in any of our clients are going to affect our abilities and our negotiations are ongoing. I really don’t have a sense before if it’s going to change perceptions and give us better opportunity to in-house some of the work that they’re doing. But I guess I really lack a good answer on that for you, Max. I’ll wait to see what happens and how if there’s any change in strategy from those clients.

Maxim Sytchev

Right. And I guess, are you seeing any changes from your other 3 key clients on that front? Or it’s sort of business as usual?

Joe Lambert

I believe one area, and I do believe this is an area we’ll continue to make inroads on is our maintenance and our maintenance rebuild and component remanufacturing capabilities. I think there’s certainly opportunity to do more of that for our clients. And I think there, we’ve shown more of them and done more of that work for them. I think near-term, we’re really focused on getting our own gear fixed and running. So it’s hard to put much time into others right now until we have more capacity built up, but I do think that’s an area that we could easily grow, and our clients are showing more and more interest in that.

So in-housing some of the maintenance that they may be doing or may have other vendors doing and bringing it to us, I think that’s a very real possibility.

Maxim Sytchev

And do you mind maybe just providing a bit of -- sort of a bridge to how many people do you have to hire, like in terms of absolute numbers or in terms of percentages so that you have the capacity to do outside kind of your own fleet work? Like is it 15% to 20%, or is it much, much higher than that?

Joe Lambert

Actually, it’s probably -- we probably get back to where we expect to be with another 5% to 6% kind of add. And I think we’ll get that in the next quarter. And then as we add, with our own high demand, I think we’ll focus on improving utilization as we can grow beyond that. This is -- 5% or 6% is 5 or 6 guys basically it’s -- actually it’s about 11 guys for that 6% increase. So that once we add another 11 -- actually, probably 9 to 11, I think it was, we’ll be at where we were in Q1 with our headcount. And as we go above that, which I believe we will be able to do, we’ll look to improve our own utilization using that manpower, but we’ll also start looking at doing more work for others.

We have been doing some and continue to do. It’s just -- we want to make sure we focus on our own fleet first before we offer our maintenance services to others. And then I think our Acheson facility has the best capabilities and ability to draw people in, and this is where we’ve added quite a bit of capacity so that we can move equipment down here. And so I think we’ll continue to be able to do that. So that cover up...?

Maxim Sytchev

Yes, yes, for sure, for sure. And then just I think in the past, you said the goal is to get to $25 million of external maintenance. Is that kind of still the number that you’re working towards? And where are we right now as a run rate relative to those numbers?

Joe Lambert

I think we’re on track to actually exceed that slightly and predominantly from those rebuilds we did for the joint venture partner. And, like I said, that’s with us drawing back some capacity to work on our own fleet. So I think the upside of that -- I think we’ll exceed those numbers that you said this year. And like I said, as we get more manpower, we’ll be able to increase upon that external maintenance work.

Operator

[Operator Instructions] This concludes the Q&A session of the call, and I will pass the call over to Joe Lambert, President and CEO, for closing comments.

Joe Lambert

Thanks, Sergio. Thanks again, everyone, for joining us today.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and ask that you please disconnect your lines.

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